Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended March 31, 2003 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-22953
OREGON TRAIL FINANCIAL CORP.
- -----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Oregon 91-1829481
- --------------------------------------------- ----------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) I.D. 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 reports), 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 Exchange Act Rule 12b-2). YES NO X
----- -----
Indicate by check mark whether disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive proxy or
other information statements incorporated by reference in Part III of this
Form 10-K or any amendments to this Form 10-K. YES X NO
----- -----
As of April 14, 2003, there were issued and outstanding 3,107,692 shares
of the Registrant's Common Stock. The Registrant's voting stock is traded
over-the-counter and is listed on the Nasdaq National Market under the symbol
"OTFC." The aggregate market value of the voting stock held by nonaffiliates
of the Registrant, based on the closing sales price of the Registrant's common
stock as quoted on the Nasdaq National Market on April 14, 2003 of $23.10, was
$71,787,685.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Registrant's Annual Report to Shareholders for the
Fiscal Year Ended March 31, 2003 ("Annual Report") (Parts I and II).
PART I
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, 2003, the Company
had total assets of $377.5 million, total deposits of $249.1 million and
shareholders' equity of $60.1 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
28.6% of total assets at March 31, 2003. 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 Pendleton.
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.
Pending Acquisition
On February 24, 2003, the Company entered into a definitive merger
agreement ("Agreement") with FirstBank NW Corp., Lewiston, Idaho ("FirstBank")
pursuant to which the Company will be merged into FirstBank NW Corp. The
Agreement also provides for the merger of the Bank with and into FirstBank's
subsidiary financial institution, FirstBank Northwest. Under the terms of the
Agreement, shareholders of the Company may elect to receive either cash or
shares of FirstBank common stock in exchange for their shares of Oregon Trail
common stock. The aggregate purchase price for the transaction is
approximately $74.0 million. Consummation of the merger is subject to
approval by FirstBank's
1
and the Company's shareholders and the receipt of all required regulatory
approvals. It is anticipated that the transaction will be completed in the
fourth quarter of calendar year 2003.
Lending Activities
General. The Bank's loan portfolio totaled $228.2 million at March 31,
2003, representing 60.5% 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. During the fiscal year ended March 31, 2002, the Bank
purchased $39.3 million of commercial real estate loans. The properties
securing these loans are located in Washington and Oregon. 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 automobile loans and home equity loans, secured and
unsecured and, to a lesser extent, 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 and recreational vehicles,
including travel trailers. During the fiscal year ended March 31, 2003, the
Bank purchased $800,000 of dealer originated contracts secured by recreational
vehicles, campers, boats, snowmobiles, and all-terrain-vehicles.
2
Loan Portfolio Analysis. The following table sets forth the composition of the Bank's loan portfolio at
the dates indicated. The Bank had no concentration of loans exceeding 10% of total gross loans other than as
presented below.
At March 31,
---------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
--------------- --------------- --------------- --------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
Mortgage Loans:
One-to-four-
family...........$ 94,456 40.75% $122,950 45.60% $137,354 53.97% $127,589 57.13% $109,089 58.00%
Multi-family...... 7,724 3.33 10,799 4.00 2,459 0.97 2,989 1.34 2,810 1.49
Commercial........ 30,874 13.32 36,397 13.50 18,235 7.17 14,808 6.63 13,703 7.29
Agricultural...... 3,952 1.71 3,505 1.30 3,548 1.39 2,420 1.08 2,240 1.19
Construction...... 676 0.29 1,255 0.47 1,399 0.55 3,648 1.63 2,825 1.50
Land.............. 23 0.01 34 0.01 124 0.05 158 0.07 330 0.17
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total mortgage
loans.......... 137,705 59.41 174,940 64.88 163,119 64.10 151,612 67.88 130,997 69.64
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Consumer Loans:
Home equity and
second mortgage.. 12,313 5.31 14,039 5.21 15,890 6.24 14,983 6.71 16,262 8.65
Credit card....... 1,354 0.58 1,174 0.43 1,093 0.43 1,026 0.46 949 0.50
Automobile(1)..... 27,058 11.67 28,147 10.44 26,501 10.41 21,547 9.65 11,843 6.30
Loans secured by
deposit accounts. 288 0.13 502 0.19 528 0.21 452 0.20 416 0.22
Unsecured......... 6,357 2.74 6,066 2.25 4,909 1.93 3,414 1.53 2,836 1.50
Other............. 4,174 1.80 4,443 1.64 3,992 1.57 3,190 1.43 2,985 1.59
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total consumer
loans.......... 51,544 22.23 54,371 20.16 52,913 20.79 44,612 19.98 35,291 18.76
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Commercial business
loans............. 26,270 11.33 24,152 8.96 22,396 8.80 13,853 6.20 12,031 6.40
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Agricultural loans. 16,294 7.03 16,185 6.00 16,054 6.31 13,275 5.94 9,781 5.20
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans..... 231,813 100.00% 269,648 100.00% 254,482 100.00% 223,352 100.00% 188,100 100.00%
====== ====== ====== ====== ======
Less:
Net deferred loan
fees.............. 1,365 1,505 1,487 1,365 1,125
Allowance for loan
losses............ 2,221 2,280 2,098 1,396 1,228
-------- -------- -------- -------- --------
Total loans
receivable,
net............$228,227 $265,863 $250,897 $220,591 $185,747
======== ======== ======== ======== ========
- ----------------
(1) Includes dealer-originated automobile contracts of $24.1 million, $24.3 million and $13.6 million at
March 31, 2003, 2002 and 2001, respectively.
3
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, 2003, $94.5 million, or 40.8%, of the
Bank's total loan portfolio, consisted of such loans, with an average loan
balance of $62,000.
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, 2003, $77.4 million, or 33.4%, of the total loans before net
items were fixed rate one- to- four family loans and $17.1 million, or 7.4%,
were adjustable rate mortgage loans ("ARM loans"). The Bank offers an ARM
product for its portfolio with an interest rate that is fixed for three years
then adjusts annually based on the one year Treasury constant maturity index.
The Bank's ARMs are typically based on a 30-year amortization schedule. 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, 2003, $9.8 million, or 57.4% 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, the life expectancy of the loan 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 the 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 that insures the Bank on those loans
that exceed 80% of the appraised value of the security property.
4
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, 2003, agricultural loans, including those secured by
agriculture real estate, amounted to $20.2 million, or 8.7%, of the total loan
portfolio; $4.0 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 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 $2.4 million (with $336,000 outstanding at March
31, 2003) 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, 2003. 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 yields and market prices.
Consideration is given to projected yields and commodity prices. 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 annual operations and expenses, 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, 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
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. In funding
this need, the Bank uses both fixed and adjustable rate notes, depending on
the maturity requested.
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
totaled $821,000 and was performing according to its terms at March 31, 2003.
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 Constant or The Wall Street Journal
prime, plus a negotiated margin. 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 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, 2003,
agricultural real estate loans totaled $4.0 million, or 1.7%, 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. The lack of water has the potential to decrease
yields and increase energy costs for the Bank's borrowers. Commodity prices
also present a risk which may be reduced by the use
5
of set price contracts. Required beginning and projected operating margins
provide for reasonable reserves to offset unexpected yield and price
deficiencies. The Bank also takes into consideration management succession,
life insurance and business continuation plans. The Bank is an approved Farm
Service Agency ("FSA") lender and at March 31, 2003 had three FSA guaranteed
loans with an outstanding balance of $283,000.
Construction Lending. 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. 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. 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 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. 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, 2003, construction loans amounted to
$676,000, or 0.3%, of the loan portfolio.
Multi-Family and Commercial Real Estate Lending. The multi-family
residential loan portfolio consists primarily of loans secured by apartment
buildings and the commercial real estate loan portfolio includes loans to
finance the construction or acquisition of small office buildings and retail
stores. The largest such loan totaled $2.8 million and was performing
according to its terms at March 31, 2003. At March 31, 2003, the Bank had
$7.7 million of multi-family residential and $30.9 million of commercial real
estate loans, which amounted to 3.3% and 13.3%, 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 with
established floors. On fixed rate loans, terms generally do not exceed ten
years.
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
risk, the Bank generally obtains 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, 2003, the Bank's consumer
loans totaled approximately $51.5 million, or 22.2%, 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.
6
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 three to four 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, 2003 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, 2003, approved lines of credit totaled $22.7 million,
of which $11.4 million was outstanding.
The Bank offers closed-end home equity loans that are made on the
security of one-to-four family 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, 2003, home equity
loans and second mortgage loans, excluding personal lines of credit, amounted
to $6.9 million, or 3.0%, of total loans.
At March 31, 2003, the Bank's automobile loan portfolio amounted to $27.1
million, or 52.5%, of consumer loans and 11.7% 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 36 automobile
dealers, most located in the Bank's market area and adjacent markets in Oregon
and Idaho. Indirect automobile loans accounted for approximately 75.5% of the
Bank's total consumer loan originations during the year ended March 31, 2003.
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. The automobile
dealers are paid a premium by the Bank. This premium is amortized over the
life of the loan. In addition to indirect automobile lending, the Bank also
originates automobile loans directly.
The maximum term for the Bank's automobile loans is 180 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, 2003, unsecured consumer loans amounted to $6.4 million, or
2.7%, 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 to mitigate the additional risk of the unsecured status.
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 3% to 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, 2003, the Bank had a commitment to fund an
aggregate of $9.8 million of credit card loans, which represented the
aggregate credit limit on credit cards, and had $1.4 million of credit card
loans outstanding, representing 0.6% 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, 2003, the Bank had $57,000 in consumer loans accounted for on a
nonaccrual basis.
7
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 fixed asset
acquisitions, 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. Generally, loans
to finance short-term working capital are made for one year or less with
interest rates adjusted monthly 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 seven years or
less at either a fixed or adjustable rate. At March 31, 2003, the commercial
business loans amounted to $26.3 million, or 11.3%, of the total loan
portfolio.
At March 31, 2003, the largest outstanding commercial business loan was a
$1.7 million operating line of credit to a manufacturing company with a
balance of $1.2 million. Such loan was performing according to its terms at
March 31, 2003.
The Bank is an approved Small Business Administration ("SBA") lender and
at March 31, 2003, had two SBA loans that totaled $186,000. The Bank also
entered into an agreement with the Oregon Economic Development Department
("OEDD") to provide loan guarantees on small business loans. As of March 31,
2003, the Bank had one OEDD loans that totaled $143,000. The Bank intends to
continue to originate loans to local businesses within its primary market area
using these programs, subject to market conditions.
The Bank generally 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 maturities exceeding two years and 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 seven 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, 2003, 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
8
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
-------- ------- ------- ---------- -----
(In thousands)
Mortgage loans:
One- to- four family.... $ 69 $ 390 $ 658 $93,339 $94,456
Multi-family............ 365 319 1,940 5,100 7,724
Commercial.............. 157 391 855 29,471 30,874
Agricultural............ -- -- 230 3,722 3,952
Construction............ -- -- -- 676 676
Land.................... -- -- 23 -- 23
Consumer loans:
Home equity and second
mortgage............... 103 391 1,007 10,812 12,313
Automobile.............. 384 5,964 15,191 5,519 27,058
Credit card............. 11 43 111 1,189 1,354
Loans secured by deposit
accounts............... 78 34 176 -- 288
Unsecured............... 296 381 390 5,290 6,357
Other................... 24 433 785 2,932 4,174
Commercial business
loans................... 9,298 2,607 4,886 9,479 26,270
Agricultural loans....... 12,005 1,075 1,304 1,910 16,294
------- ------- ------- -------- --------
Total................. $22,790 $12,028 $27,556 $169,439 $231,813
======= ======= ======= ======== ========
The following table sets forth the dollar amount of all loans due after
March 31, 2004, 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.................... $ 77,434 $16,953
Multi-family............................ 725 6,634
Commercial.............................. 2,171 28,546
Agricultural............................ 612 3,340
Construction............................ 676 -
Land.................................... 23 --
Consumer loans:
Home equity and second mortgage......... 6,638 5,571
Automobile.............................. 26,674 -
Credit card............................. -- 1,343
Loans secured by deposit accounts....... 210 --
Unsecured............................... 158 5,903
Other................................... 4,150 --
Commercial business loans................ 10,270 6,702
Agricultural loans....................... 2,248 2,041
-------- -------
Total.................................. $131,989 $77,033
======== =======
9
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 term 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 $350,000. 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 and up to $1.5 million requires approval
of either the President or Executive Vice President. Loans to borrowers with
an aggregate borrowing relationship in excess of $1.5 million and up to $2.5
million require the approval of the President and Executive Vice President.
Loans to borrowers with an aggregate borrowing relationship exceeding $2.5
million require approval by the President, Executive Vice President and two
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, 2003, the Bank began selling its
conforming loans along with the servicing of these loans. For the year ended
March 31, 2003, the Bank sold $22.0 million in fixed-rate one-to-four family
residential mortgage loans. At March 31, 2003, the Bank was not servicing any
loans for investors.
The Bank purchased $39.3 million of commercial real estate loans with
properties located in Washington and Idaho during the fiscal year 2002. The
balance of these loans at March 31, 2003 was $19.5 million and was performing
according to its terms.
The following table sets forth total loans originated, purchased, sold
and repaid during the periods indicated.
Year Ended March 31,
-----------------------------------
2003 2002 2001
-------- -------- --------
(In thousands)
Loans originated:
Mortgage loans:
One- to- four family................ $ 27,685 $ 26,446 $ 22,301
Multi-family........................ -- 450 -
Commercial.......................... 4,343 6,921 4,543
Construction........................ 743 265 1,092
Land................................ - 1 11
Consumer............................ 17,947 18,739 14,170
Commercial business loans........... 38,013 33,907 28,778
Agricultural loans.................. 32,440 35,378 32,888
-------- -------- --------
Total loans originated............ $121,171 $122,107 $103,783
======== ======== ========
(table continued on following page)
10
Year Ended March 31,
-----------------------------------
2003 2002 2001
-------- -------- --------
(In thousands)
Loans purchased:
Dealer-originated automobile
contracts.......................... $ 13,559 $ 14,499 $ 14,499
Dealer-originated other contracts... 800 1,635 --
Commercial real estate.............. -- 39,262 5,275
-------- -------- --------
Total loans purchased............. 14,359 55,992 19,774
Loans sold:
One-to-four family.................. 22,002 13,086 --
Loan principal repayments............ 151,164 150,047 93,251
-------- -------- --------
Net increase (decrease) in loans
receivable, net..................... $(37,636) $ 14,966 $ 30,306
======== ======== ========
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 40 days from approval, depending on the type of transaction. At March 31,
2003, the Bank had loan commitments of $42.5 million. See Note 17 of Notes to
Consolidated Financial Statements included in the Annual Report.
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 accreted and amortized in the same manner.
The Bank recognized $285,000, $215,000 and $71,000 of deferred loan fees
during the years ended March 31, 2003, 2002 and 2001, respectively, in
connection with loan refinancings, payoffs 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. 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 is doubtful. Loans are
reinstated to accrual status when current and collectibility of principal and
interest is no longer doubtful.
11
The following table sets forth information with respect to the Bank's
nonperforming assets and restructured loans at the dates indicated.
At March 31,
------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
(Dollars in thousands)
Loans accounted for on a
nonaccrual basis:
Mortgage loans:
One- to- four family..... $ 89 $ 90 $ -- $ 131 $ 133
Nonresidential property.. 367 -- 45 -- -
Consumer loans........... 57 246 10 24 5
-------- -------- -------- -------- --------
Total................. 513 336 55 155 138
Foreclosed real estate..... 217 -- 41 -- 37
Other repossessed assets... 84 58 22 8
-------- -------- -------- -------- --------
Total nonperforming
assets............... $ 814 $ 394 $ 118 $ 163 $ 175
======== ======== ======== ======== ========
Nonaccrual loans as a
percentage of loans
receivable, net........... 0.22% 0.12% 0.02% 0.07% 0.07%
Nonaccrual loans as a
percentage of total
assets.................... 0.14% 0.08% 0.01% 0.04% 0.04%
Nonperforming assets as a
percentage of total
assets.................... 0.22% 0.10% 0.03% 0.04% 0.06%
Loans receivable, net...... $228,227 $265,863 $250,897 $220,591 $185,747
Total assets............... $377,485 $398,366 $388,881 $370,612 $313,473
An additional $25,000 of interest income would have been recorded for the
year ended March 31, 2003, 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 included in the Annual Report, regarding the
Bank's accounting for foreclosed real estate. At March 31, 2003, the Bank had
foreclosed real estate consisting of three homes for $217,000.
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 four classifications for problem
assets: substandard, other loans especially mentioned, 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. Other loans especially mentioned
have potential weaknesses that deserve management's close attention. Loans in
this classification have a plan that is approved by the borrower and the Bank
that will return the credit to a pass classification. Loans in this category
are not adversely classified and do not expose the Bank to sufficient risk to
warrant adverse classification. 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
12
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,
---------------------------
2003 2002 2001
------ ------- -------
(In thousands)
Loss.............................. $ -- $ -- $ -
Doubtful.......................... 39 2 --
Substandard assets................ 2,089 501 1,154
Other loans especially mentioned.. 4,639 930 1,607
Watch............................. 9,034 9,819 9,426
General loss allowances........... 2,221 2,280 2,098
Specific loss allowances.......... -- -- --
At March 31, 2003, doubtful assets consisted of two business loans of
$39,000.
At March 31, 2003, substandard assets consisted of six one- to- four
family mortgage loans of $323,000, ten consumer/dealer loans of $109,000 and
16 commercial/agricultural loans (seven borrowers) of $1.6 million.
At March 31, 2003, other loans especially mentioned consisted of 18
commercial/agricultural loans (11 borrowers) of $4.6 million.
At March 31, 2003, watch assets consisted of six one- to- four family
mortgage loans of $329,000, one consumer/dealer loan of $3,000 and 47
commercial/agricultural loans (26 borrowers) of $8.7 million.
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,
13
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.
The Company's methodology for calculating the necessary reserves for loan
losses requires the Company to reserve specific percentages of outstanding
loan balances with the percentages varying based upon the perceived risk of
the different loan types and loan classification within specific loan types.
The specific reserve percentages are based upon the various loans type's
historic performance, loss trends, industry norms and the general economic
environment. Additionally, the Company has unallocated reserves which keep
the Company's reserves in line with industry norms as well as the inherent
changes in the portfolio risk due to macroeconomic factors.
At March 31, 2003, the Bank had an allowance for loan losses of $2.2
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
generally accepted accounting principles, 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 loan 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.
14
The following table sets forth an analysis of the Bank's allowance for
loan losses for the periods indicated.
Year Ended March 31,
-----------------------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
Allowance at beginning of
period.................... $2,280 $2,098 $1,396 $1,228 $ 847
------ ------ ------ ------ ------
Provision for loan losses.. 321 481 794 178 483
Recoveries:
Mortgage loans:
One- to- four family..... -- -- 1 23 --
Consumer loans:
Credit card.............. 5 10 5 7 9
Other.................... 42 32 13 2 4
------ ------ ------ ------ ------
Total recoveries........ 47 42 19 32 13
------ ------ ------ ------ ------
Charge-offs:
Mortgage loans:
One- to- four family..... -- -- -- -- 4
Consumer loans:
Credit card.............. 24 31 99 37 82
Automobile............... 266 199 11 1 15
Unsecured................ 69 47 1 -- --
Other.................... 48 25 -- 4 14
------ ------ ------ ------ ------
Commercial.............. 20 3 -- -- -
Agriculture............. - 36 -- -- --
------ ------ ------ ------ ------
Total charge-offs....... 427 341 111 42 115
------ ------ ------ ------ ------
Net charge-offs......... 380 299 92 10 102
------ ------ ------ ------ ------
Allowance at end of
period................. $2,221 $2,280 $2,098 $1,396 $1,228
====== ====== ====== ====== ======
Allowance for loan losses
as a percentage of total
loans outstanding at the
end of the period......... 0.96% 0.85% 0.82% 0.63% 0.66%
Net charge-offs as a
percentage of average
loans outstanding during
the period................ 0.15% 0.11% 0.04% --% 0.06%
Allowance for loan losses
as a percentage of
nonperforming loans at
end of period............. 432.94% 678.21% 3,814.55% 900.65% 889.86%
15
The following table sets forth the breakdown of the allowance for loan losses by loan category at the
dates indicated. Management feels that the allowance can be allocated by category only on an approximate
basis. The allocation of the allowance to each category is not necessarily indicative of future losses and
does not restrict the use of the allowance to absorb losses in any other category.
At March 31,
-----------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
---------------- ---------------- ---------------- ---------------- -----------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in in in in in
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
Mortgage loans:
One- to- four
family.......... $ 238 41.04% $ 313 46.08% $ 352 54.82% $ 338 24.21% $ 381 31.03%
Non-mortgage
loans............ 762 21.52 792 19.54 625 20.04 265 21.58 236 21.58
Commercial
business and
real estate...... 756 29.70 637 27.76 494 18.15 360 25.79 300 8.9
Agricultural
loans............ 367 7.03 260 6.00 331 6.35 314 22.49 250 3.19
Credit cards...... 95 0.58 82 0.43 76 0.43 26 1.86 29 0.55
Loans secured by
deposit accounts. 3 0.13 5 0.19 5 0.21 3 0.22 3 0.24
Unallocated....... - -- 191 -- 215 -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance
for loan
losses........ $2,221 100.00% $2,280 100.00% $2,098 100.00% $1,396 100.00% $1,228 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
16
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" included in the Annual Report.
Although the Bank generally purchases investment securities with excess
liquidity, during the years ended March 31, 2003, 2002 and 2001, the Bank
engaged in a leveraging strategy using funds borrowed from the Federal Home
Loan Bank to purchase investment securities. Total purchases amounted to
$62.2 million, $44.4 million and $17.0 million during the years ended March
31, 2003, 2002 and 2001, respectively, including $14.7 million in mortgage
backed securities, $35.5 million in short-term investments and $12.0 million
in collateralized mortgage obligations purchased in fiscal 2003. Purchases
were funded in fiscal 2003 by principal repayments of securities totaling
$38.4 million, by selling investment securities totaling $8.3 million and the
remaining purchases were funded by the overall decrease in outstanding loans
for the period. Purchases were funded in fiscal 2002 by selling investment
securities totaling $28.7 million, and principal repayment of securities
totaling $19.7 million. Purchases were funded by selling investment
securities totaling $37.8 million for the year ended March 31, 2001. 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 totaled $7.2 million at March 31, 2003.
At March 31, 2003, the Bank held securities classified as
available-for-sale under SFAS 115. There were no trading securities at March
31, 2003. See Note 2 of Notes to Consolidated Financial Statements contained
in the Annual Report.
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, 2003, the Bank did not have any individual investment
(excluding U.S. government bonds and mutual funds) that had an aggregate book
value in excess of 10% of the Company's shareholders' equity at that date.
17
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,
---------------------------------------------------------------------------
2003 2002 2001
---------------------- ---------------------- -----------------------
Carrying Percent of Carrying Percent of Carrying Percent of
Value(1) Total Value(1) Total Value(1) Total
-------- ---------- -------- ---------- --------- -----------
(Dollars in thousands)
Available for Sale:
U.S. Government agency
obligations............ $ 9,414 8.72% $10,972 11.87% $20,038 20.67%
Trust preferred
securities............. 7,168 6.64 6,837 7.40 6,860 7.08
Mortgage-backed and
related securities..... 63,616 58.94 74,100 80.18 70,010 72.23
Other................... 27,737 25.70 510 0.55 16 0.02
-------- ------ ------- ------ ------- ------
Total available for
sale securities...... $107,935 100.00% $92,419 100.00% $96,924 100.00%
======== ====== ======= ====== ======= ======
- ---------------
(1) The market value of the Bank's investment portfolio amounted to $107.9 million, $92.4 million and
$96.9 million at March 31, 2003, 2002 and 2001, respectively. At March 31, 2003, the amortized cost
of the principal components of the Bank's investment securities portfolio was as follows: U.S.
Government securities, $9.2 million; trust preferred securities, $6.8 million; mortgage-backed and
related securities, $61.2 million and other securities, $27.7 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, 2003.
Less Than One to Five to Over Ten
One Year Five Years Ten Years Years No
------------- ------------- ------------- ------------- Maturity
Amount Yield Amount Yield Amount Yield Amount Yield Amount
------ ----- ------ ----- ------ ----- ------ ----- --------
(Dollars in thousands)
Available for Sale:
U.S. Government
agency obligations... $2,109 3.02% $ - --% $2,227 4.30% $ 5,168 2.42% $ -
Trust preferred
securities........... -- -- -- -- - - 7,168 4.56 -
Mortgage-backed and
related securities... 2 3.92 -- -- 3,353 4.29 60,261 5.79 --
Other................. -- -- -- -- -- -- - 27,737
------ ----- ------ ------- -------
Total available for
sale securities.... $2,021 $ -- $5,580 $72,801 $27,737
====== ===== ====== ======= =======
Total
Yield Amount
------ ------
Available for Sale:
U.S. Government
agency obligations... --% $ 9,414
Trust preferred
securities........... -- 7,168
Mortgage-backed and
related securities... -- 63,616
Other................. 1.58 27,737
----- --------
Total available for
sale securities.... $107,935
========
18
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 $21.0 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 also
offers business deposit 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 competitive rates. 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, 2003.
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 $ 25,563 $ 10 10.26%
0.25% N/A NOW accounts 38,637 10 15.51
1.13 N/A Money market accounts 61,984 1,000 24.88
0.83 N/A Statement savings accounts 20,171 5 8.10
Certificates of Deposit
-----------------------
4.83 3 to 5 years Fixed-term, fixed-rate 18,986 1,000 7.62
1.23 91 days Fixed-term, fixed-rate 3,501 1,000 1.40
1.47 182 days Fixed-term, fixed-rate 13,920 1,000 5.59
1.98 1 year Fixed-term, variable-rate 29,141 1,000 11.70
3.95 2 1/2 years Fixed-term, variable-rate 7,560 1,000 3.03
5.10 5 years Fixed-term, variable-rate 12,604 1,000 5.06
1.25 18 months Fixed-term, adjustable-rate 2,585 5 1.04
2.51 20 months Fixed-term, fixed-rate 5,885 1,000 2.36
3.60 varies Various term, fixed-rate 1,463 1,000 0.59
3.08 varies Jumbo certificates 7,126 96,000 2.86
-------- ------
TOTAL $249,126 100.00%
======== ======
19
The following table indicates the amount of the Bank's jumbo certificates
of deposit by time remaining until maturity as of March 31, 2003. Jumbo
certificates of deposit generally have principal amounts of $100,000 or more
and have negotiable interest rates.
Certificates
Maturity Period of Deposits
---------------------------------- ------------
(In thousands)
Three months or less............... $ 6,063
Over three through six months...... 6,056
Over six through twelve months..... 5,460
Over twelve months................. 9,867
-------
Total.............................. $27,446
=======
Deposit Flow. The following table sets forth the balances (inclusive of
interest credited) and changes in dollar amounts of deposits in the various
types of accounts offered by the Bank between the dates indicated.
At March 31,
--------------------------------------------------------------------------
2003 2002 2001
-------------------------- --------------------------- ---------------
Percent Percent Percent
of Increase of Increase of
Amount Total (Decrease) Amount Total (Decrease) Amount Total
------ ----- ---------- ------ ----- ---------- ------ -----
(Dollars in thousands)
Non-interest-bearing........ $ 25,563 10.26% $ 3,685 $ 21,878 8.54% $2,200 $ 19,678 7.75%
NOW checking................ 38,637 15.51 2,834 35,803 13.98 (169) 35,972 14.17
Statement savings accounts.. 20,171 8.10 1,800 18,371 7.17 2,120 16,251 6.40
Money market deposit........ 61,984 24.88 1,299 60,685 23.70 6,702 53,983 21.27
Time certificates which mature:
Within 1 year............. 64,294 25.81 (25,152) 89,446 34.93 (5,058) 94,504 38.25
After 1 year, but within
3 years.................. 25,874 10.38 6,343 19,531 7.63 (5,837) 25,368 7.83
After 3 years, but within
5 years.................. 12,275 4.93 2,902 9,373 3.66 2,682 6,691 2.33
Certificates maturing
thereafter............... 328 0.13 (663) 991 0.39 (339) 1,330 0.53
-------- ------ ------- -------- ------ ------ -------- ------
Total................... $249,126 100.00% $(6,952) $256,078 100.00% $2,301 $253,777 100.00%
======== ====== ======= ======== ====== ====== ======== ======
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,
--------------------------------------
2003 2002 2001
-------- -------- --------
(In thousands)
1.00 - 1.99%....... $ 35,930 $ 10,375 $ --
2.00 - 3.99%....... 36,681 53,067 --
4.00 - 4.99%....... 10,748 20,970 9,933
5.00 - 5.99%....... 10,841 16,677 38,223
6.00 - 6.99%....... 8,062 16,949 62,822
7.00% and over..... 509 1,303 16,915
-------- -------- --------
Total.............. $102,771 $119,341 $127,893
======== ======== ========
20
Deposit Activity. The following table sets forth the deposit activity of
the Bank for the periods indicated.
Year Ended March 31,
---------------------------------------
2003 2002 2001
-------- -------- --------
(In thousands)
Beginning balance............. $256,078 $253,777 $237,735
-------- -------- --------
Net (withdrawals) deposits
before interest credited..... (11,871) (5,730) 5,752
Interest credited............. 4,919 8,031 10,290
-------- -------- --------
Net increase (decrease)
in deposits.................. (6,952) 2,301 16,042
-------- -------- --------
Ending balance................ $249,126 $256,078 $253,777
======== ======== ========
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 $21.0 million
overnight line of credit with Key Bank and a $50.0 million reverse repurchase
agreement with Merrill Lynch. See Note 8 of Notes to Consolidated Financial
Statements included in the Annual Report.
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
Year Ended March 31,
---------------------------------
2003 2002 2001
-------- -------- -------
(Dollars in thousands)
Maximum amount of borrowings outstanding
at any month end:
FHLB advances........................... $82,725 $109,600 $87,300
Approximate average borrowings outstanding
with respect to:
FHLB advances........................... 72,681 84,989 75,871
Approximate weighted average rate paid on:
FHLB advances........................... 5.30% 5.33% 6.34%
21
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, 2003, there was a $6.8 million, or 2.0%, 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" contained in the Annual Report
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" contained in the Annual Report Furthermore, there has been increased
scrutiny by the regulatory agencies as to financial institutions levels of
interest rate risk and Pioneer Bank has been examined by the OTS since it
increased its review of this area, with a "satisfactory" rating.
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
22
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, 2003 was $44,000.
Federal Home Loan Bank System. The FHLB System, consisting of 12 FHLBs,
is under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
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 $6.7 million at March 31, 2003.
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.
As insurer, the FDIC imposes deposit insurance premiums and is authorized
to conduct examinations of and to require reporting by FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging
in any activity the FDIC determines by regulation or order to pose a serious
risk to the SAIF or the BIF. The FDIC also has the authority to initiate
enforcement actions against savings institutions, after giving the OTS an
opportunity to take such action, and may terminate the deposit insurance if it
determines that the institution has engaged in unsafe or unsound practices or
is in an unsafe or unsound condition.
23
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified
as well capitalized (i.e., a core capital ratio of at least 5%, a ratio of
Tier 1, or core capital, to risk-weighted assets ("Tier 1 risk-based capital")
of at least 6% and a risk-based capital ratio of at least 10%) and considered
healthy pay the lowest premium while institutions that are less than
adequately capitalized (i.e., core or Tier 1 risk-based capital ratios of less
than 4% or a risk-based capital ratio of less than 8%) and considered of
substantial supervisory concern pay the highest premium. Risk classification
of all insured institutions is made by the FDIC for each semi-annual
assessment period.
The FDIC is authorized to increase assessment rates, on a semi-annual
basis, if it determines that the reserve ratio of the SAIF will be less than
the designated reserve ratio of 1.25% of SAIF insured deposits. In setting
these increased assessments, the FDIC must seek to restore the reserve ratio
to that designated reserve level, or such higher reserve ratio as established
by the FDIC. The FDIC may also impose special assessments on SAIF members to
repay amounts borrowed from the United States Treasury or for any other reason
deemed necessary by the FDIC.
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 1.88 points for each $100 in domestic
deposits for SAIF and BIF insured institutions. These assessments, which may
be revised based upon the level of BIF and SAIF deposits, will continue until
the bonds mature in 2017 through 2019.
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. Federal regulations require the Bank to maintain
sufficient liquidity to ensure its safe and sound operation. Liquid assets
include cash, cash equivalents consisting of short-term interest-earning
deposits, certain other time deposits, and other obligations generally having
remaining maturities of less than five years. Liquidity management is both a
daily and long-term responsibility of management. 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."
At March 31, 2003, 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 adopted Interagency Guidelines prescribing Standards for Safety
and Soundness. 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 a savings institution fails to meet any standard prescribed by
the
24
guidelines, the OTS may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard.
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 total assets less (i) specified liquid
assets up to 20% of total assets; (ii) intangibles, including goodwill; and
(iii) the value of property used to conduct business in certain "qualified
thrift investments " in at least nine out of each 12 month period 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, 2003, the
Bank met the test and its QTL percentage was 79.0%.
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 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, 2003, the Bank
had tangible capital of $46.1 million, or 12.4% of adjusted total assets,
which is approximately $40.5 million above the minimum requirement of 1.5% of
adjusted total assets in effect on that date.
The capital standards also require core capital equal to 4% of adjusted
total assets, depending on an institution's supervisory rating. Core capital
generally consists of tangible capital. At March 31, 2003, the Bank had core
capital equal to $46.1 million, or 12.4% of adjusted total assets, which is
$34.9 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, 2003, the Bank had total risk-based capital of approximately
$48.3 million, including $46.1 million in core capital and $2.2 million in
qualifying supplementary capital, and risk-weighted assets of $233.5 million,
or total capital of 20.7% of risk-weighted assets. This amount was $29.6
million above the 8% requirement in effect on that date.
25
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 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, 2003, the Bank's limit on loans to one borrower was $7.2 million. At
March 31, 2003, the Bank's largest aggregate loan to one borrower was $2.9
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
26
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. 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.
27
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 Company and any of its 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.
1999 Legislation. On November 12, 1999, the Gramm-Leach-Bliley Financial
Services Modernization Act of 1999 was signed into law. The purpose of this
legislation was to modernize the financial services industry by establishing a
comprehensive framework to permit affiliations among commercial banks,
insurance companies, securities firms and other financial service providers.
Generally, the Act:
a. repealed the historical restrictions and eliminates many federal and
state law barriers to affiliations among banks, securities firms,
insurance companies and other financial service providers;
b. provided a uniform framework for the functional regulation of the
activities of banks, savings institutions and their holding
companies;
c. broadened the activities that may be conducted by national banks,
banking subsidiaries of bank holding companies and their financial
subsidiaries;
d. provided an enhanced framework for protecting the privacy of
consumer information;
e. adopted a number of provisions related to the capitalization,
membership, corporate governance and other measures designed to
modernize the FHLB system;
f. modified the laws governing the implementation of the CRA; and
g. addressed a variety of other legal and regulatory issues affecting
day-to-day operations and long-term activities of financial
institutions.
The USA Patriot Act. In response to the terrorist events of September
11th, 2001, President George W. Bush signed into law the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, on October 26, 2001.
The USA PATRIOT Act gives the federal government new powers to address
terrorist threats through enhanced domestic security measures, expanded
surveillance powers, increased information sharing, and broadened anti-money
laundering requirements. By way of amendments to the Bank Secrecy Act, Title
III of the USA PATRIOT Act takes measures intended to encourage information
sharing among bank regulatory agencies and law enforcement bodies. Further,
certain provisions of Title
28
III impose affirmative obligations on a broad range of financial institutions,
including banks, thrifts, brokers, dealers, credit unions, money transfer
agents and parties registered under the Commodity Exchange Act.
Among other requirements, Title III of the USA PATRIOT Act imposes the
following requirements with respect to financial institutions:
- Pursuant to Section 352, all financial institutions must establish
anti-money laundering programs that include, at minimum: (i) internal
policies, procedures, and controls, (ii) specific designation of an anti-money
laundering compliance officer, (iii) ongoing employee training programs, and
(iv) an independent audit function to test the anti-money laundering program.
- Section 326 of the Act authorizes the Secretary of the Department of
Treasury, in conjunction with other bank regulators, to issue regulations that
provide for minimum standards with respect to customer identification at the
time new accounts are opened, which were issued in proposed form on July 23,
2002 and are still pending final action.
- Section 312 of the Act requires financial institutions that establish,
maintain, administer, or manage private banking accounts or correspondent
accounts in the United States for non-United States persons or their
representatives (including foreign individuals visiting the United States) to
establish appropriate, specific, and, where necessary, enhanced due diligence
policies, procedures, and controls designed to detect and report money
laundering.
- Effective December 25, 2001, financial institutions are prohibited from
establishing, maintaining, administering or managing correspondent accounts
for foreign shell banks (foreign banks that do not have a physical presence in
any country), and will be subject to certain recordkeeping obligations with
respect to correspondent accounts of foreign banks.
- Bank regulators are directed to consider a holding company's
effectiveness in combating money laundering when ruling on Federal Reserve Act
and Bank Merger Act applications.
During the first quarter of 2002 the Federal Crimes Enforcement Network
(FinCEN), a bureau of the Department of Treasury, issued proposed and interim
regulations to implement the provisions of Sections 312 and 352 of the USA
PATRIOT Act. Final rules were issued May 9, 2003 and are effective June 9,
2003. Banks are expected to be fully compliant by October 1, 2003. To date,
it has not been possible to predict the impact the USA PATRIOT Act and its
implementing regulations may have on the Company and the Bank.
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002
("Sarbanes-Oxley Act") was signed into law by President Bush on July 30, 2002
in response to public concerns regarding corporate accountability in
connection with the recent accounting scandals at Enron and WorldCom. The
stated goals of the Sarbanes-Oxley Act are to increase corporate
responsibility, to provide for enhanced penalties for accounting and auditing
improprieties at publicly traded companies and to protect investors by
improving the accuracy and reliability of corporate disclosures pursuant to
the securities laws.
The Sarbanes-Oxley Act is the most far-reaching U.S. securities
legislation enacted in some time. The Sarbanes-Oxley Act generally applies to
all companies, both U.S. and non-U.S., that file or are required to file
periodic reports with the Securities and Exchange Commission ("SEC"), under
the Securities Exchange Act of 1934 ("Exchange Act").
The Sarbanes-Oxley Act includes very specific additional disclosure
requirements and new corporate governance rules, requires the SEC and
securities exchanges to adopt extensive additional disclosure, corporate
governance and other related rules and mandates further studies of certain
issues by the SEC and the Comptroller General. The Sarbanes-Oxley Act
represents significant federal involvement in matters traditionally left to
state regulatory systems, such as the regulation of the accounting profession,
and to state corporate law, such as the relationship between a board of
directors and management and between a board of directors and its committees.
29
The Sarbanes-Oxley Act addresses, among other matters:
* audit committees;
* certification of financial statements by the chief executive
officer and the chief financial officer;
* the forfeiture of bonuses or other incentive-based compensation and
profits from the sale of an issuer's securities by directors and
senior officers in the twelve month period following initial
publication of any financial statements that later require
restatement;
* a prohibition on insider trading during pension plan black out
periods;
* disclosure of off-balance sheet transactions;
* a prohibition on personal loans to directors and officers;
* expedited filing requirements for Form 4s;
* disclosure of a code of ethics and filing a Form 8-K for a change
or waiver of such code;
* "real time" filing of periodic reports;
* the formation of a public accounting oversight board;
* auditor independence; and
* various increased criminal penalties for violations of securities
laws.
The Sarbanes-Oxley Act contains provisions which became effective upon
enactment on July 30, 2002 and provisions which will become effective from
within 30 days to one year from enactment. The SEC has been delegated the task
of enacting rules to implement various provisions with respect to, among other
matters, disclosure in periodic filings pursuant to the Exchange Act.
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.
30
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 and other thrifts
operating in its market area. As of March 31, 2003, there
31
were 15 financial institutions, including commercial banks, credit unions, and
other thrifts operating in the Bank's primary market area. Particularly in
times of low interest rates, the Bank faces additional significant competition
for investors' funds for certificate and money market dollars. 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 contracts. PBIC's primary interest is to hold
the Bank's non-conforming assets. At March 31, 2003, the Bank's equity
investment in PDC and PBIC was $2.2 million and $161,000, 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, 2003.
Personnel
As of March 31, 2003, the Bank had 112 full-time and eight part-time
employees, none of whom is represented by a collective bargaining unit. The
Bank believes its relationship with its employees is good.
Item 2. Properties
- -------------------
The following table sets forth certain information regarding the Bank's
offices at March 31, 2003, all of which are owned.
Current Approximate
Location Year Opened Square Footage Deposits
- -------------------------- ----------- -------------- --------
(In thousands)
Corporate Office:
2055 First Street 1979 10,700 $ 8,014
Baker City, Oregon 97814
Branch Offices:
Baker City Branch (2) 2000 12,653 57,910
1990 Washington
Baker City, Oregon 97814
La Grande Branch 1975 6,758 52,608
1215 Adams Avenue
La Grande, Oregon 97850
Ontario Branch 1960 3,700 30,485
225 SW Fourth Avenue
Ontario, Oregon 97914
(table continued on following page)
32
Current Approximate
Location Year Opened Square Footage Deposits
- -------------------------- ----------- -------------- --------
(In thousands)
John Day Branch 1973 2,420 $ 16,616
150 West Main Street
John Day, Oregon 97845
Burns Branch 1975 3,968 19,952
77 W. Adams Street
Burns, Oregon 97720
Enterprise Branch 1976 3,360 27,166
205 West Main Street
Enterprise, Oregon 97828
Island City Branch 1997 4,200 20,384
3106 Island Avenue
La Grande, Oregon 97850
Vale Branch 1999 3,512 9,724
150 Longfellow Street North
Vale, Oregon 97918
Pendleton Branch (1) 2000 3,748 6,267
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, 2003, the Bank had ten proprietary automated teller machines, all of
which were located in existing branches. At March 31, 2003, the net book
value of the Bank's office properties and the Bank's fixtures, furniture and
equipment was $8.7 million or 2.3% of total assets. See Note 6 of Notes to
Consolidated Financial Statements included in the Annual Report.
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. 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, 2003.
33
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
- --------------------------------------------------------------------------
Matters
-------
Information regarding the reported high and low sale prices of the
Company's common stock and declared dividends for each quarter within the two
most recent fiscal years are contained under the section captioned "Stock
Listing" in the Annual Report which is incorporated herein by reference.
Under Oregon law, the Company is permitted to pay cash dividends either
out of surplus or, if there is no surplus, out of net profits for the fiscal
year in which the dividend is declared and/or the preceding fiscal year. The
principal source of funds for the Company are dividend payments from the Bank.
OTS regulations require the Bank to give the OTS 30 days advance notice of any
proposed declaration of dividends to the Company, and the OTS has the
authority under its supervisory powers to prohibit the payment of dividends to
the Company. The OTS imposes certain limitations on the payment of dividends
from the Bank to the Company which utilize a three-tiered approach that
permits various levels of distributions based primarily upon a savings
association's capital level. See "REGULATION -- Federal Regulation of Savings
Associations -- Limitations on Capital Distributions." In addition, the
Company may not declare or pay a cash dividend on its capital stock if the
effect thereof would be to reduce the regulatory capital of the Company below
the amount required for the liquidation account to be established pursuant to
the Company's Plan of Conversion adopted in connection with the Conversion.
Item 6. Selected Financial Data
- --------------------------------
The information contained under the section captioned "SELECTED
CONSOLIDATED FINANCIAL DATA" on pages 3 and 4 of the Annual Report is
incorporated herein by reference.
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 5 of the Annual Report is incorporated herein by reference.
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 12 and 13 of the
Annual Report are incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
Index to Consolidated Financial Statements
Independent Auditors' Report*
Consolidated Balance Sheets as of March 31, 2003 and 2002*
Consolidated Statements of Income For the Years Ended
March 31, 2003, 2002 and 2001*
Consolidated Statements of Shareholders' Equity For the
Years Ended March 31, 2003, 2002 and 2001*
Consolidated Statements of Cash Flows For the Years Ended
March 31, 2003, 2002 and 2001*
Notes to 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.
34
(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. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
--------------------
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
Directors
The following table sets forth as to each director, his name, age, and
the year he first became a director. Unless otherwise indicated, the principal
occupation listed for each person below has been his occupation for the past
five years.
Year First Elected or Term to
Name Age(1) Appointed Director (2) Expire
- ----------------------------- ------ ---------------------- ------
John Gentry 55 1992 2004
Kevin D. Padrick 48 2001 2004
Albert H. Durgan 72 1985 2005
Edward H. Elms 55 1986 2005
Stephen R. Whittemore 53 1983 2006
Charles H. Rouse 57 1991 2006
- ---------------
(1) As of March 31, 2003.
(2) Includes prior service on the board of directors of the Bank. Each member
of the board of directors of the Company, except Kevin D. Padrick, is
also a member of the board of directors of the Bank.
The principal occupation and other business experience during the last
five years of each director is set forth below:
John Gentry has been President and General Manager of Gentry Ford Sales,
Inc., an automobile dealership located in Ontario, Oregon, since 1985. He
served as Vice President of that company between 1972 and 1985. Mr. Gentry
has a Bachelor of Science degree in Business/Journalism from the University of
Oregon. He has been a Director and President of the Ontario, Oregon, Chamber
of Commerce, a Director of the City of Ontario, Oregon, Budget Board, a
Director and President of the Oregon Automobile Dealers Association, and a
Director of the Western States Ford Dealer Advertising Association.
Kevin D. Padrick, an attorney, is a consultant for businesses in need of
an individual with a background in both business and law. Most recently, in
September 1998, Mr. Padrick was hired as a consultant by Southern Pacific
Funding Corporation and from October 1998 to 1999 Mr. Padrick served as
Executive Vice President and later as President of Southern Pacific Funding
Corporation. Mr. Padrick has a Bachelor of Science degree from the University
of Santa Clara, a Masters of Business Administration from the University of
Santa Clara Business School and a Juris Doctor from the University of Santa
Clara Law School.
Albert H. Durgan is retired from the Bank after 34 years of service. He
served as President of the Bank from 1986 to 1992. Prior to being President,
he held the position of Executive Vice President for seven years, Branch
Manager for 18 years, and also served in other front-line and back office
positions. Mr. Durgan has a Bachelor of Science degree in Real Estate and
Finance from the University of Oregon.
35
Edward H. Elms has been the owner of P&E Distributing Company, a beverage
distributor, located in Baker City, Oregon, for 30 years. He also owns and
manages commercial and residential rental properties in the Baker City area.
Mr. Elms was the co-owner of Heritage Chevrolet, a car dealership located in
Baker City, Oregon, from 1996 to 1999. Mr. Elms has a degree in Diesel
Technology from the Oregon Institute of Technology.
Stephen R. Whittemore is currently a private investor. Mr. Whittemore
was the owner of BesTruss, an engineered roof systems company from 1996 to
2001. He was a partner in Wallowa Lake Tram, Inc. from 1983 to 2001, and was
the owner of La Grande Lumber Company, a distributor of building materials,
from 1971 to 1996. Mr. Whittemore has a Bachelor of Science degree in
Economics from Oregon State University.
Charles H. Rouse is currently a private investor and consultant. Mr.
Rouse was employed by Norris Beggs & Simpson Realtors, Portland, Oregon, as
Vice President, Corporate Services, from January 2001 to August 2002. Prior
to that, Mr. Rouse was an authorized Sears dealer in Baker City, Oregon, and
a property developer and manager since 1995. He was the owner of Rouse's Home
Furnishings, Baker City, Oregon, from 1985 to 1995. He has been a Director of
the Oregon Tourism Commission and the Western Building Materials Association.
Mr. Rouse has a Bachelor of Science degree in Biology and a Masters of
Business Administration from Oregon State University.
Meetings and Committees of the Board of Directors. The boards of
directors of the Company and the Bank conduct their business through meetings
of the boards and through their committees. During the fiscal year ended
March 31, 2003, the board of directors of the Company held 12 special meetings
and four regularly scheduled meetings, and the board of directors of the Bank
held no special meetings and 12 regularly scheduled meetings. No director of
the Company or the Bank attended fewer than 75% of the total meetings of the
boards and committees on which such person served during this period.
Committees of the Company's Board. The Company's board of directors has
established Audit and Nominating Committees.
The Audit Committee consists of directors Elms (Chairman), Gentry, Durgan
and Padrick. It receives and reviews all reports prepared by the Company's
external and internal auditors. The internal auditor reports monthly to the
Audit Committee. The Audit Committee met five times during the fiscal year
ended March 31, 2003.
The full board of directors acts as a Nominating Committee for the annual
selection of management's nominees for election as directors of the Company.
The full board of directors met once in its capacity as Nominating Committee
on July 21, 2003.
Committees of the Bank's Board. The Bank's board of directors has
established Personnel and Compensation, Audit and Nominating Committees, among
others.
The Personnel and Compensation Committee, consisting of directors Rouse
(Chairman), Elms and John Lienkaemper, is responsible for all personnel
issues, including recommending compensation levels for all employees and
senior management of the Company and the Bank to their respective board of
directors. The Personnel and Compensation Committee meets at least twice a
year and met three times during the year ended March 31, 2003.
The Audit Committee, consisting of directors Elms (Chairman), Gentry and
Durgan, receives and reviews all reports prepared by the Bank's external
auditor and the internal audit function. The Audit Committee met four times
during the year ended March 31, 2003.
The full board of directors of the Bank acts as a Nominating Committee
for the annual selection of its nominees for election as directors. The full
board of directors met once in its capacity as Nominating Committee during the
year ended March 31, 2003.
36
Directors' Compensation.
Fees. The Company and the Bank each pay fees to its directors. During
the year ended March 31, 2003, each director of the Company received a
quarterly fee of $1,000, except that the chairman of the board received a
quarterly fee of $1,250. Each director of the Bank, other than the chairman
of the board, received a monthly fee of $1,075 during the year. The chairman
of the board of the Bank received a monthly fee of $1,125 during the year.
Each director received an additional $125 per month for service on the board
of directors of Pioneer Development Corporation, a wholly-owned subsidiary of
the Bank. The Company and the Bank paid total fees to directors of $165,000
for the fiscal year ended March 31, 2003.
Directors Emeritus Plan. The Bank maintains the the Bank Director's Plan
which confers director emeritus status on a director who retires at or after
attaining age 70 with 10 or more years of service. Under the Director's Plan,
a director emeritus receives a fee equal to the greater of $800 or 65% of the
fee payable to regular board members for attendance at monthly board meetings.
The fee is payable for the life of the director emeritus. As a condition of
receipt of benefits under the Director's Plan, a director emeritus is expected
to be available to advise and consult with management of the Bank, represent
and promote the interests of the Bank in its primary market area, and refrain
from business activities that are competitive with or contrary to the
interests of the Bank. An additional feature of the Director's Plan provides
that, in the event of a change in control of the Company or the Bank (as
defined in the Director's Plan), each active director would be treated as a
director emeritus on the effective date of the change of control. Within 30
days of such date, each director would receive a payment equal to the present
value of seven times the annual fees payable to the director at the effective
time of the change in control. The present value calculation is based on the
applicable federal rate as published by the Internal Revenue Service. If a
change in control had occurred at March 31, 2003, the aggregate amount payable
under the Director's Plan to all current directors would be approximately
$710,586.
Other. Pursuant to the Company's Option Plan, 16,228 stock options were
granted to each of Messrs. Gentry, Durgan, Elms, Whittemore, Rouse and
Lienkaemper, and 5,000 stock options were granted to Mr. Padrick, on October
23, 2001, the grant date. The options were granted at an exercise price of
$16.625 and vested immediately on the grant date. Pursuant to the Company's
Management Recognition and Development Plan, 9,727 shares of restricted common
stock were awarded to each of Messrs. Gentry, Durgan, Elms, Whittemore, Rouse
and Lienkaemper on October 23, 2001. These shares vest pro rata over a
three-year period with the first vesting on October 23, 2003 and subsequent
vesting on October 23, 2004 and October 23, 2005 so long as the recipient
continues service as a director of the Company or any of its subsidiaries.
Executive Officers
The following table sets forth certain information regarding the
executive officers of the Company and the Bank.
Name Age(1) Position
- -------------------- ------ --------------------------------------------
Company Bank
-------------------- --------------------
Berniel L. Maughan 60 President and Chief President and Chief
Executive Officer Executive Officer
Zane F. Lockwood 48 Executive Vice Executive Vice
President President
Jonathan P. McCreary 35 Chief Financial Chief Financial
Officer Officer
- -----------------
(1) At March 31, 2003.
Berniel L. Maughan has served as President and Chief Executive Officer of
the Company and the Bank since May 25, 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
37
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 34 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 has been very involved in the communities he has resided in
having held numerous board memberships, including current Board Chairman for
the St. Elizabeth Health Services Foundation, Eastern Oregon University
Foundation, and past president of the La Grande/Union County Chamber of
Commerce.
Jonathan P. McCreary has served as Chief Financial Officer and Senior
Vice President of the Company and the Bank since July 17, 2000. Mr. McCreary
previously served with Metropolitan Mortgage & Securities Inc., since 1993,
and was Chief Investment Officer in 2000 when he left to join the Company.
Mr. McCreary has over 12 years experience in financial management, portfolio
management and accounting. He is a Chartered Financial Analyst, Certified
Public Accountant, Certified Managerial Accountant, and holds a Bachelors
Degree in Finance and Accounting from Central Washington University.
Item 11. Executive Compensation
- --------------------------------
Summary Compensation Table. The following information is provided for
the Chief Executive Officer and each of the other executive officers of the
Company or the Bank who received salary and bonus in excess of $100,000 during
the year ended March 31, 2003 ("named executive officers").
Long-term Compensation
Annual Compensation(1) Awards
--------------------- -------------------------
Restricted Number All
Name and Stock of Other Annual
Position Year Salary($) Bonus Awards($)(2) Options(3) Compensation(4)
- -------- ---- --------- ----- ------------ ---------- ---------------
Berniel L. Maughan 2003 $185,096 $ 87,500 $ -- -- $77,812
President and Chief 2002 165,385 75,000 -- -- 76,820
Executive Officer 2001 124,039 25,000 -- 50,000 3,000
Zane F. Lockwood 2003 $113,532 $ -- $ -- -- $38,929
Executive Vice President 2002 104,423 -- -- -- 34,527
and Corporate Secretary 2001 96,000 -- -- -- 27,758
Jonathan P. McCreary 2003 $107,224 $ 30,600 $ -- -- $44,525
Senior Vice President and 2002 98,609 27,000 62,200 10,000 16,084
Chief Financial Officer 2001 64,039 -- -- 5,047 4,500
(footnotes on following page)
38
- --------------
(1) Does not include certain benefits, the aggregate amounts of which do not
exceed 10% of total annual salary and bonus.
(2) Pursuant to the Management Recognition and Development Plan, 18,779
shares of restricted common stock were awarded to Mr. Lockwood on
October 8, 1998, the award date, which had a value of $209,386. For Mr.
McCreary, represents the value of restricted stock awards at September
18, 2001, the award date, pursuant to the Management Recognition and
Development Plan. The Management Recognition and Development Plan was
approved by shareholders at the 1998 Annual Meeting of Shareholders and
provides for the award of common stock in the form of restricted stock
awards to directors, officers and key employees. Dividends are paid on
such awards if and when declared and paid by the Company on the common
stock. At March 31, 2003, the value of the unvested awards for Mr.
Lockwood (which vest pro rata over a five-year period at a rate of 20%)
was $86,365 (3,755 shares at $23.00 per share)and the value of Mr.
McCreary's unvested awards (which vest pro rata over a three-year period
at a rate of 33.33% beginning on September 18, 2002) was $61,341 (2,667
shares at $23.00 per share).
(3) Pursuant to the Option Plan, Mr. Maughan was granted 50,000 options on
May 22, 2000, Mr. Lockwood was granted 46,948 options on October 8, 1998
and Mr. McCreary was granted 5,047 options on July 19, 2000 and 10,000
options on September 18, 2001. The options for Messrs. Maughan and
Lockwood vest at a rate of 20% per year over a five year period. The
options for Mr. McCreary awarded July 19, 2000 vest at a rate of 25% per
year over a four year period and the options awarded September 18, 2001
vest at a rate of 33.33% per year over a three year period.
(4) Consists of employer 401(k) plan contributions, shares allocated but not
necessarily vested under the employee stock ownership plan and life
insurance premium benefit. Shares allocated under the employee stock
ownership plan are valued at the Company's common stock share price on
the close of business on March 31, 2003 ($23.00). Mr. Maughan
received a $14,400 auto allowance for the year ended March 31, 2003.
Option Exercise/Value Table. The following table sets forth information
with respect to the number and value of stock options held by the Chief
Executive Officer and the named executive officers at March 31, 2003. None of
these individuals exercised any stock options during the fiscal year ended
March 31, 2003.
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at Fiscal
Shares Fiscal Year End Year End($) (1)
Acquired --------------------- ---------------------
on Value Exer- Exer- Exer- Exer-
Name Exercise(#) Realized($) cisable cisable cisable cisable
- -------------------- ----------- ----------- -------- -------- ------- --------
Berniel L. Maughan -- $-- 20,000 30,000 $277,500 $416,250
Zane F. Lockwood -- -- 37,558 9,389 445,062 111,260
Jonathan P. McCreary -- -- 5,857 9,190 55,744 96,038
- ------------
(1) Value of unexercised in-the-money options equals market value of shares
covered by in-the-money options on March 31, 2003 less the option
exercise price. Options are in-the-money if the market value of the
shares covered by the options is greater than the option exercise price.
Employment Agreements
The Company, referred to as the "Employer" in this discussion, entered
into employment agreements with Messrs. Maughan, Lockwood and McCreary on May
22, 2000, April 1, 2000 and September 18, 2001, respectively. Messrs.
Maughan's and Lockwood's employment agreements were subsequently amended on
February 12, 2001 to provide the benefits to the executive intended when the
board of directors adopted the initial employment agreements.
Mr. Maughan's employment agreement has an initial four-year term, which
may be extended annually for an additional year at the discretion of the board
of directors of the Company. Mr. Lockwood's employment agreement was for an
initial term of 20 months until June 1, 2001, and may be extended annually for
an additional year at the discretion of the board of directors of the Company.
Mr. McCreary's employment agreement is for an initial term of 20 months until
August 1, 2002, and may be extended annually for an additional year at the
discretion of the board of directors of the Company. The employment agreements
provide that the executive's base salary is subject to annual review by the
board of directors. The current base salaries for Messrs. Maughan, Lockwood
and McCreary are $187,500, $115,570 and $109,148, respectively. The
employment agreements are terminable by the Employer at any time, by the
executive
39
if the executive is assigned duties inconsistent with his initial position,
duties, responsibilities and status, or upon the occurrence of certain events
specified by federal regulations.
The employment agreements provide for liquidated damages in the event of
involuntary termination. Under this provision, Mr. Maughan would receive the
lesser of three years' base salary or the base salary for the remaining term
of his employment agreement, plus the average bonus paid over the last two
fiscal years, all payable monthly. Messrs. Lockwood and McCreary would
receive the lesser of 18 month's base salary or the base salary for the
remaining term of each of their respective employment agreements, payable
monthly. The executives would also be entitled to health and other insurance
coverage as currently provided. All of these payments would be reduced,
dollar for dollar, by any earnings or insurance the executive receives over
this same time period from any other employment.
The employment agreements also provide for severance payments and other
benefits in the event of involuntary termination of employment in connection
with any change in control of the Employer. Severance payments also will be
provided on a similar basis in connection with a voluntary termination of
employment where, subsequent to a change in control, the executive is assigned
duties inconsistent with his position, duties, responsibilities and status
immediately prior to such change in control. The term "change in control" is
defined in the agreement as having occurred when, among other things, (a) a
person other than the Company purchases shares of common stock 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 Company
representing 25% or more of the combined voting power of the Company's then
outstanding securities, (c) a majority of the membership of the board of
directors changes as the result of a contested election, or (d) shareholders
of the Company approve a merger, consolidation, sale or disposition of all or
substantially all of the Company's assets, or a plan of partial or complete
liquidation.
In the event of the executive's termination six months preceding, at the
time of, or within 24 months following a change of control, the Executives
would be entitled to receive the liquidated damages described above and a lump
sum cash payment equal to 2.99 times the executive's base amount of
compensation, minus the acceleration and lapse value of any unvested stock
options. Assuming that a change in control had occurred at March 31, 2003 and
that the executives received a lump sum cash payment under the change in
control provisions of the employment agreements, Messrs. Maughan, Lockwood and
McCreary would have been entitled to a payment of approximately $616,354
$382,567 and $379,986, respectively. Section 280G of the Internal Revenue
Code provides that severance payments that equal or exceed three times the
individual's base amount are deemed to "excess parachute payments" if they are
contingent upon a change in control. Individuals receiving excess parachute
payments are subject to a 20% excise tax on the amount of such excess
payments. The employment agreements provide that in the event any payments or
benefits provided to the executives constitute excess parachute payments, the
Employer will pay the executive in cash any additional amounts equal to the
amount needed to ensure that the amount of such payment and the value of such
benefits received by the executive, net of any taxes, equals the amount of
such payments and value of such benefits as the executive would receive in the
absence of any excise taxes.
The employment agreements restrict the executive's right to compete
against the Employers for a period of one year from the date of termination of
the employment agreement if the executive voluntarily terminates employment,
except in the event of a change in control.
Audit Committee Matters
Audit Committee Charter. The Audit Committee operates under a written
charter approved by the Company's board of directors. The Audit Committee
reports to the board of directors and is responsible for overseeing and
monitoring financial accounting and reporting, the system of internal controls
established by management and the audit process of the Company. The Audit
Committee charter sets out the responsibilities, authority and specific duties
of the Audit Committee. The charter specifies, among other things, the
structure and membership requirements of the Audit Committee, as well as the
relationship of the Audit Committee to the independent accountants, the
internal audit department, and management of the Company. A copy of the Audit
Committee charter was attached to the Company's 2001 annual meeting proxy
statement.
40
Report of the Audit Committee. In connection with the specific
activities performed by the Audit Committee in its oversight role, it has
issued the following report:
(1) The Audit Committee has reviewed and discussed the audited financial
statements as of and for the year ended March 31, 2003 with
management of the Company.
(2) The Audit Committee has discussed with the independent auditors the
matters required to be discussed by SAS 61 and SAS 90.
(3) The Audit Committee has received from the independent accountants,
as required by Independence Standards Board Standard No. 1,
Independence Discussions with Audit Committee, (i) a written
disclosure, indicating all relationships, if any, between the
independent auditor and its related entities and the Company and its
related entities which, in the auditor's professional judgment,
reasonably may be thought to bear on the auditor's independence, and
(ii) a letter from the independent auditor confirming that, in its
professional judgment, it is independent of the Company; and the
Audit Committee has discussed with the auditor the auditor's
independence from the Company.
Based on the review and discussions referred to in paragraphs (1) through
(3) above, the Audit Committee recommended to the board of directors that the
audited financial statements should be included in the Company's Annual Report
on Form 10-K for the fiscal year ended March 31, 2003, for filing with the
SEC.
The Audit Committee:
Edward H. Elms (Chairman)
John Gentry
Albert H. Durgan
Kevin D. Padrick
Independence and Other Matters. Each member of the Audit Committee is
"independent," as defined under the Nasdaq Stock Market Rules. The Audit
Committee members do not have any relationship to the Company that may
interfere with the exercise of their independence from management and the
Company. None of the Audit Committee members are current officers or
employees of the Company or its affiliates.
Compensation Committee Matters
Notwithstanding anything to the contrary set forth in any of the
Company's previous filings under the Securities Act of 1933, as amended, or
the Exchange Act that might incorporate future filings, including this
document, in whole or in part, the following Report of the Compensation
Committee and Performance Graph shall not be incorporated by reference into
any such filings.
Report of the Compensation Committee. Under rules established by the
SEC, the Company is required to provide certain data and information in regard
to the compensation and benefits provided to the Company's Chief Executive
Officer and other executive officers. The disclosure requirements for the
Chief Executive Officer and other executive officers include the use of tables
and a report explaining the rationale and considerations that led to the
fundamental executive compensation decisions affecting those individuals.`
The Personnel and Compensation Committee ("Committee") of the Bank's
board of directors sets and administers all policies, as defined by the SEC,
that govern the total compensation, including long-term compensation of the
Company's Chief Executive Officer and other executive officers. None of the
members of the Committee is an employee of the Company. The Committee's
policy is to offer executive officers competitive compensation and benefits
that will permit the Company to attract and retain highly qualified
individuals and to motivate such individuals by rewarding them based on the
Company's performance.
41
Currently, the Company's executive compensation package consists
primarily of base salary and bonus awards. Individual executive salaries are
established based on the individual's subjective performance evaluation, the
Company's performance, and market parity. The Committee uses compensation and
bonus survey data from the Oregon Banker's Association, America's Community
Bankers, and the Washington Financial Industry for its market comparison. The
data compares the Company's executive officers to those similarly situated in
other similarly sized financial institutions in the region. The compensation
of Mr. Maughan, the Company's President and Chief Executive Officer, is
determined in the same manner as other executive officers as described above.
Therefore, Mr. Maughan's compensation is largely dependent upon his individual
performance, the Company's overall performance, and market comparison.
Bonuses may be awarded to executive and other officers of the Company
based on their performance and that of the Company. The Committee determines
the appropriate level of bonuses using the Committee's assessment of each
executive officer's contributions to the Company's success. More
specifically, the Company's return on average assets, return on equity,
corporate management, and staffing controls all are used in this assessment.
The Company has implemented a Stock Option Plan and management
recognition and development plan as part of its overall compensation to
executive officers.
The Company provides benefits to its executive officers that are
generally available to other officers and employees of the Company. This
includes a 401(k) profit sharing plan, an employee stock ownership plan, and a
non-qualified deferred compensation plan for key executives. A committee
appointed by the board of directors administers the plans. Mr. Maughan
participates in the 401(k) profit sharing plan and the employee stock
ownership plan.
The Committee has recognized that the efforts of key executives of the
Company are, and will continue to be, paramount to its success. Therefore,
the board of directors approved, based upon the Committee's recommendation,
the adoption of an employment agreement with Mr. Maughan, which is designed to
retain him and allow him a concerted focus on operations of the Company. The
terms of Mr. Maughan's employment agreement is discussed under "-- Executive
Compensation -- Employment Agreements."
The Committee has reviewed the total compensation of all executive
officers during fiscal year 2003 and has concluded that their compensation is
reasonable and consistent with the Company's compensation philosophy and
industry practice.
PERSONNEL AND COMPENSATION COMMITTEE
/s/ Charles H. Rouse (Chairman)
/s/ John Lienkaemper
/s/ Edward H. Elms
Compensation Committee Interlocks and Insider Participation. No
executive officer of the Company or the Bank has served as a member of the
compensation committee of another entity, one of whose executive officers
served on the Personnel Committee. No executive officer of the Company or the
Bank has served as a director of another entity, one of whose executive
officers served on the Personnel Committee. No executive officer of the
Company or the Bank has served as a member of the compensation committee of
another entity, one of whose executive officers served as a director of the
Company or the Bank.
42
Performance Graph
The following graph compares the cumulative total shareholder return on
the Company's common stock with the cumulative total return on the Nasdaq U.S.
Companies Index and a peer group of the SNL Securities, Inc. $250 Million to
$500 Million Asset Thrift Index. Total return assumes (i) the reinvestment of
all dividends and (ii) the value of the investment in the Company's common
stock and each index was $100 at the close of trading on March 31, 1998.
[Graph appears here]
Period Ended
Index 03-31-98 03/31/99 03/31/00 03/31/01 03/31/02 03/31/03
- ---------------------------- -------- -------- -------- -------- -------- --------
Oregon Trail Financial Corp. 100.00 73.65 51.75 84.97 115.22 145.33
NASDAQ - Total U.S.* 100.00 135.08 250.99 100.60 101.32 74.37
SNL $250MM to $500MM
Thrift Index 100.00 85.17 89.56 119.48 169.86 220.55
*Source: CRSP, Center for Research in Security Prices, Graduate School of Business, The University of
Chicago, 2001. Used with permission. All rights reserved. crsp.com
43
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
(b) Security Ownership of Management
The following table sets forth certain information as of the record date
regarding the share ownership of: (1) those persons or entities known by
management to beneficially own more than five percent of the common stock, (2)
each officer of the Company and its subsidiary bank who made in excess of
$100,000 (salary and bonus) during the 2003 fiscal year ("named executive
officers"); and (3) all directors and executive officers of the Company and of
its subsidiary bank as a group.
Number of Shares Percent of Shares
Name Beneficially Owned(1)(2) Outstanding
- ----------------------------------- ------------------------ -----------
Beneficial Owners of More Than 5%
Oregon Trail Financial Corp. (3) 349,251 11.26%
Employee Stock Ownership Plan Trust
David M. W. Harvey 212,600 6.85
Hot Creek Capital, L.L.C.
P.O. Box 3178
Gardnerville, Nevada 89410
Westport Asset Management, Inc. (4) 181,000 5.83
253 Riverside Avenue
Westport, Connecticut 06880
Directors(5)
John Gentry 73,818 2.38
Albert H. Durgan 63,335 2.04
Edward H. Elms 82,887 2.67
Stephen R. Whittemore 79,274 2.56
Charles H. Rouse 78,818 2.54
Kevin D. Padrick 5,000 *
John A. Lienkaemper (6) 74,043 2.39
Named Executive Officers
Berniel L. Maughan 30,000 *
Zane F. Lockwood 53,932 1.74
Jonathan P. McCreary 11,115 *
All Executive Officers and
Directors as a Group (ten persons) 333, 774 22.69%
(footnotes on following page)
44
- ---------------
* Less than one percent of shares outstanding.
(1) In accordance with Rule 13d-3 under the Securities Exchange Act of 1934,
as amended, a person is deemed to be the beneficial owner, for purposes
of this table, of any shares of common stock if he or she has voting
and/or investment power with respect to such security. The table
includes shares owned by spouses, other immediate family members in
trust, shares held in retirement accounts or funds for the benefit of
the named individuals, and other forms of ownership, over which shares
the persons named in the table may possess voting and/or investment
power.
(2) The table includes exercisable stock options under Oregon Trail's 1998
Stock Option Plan ("Option Plan") in the amounts of 39,702 each for
Messrs. Gentry, Lienkaemper, Durgan, Elms, Whittemore and Rouse, and
5,000 for Mr. Padrick. The table also includes exercisable stock
options under the Option Plan in the amounts of 30,000, 37,558 and 7,115
for Messrs. Maughan, Lockwood and McCreary, respectively.
(3) Under the terms of the employee stock ownership plan, the trustees will
vote unallocated shares and allocated shares for which no voting
instructions are received in the same proportion as shares for which the
trustees have received voting instructions from participants. As of the
record date, 159,915 shares have been allocated to participants'
accounts. The trustees of the employee stock ownership plan are William
H. Winegar, Michelle Kaseburg, Anne Raffetto and Jonathan McCreary.
(4) Based on a SEC Schedule 13G, dated February 14, 2003, that discloses
shared voting and dispositive power as to 181,000 shares.
(5) Includes unvested shares in Oregon Trail's Management Recognition and
Development Plan. Participants in the Management Recognition and
Development Plan exercise all rights incidental to ownership, including
voting rights.
(6) Mr. Lienkaemper is a director of the Bank and is not a director of the
Company.
Equity Compensation Plan Information. The following table summarizes
share and exercise price information about the Company's equity compensation
plans as of March 31, 2003.
(c)
Number of securities
(a) (b) remaining available
Number of securities Weighted-average for future issuance
to be issued upon exercise price under equity
exercise of of outstanding compensation plans
outstanding options, options, warrants (excluding securities
Plan category warrants and rights and rights reflected in column (a))
- ------------------------- ------------------- ----------------- ------------------------
Equity compensation
plans approved by
security holders:
Option plan............... 400,331 $12.47 21,465
Restricted stock plan..... 67,370 16.13 2
Equity compensation
plans not approved
by security holders.......... -- -- --
(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.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires the Company's executive
officers and directors, and persons who own more than 10% of any registered
class of its equity securities, to file reports of ownership and changes in
ownership
45
with the SEC. Executive officers, directors and greater than 10% shareholders
are required by regulation to furnish the Company with copies of all Section
16(a) forms they file.
Based solely on its review of the copies of such forms it has received
and written representations provided to it by the above referenced persons,
the Company believes that during the fiscal year ended March 31, 2003 all
filing requirements applicable to its reporting officers, directors and
greater than 10% shareholders were properly and timely complied with.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
Federal regulations require that all loans or extensions of credit to
executive officers and directors of insured financial institutions must be
made on substantially the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transactions with other
persons, except for loans made pursuant to programs generally available to all
employees, and must not involve more than the normal risk of repayment or
present other unfavorable features. The Company's subsidiary financial
institution is therefore prohibited from making any new loans or extensions of
credit to executive officers and directors at different rates or terms than
those offered to the general public, except for loans made pursuant to
programs generally available to all employees, and has adopted a policy to
this effect. In addition, loans made to a director or executive officer in an
amount that, when aggregated with the amount of all other loans to such person
and his or her related interests, are in excess of the greater of $25,000 or
5% of the Bank's capital and surplus (up to a maximum of $500,000) must be
approved in advance by a majority of the disinterested members of the board of
directors. At March 31, 2003, loans to directors and executive officers
totalled approximately $1.539 million.
Item 14. 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 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 annual 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 year ended March 31, 2003, 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.
Item 15. Principal Accountant Fees and Services
- ------------------------------------------------
General
Deloitte & Touche LLP served as the Company's independent auditors for
the calendar year ended March 31, 2003. The board of directors has appointed
Deloitte & Touche LLP as independent auditors for the fiscal year ending March
31, 2004, subject to approval by shareholders.
Audit Fees
The aggregate fees billed to the Company by Deloitte & Touche LLP for
professional services rendered for the audit of the Company's financial
statements for fiscal 2003 and the reviews of the financial statements
included in the Company Forms 10-Q for that year, including travel expenses,
were $99,000.
46
Financial Information Systems Design and Implementation Fees
Deloitte & Touche LLP performed no financial information system design or
implementation work for the Company during the fiscal year ended March 31,
2003.
All Other Fees
Other than audit fees, the aggregate fees billed to the Company by
Deloitte & Touche LLP for fiscal 2003 none of which were financial information
systems design and implementation fees, were approximately $20,229. The Audit
Committee of the board of directors determined that the services performed by
Deloitte & Touche LLP other than audit services are not incompatible with
Deloitte & Touche LLP maintaining its independence.
PART IV
Item 16. Exhibits, Financial Statement Schedules, 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(r) 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
10(j) 1998 Management Recognition and Development Plan (5)
10(k) August 21, 2001 Amendment to 1998 Management Recognition and
Development Plan (6)
13 2003 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Independent Auditors Consent
99 Certification required by 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 Amended 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
One Current Report on Form 8-K was filed during the quarter ended
March 31, 2003. The Form 8-K was filed on February 26, 2003, which announced
that the Company had entered into a definitive merger agreement with FirstBank
NW Corp., Lewiston, Idaho.
47
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 30, 2003 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 Officer June 30, 2003
Berniel L. Maughan (Principal Executive Officer)
/s/ Jonathan P. McCreary
- ------------------------ Chief Financial Officer June 30, 2003
Jonathan P. McCreary (Principal Financial Officer)
/s/ Stephen R. Whittemore
- ------------------------ Chairman of the Board June 30, 2003
Stephen R. Whittemore
/s/ John Gentry
- ------------------------ Director June 30, 2003
John Gentry
- ------------------------ Director June , 2003
Albert H. Durgan --
/s/ Edward H. Elms
- ------------------------ Director June 30, 2003
Edward H. Elms
- ------------------------ Director June , 2003
Charles Rouse --
/s/ Kevin D. Padrick
- ------------------------ Director June 30, 2003
Kevin D. Padrick
48
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 annual report on Form 10-K of Oregon Trail
Financial Corp.;
(2) Based on my knowledge, this 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 report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
(4) The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
(5) The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: June 30, 2003
/s/ Berniel L. Maughan
--------------------------------
Berniel L. Maughan
Chief Executive Officer
49
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 annual report on Form 10-K of Oregon Trail
Financial Corp.;
(2) Based on my knowledge, this 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 report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
(4) The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
(5) The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: June 30, 2003
/s/ Jonathan P. McCreary
--------------------------------
Jonathan P. McCreary
Chief Financial Officer
50
Exhibit 13
2003 Annual Report to Stockholders
[Cover]
2003 Annual Report
INDEX
Letter to Shareholders 1
Business of the Company 2
Selected Consolidated Financial
and Other Data 3
Management's Discussion and Analysis
of Financial Condition and Results
of Operations 4
Independent Auditors' Report 16
Consolidated Financial Statements 17
Notes to Consolidated Financial Statements 26
Corporate Information 48
Investor Information 48
Board of Directors 48
Stock Listing 48
Offices 49
To Our Shareholders
Oregon Trail Financial Corp. has made significant progress over the past few
years by enhancing value and rewarding shareholders for their investment in
the Company. In fiscal 2001 we took steps to transform Oregon Trail into a
company that has continuously improved earnings while enhancing its ability to
meet the financial needs of Eastern Oregon.
In 2002 the Company realized the financial benefits of our strategic
redirection, resulting in record earnings per share and return on
shareholders' equity. Our continued focus in 2003 has resulted in the Company
reporting higher levels of net income, earnings per share, return on equity,
return on assets, net interest margin, and in addition, improved efficiency
ratio.
Looking ahead to fiscal 2004, the Company has engaged in merger plans to
combine our strengths with that of FirstBank NW Corp. and create a larger more
profitable company. As communicated in the proxy statement-prospectus under
"Background and Reasons for the Merger," this partnership will enhance our
ability to meet the high expectations of our shareholders while continuing to
meet the growing needs of our customer base.
The capital markets have embraced our improved financial results and future
plans by rewarding our shareholders with exceptional stock price performance.
Oregon Trail Financial Corp. stock has steadily increased in each of the past
three years; 64.2% in fiscal 2001, 35.6% in fiscal 2002; and 26.1% in fiscal
2003, for a total three year appreciation of 180.8% from March 31, 2000,
through March 31, 2003.
We appreciate the broad acceptance and support for the strategic direction of
Oregon Trail. Our employees continue to support and implement the changes
necessary to maintain strong customer relationships, while improving financial
performance and strengthening the confidence of our shareholders.
We look forward to the future as we strive to continually improve upon our
ability to meet the needs of all the people whose lives we affect; employee,
customer, and shareholder. Thank you for the confidence and support you
provide as we continue to serve you.
Sincerely,
/s/Berniel L. Maughan /s/Stephen R.Whittemore
Berniel L. Maughan Stephen R.Whittemore
President and Chief Executive Officer Chairman of the Board
1
BUSINESS OF THE COMPANY
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, 2003, the Company
had total assets of $377.5 million, total deposits of $249.1 million and
shareholders' equity of $60.1 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, which 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 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.
2
Oregon Trail Financial Corp. And Subsidiary
Selected Consolidated Financial and Other Data
At March 31,
-------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(In thousands)
FINANCIAL CONDITION DATA:
Total assets............... $377,485 $398,366 $388,881 $370,612 $313,473
Loans receivable, net...... 228,227 265,863 250,897 220,591 185,747
Stock in FHLB.............. 6,727 6,315 4,651 3,897 3,221
Investment securities
available for sale....... 44,319 18,306 26,914 37,436 37,965
Mortgage-backed and
related securities
available for sale....... 63,616 74,113 70,010 84,615 60,371
Mortgage-backed and
related securities
held to maturity......... -- -- -- -- 9,338
Cash and cash equivalents.. 9,114 7,795 10,581 9,261 6,276
Deposits................... 249,126 256,078 253,777 237,735 199,589
Advances from FHLB......... 64,500 87,100 73,125 76,750 50,250
Total shareholders' equity. 60,107 52,823 57,806 53,104 60,083
Year Ended March 31,
-------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(In thousands, except per share amounts)
OPERATING DATA:
Interest income............ $ 24,832 $ 27,861 $ 28,279 $ 24,548 $ 20,582
Interest expense........... 9,174 12,739 15,392 11,776 8,064
Net interest income........ 15,658 15,122 12,887 12,772 12,518
Provision for loan losses.. 321 481 794 178 483
Net interest income after
provision for loan
losses................... 15,337 14,641 12,093 12,594 12,035
Gains (losses) from sale of
securities............... -- 314 (953) -- --
Noninterest income......... 3,451 3,165 2,155 1,602 1,098
Noninterest expense........ 11,263 11,283 10,951 10,115 8,182
Income before income taxes. 7,525 6,837 2,344 4,081 4,951
Provision for income taxes. 2,371 1,922 650 1,472 1,797
Net income................. $ 5,154 $ 4,915 $ 1,694 $ 2,609 $ 3,154
Basic earnings per share... $ 1.78 $ 1.58 $ 0.51 $ 0.74 $ 0.78
At March 31,
-------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(In thousands)
Weighted average common
shares outstanding....... 2,903 3,104 3,331 3,547 4,065
Diluted earnings per share. $ 1.67 $ 1.52 $ 0.50 $ 0.70 $ 0.76
Weighted average common
dilutive shares.......... 3,082 3,229 3,367 3,724 4,160
3
At March 31,
-------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
OTHER DATA:
Number of:
Real estate loans
outstanding............ 1,792 2,188 2,182 2,298 2,346
Deposit accounts......... 29,797 31,573 32,306 31,384 28,820
Full-service offices..... 9 9 9 8 7
At or For Year Ended March 31,
-------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
SELECTED FINANCIAL RATIOS
Performance Ratios:
Return on average
assets (1)............... 1.32% 1.24% 0.44% 0.76% 1.14%
Return on average
equity (2)............... 9.07 8.77 3.09 4.60 4.90
Interest rate spread (3)... 3.85 3.58 3.18 3.10 3.85
Net interest margin (4).... 4.33 4.11 3.51 3.89 4.70
Average interest-earning
assets to average
interest-bearing
liabilities.............. 118.75 115.11 118.71 122.02 128.10
Noninterest expense as a
percent of average
total assets............. 2.89 2.86 2.85 2.95 2.96
Efficiency ratio (5)....... 58.94 60.66 79.14 70.37 60.09
Dividend payout ratio (6).. 23.60 24.68 64.00 42.14 28.95
Asset Quality Ratios:
Nonaccrual and 90 days or
more past due loans
as a percent of total
loans, net............... 0.22 0.12 0.02 0.07 0.07
Nonperforming assets as a
percent of total assets.. 0.22 0.10 0.03 0.04 0.01
Allowance for losses as a
percent of gross loans
receivable............... 0.96 0.85 0.82 0.63 0.66
Allowance for losses as
a percent of non-
performing loans......... 432.94 678.56 3814.55 900.65 889.86
Net charge-offs to average
outstanding loans........ 0.15 0.11 0.04 -- 0.06
Capital Ratios:
Total equity-to-assets
ratio.................... 15.92 13.26 14.86 14.33 19.17
Average equity to average
assets (7)............... 14.59 14.13 14.28 16.55 23.27
- ------------
(1) Net earnings divided by average total assets.
(2) Net earnings divided by average equity.
(3) Difference between weighted average yield on interest-earning assets and
weighted average cost of interest-bearing liabilities.
(4) Net interest income as a percentage of average interest-earning assets.
(5) Non-interest expense divided by the sum of net interest income and other
income.
(6) Dividends declared per share divided by net income per share.
(7) Average total equity divided by average total assets.
4
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 this Form 10-K. "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 cause actual results to differ materially
include, but are not limited to, general and local economic conditions,
changes in interest rates, deposit flows, demand for mortgages and other
loans, real estate values, competition, loan delinquency rates, changes in
accounting principles, practices, policies or guidelines, changes in
legislation or regulation, and other economic, competitive governmental,
regulatory and technological factors effecting operations, pricing, products
and services. Accordingly, 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 the preparation of the Company's Consolidated Financial
Statements. The preparation of these financial statements requires management
to use assumptions, judgement and estimates. Management evaluates its use of
these assumptions, judgments and estimates on an ongoing basis. Estimates are
based on current 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. However, the use
of judgments, estimates and assumptions 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 "Comparison of
Operating Results for the Years Ended March 31, 2003 and 2002 -- Provision for
Loan Losses" in this section.
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 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.
The Bank operates as a community oriented financial institution devoted
to serving the needs of its customers. The Bank's business consists generally
of attracting retail deposits from the general public and using those funds to
originate one-to-four family residential loans, consumer loans and commercial
loans in its market area. To a lesser extent the Bank also purchases loans in
or near its market area and utilizes wholesale funding from the Federal Home
Loan Bank of Seattle ("FHLB").
5
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 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, 2003 and March 31, 2002
Total assets at March 31, 2003 decreased $20.9 million to $377.5 million
compared to $398.4 million, or 5.2%, at March 31, 2002. The decrease in
assets is principally attributable to a $37.6 million, or 14.2%, decrease in
net loans receivable partially offset by a $15.5 million, or 16.8% increase in
securities. The decrease in loans receivable was primarily caused by a $28.5
million, or 23.2%, decrease in residential real estate loans, an $8.1 million,
or 29.2%, decrease in a commercial real estate loan pool purchased in fiscal
year end 2002. The decrease in residential real estate loans is reflective of
the Company's strategy to decrease interest rate risk by selling newly
originated fixed rate real estate loans. Total liabilities at March 31, 2003
decreased $28.2 million, or 8.2%, to $317.4 million compared to $345.5 million
at March 31, 2002. Borrowings decreased $22.6 million, or 25.9% to $64.5
million at March 31, 2003 compared to $87.1 million at March 31, 2002. The
Company paid off borrowings during fiscal year 2003 with the proceeds from
loan repayments. Deposits decreased $7.0 million, or 2.7%, to $249.1 million
at March 31, 2003 compared to deposits of $256.1 million at March 31, 2002.
The decrease in deposits reflects the mature market in which the Company
conducts business as well as an emphasis on disciplined product pricing.
Demand and savings accounts at March 31, 2003 increased by a total of $9.6
million, or 7.0%, to $146.4 million compared to $136.7 million at March 31,
2002. Certificates of deposits decreased by $16.6 million, or 13.9%,
offsetting the growth in core deposits. Total shareholders' equity increased
$7.3 million, or 13.8%, to $60.1 million at March 31, 2003 compared to total
shareholders' equity of $52.8 million at March 31, 2002. The increase in
shareholders' equity was largely attributable to annual net income of $5.2
million, a $1.5 million increase in other comprehensive income partially
offset by the Company paying $1.2 million in dividends throughout fiscal 2003.
Comparison of Operating Results for the Years Ended March 31, 2003 and 2002
General. Net income for the year ended March 31, 2003 was $5.2 million
or $1.67 per diluted share compared to net income of $4.9 million or $1.52 per
share for the year ended March 31, 2002, an increase of $239,000. The
increase in net income was primarily due a $696,000 increase in net interest
income after provision for loan losses partially offset by a $449,000 increase
in the provision for income taxes. The increase in net interest income after
provision for loan losses was generally due to wider interest rate spreads in
the most recent year as well as a $160,000 decrease in the provision for loan
losses. The increase in the provision for income taxes was generally due to
higher pre-tax earnings and a higher effective tax rate.
Interest Income. Interest income for the year ended March 31, 2003 was
$24.8 million compared to $27.9 million for the year ended March 31, 2002, a
decrease of $3.1 million, or 11.1%. The decrease in interest income was
primarily a result of a 70 basis point decrease in the yield on average
interest earning assets to 6.86% for the year ended March 31, 2003 compared to
7.56% for the year ended March 31, 2002. Average interest earning assets
decreased by $6.3 million to $362.0 million from $368.3 million during the
year ended March 31, 2003, contributing to a reduction in interest income.
The decrease in the yield on average interest earning assets is a result of a
decreasing rate environment in 2003 as well as an increase in the ratio of
average security balances relative to average interest earning assets. The
average yield on interest earning asset groups for the year ended March 31,
2003 compared to the year ended March 31, 2002 were as follows: loans
receivable: 7.62% versus 8.05%, mortgage-backed securities: 5.85% versus
6.65%, investment securities: 3.99% versus 6.14%, FHLB stock: 6.38% versus
6.74%, cash and overnight investments: 1.50% versus 0.16%, respectively. The
average balance of interest earning asset groups for the year ended March 31,
2003 compared to the year ended March 31, 2002 were as follows: loans
receivable: $248.7 million versus $282.3 million, mortgage-backed securities:
$75.5 million versus $52.0 million, investment securities: $23.0 million
6
versus $20.9 million, FHLB stock: $6.5 million versus $5.9 million, cash and
overnight investments: $8.3 million versus $7.3 million, respectively.
Interest Expense. Interest expense for the year ended March 31, 2003 was
$9.2 million compared to $12.7 million for the year ended March 31, 2002, a
decrease of $3.5 million, or 27.6%. The decrease in interest expense was the
result of a 97 basis point reduction in the average cost of interest bearing
liabilities for the year ended March 31, 2003 to 3.01% from 3.98% during the
year ended March 31, 2002. The decrease in the average cost of liabilities
was augmented by a $15.1 million, or 4.7%, decrease in average interest
bearing liabilities to $304.9 million for the year ended March 31, 2003 versus
$320.0 million for the year ended March 31, 2002. The average costs of
interest bearing liabilities for the year ended March 31, 2003 compared to the
year ended March 31, 2002 were as follows: interest checking: 0.42% versus
0.86%, savings: 1.09% versus 1.81%, money market: 1.60% versus 2.48%,
certificates of deposit 3.49% versus 5.04% respectively. The average balance
of interest bearing liabilities for the year ended March 31, 2003 compared to
the year ended March 31, 2002 were as follows: interest checking: $37.0
million versus $36.7 million, savings: $19.6 million versus $17.2 million,
money market: $63.5 million versus $60.6 million, certificates of deposit
$121.2 million versus $120.6 million respectively.
Provision and Allowance 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 the Consolidated Financial Statements.
The provision for loan losses for the year ended March 31, 2003 was
$321,000 compared to $481,000 for the year ended March 31, 2002, a decrease of
$160,000. The lower provision for loan losses in fiscal 2003 reflects the
reduction in loans that occurred during the year versus an increase in loans
during fiscal 2002. During the year ended March 31, 2003 loan balances
decreased by $37.7 million, or 14.1%, to $230.4 million. During the year ended
March 31, 2002 loan balances increased by $15.1 million, or 6.0% to $268.1
million. Net charge offs for the year ended March 31, 2003 were $380,000
compared to $299,000 for the fiscal year ended March 31, 2002. The increase
in charge offs for the year ended March 31, 2003 was generally attributable to
the weakening economy and its impact of the Bank's dealer loan portfolio. At
March 31, 2003 the allowance for loan losses was .96% of total loans compared
to .85% at March 31, 2002. The allowance for loan losses was 432.9% of
non-performing loans at March 31, 2003 compared to 678.2% at March 31, 2002,
which management believes is adequate to absorb potential losses in the loan
portfolio.
The Company's methodology for calculating the necessary allowance for
loan losses requires the Company to reserve specific percentages of
outstanding loan balances with the percentages varying based upon the
perceived risk of the different loan types and loan classification within
specific loan types. For unclassified loans the Company reserves .25% of
outstanding balances for single family real estate loans, .50% for commercial
real estate loans, 1.00% for consumer loans, 2.00% for dealer auto loans,
7.00% for credit card balances, and 1.50% for commercial and agricultural
loans. For classified loans the Company reserves from 2.00% to 100.00% of
outstanding balances depending upon the loan type and classification. During
the year ended March 31, 2003 loan balances decreased by $37.7 million, or
14.1% to $230.4 million from $268.1 million at March 31, 2002. Generally, the
decrease in loan balances during the year caused the required allowance for
loan losses to decrease by $59,000 to $2.2 million.
Non-Interest Income. Non-interest income for the year ended March 31,
2003 was $3.5 million and was also $3.5 million for the year ended March 31,
2002. However, non-interest income for the year ended March 31, 2003 included
no gain on sale of securities compared to a $314,000 gain on securities for
the year ended March 31, 2002. During the year ended March 31, 2003 deposit
service charges increased $88,000, or 4.9%, check card fees increased by
$30,000, or 22.8%, loan fees on conventional loans sold increased $159,000, or
82.2%, and gain on sale of real estate increased $32,000, or 266.4% partially
offsetting the decrease in gain on sale of securities.
7
Non-Interest Expense. Non-interest expense for the year ended March 31,
2003 decreased by $20,000, or 0.2%, to $11.3 million from $11.3 million for
the year ended March 31, 2002. The primary factors affecting the decrease in
non-interest expense were a $652,000 decrease in legal services, a $83,000
decrease in deposit product expenses, a $52,000 decrease in telephone expense,
and a $73,000 decrease in furniture and equipment depreciation which were
partially offset by a $495,000 increase in compensation and benefits, a
$117,000 increase in other professional services, a $64,000 increase in audit
expenses, a $53,000 increase in advertising and promotions and a $45,000
increase in other employee expense. The reduction in legal expenses are a
result of settled lawsuits referenced in the Company's March 31, 2002 Form
10-K and March 14, 2002 Form 8-K. The increase in compensation and benefits
expense is due to normal annual increases in individual employee compensation
as well as an increase in the cost of stock-based compensation due to a higher
company stock price.
Income Taxes. Income tax expense was $2.4 million for the year ended
March 31, 2003 compared to $1.9 million for the prior year. The Company's
effective tax rate for the years ended March 31, 2003 and 2002 were 31.5% and
28.1%, respectively. The Company's effective tax rate has increased in the
year ended March 31, 2003 due to increased earnings, and a $168,000 tax
benefit related to the Company's employee stock ownership plan taken in fiscal
2002 that related to a prior year.
Comparison of Financial Condition at March 31, 2002 and March 31, 2001
Total assets at March 31, 2002 increased $9.5 million to $398.4 million
compared to $388.9 million at March 31, 2001. The growth in assets was
primarily attributable to a $15.0 million increase in net loans receivable
partially offset by a $4.5 million dollar decrease in securities. The
increase in loans receivable was caused by a $26.5 million increase in
commercial real estate loans, a $1.9 million increase in commercial and
agricultural loans and a $1.5 million increase in consumer loans partially
offset by a $14.4 million decrease in residential real estate loans. The
decrease in residential real estate loans reflects the Company's strategy to
decrease interest rate risk by selling newly originated fixed rate real estate
loans. The net loan growth was funded by $14 .0 million increase in
borrowings and $2.3 million increase in deposits offset by a $5.0 million
decrease in shareholders' equity. The increase in deposits reflects the
Company's emphasis on core deposit growth. Demand and savings accounts at
March 31, 2002 increased by a total of $10.9 million, or 8.6%, to $136.7
million compared to $125.9 million at March 31, 2001. Certificates of
deposits decreased by $8.6 million, or 6.7%, partially offsetting the growth
in core deposits. The decrease in shareholders' equity was largely caused by
the Company purchasing $9.7 million of its common stock, paying $1.3 million
of dividends, and partially offset by earnings of $4.9 million. Generally,
the Company purchases its outstanding shares through formal share repurchase
programs, when purchases are thought to be accretive to earnings per share and
the Company has excess capital available for such purchases.
Comparison of Operating Results for the Years Ended March 31, 2002 and 2001
General. Net income for the year ended March 31, 2002 was $4.9 million
or $1.58 per basic share compared to net income of $1.7 million or $0.51 per
share for the year ended March 31, 2001. The increase in net income was
attributable to a $2.2 million increase in net interest income, a $1.3 million
increase in non-interest income, and a $600,000 decrease in non-interest
expense. The decrease in non-interest expense for the year ended March 31,
2002 was largely a result of one-time restructuring expenses incurred in the
year ended March 31, 2001 including a $303,000 reduction-in-force charge and
a $953,000 loss on sale of low yielding securities. The substantial increase
in earnings per share are a result of a favorable interest rate environment as
well as the successful execution of the Company's strategic plan which
required the development of sustainable earnings per share growth as its
primary objective. Related objectives included, but were not limited to,
reduction of interest rate sensitive assets, non-interest income growth, non-
interest expense control, core deposit growth and a Company-wide emphasis of
customer service combined with a de-emphasis of "best price."
Interest Income. Interest income for the year ended March 31, 2002 was
$27.9 million compared to $28.3 million for the year ended March 31, 2001, a
decrease of $400,000, or 1.4%. The decrease in interest income was a result
of a 14 basis point decrease in the yield on average interest earning assets
to 7.56% for the year ended March 31, 2002 compared to 7.70% for the year
ended March 31, 2001. Average interest earning assets increased by $849,000
8
to $368.3 million during the year ended March 31, 2002, partially offsetting
the reduction in yield on those assets. The decrease in the yield on average
interest earning assets was a result of a decreasing rate environment in 2002
as well as increases in adjustable rate loans and a decrease in fixed rate
real estate loans. The average yield on interest earning asset groups for the
year ended March 31, 2002 compared to the year ended March 31, 2001 were as
follows: loans receivable: 8.05% versus 8.31%, mortgage-backed securities:
6.65% versus 7.10%, investment securities: 6.14% versus 6.44%, FHLB stock:
6.74% versus 6.48%, and cash and overnight investments: 0.16% versus 1.59%,
respectively. The average balance of interest earning assets for the year
ended March 31, 2002 compared to the year ended March 31, 2001 were as
follows: loans receivable: $282.3 million versus $242.7 million,
mortgage-backed securities: $52.0 million versus $77.4 million, investment
securities: $20.9 million versus $34.2 million, FHLB stock: $5.9 million
versus $4.4 million, and cash and overnight investments: $7.3 million versus
$8.8 million, respectively.
Interest Expense. Interest expense for the year ended March 31, 2002
was $12.7 million compared to $15.4 million for the year ended March 31, 2001,
a decrease of $2.7 million, or 17.5%. The decrease in interest expense was
due to a 74 basis point reduction in the average cost of interest bearing
liabilities for the year ended March 31, 2002 to 3.98% from 4.92% during the
year ended March 31, 2001. The decrease in the average cost of liabilities
was partially offset by a $10.4 million, or 3.4% increase in average interest
bearing liabilities to $320.0 million for the year ended March 31, 2002 versus
$309.6 million for the year ended March 31, 2001. The average cost of
interest bearing liabilities for the year ended March 31, 2002 compared to the
year ended March 31, 2001 were as follows: interest checking: 0.86% versus
1.25%, savings: 1.81% versus 2.34%, money market: 2.48% versus 4.11%,
certificates of deposit 5.04% versus 5.97%, respectively. The average balance
of interest bearing liabilities for the year ended March 31, 2002 compared to
the year ended March 31, 2001 were as follows: interest checking: $36.7
million versus $37.1 million, savings: $17.2 million versus $17.0 million,
money market: $60.6 million versus $53.9 million, certificates of deposit
$120.6 million versus $125.8 million, respectively.
Provision and Allowance 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 the Consolidated Financial Statements.
The provision for loan losses for the year ended March 31, 2002 was
$481,000 compared to $794,000 for the year ended March 31, 2001, a decrease of
$313,000. The lower provision for loan losses is fiscal 2002 reflects the
significant one time increase to the allowance for loan losses that occurred
in fiscal 2001 as a result of changing the methodology for determining the
allowance for loan losses. Net charge offs for the year ended March 31, 2002
were $299,000 compared to $92,000 for the fiscal year ended March 31, 2001.
At March 2002 the allowance for loans losses was 0.85% of total loans compared
to 0.84% at March 31, 2001. The allowance for loan losses was 678.6% of non-
performing loans at March 31, 2002 compared to 3,814.6% at March 31, 2001.
Non-Interest Income. Non-interest income for the year ended March 31,
2002 increased by 58%, or $1.3 million, to $3.5 million when compared to the
year ended March 31, 2001. The increase in non-interest income was
principally due to a $627,000 increase in income from bank owned life
insurance, a $314,000 net increase in gain on sale of securities and a
$193,000 gain on sale of loans.
Non-Interest Expense. Non-interest expense for the year ended March 31,
2002 decreased by $621,000, or 5%, to $11.3 million from $11.9 million for the
year ended March 31, 2001. The primary factors affecting the decrease in
non-interest expense were $953,000 of losses on sales of securities in the
year ended March 31, 2001 compared to no net losses for the year ended March
31, 2002, $1.1 million of legal expenses in fiscal 2002 versus $307,000 of
legal expenses in fiscal 2001, and $6.2 million of compensation and benefits
in fiscal 2002 compared to $6.6 million of compensation and benefits in fiscal
2001.
9
Income Taxes. Income tax expense was $1.9 million for the year ended
March 31, 2002 compared to $650,000 for the prior year. The Company's
effective tax rate for the years ended March 31, 2002 and 2001 were 28.1% and
27.7%, respectively. The Company's effective tax rate has benefitted from
increased levels of tax advantaged assets. In the year ended March 31, 2002,
the Company realized a $168,000 tax benefit related to the Company's employee
stock ownership plan from a prior year.
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, 2003, 2002 and 2001.
Year Ended March 31,
----------------------------------------------------------------------------------
2003 2002 2001
------------------------- ------------------------- -------------------------
Interest Interest Interest
Average and Yield/ Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost Balance Dividends Cost
------- --------- ---- ------- --------- ---- ------- --------- ----
(Dollars in thousands)
Interest-earning
assets:
Loans receivable,
net (1)............. $248,748 $18,964 7.62% $282,267 $22,710 8.05% $242,662 $20,155 8.31%
Mortgage-backed
securities.......... 75,508 4,414 5.85 51,950 3,456 6.65 77,413 5,496 7.10
Investment
securities.......... 23,020 918 3.99 20,944 1,286 6.14 34,164 2,201 6.44
FHLB stock........... 6,463 412 6.37 5,891 397 6.74 4,411 286 6.48
Federal funds sold
and overnight
interest-bearing
deposits............ 8,278 124 1.50 7,294 12 0.16 8,847 141 1.59
-------- ------- -------- ------- -------- -------
Total interest-
earning assets.... 362,017 24,832 6.86 368,346 27,861 7.56 367,497 28,279 7.70
-------- ------- -------- ------- -------- -------
Non-interest-
earning assets...... 27,451 27,955 16,512
-------- -------- --------
Total assets....... $389,468 $396,301 $384,009
======== ======== ========
Interest-bearing
liabilities:
Passbook accounts.... $ 19,560 213 1.09 $ 17,175 311 1.81 $ 16,983 397 2.34
Money market
accounts............ 63,495 1,018 1.60 60,575 1,505 2.48 53,852 2,213 4.11
NOW accounts......... 36,968 155 0.42 36,680 315 0.86 37,122 463 1.25
Certificates of
deposit............. 112,161 3,916 3.49 120,577 6,075 5.04 125,756 7,502 5.97
-------- ------- -------- ------- -------- -------
Total interest-
bearing deposits.. 232,184 5,302 2.28 235,007 8,206 3.49 233,713 10,575 4.52
-------- ------- -------- ------- -------- -------
Securities sold under
agreements to
repurchase.......... -- -- NA -- -- NA -- -- NA
FHLB advances........ 72,681 3,872 5.33 84,989 4,533 5.33 75,871 4,817 6.35
-------- ------- -------- ------- -------- -------
Total interest-
bearing
liabilities....... 304,865 9,174 3.01 319,996 12,739 3.98 309,584 15,392 4.72
-------- ------- -------- ------- -------- -------
Non-interest-
bearing
liabilities....... 27,799 20,291 19,607
-------- -------- --------
Total liabilities.. 332,664 340,287 329,191
-------- -------- --------
Shareholders' equity. 56,804 56,014 54,818
-------- -------- --------
Total liabilities
and shareholders'
equity............ $389,468 $396,301 $384,009
======== ======== ========
Net interest income.. $15,658 $15,122 $12,887
======= ======= =======
Interest rate spread. 3.85% 3.58% 3.18%
10
Year Ended March 31,
----------------------------------------------------------------------------------
2003 2002 2001
------------------------- ------------------------- -------------------------
Interest Interest Interest
Average and Yield/ Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost Balance Dividends Cost
------- --------- ---- ------- --------- ---- ------- --------- ----
(Dollars in thousands)
Net interest margin.. 4.33% 4.11% 3.51%
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities......... 118.75% 115.11% 118.71%
- ------------------
(1) Does not include interest on loans 90 days or more past due.
Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes on net interest income of the
Bank. Information is provided with respect to (i) effects on interest income attributable to changes in
rate (changes in rate multiplied by prior volume); (ii) effects on interest income attributable to changes
in volume (changes in volume multiplied by prior rate); (iii) the net change attributable to the combined
impact of volume and rate; and (iv) the total change (the sum of the prior columns).
Year Ended March 31, Year Ended March 31,
2003 Compared to Year 2002 Compared to Year
Ended March 31, 2002 Ended March 31, 2001
Increase (Decrease) Increase (Decrease)
Due to Due to
----------------------------------- ---------------------------------
Rate/ Rate/
Rate Volume Volume Total Rate Volume Volume Total
---- ------ ------ ----- ---- ------ ------ -----
(In thousands)
Interest-earning assets:
Loans receivable (1).........$(1,214) $(2,698) $ 166 $(3,746) $ (631) $ 3,291 $(105) $ 2,555
Mortgage-backed and related
securities.................. (416) 1,567 (193) 958 (348) (1,808) 116 (2,040)
Investment securities........ (450) 127 (45) (368) (102) (851) 38 (915)
FHLB stock................... (22) 39 (2) 15 11 96 4 111
Federal funds sold and over-
night interest-bearing
deposits.................... 98 2 12 112 (127) (25) 23 (129)
------- ------ ------ ------- ------- ------ ----- ------
Total net change in
income on interest-
earning assets............ (2,004) (963) (62) (3,029) (1,197) 703 76 (418)
------- ------ ------ ------- ------- ------ ----- ------
Interest-bearing liabilities:
Passbook accounts............ (124) 43 (17) (98) (90) 4 -- (86)
Money market accounts........ (533) 72 (26) (487) (878) 276 (106) (708)
NOW accounts................. (161) 2 (1) (160) (145) (6) 3 (148)
Certificate accounts......... (1,869) (424) 134 (2,159) (1,170) (309) 52 (1,427)
Securities sold under
agreements to repurchase.... -- -- -- -- -- -- -- --
FHLB advances................ -- (656) (5) (661) (774) 579 (89) (284)
------- ------ ------ ------- ------- ------ ----- ------
Total net change in expense
on interest-bearing
liabilities................ (2,687) (963) 85 (3,565) (3,057) 544 (140) (2,653)
------- ------ ------ ------- ------- ------ ----- ------
Net change in net interest
income.......................$ 683 $ -- $ (147) $ 536 $ 1,860 $ 159 $ 216 $2,235
======= ====== ====== ======= ======= ====== ===== ======
- --------------
(1) Does not include interest on loans 90 days or more past due.
11
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). 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. Management's efforts at lowering the Bank's
interest rate risk have proven successful. The Bank was examined by the OTS
and received a "satisfactory" rating.
The Bank's primary monitoring tool for assessing interest rate risk is
asset/liability simulation modeling, which is performed for the Bank by the
OTS. 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 OTS 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 OTS and sets forth the change in
the Bank's net portfolio value ("NPV") at March 31, 2003, based on OTS
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.
Basis Points ("bp") Estimated Change in
Change in Interest Rates Net Portfolio Value
------------------------ ----------------------------------------
2003 2002
------------------ -------------------
(Dollars in Thousands)
300(bp) $(12,053) (22.0)% $(21,412) (45.1)%
200 (6,776) (12.0) (14,430) (29.6)
100 (2,320) (4.0) (7,156) (14.3)
0 0 0 0 0
100 337 1.0 4,202 0.8
200 N/A N/A N/A N/A
300 N/A N/A N/A N/A
The above table illustrates, for example, that an instantaneous 200 basis
point increase in market interest rates at March 31, 2003 would reduce the
Bank's NPV by approximately $6.8 million, or 12.0% at that date. This
compares to a reduction in the Bank's NPV by approximately $14.4 million, or
29.6% at March 31, 2002.
12
Certain assumptions utilized by the OTS 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, 2003. Market risk sensitive
instruments are generally defined as on- and off-balance sheet derivatives and
other financial instruments.
One Year After
Average Within to Three 3 Years to Beyond Fair
Rate One Year Years 5 Years 5 Years Total Value
---- -------- ----- ------- ------- ----- -----
(Dollars in thousands)
Interest Sensitive Assets:
Loans receivable............ 7.42% $133,981 $56,607 $26,672 $14,553 $231,813 $239,393
Mortgage-backed securities.. 5.82 15,403 15,945 9,292 12,254 52,894 52,894
Tax free municipal bonds.... 4.49 -- -- -- 7,394 7,394 7,394
Investments and other
interest-earning assets... 3.25 27,229 -- -- 18,408 47,647 47,647
FHLB stock.................. 6.75 -- -- -- 6,727 6,727 6,727
Interest Sensitive Liabilities:
NOW checking................ 0.25 11,591 13,793 6,759 6,494 38,637 38,637
Passbook savings............ 0.83 6,052 7,201 3,529 3,389 20,171 20,171
Money market deposits....... 1.13 55,242 13,258 530 22 69,052 69,052
Time certificates........... 3.05 64,294 25,875 12,602 -- 102,771 102,771
Off-balance Sheet Items:
Commitments to extend
credit.................... 7.20 14,121 -- -- -- 14,121 14,121
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, 2003 cash and cash equivalents
totaled $9.1 million or 2.4% 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 $113.2 million, under which
$64.5 million in advances were outstanding at March 31, 2003. In addition to
the FHLB credit facility, at March 31, 2003 the Bank had a $50.0 million
reverse repurchase line of credit available with Merrill Lynch and a $21.0
million overnight line of credit with Key Bank.
13
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, 2003, 2002 and 2001 the Bank originated $27.7 million, $26.4 million
and $22.3 million of such loans, respectively. At March 31, 2003, the Bank
had commitments to extend credit totaling $42.5 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, 2003 totaled $64.3 million. Historically, the Bank has been
able to retain a significant amount of its deposits as they mature.
OTS regulations require the Bank to maintain specific amounts of
regulatory capital. As of March 31, 2003, the Bank complied with all
regulatory capital requirements as of that date with tangible, core and total
capital ratios of 12.4%, 12.4% and 20.7%, respectively. See Note 15 of Notes
to Consolidated Financial Statements contained herein.
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.
14
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Oregon Trail Financial Corp.
Baker City, Oregon
We have audited the accompanying consolidated balance sheets of Oregon Trail
Financial Corp. and Subsidiary (the "Company) as of March 31, 2003 and 2002,
and the related consolidated statements of income, shareholders' equity and
cash flows for each of the three years in the period ended March 31, 2003.
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, 2003 and 2002, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
2003, in conformity with accounting principles generally accepted in the
United States of America.
/s/Deloitte & Touche LLP
Portland, Oregon
May 2, 2003
15
OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 AND 2002
(In thousands)
- -----------------------------------------------------------------------------
ASSETS 2003 2002
Cash and due from banks $ 1,860 $ 1,725
Interest-bearing deposits 7,254 6,070
-------- --------
Total cash and cash equivalents 9,114 7,795
Securities:
Investment securities available for sale, at fair
value (amortized cost of $43,726 and $18,552) 44,319 18,319
Mortgage-backed and related securities available
for sale, at fair value (amortized cost of
$61,205 and $74,252) 63,616 74,100
Loans:
Loans held for sale 1,134 -
Loans receivable 229,314 268,143
Allowance for loan losses (2,221) (2,280)
-------- --------
Total loans, net 228,227 265,863
Accrued interest receivable 1,906 2,308
Premises and equipment, net 8,719 9,466
Stock in FHLB, at cost 6,727 6,315
Real estate owned and other repossessed assets 302 58
Other assets 14,555 14,142
-------- --------
TOTAL ASSETS $377,485 $398,366
======== ========
(Continued)
16
OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 AND 2002
(In thousands, except share data)
- -----------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 2003 2002
LIABILITIES:
Deposits:
Interest-bearing $120,792 $114,859
Noninterest-bearing 25,563 21,878
Time certificates 102,771 119,341
-------- --------
Total deposits 249,126 256,078
Accrued expenses and other liabilities 2,483 2,052
Advances from FHLB 64,500 87,100
Net deferred tax liability 1,231 276
Advances from borrowers for taxes and insurance 38 37
-------- --------
Total liabilities 317,378 345,543
-------- --------
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; March 3l, 2003, 4,694,875 issued,
2,954,938 outstanding; March 31, 2002, 4,694,875
issued 2,854,548 outstanding 29 31
Additional paid-in capital 23,815 22,965
Retained earnings (substantially restricted) 36,098 32,042
Unearned shares issued to the ESOP (805) (1,341)
Unearned shares issued to the MRDP (881) (1,253)
Accumulated other comprehensive income 1,851 379
-------- --------
Total shareholders' equity 60,107 52,823
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $377,485 $398,366
======== ========
See notes to consolidate financial statements (Concluded)
17
OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 2003, 2002, AND 2001
(In thousands)
- -----------------------------------------------------------------------------
2003 2002 2001
INTEREST INCOME:
Interest and fees on loans receivable $18,964 $22,710 $20,155
Securities:
Mortgage-backed and related securities 4,414 3,456 5,496
U.S. government and government agencies
and other 1,042 1,298 2,342
FHLB dividends 412 397 286
------- ------- -------
Total interest income 24,832 27,861 28,279
------- ------- -------
INTEREST EXPENSE:
Deposits 5,302 8,206 10,575
FHLB advances 3,872 4,533 4,817
------- ------- -------
Total interest expense 9,174 12,739 15,392
------- ------- -------
Net interest income 15,658 15,122 12,887
PROVISION FOR LOAN LOSSES 321 481 794
------- ------- -------
Net interest income after
provision for loan losses 15,337 14,641 12,093
------- ------- -------
NONINTEREST INCOME:
Service charges on deposit accounts 1,881 1,793 1,728
Loan servicing fees 459 437 391
Gain on sale of loans 352 193 -
Realized gain on sale of securities - 314 -
Income from Bank Owned Life Insurance 668 685 58
Other income 91 57 (22)
------- ------- -------
Total noninterest income 3,451 3,479 2,155
------- ------- -------
(Continued)
18
OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 2003, 2002, AND 2001
(In thousands, except share data)
- -----------------------------------------------------------------------------
2003 2002 2001
NONINTEREST EXPENSES:
Employee compensation and benefits $ 6,722 $ 6,227 $ 6,601
Supplies, postage, and telephone 880 895 860
Depreciation 783 852 895
Occupancy and equipment 733 730 705
Customer accounts 462 515 550
Advertising 375 322 314
Professional fees 961 1,472 606
FDIC insurance premium 44 48 49
Realized loss on sale of securities - - 953
Other 303 222 371
---------- ---------- ----------
Total noninterest expenses 11,263 11,283 11,904
---------- ---------- ----------
Income before income taxes 7,525 6,837 2,344
PROVISION FOR INCOME TAXES 2,371 1,922 650
---------- ---------- ----------
NET INCOME $ 5,154 $ 4,915 $ 1,694
========== ========== ==========
Basic earnings per share $ 1.78 $ 1.58 $ 0.51
Diluted earnings per share $ 1.67 $ 1.52 $ 0.50
Weighted average common shares outstanding:
Basic 2,902,501 3,104,121 3,331,002
Diluted 3,081,535 3,229,081 3,367,210
See notes to consolidated financial statements.
(Concluded)
19
OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2003, 2002, AND 2001
(In thousands, except share data)
- -----------------------------------------------------------------------------------------------------------
Unearned Unearned
Shares Shares Accumulated
Issued to Issued to Other
Employee Management Compre- Compre-
Common Stock Additional Stock Recognition hensive hensive
-------------- Paid-in Retained Ownership and Develop- Income Income
Shares Amount Capital Earnings Trust ment Plan (Loss) (Loss) Total
BALANCE, APRIL
1, 2000 3,317,006 $36 $31,743 $27,759 $(2,415) $ (740) $(3,279) $53,104
Net income - - - 1,694 - - $1,694 - 1,694
Cash dividends
paid - - - (1,079) - - - - (1,079)
Stock repurchased
and retired (76,308) (1) (945) - - - - - (946)
Earned ESOP
shares 53,656 - 70 - 537 - - - 607
New MRDP shares
granted - - 42 - - (42) - -
Earned MRDP
shares 25,811 - - - - 267 - - 267
Exercise of
stock options 5,592 1 62 63
Net unrealized loss
on securities
available for sale
of $5,584 (net of
tax expense of
$3,319) less re-
classification
adjustment for net
losses included
in net income of
$1,488(net of tax
benefit of $766) - - - - - - 4,096 4,096 4,096
------
- - - - - - 5,790 - -
--------- --- ------- ------- ------- ------- ====== ------- -------
BALANCE, MARCH
31, 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
New MRDP shares
granted - - 1,056 - - (1,056) - - -
Earned MRDP
shares 29,380 - - - - 318 - - 318
Exercise of
stock options 20,342 1 270 - - - - - 271
Net unrealized
loss on
securities
available for
sale of $236
(net of tax
benefit of $148)
less reclassifi-
cation 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
20
OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2003, 2002, AND 2001
(In thousands, except share data)
- -----------------------------------------------------------------------------------------------------------
Unearned Unearned
Shares Shares Accumulated
Issued to Issued to Other
Employee Management Compre- Compre-
Common Stock Additional Stock Recognition hensive hensive
-------------- Paid-in Retained Ownership and Develop- Income Income
Shares Amount Capital Earnings Trust ment Plan (Loss) (Loss) Total
BALANCE, MARCH
31,2002 2,854,548 $31 $22,965 $32,042 $(1,341) $(1,253) $ - $ 379 $52,823
Net income - - - 5,154 - - 5,154 - 5,154
Cash dividends
paid - - - (1,246) - - - - (1,246)
Stock repurchased
and retired (6,239) (2) (38) - - - - - (40)
Earned ESOP
shares 53,656 - 558 - 536 - - - 1,094
Earned MRDP
shares 31,215 - - - - 372 - - 372
Exercise of
stock options 21,758 330 - - - - - 330
Tax benefit of
SOP 148 148
Net unrealized
gain on
securities
available for
sale of $2,388
(net of tax
expense of $916) - - - - - - 1,472 1,472 1,472
Comprehensive
income - - - - - $6,626 - -
--------- --- ------- ------- ----- ----- ====== ------- -------
BALANCE, MARCH
31, 2003 2,954,938 $29 $23,815 $36,098 $(805) $(881) $ 1,851 $60,107
========= === ======= ======= ===== ===== ======= =======
21
OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2003, 2002, AND 2001
(In thousands)
- -----------------------------------------------------------------------------
2003 2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,154 $ 4,915 $ 1,694
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation 783 852 895
Compensation expense related to ESOP 1,094 876 607
Compensation expense related to MRDP 372 318 267
Amortization of deferred loan fees (285) (215) (71)
Provision for loan losses 321 481 794
Deferred income taxes 579 97 (267)
Amortization and accretion of premiums and
discounts on investments and loans purchased 416 355 361
FHLB dividends (412) (397) (286)
Gain on sale of loans (352) (193) -
(Gain) loss on sale of premises and equipment 10 (1) 5
Change in assets and liabilities:
Accrued interest receivable 402 64 80
Other assets (657) (880) 131
Accrued expenses and other liabilities 39 (1,646) 1,042
--------- --------- ---------
Net cash provided by (used in) operating
activities 7,464 4,626 5,252
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan originations (121,171) (122,107) (103,783)
Loan principal repayments 151,138 149,358 92,291
Loans purchased (14,359) (55,992) (19,774)
Loans sold 22,002 13,086 -
Proceeds from maturity of securities
available for sale 2,274 - -
Principal repayments of securities
available for sale 38,386 19,672 10,808
Purchase of securities available for sale (62,162) (44,368) (17,000)
Proceeds from sale of securities available
for sale 8,300 28,746 37,841
Purchases of stock in FHLB - (1,267) (468)
Purchase of Bank Owned Life Insurance - - (12,500)
Purchase of premises and equipment (46) (293) (1,137)
Proceeds from sale of premises and equipment - 111 3
--------- --------- ---------
Net cash provided by(used in)
investing activities 24,362 (13,054) (13,719)
--------- --------- ---------
(Continued)
22
OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2003, 2002, AND 2001
(In thousands)
- -----------------------------------------------------------------------------
2003 2002 2001
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits, net of withdrawals $ (6,952) $ 2,301 $ 16,042
Change in advances from borrowers for
taxes and insurance 1 15 (668)
Proceeds from FHLB advances 308,275 803,885 1,080,422
Repayment of FHLB advances (330,875) (789,910) (1,084,047)
Payment of cash dividends (1,246) (1,247) (1,079)
Stock options exercised 330 270 63
Stock repurchased and retired (40) (9,672) (946)
--------- --------- -----------
Net cash provided by(used in)
financing activities (30,507) 5,642 9,787
--------- --------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,319 (2,786) 1,320
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 7,795 10,581 9,261
--------- --------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 9,114 $ 7,795 $ 10,581
========= ========= ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest on deposits and other
borrowings $ 8,791 $ 12,564 $ 14,691
Income taxes 1,893 2,745 435
Noncash investing activities:
Transfer of loans to real estate owned 217 - 41
Unrealized gain (loss) on securities
available for sale, net of tax 1,472 (438) 4,096
See notes to consolidated financial statements.
(Concluded)
23
OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2003, 2002, AND 2001
- -----------------------------------------------------------------------------
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.
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 a maturity of three months or less at date of
acquisition 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 or held to maturity securities
at March 31, 2003 and 2002. 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.
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
24
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. The Company's minimum investment
requirement was approximately $3,502,000, and $4,355,000 at March 31, 2003 and
2002, respectively. 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, 2003 loans held for sale totaled $1.1
million. At March 31, 2002 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 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.
25
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 those 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.
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 - 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 as follows:
Software 3 years
Furniture and Equipment 5 to 7 years
Buildings and Improvements 15 to 39 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 temporary 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.
26
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.
The plan authorizes the grant of common stock shares to certain officers and
directors, which vest over a two 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. 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 14
for further discussion.
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, 2003,
2002, and 2001 (dollars in thousands):
2003 2002 2001
Net income:
As reported $5,154 $4,915 $1,694
Pro forma 5,129 4,644 1,612
Earnings per common share - basic:
As reported $ 1.78 $ 1.58 $ 0.51
Pro forma 1.77 1.50 0.48
Earnings per common share - diluted:
As reported $ 1.67 $ 1.52 $ 0.50
Pro forma 1.66 1.44 0.48
Recently Issued Accounting Pronouncements-In July 2002, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities." This Statement 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
27
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, and applies to all acquisitions except
those between two or more mutual enterprises. The provisions of this
statement provide 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 No. 142, "Goodwill and Other Intangible Assets." Financial institutions
meeting conditions outlined in SFAS No. 147 will be required to restate
previously issued financial statements. The Company currently has no goodwill
that will be impacted by SFAS No. 147.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN No. 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". FIN No. 45 is an
interpretation of FASB Statements No. 5, 57, and 107 and rescinds FIN No. 35.
This Interpretation elaborates on the disclosures to be made by a guarantor in
its interim and annual financial statements about its obligations under
certain guarantees that it has issued. The disclosure requirements in this
Interpretation are effective for financial statements of interim or annual
periods ending after December 15, 2002. The Company has adopted the
provisions of FIN No. 45.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for an entity that voluntarily changes to the fair value based
method of accounting for stock-based employee compensation. This statement is
effective for fiscal years ending after December 15, 2002. The provisions of
SFAS No. 148 do not have a material impact on the results of operations or
financial condition of the Company.
2. SECURITIES
The amortized cost, gross unrealized gains and losses, and estimated fair
value of securities classified as available for sale at March 31, 2003 and
2002 are summarized as follows (in thousands):
28
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
March 31, 2003
Available for sale:
U.S. government and government
agency obligations $ 9,158 $ 256 $ - $ 9,414
Trust preferred securities 6,833 464 (129) 7,168
Other Securities 27,735 11 (9) 27,737
Mortgage-backed and related
securities 50,582 2,312 - 52,894
Collateralized mortgage
obligations 10,623 99 - 10,722
-------- ------ ----- --------
Total available for sale $104,931 $3,142 $(138) $107,935
======== ====== ===== ========
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
March 31, 2002
Available for sale:
U.S. government and government
agency obligations $11,161 $ 234 $(423) $10,972
Trust preferred securities 6,881 87 (131) 6,837
Other Securities 510 - - 510
Mortgage-backed and related
securities 58,433 1,171 (248) 59,356
Collateralized mortgage
obligations 14,819 4 (79) 14,744
------- ------ ----- -------
Total available for sale $91,804 $1,496 $(881) $92,419
======= ====== ===== =======
The carrying value and fair value of available for sale debt securities at
March 31, 2003 with contractual maturity dates are as follows (in thousands):
Amortized Cost Fair Value
Due in five years or less $ 2,003 $ 2,021
Due after five years through ten years 5,457 5,580
Due after ten years 69,736 72,597
No contractural maturity 27,735 27,737
-------- --------
Total $104,931 $107,935
======== ========
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 $35,774,000
and $41,357,000 were pledged against public funds and other deposits at March
31, 2003 and 2002, respectively.
29
3. LOANS RECEIVABLE
Loans receivable are summarized as follows (in thousands):
March 31,
---------------------
2003 2002
Mortgage loans:
One-to-four family $ 94,456 $122,950
Multi-family 7,724 10,799
Commercial 30,874 36,397
Agricultural 3,952 3,505
Construction 676 1,255
Land 23 34
-------- --------
Total mortgage loans 137,705 174,940
-------- --------
Consumer loans:
Unsecured $ 6,357 $ 6,066
Home equity and second mortgage 12,313 14,039
Auto loans 27,058 28,147
Credit card 1,354 1,174
Loans secured by savings deposits 288 502
Other secured 4,174 4,443
-------- --------
Total consumer loans 51,544 54,371
-------- --------
Commercial loans:
Business 26,270 24,152
Agricultural 16,294 16,185
-------- --------
Total commercial loans 42,564 40,337
-------- --------
Total loans 231,813 269,648
Less:
Net deferred loan fees 1,365 1,505
Allowance for loan losses 2,221 2,280
-------- --------
Total loans receivable, net $228,227 $265,863
======== ========
The weighted average interest rate on loans at March 31, 2003 and 2002 was
7.42% and 7.77%, respectively.
Allowance for loan loss activity is summarized as follows for the years ended
March 31, 2003, 2002, and 2001 (in thousands):
30
2003 2002 2001
Balance, beginning of year $2,280 $2,098 $1,396
Provision for loan losses 321 481 794
Charge-offs (427) (341) (111)
Recoveries 47 42 19
------ ------ ------
$2,221 $2,280 $2,098
====== ====== ======
At March 31, 2003 and 2002, the Company's recorded investment in loans for
which an impairment has been recognized under the guidance of SFAS No. 114 and
SFAS No. 118 was $513,000 and $336,000, respectively. The allowance for loan
losses in excess of specific reserves is available to absorb losses from all
loans, although allocations have been made for certain loan categories as part
of management's analysis of the allowance. The average investment in impaired
loans was approximately $391,000, $381,000 and $111,000 during the years ended
March 31, 2003, 2002, and 2001, respectively.
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,
2003, 2002, and 2001 is summarized as follows (in thousands):
2003 2002 2001
Beginning balance $1,599 $1,245 $1,216
Additions 10 734 238
Reductions (70) (380) (209)
------ ------ ------
Ending balance $1,539 $1,599 $1,245
====== ====== ======
At March 31, 2003, 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,
------------------
2003 2002
Loans receivable $1,413 $1,698
Mortgage-backed and related securities 301 394
U.S. government and government agencies 192 216
------ ------
$1,906 $2,308
====== ======
31
6. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows (in thousands):
March 31,
-----------------
2003 2002
Land $1,226 $1,226
Buildings and improvements 8,758 8,751
Furniture, fixtures and equipment 4,108 4,137
Construction in process - 3
------- -------
14,092 14,117
Less accumulated depreciation 5,373 4,651
------- -------
$ 8,719 $ 9,466
======= =======
7. DEPOSITS
Savings deposits at March 31 are summarized as follows (dollars in thousands):
2003 2002
----------------- ------------------
Weighted Weighted
Average Average
Interest Interest
Rate Balance Rate Balance
Non-interest bearing - % $ 25,563 - % $ 21,878
NOW checking 0.25 38,637 0.50 35,803
Passbook savings accounts 0.83 20,171 1.41 18,371
Money market deposit 1.13 61,984 1.75 60,685
Time certificates 3.05 102,771 3.96 119,341
---- -------- ---- --------
1.65% $249,126 2.43% $256,078
==== ======== ==== ========
At March 31, 2003, time certificate maturities are as follows (dollars in
thousands):
Within one year $ 64,294
One year to two years 16,007
Two years to three years 9,867
Three years to four years 6,422
Four years to five years 5,853
Thereafter 328
--------
$102,771
========
The aggregate amount of time certificates with a minimum denomination of
$100,000 was $27.4 million and $32.9 million at March 31, 2003 and 2002,
respectively. Deposit accounts in excess of $100,000 are not insured by the
Federal Deposit Insurance Corporation ("FDIC").
32
Interest expense on deposits is summarized as follows for the years ended
March 31, 2003, 2002, and 2001 (dollars in thousands):
2003 2002 2001
NOW checking $ 155 $ 314 $ 462
Passbook savings accounts 213 311 398
Money market deposit 1,018 1,504 2,213
Time certificates 3,916 6,077 7,502
------ ------ -------
$5,302 $8,206 $10,575
====== ====== =======
8. 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, 2003, FHLB advances were scheduled to mature as follows (dollars
in thousands):
Adjustable Rate Fixed Rate Total
Advances Advances Advances
---------------------------------- ----------------
Rate* Amount Rate* Amount Rate* Amount
Due in less than
one year N/A $ - 5.98% $32,500 5.98% $32,500
One to two years N/A - 2.32 10,000 2.32 10,000
Three to four years N/A - 7.01 7,000 7.01 7,000
Greater than four
years N/A - 7.08 15,000 7.08 15,000
----- ---- ---- ------- ---- -------
N/A $ - 5.78% $64,500 5.78% $64,500
===== ==== ==== ======= ==== =======
* 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, 2003,
2002, and 2001 (dollars in thousands):
2003 2002 2001
Maximum outstanding at any month end $82,725 $109,600 $87,300
Daily average outstanding 72,681 84,989 75,871
Weighted average interest rates:
Annual 5.30% 5.33% 6.34%
End of year 5.78% 4.75% 6.10%
Interest expense during the year $ 3,872 $ 4,533 $ 4,817
The Bank has a $21.0 million overnight line of credit with Key Bank and a
$50.0 million reverse repurchase agreement with Merrill Lynch. At March 31,
2003, there were no outstanding balances in either account.
33
9. INCOME TAXES
A reconciliation between federal income taxes computed at the statutory rate
and the effective tax rate for the years ended March 31 is as follows:
2003 2002 2001
------ ------ ------
Federal income taxes at statutory rate 34.0% 34.0% 34.0%
State income taxes at statutory rate, net
of related federal tax effect 4.2 3.5 4.4
Officers life insurance (3.0) (3.4) -
Tax exempt interest (1.3) (1.4) (6.8)
Tax credit for qualified loans (0.9) (1.1) (5.3)
Other, net (1.5) (3.5) 1.6
---- ---- ----
31.5% 28.1% 27.9%
==== ==== ====
Provision (benefit) for income taxes for the years ended March 31, 2003, 2002,
and 2001 is summarized as follows (in thousands):
2003 2002 2001
------ ------ -----
Current:
Federal $1,422 $1,473 $ 711
State 370 352 206
------ ------ -----
Total current 1,792 1,825 917
------ ------ -----
Deferred:
Federal 476 83 (221)
State 103 14 (46)
------ ------ -----
Total deferred 579 97 (267)
------ ------ -----
Total provision for income taxes $2,371 $1,922 $ 650
====== ====== =====
34
The components of net deferred tax assets and liabilities at March 31, 2003
and 2002 are summarized as follows (in thousands):
2003 2002
Deferred tax assets:
Deferred loan fees $ - $ 323
Allowance for loan losses 768 792
Vacation accrual 158 137
Other 162 122
------- -------
Total gross deferred tax assets 1,088 1,374
------- -------
Deferred tax liabilities:
Unrealized gains on securities available
for sale (626) (250)
FHLB stock dividends (1,490) (1,322)
Accumulated depreciation (46) (76)
Deferred loan fees (155) -
Other (2) (2)
------- -------
Total gross deferred tax liabilities (2,319) (1,650)
------- -------
Net deferred tax liability $(1,231) $ (276)
======= =======
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.
10. SHAREHOLDERS' EQUITY
Oregon Trail Financial 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.
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
35
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.
The Company participates in stock repurchase programs in which it actively
repurchases shares of its common stock. The repurchase programs result in a
reduction of shares outstanding and reduce equity. A portion of the shares
repurchased were used to fund the MRDP and the ESOP. These plans were
approved by shareholders in August 1998 and were implemented in October 1998.
Repurchases of the Company's stock which were approved by the Board of
Directors and completed by management are summarized as follows:
Month Completed Shares Price
August 1998 422,539 $15.51
February 1999 213,666 13.14
July 1999 210,299 13.03
October 1999 6,144 11.31
November 1999 199,785 12.03
October 2000 3,508 11.69
December 2000 179,000 10.71
September 2001 332,900 15.77
October 2001 3,233 15.74
November 2001 151,754 17.52
December 2001 98,500 18.24
October 2002 6,239 20.47
Since converting to a stock company, 1,827,567 shares, or 38.9% of shares
initially outstanding, have been repurchased.
11. EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP")
As part of the conversion discussed in Note 10, 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 ESOP Trust over a seven-year
period. The loan had an outstanding balance of $1.0 million and $1.6 million
at March 31, 2003 and 2002, 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 $1,094,000,
$876,000, and $607,000 during the years ended March 31, 2003, 2002, and 2001,
respectively.
36
ESOP share activity is summarized as follows:
Committed to
Unreleased be Released
ESOP Shares Shares
Balance, March 31, 2000 241,450 131,907
2001 release (53,656) 53,656
-------
2001 Distributions (7,388)
-------
Balance, March 31, 2001 187,794 178,175
2002 release (53,656) 53,656
-------
2002 Distributions (7,384)
-------
Balance, March 31, 2002 134,138 224,447
2003 release (53,654) 53,654
-------
2003 Distributions (6,941)
-------
Balance, March 31, 2003 80,484 271,160
======= =======
At March 31, 2003, there were 351,644 shares remaining in the ESOP.
12. 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 authorized the grant of 187,795
common stock shares. Shareholders approved the plan in July 1998. 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 two- to five-year period beginning on 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, 2003, 2002, and 2001 was $372,000, $318,000, and $267,000,
respectively. MRDP grants were as follows:
Number of Grant
Year Awarded Shares Price
1999 147,322 $11.15
2000 6,350 11.18
2001 7,130 11.72
2002 5,500 15.55
2002 58,362 16.63
2003 - -
At March 31, 2003, awarded but unvested MRDP shares totaled 67,370.
37
13. 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, 2003, 2002, and
2001. There are no resulting adjustments to net income:
2003 2002 2001
Weighted average common shares out-
standing - basic 2,902,501 3,104,121 3,331,002
Effect of dilutive securities on number
of shares:
MRDP shares 23,109 23,621 25,723
Stock options 155,925 101,339 10,485
--------- --------- ---------
Total dilutive securities 179,034 124,960 36,208
Weighted average common shares out-
standing - assuming dilution 3,081,535 3,229,081 3,367,210
14. 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. All awards vest in equal
installments over a three- to five-year period, with the exception of 102,368
shares granted in fiscal 2002 which vested immediately upon grant. Unvested
options become immediately exercisable in the event of death or disability.
38
Stock option activity is summarized as follows:
Weighted
Weighted Average
Average Remaining
Number of Exercise Contractual Exercisable
Shares Price Life Options
Outstanding, March 31, 2000 287,742 $11.15 8.5 years 80,119
Granted 66,251 9.70
Canceled (26,287) 11.15
Exercised (5,592) 11.15
------- ------
Outstanding, March 31, 2001 322,114 $10.85 7.9 years 120,823
Granted 120,626 16.46
Canceled (309) 11.15
Exercised (20,342) 11.18
------- ------
Outstanding, March 31, 2002 422,089 $12.44 7.7 years 280,277
======= ======
Granted - -
Canceled - -
Exercised (21,758) $11.76
------- ------
Outstanding, March 31, 2003 400,331 $12.47 6.4 years 339,852
As of March 31, 2003, outstanding stock options consist of the following:
Weighted Weighted Weighted
Average Average Average
Exercise Options Exercise Remaining Exercisable Exercise
Price Range Outstanding Price Life Options Price
$ 9.13 - $11.72 282,458 $10.80 5.4 years 234,152 $10.98
$11.73 - $16.63 117,873 16.48 8.6 years 105,700 16.59
------- ------ --------- ------- ------
Total 400,331 $12.47 6.4 years 339,852 $12.73
======= =======
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 2000. Under
39
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:
2003 2002 2001
---- ---- ----
Risk-free interest rate N/A 4.49% 4.64%
Expected dividend N/A 2.42% 2.66%
Expected lives, in years N/A 7.9 5.0
Expected volatility N/A 14% 21%
The estimated weighted average grant-date fair value of options granted was
$3.15 and $1.91 per share for the years ended March 31, 2002, and 2001,
respectively. No options were granted in 2003.
15. 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 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, 2003.
As of March 31, 2003, the most recent notification from the Office of Thrift
Supervision ("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 and Tier I
risk-based 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.
40
The Bank's actual and required capital amounts and ratios are presented in the
table below (dollars in thousands):
Categorized as
"Well Capitalized"
For Under
Capital Adequacy Prompt Corrective
Actual Purposes Action Provision
-------------- -------------- ----------------
As of March 31, 2003 Amount Ratio Amount Ratio Amount Ratio
Total Capital
(To risk weighted
assets) $48,327 20.7% $18,676 8.0% $23,345 10.0%
Tier I Capital
(To risk weighted
assets) $46,106 19.8% N/A N/A $14,007 6.0%
Core Capital
(To total assets) $46,106 12.4% $14,888 4.0% $18,610 5.0%
Tangible Capital
(To tangible assets) $46,106 12.4% $ 5,583 1.5% N/A N/A
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%
Core Capital
(To total 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
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, 2003 (in thousands):
Equity $48,082
Unrealized securities gains (1,745)
Equity of non-includable subsidiaries (161)
Other intangible assets (70)
-------
Tangible capital 46,106
General valuation allowance 2,221
-------
Total capital $48,327
=======
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 2003, 2002, and 2001 financial
41
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.
16. 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% of participating
employees' salaries for the years ended March 31, 2003, 2002 and 2001.
Contributions and plan administration expenses totaled $124,000, $110,000, and
$101,000 for the years ended March 31, 2003, 2002, and 2001, respectively.
17. COMMITMENTS AND CONTINGENCIES
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 $42,467,027 at March 31, 2003, which include fixed rate loan commitments
of $4,714,926. The range of interest rates for these loan commitments are
3.25% to 10.00%.
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
and western Idaho.
The Company is party to litigation arising in the ordinary course of business.
In the opinion of management, these actions will not have a material adverse
effect, if any, on the Company's financial position, results of operations, or
cash flows.
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
A summary of carrying value and estimated fair value of financial instruments
is summarized as follows (in thousands):
42
March 31, 2003 March 31, 2002
---------------------- ---------------------
Carrying Carrying
Value Fair Value Value Fair Value
Financial assets:
Cash and cash equivalents $ 9,114 $ 9,114 $ 7,795 $ 7,795
Securities 107,935 107,935 92,419 92,419
Loans receivable, net of
allowance for loan losses 228,227 247,921 265,863 278,536
FHLB stock 6,727 6,727 6,315 6,315
Financial liabilities:
Demand and savings
deposits 146,355 146,355 136,737 136,737
Time certificates of
deposit 102,771 105,323 119,341 120,489
FHLB advances 64,500 70,530 87,100 89,664
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 approximates carrying amounts. The fair value of time certificates of
deposit and FHLB advances 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 17 to the consolidated financial
statements.
19. 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.
43
Following are disclosures related to the Plan (in thousands):
2003 2002 2001
Change in benefit obligation:
Benefit obligation, beginning of year $ 301 $ 299 $ 303
Service cost 8 8 8
Interest cost 23 23 23
Benefits paid (29) (29) (35)
----- ----- -----
Benefit obligation, end of year $ 303 $ 301 $ 299
===== ===== =====
Unrecognized prior service cost $ 215 $ 237 $ 259
===== ===== =====
Weighted average assumption -
discount rate 6.75% 7% 7%
===== ===== =====
Components of net periodic benefit cost:
Service cost $ 8 $ 8 $ 8
Interest cost 23 23 23
Amortization of prior service cost 22 22 22
----- ----- -----
Net periodic benefit cost $ 53 $ 53 $ 53
===== ===== =====
20. PARENT COMPANY FINANCIAL INFORMATION
The Parent company financial information at March 31, 2003 and 2002 is as
follows (in thousands):
2003 2002
Assets:
Cash $ 8,606 $ 7,407
Investment in subsidiary 48,081 40,972
Other assets 3,659 4,520
------- -------
Total $60,346 $52,899
======= =======
Liabilities and Shareholders' Equity:
Other liabilities $ 239 $ 76
Shareholders' equity 60,107 52,823
------- -------
Total $60,346 $52,899
======= =======
44
The statements of income for the years ended March 31, 2003, 2002, and 2001
are as follows (in thousands):
2003 2002 2001
Income:
Interest on debt securities $ 214 $ 139 $ -
------ ------ ------
Total income 214 139 -
Expenses:
Interest and other expense 858 1,404 784
------ ------ ------
Total expenses 858 1,404 784
====== ====== ======
Income(loss) before income taxes and
equity in undistributed earnings of
the bank (644) (1,265) (784)
Income tax benefit 247 494 301
------ ------ ------
Net income before equity in undistributed
earnings of the bank (397) (771) (483)
Equity in undistributed earnings of the
bank 5,551 5,686 2,177
------ ------ ------
Net income $5,154 $4,915 $1,694
====== ====== ======
The statements of cash flows for the years ended March 31, 2003, 2002, and
2001 are as follows (in thousands):
2003 2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $5,154 $4,915 $1,694
Adjustments to reconcile net income to
cash provided by (used in) operating
activities:
Equity in undistributed income of
subsidiary (5,551) (5,686) (2,177)
Compensation expense related to MRDP 372 318 267
Compensation expense related to ESOP 1,094 876 607
Change in assets and liabilities:
Decrease in other assets (662) (1,171) (295)
(Increase)decrease in other liabilities (163) (59) 46
------ ------ ------
Net cash provided by (used in)
operating activities 244 (807) 142
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Dividend received from subsidiary - 14,000 5,548
------ ------ ------
Net cash provided by investing
activities - 14,000 5,548
------ ------ ------
45
2003 2002 2001
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common stock (40) (9,672) (946)
Proceeds from exercise of stock options 330 270 63
Investment in subsidiary 2,111 (97) 409
Payment of cash dividend (1,246) (1,247) (1,079)
------ ------ ------
Net cash provided by(used in)
financing activities 1,155 (10,746) (1,553)
------ ------ ------
Net increase in cash 1,199 2,447 4,137
Cash:
Beginning of year 7,407 4,960 823
------ ------ ------
End of year $8,606 $7,407 $4,960
====== ====== ======
21. PENDING ACQUISITION
On February 24, 2003, the Company entered into a definitive merger agreement
("Agreement") with FirstBank NW Corp., Lewiston, Idaho ("FirstBank") pursuant
to which the Company will be merged into FirstBank NW Corp. The Agreement
also provides for the merger of the Bank with and into FirstBank's subsidiary
financial institution, FirstBank Northwest. Under the terms of the Agreement,
shareholders of the Company may elect to receive either cash or shares of
FirstBank common stock in exchange for their shares of Oregon Trail common
stock. The aggregate purchase price for the transaction is approximately
$74.0 million. Consummation of the merger is subject to approval by
FirstBank's and the Company's shareholders and the receipt of all required
regulatory approvals. It is anticipated that the transaction will be
completed in the fourth quarter of calendar year 2003. The Company incurred
$330,000 in expense related to the proposed merger with FirstBank for the year
ended March 31, 2003.
* * * * * *
46
SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
Year ended March 31, 2003 (in thousands, except share data):
June 30 September 30 December 31 March 31
Total interest income $6,515 $6,451 $6,218 $5,648
Total interest expense 2,553 2,405 2,213 2,002
------ ------ ------ ------
Net interest income 3,962 4,046 4,005 3,646
Provision for loan losses 143 105 36 38
------ ------ ------ ------
Net interest income after
provision 3,819 3,941 3,969 3,608
Noninterest income 850 799 858 944
Noninterest expense 2,709 2,795 2,730 3,028
------ ------ ------ ------
Income before income taxes 1,960 1,945 2,097 1,524
Provision for income taxes 633 670 767 301
------ ------ ------ ------
Net income $1,327 $1,275 $1,330 $1,223
====== ====== ====== ======
Basic earnings per share $ 0.46 $ 0.44 $ 0.45 $ 0.42
Diluted earnings per share $ 0.44 $ 0.42 $ 0.42 $ 0.39
Year ended March 31, 2002(in thousands, except share data):
June 30 September 30 December 31 March 31
Total interest income $7,248 $7,322 $6,860 $6,431
Total interest expense 3,785 3,445 2,954 2,555
------ ------ ------ ------
Net interest income 3,463 3,877 3,906 3,876
Provision for loan losses 318 24 (4) 144
------ ------ ------ ------
Net interest income after
provision 3,145 3,853 3,910 3,732
Noninterest income 1,019 723 796 942
Noninterest expense 2,732 2,718 2,973 2,861
------ ------ ------ ------
Income before income taxes 1,432 1,858 1,733 1,813
Provision for income taxes 358 525 513 526
------ ------ ------ ------
Net income $1,074 $1,333 $1,220 $1,287
====== ====== ====== ======
Basic earnings per share $ 0.32 $ 0.40 $ 0.42 $ 0.45
Diluted earnings per share $ 0.31 $ 0.39 $ 0.40 $ 0.43
* * * * * *
47
Corporate Information Board of Directors
Corporate Headquarters: Stephen R. Whittemore
2055 First Street Chairman of the Board
P.O. Box 786 Private Investor
Baker City, OR 97814
541.523.6327 John Gentry
President and General Manager,
Subsidiaries Gentry Ford Sales, Inc.
Pioneer Bank, A Federal Savings Bank
Albert H. Durgan
Transfer Agent and Registrar Retired President, Pioneer Bank
Registrar & Transfer Company
10 Commerce Drive Edward H. Elms
Cranford, NJ 07016 Owner, P&E Distributing Company
Special Counsel Charles H. Rouse
Breyer & Associates PC Private Investor and Consultant
8180 Greensboro Drive, Suite 785
McLean, VA 22102 Kevin D. Padrick
Attorney
Annual Meeting of Stockholders
A date for this year's annual Stock Listing
meeting of shareholders has not
been established by the Board of Oregon Trail Financial Corp. common
Directors. stock is traded over-the-counter on
the Nasdaq National Market under the
Executive Officers symbol "OTFC" since October 3, 1997.
Berniel L. Maughan, President and CEO Stockholders of record at March 31,
Zane L. Lockwood, Executive Vice 2003 totaled 726. This total does not
President reflect the number of persons or
Jonathan P. McCreary, Vice President entities who hold stock in nominee or
and CFO "street" name through various
brokerage firms. The following table
Investor Information shows the reported high and low sale
prices of the Company's common stock
A copy of the Form 10-K, including and declared dividends for each
consolidated financial statements, quarter within the two most recent
as filed with the Securities and fiscal years.
Exchange Commission, will be furnished Sale Price
without charge to stockholders as of ---------- Dividends
the record date for voting at the High Low Declared
annual meeting of stockholders upon ---- --- --------
written request to the Secretary,
Oregon Trail Financial Corp., 2055 Fiscal 2003
First Street, PO Box 786, Baker City, First quarter $19.70 $18.45 $0.10
Oregon 97814. Second quarter 21.58 17.45 0.10
Third quarter 21.60 20.20 0.11
Fourth quarter 23.10 20.11 0.11
Fiscal 2002
First quarter 14.99 13.94 0.09
Second quarter 16.10 14.52 0.10
Third quarter 18.63 15.48 0.10
Fourth quarter 18.62 17.51 0.10
48
Offices
www.pioneerbankfsb.com
Administrative Office Baker City Branch
2055 First Street 1990 Washington Avenue
Baker City, Oregon Baker City, Oregon
541.523.6327 541.523.5884
La Grande Branch Ontario Branch
1215 Adams Avenue 225 SW Fourth Avenue
La Grande, Oregon Ontario, Oregon
541.963.4126 541.889.3154
John Day Branch Burns Branch
150 West Main Street 524 West Monroe Street
John Day, Oregon Burns, Oregon
541.575.0257 541.573.2121
Enterprise Branch Island City Branch
205 West Main Street 3106 Island Avenue
Enterprise, Oregon La Grande, Oregon
541.426.4529 541.963.2200
Vale Branch Pendleton Branch
150 Longfellow Street North 1701 SW Court Avenue
Vale, Oregon Pendleton, Oregon
541.473.3831 541.276.1000
49
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 2, 2003, appearing in the Annual Report on Form 10-K of
Oregon Trail Financial Corp. for the year ended March 31, 2003.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Portland, Oregon
June 30, 2003
Exhibit 99
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 Annual Report on Form
10-K, that:
(1) the report fully complies with the requirements of Sections 13(a)
and 15(d) of the Securities 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/ Jonathan P. McCreary
- ------------------------------- --------------------------------
Berniel L. Maughan Jonathan P. McCreary
Chief Executive Officer Chief Financial Officer
Dated: June 30, 2003
A signed original of this written statement required by Section 906, or
other document authenticating, acknowledging, or otherwise adopting the
signature that appears in typed form within the electronic version of this
written statement required by Section 906, has been provided to Oregon Trail
Financial Corp. and will be retained by Oregon Trail Financial Corp. and
furnished to the Securities and Exchange Commission or its staff upon request.