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 September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-26556
KLAMATH FIRST BANCORP, INC.
(Exact name of registrant as specified in its charter)
Oregon 93-1180440
- ---------------------------------------------- ---------------
(State or other jurisdiction of incorporation I.R.S. Employer
or organization) I.D. Number)
540 Main Street, Klamath Falls, Oregon 97601
- ---------------------------------------------- ---------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (541) 882-3444
----------------
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 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 December 10, 1996, there were issued and outstanding 11,612,470
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
"KFBI." 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 December 10, 1996 of $15.00,
was $167,255,070.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Registrant's Annual Report to Shareholders for the Fiscal
Year Ended September 30, 1996 ("Annual Report") (Parts I and II).
2. Portions of Registrant's Definitive Proxy Statement for the 1997 Annual
Meeting of Shareholders (Part III).
3. Registrant's Current Report on Form 8-K dated May 21, 1996, as amended
on May 31, 1996 (Part II, Item 9).
<PAGE>
PART I
Item 1. Business
General
Klamath First Bancorp, Inc. ("Company"), an Oregon corporation, was
organized on June 16, 1995 for the purpose of becoming the holding company for
Klamath First Federal Savings and Loan Association ("Association") upon the
Association's conversion from a federal mutual to a federal stock savings and
loan association ("Conversion"). The Conversion was completed on October 4,
1995. At September 30, 1996, the Company had total assets of $672.0 million,
total deposits of $399.7 million and shareholders' equity of $153.4 million. All
references to the Company herein include the Association where applicable.
The Association was organized in 1934. The Association 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 Association also is a member
of the Federal Home Loan Bank ("FHLB") System.
The Association is a traditional, community-oriented savings and loan
association that focuses on customer service within its primary market area.
Accordingly, the Association is primarily engaged in attracting deposits from
the general public through its offices and using those and other available
sources of funds to originate permanent residential one- to four-family real
estate loans within its market area and to a lesser extent on commercial
property and multi-family dwellings. At September 30, 1996, permanent
residential one- to four-family real estate loans totalled $447.0 million, or
91.50% of the total loans. The Association has historically emphasized
fixed-rate lending but has determined to place greater emphasis on the
origination of adjustable rate loans on permanent one- to four-family
residences. In an attempt to increase this type of business, in November 1994
the Association began to use below market "teaser" rates which are competitive
with other institutions originating mortgages in the Association's primary
market area. At September 30, 1996, 89.32% and 10.68% of the Association's total
loan portfolio consisted of long-term, fixed-rate and adjustable rate loans,
after loans in process and non-performing loans, respectively.
Market Area
The Association's market area covers the counties of Klamath, Deschutes
and Jackson in Southern and Central Oregon. This area has a diverse economic
base, with each of the three counties influenced by distinct economic factors.
The economy of Klamath County, where the Association's main office is
located, has been historically reliant on the timber and wood products industry
and agriculture. However, Klamath County's economy has been increasingly
influenced in recent years by employment growth in light industry, the federal
government (including the Kingsley Field Air National Guard Installation) and
health services. Major employers in Klamath County include Merle West Medical
Center and JELD-WEN (wood products).
The economy of Deschutes County, which is located in the center of the
state, has been affected by rapid expansion in tourism, recreation and
retirement activities, especially in and around the Three Sisters Alpine
Wilderness Area and the Mt. Bachelor ski area. Much of this activity, and
related service sector and retail/wholesale trade employment, is centered in
Bend which lies 140 miles north of the Association's main office. Redmond,
Oregon, 20 miles to the north of Bend and the location of the new loan center,
has grown rapidly because of affordable housing for many people employed in the
Bend area. Deschutes County's major employers include Bend Mill Works (wood
products), St. Charles Medical Center and Bend-Lapine Schools.
The economy of Jackson County has been influenced by a steady influx of
new residents, primarily retirees, many of whom have migrated from nearby
California. Related to this increase, employment in services, including
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lodging, recreation and health care, has expanded. The cities of Medford, which
is 75 miles northwest of the Association's main office, and Ashland which is 62
miles southwest of the main office, are located in Jackson County. Major
employers in Jackson County include Bear Creek Corporation (fruit production and
sales), Rogue Valley Medical Center and Jackson County School District.
<TABLE>
Yields Earned and Rates Paid
The following table sets forth, for the periods and at the date indicated,
the weighted average yields earned on interest-earning assets, the weighted
average interest rates paid on interest-bearing liabilities, and the interest
rate spread between the weighted average yields earned and rates paid.
<CAPTION>
Year Ended
At September 30,
September 30, -----------------
1996 1996 1995 1994
------------ ---- ---- ----
Weighted average yield:
<S> <C> <C> <C> <C>
Loans receivable........................... 7.73% 8.00% 7.89% 8.12%
Mortgage backed and related securities..... 6.34 5.75 -- --
Investment securities...................... 6.31 6.27 7.43 7.09
Federal funds sold......................... 5.38 5.47 5.55 3.42
Time deposits.............................. 5.24 5.37 5.30 5.39
FHLB stock................................. 8.00 7.64 6.86 8.89
Combined weighted average yield on
interest-bearing assets...................... 7.34 7.45 7.75 7.86
---- ---- ---- ----
Weighted average rate paid on:
Tax and insurance reserves................. 3.30 3.30 3.97 4.10
Passbook accounts.......................... 3.29 2.87 2.78 2.67
Negotiable order of withdrawal ("NOW") accounts 2.54 2.47 2.44 2.58
Money market deposit accounts.............. 3.96 3.88 3.95 3.33
Certificate accounts....................... 5.95 5.94 5.79 5.30
FHLB advances.............................. 5.62 5.60 6.21 --
Combined weighted average rate on
interest-bearing liabilities................. 5.30 5.23 5.02 4.46
---- ---- ---- ----
Net interest spread........................... 2.04% 2.22% 2.73% 3.40%
==== ==== ==== ====
</TABLE>
Average Balances, Net Interest Income and Yields Earned and Rates Paid
Reference is made to the section entitled "Average Balances, Net Interest
Income and Yields Earned and Rates Paid" on page 12 of the Annual Report, which
section is incorporated herein by reference.
Interest Sensitivity Gap Analysis
Reference is made to the section entitled "Interest Sensitivity Gap
Analysis" on page 10 of the Annual Report, which section is incorporated herein
by reference.
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Rate/Volume Analysis
Reference is made to the section entitled "Rate/Volume Analysis" on page
13 of the Annual Report, which section is incorporated herein by reference.
Lending Activities
General. As a federally chartered savings and loan association, the
Association has authority to originate and purchase loans secured by real estate
located throughout the United States. Notwithstanding this nationwide lending
authority, over 95% of the mortgage loans in the Association's portfolio are
secured by properties located in Klamath, Jackson and Deschutes counties in
Southern and Central Oregon. It is management's intention, subject to market
conditions, that the Association will remain a traditional financial institution
originating long-term mortgage loans for the purchase, construction or refinance
of one- to four-family residential real estate.
Permanent residential one- to four-family mortgage loans amounted to
$447.0 million, or 91.50%, of the Association's total loan portfolio before net
items, at September 30, 1996. The Association originates other loans secured by
multi-family residential and commercial real estate, construction and land
loans. Those loans amounted to $37.6 million, or 7.70%, of the total loan
portfolio, before net items, at September 30, 1996. Approximately 0.80%, or $3.9
million, of the Association's total loan portfolio, before net items, as of
September 30, 1996 consisted of non-real estate loans.
Permissible loans-to-one borrower by the Association are generally limited
to 15% of unimpaired capital and surplus. The Association's loan-to-one borrower
limitation was $18.0 million at September 30, 1996. At September 30, 1996, the
Association had seven borrowing relationships with outstanding balances in
excess of $1.0 million, the largest of which amounted to $1.4 million and
consisted of three loans, all of which were secured by multi-family residential
or commercial real estate. All of those loans have performed in accordance with
their terms since origination.
The Association has placed a growing emphasis on the origination of
adjustable rate mortgage ("ARM") loans in order to increase the interest rate
sensitivity of its loan portfolio. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Asset Liability Management and
Interest Rate Risk" and "INTEREST SENSITIVITY GAP ANALYSIS" in the Annual
Report. At September 30, 1996, $51.3 million, or 10.68% of loans in the
Association's total loan portfolio, after loans in process and non-performing
loans, consisted of ARM loans.
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<TABLE>
Loan Portfolio Analysis.
The following table sets forth the composition of the loan portfolio by type of loan at the dates indicated.
<CAPTION>
At September 30,
----------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------- ---------------- ---------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------ ------- ------- ------- ------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Permanent residential
1-4 family ............. $447,004 91.50% $381,683 91.68% $337,212 90.06% $291,317 90.54% $272,421 91.61%
Multi-family residential . 6,555 1.34 7,433 1.79 8,209 2.19 7,797 2.42 6,009 2.02
Construction ............. 14,276 2.92 9,807 2.36 12,625 3.37 8,298 2.58 5,055 1.70
Commercial ............... 15,645 3.20 13,984 3.36 13,425 3.58 11,227 3.49 10,420 3.50
Land ..................... 1,152 0.24 1,072 0.25 1,180 0.32 1,270 0.39 1,376 0.46
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total real estate loans .... 484,632 99.20 413,979 99.44 372,651 99.52 319,909 99.42 295,281 99.29
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Non-real estate loans:
Savings accounts ......... 1,640 0.34 1,966 0.47 1,316 0.35 1,250 0.39 1,414 0.48
Home improvement loans ... 1,977 0.40 -- -- -- -- -- -- -- --
Education ................ -- -- -- -- -- -- -- -- 99 0.03
Other .................... 302 0.06 367 0.09 472 0.13 615 0.19 594 0.20
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total non-real estate loans 3,919 0.80 2,333 0.56 1,788 0.48 1,865 0.58 2,107 0.71
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans ............... 488,551 100.00% 416,312 100.00% 374,439 100.00% 321,774 100.00% 297,388 100.00%
====== ====== ====== ====== ======
Less:
Undisbursed portion of loans 8,622 7,203 9,310 7,148 5,240
Deferred loan fees ......... 5,445 4,757 4,252 3,330 2,354
Allowance for loan losses .. 928 808 755 628 572
--------- -------- -------- -------- --------
Net loans .................. $473,556 $403,544 $360,122 $310,668 $289,222
========= ======== ======== ======== ========
</TABLE>
4
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<TABLE>
The following table sets forth the amount of fixed-rate and adjustable
rate loans, net of loans in process and non-performing loans, included in the
total loan portfolio at the dates indicated.
<CAPTION>
At September 30,
-------------------------------------
1996 1995
----------------- -----------------
Amount Percent Amount Percent
-------- ------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Fixed rate.. $428,528 89.32% 353,457 86.55%
Adjustable-rate 51,250 10.68 54,918 13.45
-------- ------ --------- ------
Total.. $479,778 100.00% $408,375 100.00%
======== ====== ======== ======
</TABLE>
Permanent Residential One- to Four-Family Mortgage Loans. The primary
lending activity of the Association is the origination of permanent residential
one- to four-family mortgage loans. Management believes that this policy of
focusing on single-family residential mortgage loans has been successful in
contributing to interest income while keeping delinquencies and losses to a
minimum. At September 30, 1996, $447.0 million, or 91.50%, of the Association's
total loan portfolio, before net items, consisted of permanent residential one-
to four-family mortgage loans. As of such date, the average balance of the
Association's permanent residential one- to four-family mortgage loans was
$60,447.
The Association presently originates both fixed-rate mortgage loans and ARM
loans secured by one- to four-family properties with terms of 15 to 30 years.
Historically, most of the loans originated by the Association have been fixed
rate loans secured by one- to four-family properties. At September 30, 1996,
$410.1 million, or 86.61% of the total loans after loans in process and
non-performing loans were fixed rate one- to four-family loans and $42.3
million, or 8.92%, were ARM loans. Borrower demand for ARM loans versus
fixed-rate mortgage loans is a function of the level of interest rates, the
expectations of changes in the level of interest rates and the difference
between the initial interest rates and fees charged for each type of loan. The
relative amount of fixed-rate mortgage loans and ARM loans that can be
originated at any time is largely determined by the demand for each in a
competitive environment.
The Association qualifies the ARM loan borrower based on the borrower's
ability to repay the loan using the fully indexed rate. As a result, the
Association believes that the potential for delinquencies and defaults on ARM
loans when rates adjust upwards is lessened.
The loan fees charged, interest rates and other provisions of the
Association's ARM loans are determined by the Association on the basis of its
own pricing criteria and competitive market conditions. At September 30, 1996,
the Association charged 1.75% origination fees on its ARM loans.
The Association has placed greater emphasis on the origination of ARM loans
for permanent one- to four-family residences. In an attempt to increase this
type of business, the Association uses below market "teaser" rates which are
competitive with other institutions originating mortgages in the Association's
primary market area. Initially, ARM loans are priced at the competitive teaser
rate and after one year reprice at 2.875% over the One-Year Constant Maturity
Treasury Bill Index, with a maximum increase or decrease of 2.00% in any one
year and 6.00% over the life of the loan.
The retention of ARM loans in the Association's loan portfolio helps reduce
the Association'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 with increased costs to the borrower. Furthermore, the ARM
loans originated by the Association generally provide, as a marketing incentive,
5
<PAGE>
for initial rates of interest below the rates which would apply were the
adjustment index used for pricing initially (discounting). These loans are
subject to increased risks of default or delinquency because of this. Another
consideration is that although ARM loans allow the Association to increase the
sensitivity of its asset base to changes in the interest rates, the extent of
this interest sensitivity is limited by the periodic and lifetime interest rate
adjustment limits. Because of these considerations, the Association has no
assurance that yields on ARM loans will be sufficient to offset increases in the
Association's cost of funds.
The loan-to-value ratio, maturity and other provisions of the loans made
by the Association generally have reflected the policy of making less than the
maximum loan permissible under applicable regulations, in accordance with sound
lending practices, market conditions and underwriting standards established by
the Association. The Association's lending policies on permanent residential
one- to four-family mortgage loans generally limit the maximum loan-to-value
ratio to 90% of the lesser of the appraised value or purchase price of the
property and generally all permanent residential one- to four-family mortgage
loans in excess of an 80% loan-to-value ratio require private mortgage
insurance. A 95% loan-to- value program is available for owner occupied purchase
transactions.
The Association also has a limited amount of non-owner-occupied permanent
residential one- to four-family mortgage loans in its portfolio. These loans are
underwritten using generally the same criteria as owner-occupied permanent
residential one- to four-family mortgage loans, except that the maximum
loan-to-value ratio is generally 75% of the lesser of the appraised value or
purchase price of the property and such loans are generally provided at an
interest rate generally higher than owner-occupied loans.
The Association offers fixed-rate, permanent residential one- to
four-family mortgage loans with terms of 15 to 30 years. Substantially all
permanent one- to four-family loans have original contractual terms to maturity
of 30 years. Such loans are amortized on a monthly basis with principal and
interest due each month and customarily include "due-on-sale" clauses. The
Association enforces due-on-sale clauses to the extent permitted under
applicable laws. Substantially all of the Association's mortgage loan portfolio
consists of conventional loans.
Historically, the Association has not originated significant amounts of
mortgage loans on second residences. However, with the opening of a branch
office in Bend and the loan center in Redmond, near popular ski areas and other
outdoor activities, the Association believes that there is an opportunity to
engage in such lending within the parameters of its current underwriting
policies.
Commercial and Multi-Family Real Estate Loans. The Association has
historically engaged in a limited amount of multi-family and commercial real
estate lending. At September 30, 1996, $6.6 million, or 1.34%, of the
Association's total loan portfolio, before net items, consisted of loans secured
by existing multi-family residential real estate and $15.6 million, or 3.20%, of
the Association's total loan portfolio, before net items, consisted of loans
secured by existing commercial real estate. The Association's commercial and
multi-family real estate loans include primarily loans secured by office
buildings, small shopping centers, churches, mini-storage warehouses and
apartment buildings. All of the Association's commercial and multi-family real
estate loans are secured by properties located in the Association's primary
market area. The average outstanding balance of commercial and multi-family real
estate loans was $155,247 at September 30, 1996, the largest of which was a $1.2
million loan secured by a commercial office property. The loan has performed in
accordance with its terms since origination. Originations of commercial real
estate and multi-family residential real estate amounted to 2.58%, 1.35% and
4.51% of the Association's total loan originations in the fiscal year ended
September 30, 1996, 1995 and 1994, respectively.
The Association's commercial and multi-family loans have terms which range
up to 25 years and loan-to-value ratios of up to 75%. The Association currently
originates fixed- and adjustable-rate commercial and multi-family real estate
loans. Commercial real estate and multi-family adjustable rate loans are priced
to be competitive with other commercial lenders in the Association's market
area. A variety of terms are available to meet specific commercial and
multi-family residential financing needs. As of September 30, 1996, $9.0
million, or 1.87%, after loans in process and non-performing loans, of
commercial and multi-family residential real estate loans had adjustable rates
of interest.
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Multi-family residential and commercial real estate lending is generally
considered to involve a higher degree of risk than permanent residential one- to
four-family lending. Such lending typically involves large loan balances
concentrated in a single borrower or groups of related borrowers. In addition,
the payment experience on loans secured by income-producing properties is
typically dependent on the successful operation of the related real estate
project and thus may be subject to a greater extent to adverse conditions in the
real estate market or in the economy generally. The Association generally
attempts to mitigate the risks associated with multi-family commercial and
residential real estate lending by, among other things, lending on collateral
located in its market area and generally to individuals who reside in its
market.
Construction Loans. The Association makes construction loans primarily to
individuals for the construction of their single-family residences. The
Association also makes loans to builders for the construction of single-family
residences which are not presold at the time of origination ("speculative
loans"). The Association generally limits loans to builders to not more than two
residences under construction at a given time. With the exception of a limited
number of 18-month speculative loans, construction loans generally begin to
amortize as permanent residential one-to four-family mortgage loans within one
year of origination unless extended. At September 30, 1996, construction loans
amounted to $14.3 million (including $1.0 million of speculative loans), or
2.92%, of the Association's total loan portfolio before net items. Construction
loans have rates and terms which generally match the non-construction loans then
offered by the Association, except that during the construction phase, the
borrower pays only interest on the loan. The Association's construction loan
agreements generally provide that loan proceeds are disbursed in increments as
construction progresses. The Association periodically reviews the progress of
the underlying construction project. Construction loans are underwritten
pursuant to the same general guidelines used for originating permanent one- to
four-family loans. Construction lending is generally limited to the
Association's market area.
Construction financing is generally considered to involve a higher degree
of risk of loss than financing on improved, owner-occupied real estate because
of the uncertainties of construction, including the possibility of costs
exceeding the initial estimates and, in the case of speculative loans, the need
to obtain a purchaser. The Association has sought to minimize the risks
associated with permanent construction lending by limiting construction loans to
qualified owner-occupied borrowers with construction performed by qualified
state licensed builders located primarily in the Association's market area.
The Association's underwriting criteria are designed to evaluate and
minimize the risks of each construction loan. Interim construction loans are
qualified at permanent rates in order to ensure the capability of the borrower
to repay the loan.
Loan proceeds are disbursed only as construction progresses and
inspections warrant. These loans are underwritten to the same standards and to
the same terms and requirements as one- to four-family purchased mortgage loans,
except the loans provide for disbursement of funds during a construction period
of up to one year. During this period, the borrower is required to make monthly
payments of accrued interest on the outstanding loan balance. Disbursements
during the construction period are limited to no more than the percent of
completion. Up to 95% loan-to-value upon completion of construction, may be
disbursed if private mortgage insurance above 80% loan-to-value is in place.
Land Loans. The Association makes loans to individuals for the purpose of
acquiring land to build a permanent residence. These loans generally have terms
not exceeding 15 years and maximum loan-to-value ratios of 75%. As of September
30, 1996, $1.2 million, or 0.24%, of the Association's total loan portfolio
consisted of land loans.
Non-Real Estate Loans. Non-real estate lending has traditionally been a
small part of the Association's business. Non-real estate loans generally have
shorter terms to maturity or repricing and higher interest rates than real
estate loans. As of September 30, 1996, $3.9 million, or .80%, of the
Association's total loan portfolio consisted of non-real estate loans. As of
that date, $1.6 million, or .34%, of such loans were secured by savings
accounts.
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At September 30, 1996, $2.0 million, or 0.40%, million of non-real estate loans
consisted of Title I home improvement loans insured by the Federal Housing
Administration and most are secured by liens on the real property.
<TABLE>
Loan Maturity and Repricing. The following table sets forth certain
information at September 30, 1996 regarding the dollar amount of total loans,
after loans in process and non-performing loans, maturing in the Association's
portfolio, based on the contractual terms to maturity. Demand loans, loans
having no stated schedule of repayments and no stated maturity, and overdrafts
are reported as due in one year or less.
<CAPTION>
After One Year
Within One Year Through 5 Years After 5 Years Total
--------------- --------------- ------------- -----
(In thousands)
<S> <C> <C> <C> <C>
Permanent residential
1-4 family:
Adjustable rate..... $41,149 $1,109 $ -- $ 42,258
Fixed rate.......... 884 1,098 408,150 410,132
Other mortgage loans:
Adjustable rate..... 8,843 249 -- 8,992
Fixed rate.......... 96 2,088 12,293 14,477
Non-real estate loans. 1,159 836 1,924 3,919
------- ------ --------- ---------
Total loans....... $52,031 $5,380 $422,367 $479,778
======= ====== ======== ========
</TABLE>
Scheduled contractual amortization of loans does not reflect the actual
term of the Association's loan portfolio. The average life of loans is
substantially less than their contractual terms because of prepayments and
due-on-sale clauses, which gives the Association the right to declare a
conventional loan 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 dollar amount of all loans, net of loans in process and non-performing
loans, due one year after September 30, 1996, which have fixed interest rates
and have floating or adjustable rates, was $426.4 million and $1.4 million,
respectively.
Loan Commitments. The Association issues commitments for fixed- and
adjustable-rate one- to four-family residential mortgage loans conditioned upon
the occurrence of certain events. Such commitments are made on specified terms
and conditions and are honored for up to 60 days from commitment. The
Association had outstanding loan commitments of approximately $10.8 million at
September 30, 1996 consisting of $146,000 of variable rate loans and $10.7
million of fixed rate loans. See Note 16 of Notes to the Consolidated Financial
Statements.
Loan Solicitation and Processing. The Association originates real estate
and other loans at each of its offices. Loan originations are obtained by a
variety of sources, including developers, builders, existing customers,
newspapers, radio, periodical advertising and walk-in customers, although
referrals from local realtors has been the primary source. Loan applications are
taken by lending personnel, and the loan processing department obtains credit
reports, appraisals and other documentation involved with a loan. All of the
Association's lending is subject to its written nondiscriminatory underwriting
standards, loan origination procedures and lending policies prescribed by the
Association's Board of Directors. Property valuations are required on all real
estate loans and are prepared by employees experienced in the field of real
estate or by independent appraisers approved by the Association's Board of
Directors. Additionally, all appraisals on loans in excess of $250,000 must meet
applicable regulatory standards.
8
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The Association's loan approval process is intended to assess the
borrower's ability to repay the loan, the viability of the loan, the adequacy of
the value of the property that will secure the loan, the location of the real
estate, and, in the case of commercial and multi-family real estate loans, the
cash flow of the project and the quality of management involved with the
project. The Association generally requires title insurance on all loans and
also that borrowers provide evidence of fire and extended casualty insurance in
amounts and through insurers that are acceptable to the Association. A loan
application file is first reviewed by a loan officer of the Association and then
is submitted to the loan committee for underwriting and approval. The
Association generally originates loans for its own portfolio which has enabled
it to develop an expedited loan application and approval process which
management believes provides it with a competitive advantage in its primary
market area. The Association can make loan commitments, subject to property
valuation and possible other conditions of approval, in three to five days if
income and credit data of the borrower are readily available.
Loan Originations, Purchases and Sales. The Association has originated
substantially all of the loans in its portfolio and generally holds them until
maturity. During the year ended September 30, 1996, the Association originated
$135.6 million in total loans, compared to $84.7 million in the same period of
1995. The increase in loan originations was attributable to strong new purchase
loan originations.
The Association generally does not engage in the sale or purchase of
loans. Between 1989 and 1992, however, the Association purchased permanent
residential one- to four-family jumbo mortgage loans (i.e., loans with principal
balances over $203,150) on detached residences from various localities
throughout the Western United States, primarily Oregon, Washington, California
and Arizona. At one time the aggregate balance of such loans was approximately
$64.6 million. At September 30, 1996, the balance was $5.8 million. These loans
were underwritten on the same basis as permanent residential one- to four-family
real estate loans originated by the Association.
9
<PAGE>
<TABLE>
The following table shows total loans originated, loan reductions and the
net increase in the Association's loans during the periods indicated.
<CAPTION>
Year Ended September 30,
-------------------------
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Total net loans at beginning of period.... $403,544 $360,122 $310,668
Loans originated:
Real estate loans originated (1)......... 133,814 83,344 128,814
Non-real estate loans originated......... 1,753 1,370 1,211
-------- -------- --------
Total loans originated................. 135,567 84,714 130,025
-------- -------- --------
Loan reductions:
Principal paydowns....................... (64,530) (40,408) (79,226)
Other reductions (2)..................... (1,025) (884) (1,345)
-------- -------- --------
Total loan reductions................. (65,555) (41,292) (80,571)
-------- --------- --------
Total net loans at end of period.......... $473,556 $403,544 $360,122
======== ======== ========
<FN>
(1) Includes decreases/increases from loans-in-process.
(2) Includes net reductions due to deferred loans fees, discounts net of
amortization, provision for loan loss and transfers to real estate owned.
</FN>
</TABLE>
Loan Origination and Other Fees. In addition to interest earned on loans,
the Association receives loan origination fees or "points" for originating
loans. Loan points are a percentage of the principal amount of the real estate
loan and are charged to the borrower in connection with the origination of the
loan. The amount of points charged by the Association varies, though it
generally amounts to 1.75% on permanent loans and 2.00% on construction loans.
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 91, which deals with the accounting for non-refundable fees and costs
associated with originating or acquiring loans, the Association's loan
origination fees and certain related direct loan origination costs are offset,
and the resulting net amount is deferred and amortized as income over the
contractual life of the related loans as an adjustment to the yield of such
loans, or until the loan is paid in full. At September 30, 1996, the Association
had $5.4 million of net loan fees which had been deferred and are being
recognized as income over the contractual maturities of the related loans.
<TABLE>
Asset Quality
Delinquent Loans. The following table sets forth information concerning
delinquent loans at September 30, 1996, in dollar amount and as a percentage of
the Association's total loan portfolio. The amounts presented represent the
total outstanding principal balances of the related loans, rather than the
actual payment amounts which are past due.
<CAPTION>
Permanent
residential Non-real
1-4 family Estate Loans Total
------------------- ------------------- -------------------
Amount Percentage Amount Percentage Amount Percentage
------ ---------- ------ ---------- ------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans delinquent
for 90 days and more..... $189 0.04% $2 --% $191 0.04%
</TABLE>
10
<PAGE>
Delinquency Procedures. When a borrower fails to make a required payment
on a real estate loan, the Association attempts to cure the delinquency by
contacting the borrower. In the case of loans past due, appropriate late notices
are sent on the fifth and fifteenth days after the due date. If the delinquency
is not cured, the borrower is contacted by telephone on the fifteenth day after
the payment is due.
In the event a loan is past due for 45 days or more, the Association will
attempt to arrange an in-person interview with the borrower to determine the
nature of the delinquency; based upon the results of the interview and its
review of the loan status, the Association may negotiate a repayment program
with the borrower. If a loan remains past due at 60 days, the Association
performs an in-depth review of the loan status, the condition of the property
and the circumstances of the borrower. If appropriate, an alternative payment
plan is established.
At 90 days past due, a letter prepared by the Association's legal counsel
is sent to the borrower describing the steps to be taken to collect the loan,
including acceptance of a voluntary deed-in-lieu of foreclosure, and of the
initiation of foreclosure proceedings. A decision as to whether and when to
initiate foreclosure proceedings is made by senior management, with the
assistance of legal counsel, at the direction of the Board of Directors, based
on such factors as the amount of the outstanding loan in relation to the value
of the property securing the original indebtedness, the extent of the
delinquency and the borrower's ability and willingness to cooperate in curing
the delinquency.
Non-Performing Assets. The Association's non-performing assets consist of
non-accrual loans, accruing loans greater than 90 days delinquent, real estate
owned and other repossessed assets. All loans are reviewed on a regular basis
and are placed on a non-accrual status when, in the opinion of management, the
collection of additional interest is deemed insufficient to warrant further
accrual. Generally, the Association places all loans more than 90 days past due
on non-accrual status. Uncollectible interest on loans is charged-off or an
allowance for losses is established by a charge to earnings equal to all
interest previously accrued and interest is subsequently recognized only to the
extent cash payments are received until delinquent interest is paid in full and,
in management's judgment, the borrower's ability to make periodic interest and
principal payments is back to normal in which case the loan is returned to
accrual status.
Real estate acquired by foreclosure or accounted for as "in substance"
foreclosure is classified as real estate owned until such time as it is sold.
See Note 1 of Notes to the Consolidated Financial Statements. When such property
is acquired, it is recorded at the lower of the balance of the loan on the
property at the date of acquisition (not to exceed the net realizable value) or
the estimated fair value. Costs, excluding interest, relating to holding the
property are expensed. Valuations are periodically performed by management and
an allowance for losses is established by a charge to operations if the carrying
value of property exceeds its estimated net realizable value. From time to time,
the Association also acquires personal property, generally mobile homes, which
are classified as other repossessed assets and are carried on the books at their
estimated fair market value and disposed of as soon as commercially reasonable.
As of September 30, 1996, the Association's total non-performing loans
amounted to $191,000, or 0.04% of total loans, before net items, compared to
$734,000, or 0.18% of total loans, before net items, at September 30, 1995. The
decrease in non-accruing loans at September 30, 1996 was the result of
properties foreclosed and sold during the year.
11
<PAGE>
<TABLE>
The following table sets forth the amounts and categories of the
Association's non-performing assets at the dates indicated. The Association had
no material troubled debt restructurings as defined by SFAS No. 15 at any of the
dates indicated.
<CAPTION>
At September 30,
----------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans (1)....... $191 $734 $183 $198 $1,350
Accruing loans greater than 90
days delinquent............ -- -- -- -- --
------ ------ ------ ------ ------
Total non-performing loans 191 734 183 198 1,350
Real estate owned............ 69 24 59 84 354
Other repossessed assets..... -- -- -- 16 --
------ ------ ------ ------ ------
Total repossessed assets. 69 24 59 100 354
------ ------ ------ ------ ------
Total non-performing assets $260 $758 $242 $298 $1,704
====== ====== ====== ====== ======
Total non-performing assets as a
percentage of total assets. 0.04% 0.12% 0.05% 0.07% 0.46%
==== ==== ==== ==== ====
Total non-performing loans as a
percentage of total loans,
before net items........... 0.04% 0.18% 0.05% 0.06% 0.45%
==== ==== ==== ==== ====
Allowance for loan losses as a
percentage of total non-performing
assets..................... 356.92% 106.80% 311.98% 210.74% 33.57%
====== ====== ====== ====== =====
Allowance for loan losses as a percentage
of total non-performing loans 485.86% 110.08% 412.57% 317.19% 42.37%
====== ====== ====== ====== =====
<FN>
(1) Consists of permanent residential one- to four-family mortgage loans.
</FN>
</TABLE>
For the year ended September 30, 1996, the amount of gross income that
would have been recorded in the period then ended if non-accrual loans and
troubled debt restructurings had been current according to their original terms,
and the amount of interest income on such loans that was included in net income
for each of such periods, were, in both cases, less than 1% of total interest
income.
Classified Assets. Federal regulations require that each insured savings
association classify its assets on a regular basis. In addition, in connection
with examinations of insured institutions, federal examiners have authority to
identify problem assets and, if appropriate, classify them. There are four
categories used to classify problem assets: "special mention", "substandard",
"doubtful", and "loss." Special mention assets are not considered classified
assets, but assets of questionable quality that have potential or past
weaknesses that deserve management's close attention and monitoring. Substandard
assets have one or more defined weaknesses and are characterized by the distinct
possibility that the insured institution will sustain some loss if the
deficiencies are not corrected. Doubtful assets have the weaknesses of
substandard assets with the additional characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of loss. An
asset classified loss is considered uncollectible and of such little value that
continuance as an asset of the institution is not warranted. Special mention
assets and assets
12
<PAGE>
classified as substandard or doubtful require the institution to establish
general allowances for loan losses. If an asset or portion thereof is classified
loss, the insured institution must either establish specific allowances for loan
losses in the amount of 100% of the portion of the asset classified loss, or
charge-off such amount. General loss allowances established to cover possible
losses related to special mention assets and assets classified substandard or
doubtful may be included in determining an institution's regulatory capital,
while specific valuation allowances for loan losses do not qualify as regulatory
capital. Federal examiners may disagree with an insured institution's
classifications and the amounts reserved.
Exclusive of assets classified loss and which have been fully reserved,
the Association's classified assets at September 30, 1996 consisted of $281,000
of loans classified as substandard and $645,000 designated as special mention.
As of September 30, 1996, total classified assets amounted to 0.14% of total
assets.
<TABLE>
At September 30, 1996 and 1995, the aggregate amounts of the Association's
classified assets were as follows:
<CAPTION>
At September 30,
----------------
1996 1995
---- ----
(In thousands)
<S> <C> <C>
Loss.......................... $ -- $ --
Doubtful...................... -- --
Substandard assets............ 281 1,095
Special mention............... 645 --
General loss allowances....... 928 808
Specific loss allowances...... -- --
Charge offs................... -- 67
</TABLE>
Allowance for Loan Losses. The allowance for loan losses is maintained at
a level considered adequate by management to provide for anticipated loan losses
based on management's assessment of various factors affecting the loan
portfolio, including a review of all loans for which full collectibility may not
be reasonably assured, an overall evaluation of the quality of the underlying
collateral, economic conditions, historical loan loss experience and other
factors that warrant recognition in providing for an adequate loan loss
allowance. While management believes it uses the best information available to
determine the allowance for loan losses, unforeseen market conditions could
result in adjustments to the allowance for loan losses and net earnings could be
significantly affected, if circumstances differ substantially from the
assumptions used in making the final determination. At September 30, 1996, the
Association had an allowance for loan losses of $928,000, which was equal to
356.9% of non-performing assets and 0.19% of total loans.
Provisions for loan losses are charged to earnings to bring the total
allowance for loan losses to a level deemed appropriate by management based on
historical loan loss experience, the volume and type of lending conducted by the
Association, industry standards, the amount of non-performing assets, general
economic conditions (particularly as they relate to the Association's market
area), and other factors, which exist at the time the determination of the
adequacy of the provision is made, related to the collectibility of the
Association's loan portfolio. The provisions for loan losses charged against
income for the years ended September 30, 1996, 1995 and 1994 were $120,000,
$120,000 and $150,000, respectively. Management believes that the amount
maintained in the allowances will be adequate to absorb possible losses in the
portfolio.
13
<PAGE>
<TABLE>
The following table sets forth for the periods indicated information
regarding changes in the Association's allowance for loan losses. All
information is before net items.
<CAPTION>
Year Ended September 30,
-----------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total loans outstanding......... $488,551 $416,312 $374,439 $321,774 $297,388
======= ======= ======= ======= =======
Average loans outstanding....... $440,510 $381,689 $338,679 $298,481 $291,775
======= ======= ======= ======= =======
Allowance at beginning of period $ 808 $ 755 $ 628 $ 572 $ 532
Charge-offs..................... -- (67) (23) (64) (80)
Provision for loan losses....... 120 120 150 120 120
-------- -------- -------- -------- --------
Allowance at end of period...... $ 928 $ 808 $ 755 $ 628 $ 572
======= ======= ======= ======= =======
Allowance for loan losses as a percentage
of total loans outstanding..... 0.19% 0.19% 0.20% 0.20% 0.19%
==== ==== ==== ==== ====
Ratio of net charge-offs to average loans
outstanding during the period.. --% 0.02% 0.01% 0.02% 0.03%
=== ==== ==== ==== ====
</TABLE>
14
<PAGE>
<TABLE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category and summarizes the percentage of total loans, before net
items, in each category to total loans, before net items, at the dates
indicated.
<CAPTION>
At September 30,
------------------------------------------------------------------------------------------------------------
1996 1995 1994
----------------------------------- ---------------------------------- -----------------------------------
Percent of Percent of Percent of
Amount Allowance in Percent of Amount Allowance in Percent of Amount Allowance in Percent of
of Category to Total Loans of Category to Total Loans of Category to Total Loans
Allowance Total Loans by Category Allowance Total Loans by Category Allowance Total Loans by Category
--------- ----------- ----------- --------- ----------- ----------- --------- ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Permanent residential
1-4 family ........... $925 0.19% 91.50% $807 0.19% 91.68% $713 0.19% 90.06%
Multi-family residential -- -- 1.34 -- -- 1.79 -- -- 2.19
Construction ........... -- -- 2.92 -- -- 2.36 -- -- 3.37
Commercial ............. -- -- 3.20 -- -- 3.36 41 0.01 3.58
Land ................... -- -- 0.24 -- -- 0.25 -- -- 0.32
Non-real estate ........ 3 -- 0.80 1 -- 0.56 1 -- 0.48
----- ----- ----- ----- ----- ------ ----- ----- ------
Total ............... $928 0.19% 100.00% $808 0.19% 100.00% $755 0.20% 100.00%
===== ===== ====== ===== ===== ====== ===== ===== ======
<CAPTION>
At September 30,
-----------------------------------------------------------------------
1993 1992
----------------------------------- ----------------------------------
Percent of Percent of
Amount Allowance in Percent of Amount Allowance in Percent of
of Category to Total Loans of Category to Total Loans
Allowance Total Loans by Category Allowance Total Loans by Category
--------- ----------- ----------- --------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Permanent residential
1-4 family ............ $599 0.19% 90.54% $565 0.19% 91.61%
Multi-family residential -- -- 2.42 -- -- 2.02
Construction ............ -- -- 2.58 -- -- 1.70
Commercial .............. 28 0.01 3.49 -- -- 3.50
Land .................... -- -- 0.39 -- -- 0.46
Non-real estate ......... 1 -- 0.58 7 -- 0.71
----- ----- ----- ----- ----- ------
Total ................ $628 0.20% 100.00% $572 0.19% 100.00%
===== ===== ====== ===== ===== ======
</TABLE>
15
<PAGE>
Although the Association believes that it has established its allowance
for loan losses in accordance with generally accepted accounting principles
("GAAP"), there can be no assurance that regulators, in reviewing the
Association's loan portfolio, will not request the Association to significantly
increase its allowance for loan losses, thereby reducing the Association's net
worth and earnings. In addition, because future events affecting borrowers and
collateral cannot be predicted with certainty, there can be no assurance that
the existing allowance for loan losses is adequate or that substantial increases
will not be necessary should the quality of any loans deteriorate as a result of
the factors discussed above. Any material increase in the allowance may
adversely affect the Association's financial condition and results of operation.
Investment Activities
Federally chartered savings institutions have the authority to invest in
securities of various federal agencies, certain insured certificates of deposit
of banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in commercial paper,
investment grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally chartered savings institution is otherwise
authorized to make directly. OTS regulations restrict investments in corporate
debt securities of any one issuer in excess of 15% of the Association's
unimpaired capital and unimpaired surplus, as defined by federal regulations,
which totalled $120.3 million at September 30, 1996, plus an additional 10% if
the investments are fully secured by readily marketable collateral. See
"REGULATION -- Investment Rules" for a discussion of additional restrictions on
the Association's investment activities.
The investment securities portfolio is managed in accordance with a
written investment policy adopted by the Board of Directors and administered by
the Investment Committee, which consists of the President and four Board
members. Generally, the investment policy is to invest funds among various
categories of investments and maturities based upon the need for liquidity, to
achieve the proper balance between its desire to minimize risk and maximize
yield, and to fulfill the asset/liability management policy. The President and
the Chief Financial Officer may independently invest up to 1% of total assets of
the Association within the parameters set forth in the Investment Policy, to be
subsequently reviewed with the Investment Committee at their next scheduled
meeting. Transactions or investments in any one security determined by type,
maturity and coupon in excess of 1.0% of assets are not permitted.
Investment securities held to maturity are carried at cost and adjusted
for amortization of premiums and accretion of discounts. As of September 30,
1996, the investment securities portfolio held to maturity had $1.2 million in
tax-exempt securities issued by states and municipalities and $8.6 million in
investment grade corporate obligations. Securities to be held for indefinite
periods of time and not intended to be held to maturity are classified as
available for sale and carried at fair value. Securities available for sale
include securities that management intends to use as part of its asset/liability
management strategy that may be sold in response to changes in interest rates or
significant prepayments risks or both. As of September 30, 1996, the portfolio
of securities available for sale consisted of $12.1 million in a U.S. Federal
securities mutual bond fund, which was sold subsequent to year end and was
recorded as a realized loss of $1.6 million, $59.7 million in securities issued
by the U.S. Treasury and other federal government agencies, $250,000 in tax
exempt securities issued by states and municipalities, and $5.0 million in
investment grade corporate investments.
On November 15, 1995, the Financial Accounting Standards Board published
implementation guidance on SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities", that allows a corporation to reassess the
appropriateness of the classification of its debt securities under a special
transition provision. Debt securities classified as "held to maturity" are
reported in financial statements at amortized cost while those classified as
"available for sale" are reported at fair value and unrealized gains and losses
on such securities are reported as a net amount in a separate component of
shareholders' equity. The net unrealized gain or loss on securities classified
as available for sale fluctuates based on several factors, including market
interest rates, prepayment rates and the portfolio amount. Subsequent to
16
<PAGE>
September 30, 1995, the Association reclassified and transferred $27.2 million
of its debt securities from the held-to-maturity portfolio to the
available-for-sale portfolio.
During the years ended September 30, 1996, 1995 and 1994, neither the
Company nor the Association held any off-balance sheet derivative financial
instruments in their investment portfolios to which the provisions of SFAS No.
119 would apply.
<TABLE>
The following tables set forth certain information relating to the
investment securities portfolio held to maturity and securities available for
sale at the dates indicated.
<CAPTION>
At September 30,
--------------------------------------------------------------------------------------------
1996 1995 1994
-------------------------- --------------------------- --------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost(1) Value
---- ----- ---- ----- ---- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Held to maturity:
U.S. Government obligations...... $ -- $ -- $28,961 $28,873 $29,091 $27,681
State and municipal obligations.. 1,227 1,249 512 552 513 536
Corporate obligations............ 8,600 8,611 12,736 12,753 14,960 14,833
Available for sale:
U.S. Federal securities
mutual bond fund................ 12,080 12,080 12,606 12,606 12,224 12,224
U.S. Government obligations...... 59,717 58,624 -- -- -- --
State and municipal obligations . 250 251 -- -- -- --
Corporate obligations............ 5,024 5,032 -- -- -- --
-------- -------- -------- -------- -------- --------
Total.......................... $86,898 $85,847 $54,815 $54,784 $56,788 $55,274
======== ======== ======= ======== ======== =======
<FN>
(1) SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities", was adopted on
October 1, 1993. See the Notes to the Consolidated Financial Statements.
</FN>
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------------------------------------------------
1996 1995 1994
------------------------- ------------------------- -------------------------
Amortized Percent of Amortized Percent of Amortized Percent of
Cost Portfolio Cost Portfolio Cost(1)(2) Portfolio
---- --------- ---- --------- ---------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Held to maturity:
U.S. Government obligations...... $ -- 0.00% $28,961 52.84% $29,091 51.23%
State and municipal obligations.. 1,227 1.41 512 .93 513 0.90
Corporate obligations............ 8,600 9.90 12,736 23.23 14,960 26.34
Available for sale:
U.S. Federal securities
mutual bond fund................ 12,080 13.90 12,606 23.00 12,224 21.53
U.S. Government obligations...... 59,717 68.72 -- -- -- --
State and municipal obligations.. 250 0.29 -- -- -- --
Corporate obligations............ 5,024 5.78 -- -- -- --
-------- -------- -------- -------- -------- --------
Total........................... $86,898 100.00% $54,815 100.00% $56,788 100.00%
======== ======== ======== ======== ======== ========
<FN>
(1) The fair value of the investment portfolio amounted to $85.8 million, $54.8 million and $55.3 million at
September 30, 1996, 1995 and 1994, respectively.
(2) SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities", was adopted on
October 1, 1993. See Note 1 of Notes to the Consolidated Financial Statements.
</FN>
</TABLE>
<TABLE>
The following table sets forth the maturities and weighted average yields of the debt securities in
the investment portfolio at September 30, 1996.
<CAPTION>
Less Than One to Five to Over Ten
One Year Five Years Ten Years Years
------------- ------------- ------------- -------------
Amount Yield Amount Yield Amount Yield Amount Yield Totals
------ ----- ------ ----- ------ ----- ------ ----- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Held to maturity:
State and municipal
obligations....... $ 181 5.90% $ 536 6.55% $ 510 6.57% -- -- $ 1,227
Corporate obligations 6,600 6.37% 2,000 5.86% -- -- -- -- 8,600
Available for sale:
U.S. Federal securities
mutual bond fund.... 12,080 6.10% -- -- -- -- -- -- 12,080
U.S. Government
obligations......... -- -- 43,720 6.14% 15,997 6.94% -- -- 59,717
State and municipal
obligations......... -- -- 250 7.12% -- -- -- -- 250
Corporate obligations -- -- 5,024 6.27% -- -- -- -- 5,024
------- ------- ------- ------- ------
Total ................. $18,861 $51,530 $16,507 $0 $86,898
======= ======= ======= ======= =======
</TABLE>
18
<PAGE>
Mortgage Backed and Related Securities
At September 30, 1996, the Company's and Association's net mortgage backed
and related securities totaled $80.8 million at fair value ($81.0 million at
amortized cost) and had a weighted average yield of 6.34%. At September 30,
1996, all of the mortgage backed securities were adjustable-rate securities. The
Company and Association purchased its mortgage backed and related securities
during 1996 with proceeds from the Company's initial stock offering and
borrowings from the FHLB of Seattle.
Mortgage backed and related securities (which also are known as mortgage
participation certificates or pass-through certificates) typically represent a
participation interest in a pool of single-family or multi-family mortgages. The
principal and interest payments on these mortgages are passed from the mortgage
originators, through intermediaries (generally U.S. Government agencies and
government sponsored enterprises) that pool and resell the participation
interests in the form of securities, to investors such as the Association. Such
U.S. Government agencies and government sponsored enterprises, which guarantee
the payment of principal and interest to investors, primarily include the
Federal Home Loan Mortgage Corporation ("FHLMC"), Fannie Mae ("FNMA") (formerly
the Federal National Mortgage Association), the Government National Mortgage
Association ("GNMA") and the U.S. Small Business Administration ("SBA").
Mortgage backed and related securities typically are issued with stated
principal amounts, and the securities are backed by pools of mortgages that have
loans with interest rates that fall within a specific range and have varying
maturities. Mortgage backed and related securities generally yield less than the
loans that underlie such securities because of the cost of payment guarantees
and credit enhancements. In addition, mortgage-backed and related securities are
usually more liquid than individual mortgage loans and may be used to
collateralize certain liabilities and obligations of the Association. These
types of securities also permit the Association to optimize its regulatory
capital because they have low risk weighting.
Expected maturities of mortgage backed and related securities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties. Prepayments
that are faster than anticipated may shorten the life of the security and may
result in a loss of any premiums paid and thereby reduce the net yield on such
securities. Although prepayments of underlying mortgages depend on many factors,
including the type of mortgages, the coupon rate, the age of mortgages, the
geographical location of the underlying real estate collateralizing the
mortgages and general levels of market interest rates, the difference between
the interest rates on the underlying mortgages and the prevailing mortgage
interest rates generally is the most significant determinant of the rate of
prepayments. During periods of declining mortgage interest rates, if the coupon
rate of the underlying mortgages exceeds the prevailing market interest rates
offered for mortgage loans, refinancing generally increases and accelerates the
prepayment of the underlying mortgages and the related security. Under such
circumstances, the Association may be subject to reinvestment risk because, to
the extent that the Association's mortgage backed securities amortize or prepay
faster than anticipated, the Association may not be able to reinvest the
proceeds of such repayments and prepayments at a comparable rate.
Subsequent to September 30, 1995, the Association reclassified $1.7
million of mortgage backed and related securities from held to maturity to
available for sale at fair values, with an unrealized loss of $100,421,
consistent with the implementation guidance discussed under above "-- Investment
Activities.
19
<PAGE>
<TABLE>
The following tables set forth certain information relating to the
mortgage backed and related securities portfolio held to maturity and available
for sale at the dates indicated.
<CAPTION>
At September 30,
------------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Held to maturity:
GNMA......................... $ 6,783 $ 6,736 $-- $-- $-- $--
Available for sale:
FNMA......................... 15,905 15,959 -- -- -- --
FHLMC........................ 39,205 39,179 -- -- -- --
SBA.......................... 19,139 18,971 -- -- -- --
------ -------- ----- ----- ----- -----
Total...................... $81,032 $80,845 $-- $-- $-- $--
======= ======= === === === ===
<CAPTION>
At September 30,
-------------------------------------------------------------------------
1996 1995 1994
---------------------- ---------------------- ----------------------
Amortized Percent of Amortized Percent of Carrying Percent of
Cost Portfolio Cost Portfolio Value(1) Portfolio
------ ---------- ------ ---------- ----------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Held to maturity:
GNMA......................... $ 6,783 8.37% $-- 0.00% $-- 0.00%
Available for sale:
FNMA......................... 15,905 19.63 -- -- -- --
FHLMC........................ 39,205 48.38 -- -- -- --
SBA.......................... 19,139 23.62 -- -- -- --
------ ------ ------ ------ ------ ------
Total...................... $81,032 100.00% $-- 0.00% $-- 0.00%
====== ====== ====== ====== ====== ======
<FN>
(1) The fair value of the mortgage-backed and related securities portfolio amounted to $80.8 million at
September 30, 1996.
</FN>
</TABLE>
Interest-Earning Deposits
The Company also had interest-earning deposits in the FHLB of Seattle
amounting to $3.1 million and $134.0 million at September 30, 1996 and 1995,
respectively.
Deposit Activities and Other Sources of Funds
General. Deposits are the primary source of the Association's funds for
lending and other investment purposes. In addition to deposits, the Association
derives funds from loan principal repayments. Loan repayments are a relatively
stable source of funds, while deposit inflows and outflows are significantly
influenced by general interest rates and money market conditions. Borrowings may
be used on a short-term basis to compensate for
20
<PAGE>
reductions in the availability of funds from other sources. They may also be
used on a longer term basis for general business purposes.
Deposits. The Association's deposits are attracted principally from within
the Association's primary market area through the offering of a broad selection
of deposit instruments, including NOW accounts, money market deposit accounts,
passbook accounts, and term certificate accounts. Included among these deposit
products are individual retirement account ("IRA") certificates of approximately
$73.0 million at September 30, 1996. Deposit account terms vary, with the
principal differences being the minimum balance required, the time periods the
funds must remain on deposit and the interest rate.
Beginning in 1996, the Association began accepting deposits from outside
its primary market area through both private placements and brokered deposits if
the terms of the deposits fit the Association's specific needs and are at a rate
lower than the rates on similar maturity borrowings through the FHLB of Seattle.
At September 30, 1996, these deposits totalled $9.3 million, or 2.33% of total
deposits.
Interest rates paid, maturity terms, service fees and withdrawal penalties
are established by the Association on a periodic basis. Determination of rates
and terms are predicated on funds acquisition and liquidity requirements, rates
paid by competitors, growth goals and federal regulations.
For the year ended September 30, 1996, the Association experienced a net
decrease in deposits (before interest credited) of $2.4 million as depositors
withdrew funds to seek higher yielding alternative investments. To offset this
deposit outflow, the Association has relied on increased borrowings from the
FHLB of Seattle. See "--Borrowings." The Association has also offered special
certificate accounts with odd-month terms (i.e., 13, 17, 23 and 25 month terms)
in an effort to attract and retain deposits. The increased use of FHLB advances
and the certificate account specials have contributed to the Association's
interest rate spread decreasing from 2.73% for the year ended September 30, 1995
to 2.22% for the year ended September 30, 1996. In addition, the Association
introduced a Basic Checking Account and a Small Business Checking Account to
compete for student checking and small business accounts. Both accounts have
check truncation and do not pay interest which results in low costs for the
customer.
At September 30, 1996, certificate accounts maturing during the year
ending September 30, 1997 totalled $102.4 million. Based on historical
experience, the Association expects that a significant amount will be renewed
with the Association at maturity. In the event a significant amount of such
accounts are not renewed at maturity, the Association would not expect a
resultant adverse impact on operations and liquidity because of the
Association's borrowing capacity. See "-- Borrowings."
In the unlikely event the Association is liquidated, depositors will be
entitled to full payment of their deposit accounts prior to any payment being
made to the Company, which is the sole shareholder of the Association.
Substantially all of the Association's depositors are residents of the State of
Oregon.
<TABLE>
The following table indicates the amount of certificate accounts with
balances of $100,000 or greater by time remaining until maturity as of September
30, 1996.
<CAPTION>
Certificate
Maturity Period Accounts
--------------- ----------
(In thousands)
<S> <C>
Three months or less $ 6,278
Over three through six months 7,538
Over six through twelve months 19,318
Over twelve months 20,058
------
Total $53,192
======
</TABLE>
21
<PAGE>
<TABLE>
The following table sets forth the deposit balances in the various types
of savings accounts offered by the Association at the dates indicated.
<CAPTION>
At September 30,
-------------------------------------------------------------------------------
1996 1995 1994
----------------------------- ------------------------------ -------------
Percent Percent Percent
of Increase of Increase of
Amount Total (Decrease) Amount Total (Decrease) Amount Total
------ ----- -------- ------ ----- -------- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts... $289,188 72.36% $12,093 $277,095 2.09% $21,109 $255,986 65.68%
-------- ----- ------- -------- ---- ------- -------- -----
Transaction accounts:
Non-interest checking.. 161 0.04 161 -- -- -- -- --
NOW accounts........... 24,282 6.08 2,245 22,037 5.73 (814) 22,851 5.86
Passbook accounts...... 33,711 8.43 (3,526) 37,237 9.69 (7,277) 44,514 11.42
Money market deposit
accounts.............. 52,331 13.09 4,320 48,011 12.49 (18,389) 66,400 17.04
-------- ------ ------- -------- ------ ------ -------- ------
Total transaction accounts 110,485 27.64 3,200 107,285 27.91 (26,480) 133,765 34.32
-------- ------ ------- -------- ------ ------ -------- ------
Total deposits......... $399,673 100.00% $15,293 $384,380 100.00% ($5,371) $389,751 100.00%
======== ====== ======= ======== ====== ====== ======== ======
</TABLE>
<TABLE>
The following table sets forth the savings activities of the Association
for the periods indicated.
<CAPTION>
Year Ended September 30,
----------------------------
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Beginning balance........... $384,380 $389,751 $349,952
-------- ------- -------
Net increase (decrease) before
interest credited.......... (2,364) (21,109) 25,248
Interest credited........... 17,657 15,738 14,551
-------- ------- -------
Net increase (decrease) in deposits 15,293 (5,371) 39,799
-------- ------- -------
Ending balance.............. $399,673 $384,380 $389,751
======= ======= =======
</TABLE>
Borrowings. Savings deposits are the primary source of funds for the
Association's lending and investment activities and for its general business
purposes. The Association may rely upon advances from the FHLB of Seattle,
reverse repurchase agreements and a bank line of credit to supplement its supply
of lendable funds and to meet deposit withdrawal requirements. The FHLB of
Seattle serves as the Association's primary borrowing source after deposits.
The FHLB of Seattle functions as a central reserve bank providing credit
for savings and loan associations and certain other member financial
institutions. As a member, the Association is required to own capital stock in
the FHLB of Seattle and is authorized to apply for advances on the security of
certain of its mortgage loans and other assets (principally securities which 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. Each credit program has its own interest rate and
range of maturities. Depending on the program, limitations on the amount of
advances are based on the financial condition of the member
22
<PAGE>
institution and the adequacy of collateral pledged to secure the credit. As a
member of the FHLB, the Association maintains a credit line that is a percentage
of its regulatory assets, subject to collateral requirements. At September 30,
1996, the credit line was 30% of total assets of the Association. Advances are
collateralized in aggregate, as provided for in the Advances, Security and
Deposit Agreements with the FHLB, by certain mortgages or deeds of trust and
securities of the U.S. Government and agencies thereof.
During the year ended September 30, 1996 the Company sold under agreements
to repurchase specific securities of the U.S. Government and its agencies and
other approved investments to a broker-dealer. The securities underlying these
repurchase agreements were delivered to the broker-dealer who arranged the
transaction. Securities delivered to the broker-dealer may be loaned out in the
ordinary course of operations. All of the reverse repurchase agreements at
September 30, 1996 were due within 30 days and were subsequently renewed with
additional principal outstanding of approximately $53,000 and at an interest
rate of 5.65%.
<TABLE>
The following table sets forth certain information regarding short-term
borrowings by the Company and Association at the end of and during the periods
indicated:
<CAPTION>
At September 30,
------------------
1996 1995
---- ----
<S> <C> <C>
Weighted average rate paid on:
FHLB advances................. 5.50% 5.94%
Reverse repurchase agreements. 5.65 --
<CAPTION>
Year Ended
September 30,
------------------
1996 1995
---- ----
(Dollars in thousands)
<S> <C> <C>
Maximum amount outstanding at any month
end:
FHLB advances.................. $90,000 $22,000
Reverse repurchase agreements.. 14,904 --
Approximate average balance:
FHLB advances.................. 47,986 15,305
Reverse repurchase agreements.. 3,531 --
Approximate weighted average rate paid on:
FHLB advances................. 5.60% 6.21%
Reverse repurchase agreements. 5.55 --
</TABLE>
The Association also has an uncommitted line of credit of $15.0 million
with a commercial bank. At September 30, 1996, the Association had no borrowings
outstanding under this credit facility.
REGULATION OF THE ASSOCIATION
The Association 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, as amended (the "HOLA") and, in certain respects, the
Federal Deposit Insurance Act ("FDIA") and the regulations issued by the OTS and
the FDIC to implement these statutes. These laws and regulations delineate the
nature and extent of the activities in which federal savings associations may
engage. Lending activities and other investments must comply with various
23
<PAGE>
statutory and regulatory capital requirements. In addition, the Association'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 Association's mortgage documents. The Association must
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 Association'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 Holding Company, the Association and their
operations. The Holding Company, as a savings and loan holding company, will
also be required to file certain reports with, and otherwise comply with the
rules and regulations of, the OTS.
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 generally possesses the supervisory and regulatory duties and
responsibilities formerly vested in the Federal Home Loan Bank Board. Among
other functions, the OTS issues and enforces regulations affecting federally
insured savings associations and regularly examines these institutions.
Federal Home Loan Bank System. The FHLB System, consisting of 12 FHLBs, is
under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to supervise the FHLBs, to ensure that the
FHLBs carry out their housing finance mission, to ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets, and to
ensure that the FHLBs operate in a safe and sound manner.
The Association, as a member of the FHLB of Seattle, is required to
acquire and hold shares of capital stock in the FHLB of 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 (borrowings) from
the FHLB of Seattle. The Association is in compliance with this requirement with
an investment in FHLB of Seattle stock of $4.8 million at September 30, 1996.
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 of 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. In 1989 the FDIC also became the insurer, up to the
prescribed limits, of the deposit accounts held at federally insured savings
associations and established two separate insurance funds: the Bank Insurance
Fund ("BIF") and the SAIF. As insurer of deposits, the FDIC has examination,
supervisory and enforcement authority over all savings associations.
The Association's accounts are insured by the SAIF. The FDIC insures
deposits at the Association to the maximum extent permitted by law. The
Association currently pays deposit insurance premiums to the FDIC based on a
risk-based assessment system established by the FDIC for all SAIF-member
institutions. Under applicable regulations, institutions are assigned to one of
three capital groups that are based solely on the level of an institution's
capital -- "well capitalized", "adequately capitalized", and "undercapitalized"
- -- which are defined in the same manner as the regulations establishing the
24
<PAGE>
prompt corrective action system, as discussed below. These three groups are then
divided into three subgroups which reflect varying levels of supervisory
concern, from those which are considered to be healthy to those which are
considered to be of substantial supervisory concern. The matrix so created
results in nine assessment risk classifications, with rates currently ranging
from .23% for well capitalized, financially sound institutions with only a few
minor weaknesses to .31% for undercapitalized institutions that pose a
substantial risk of loss to the SAIF unless effective corrective action is
taken. The FDIC is authorized to raise assessment rates in certain
circumstances. The Association's assessments expensed for the year ended
September 30, 1996, totalled $907,825.
Until the second half of 1995, the same matrix applied to BIF-member
institutions. As a result of the BIF having reached its designated reserve
ratio, effective January 1, 1996, the FDIC substantially reduced deposit
insurance premiums for well-capitalized, well-managed financial institutions
that are members of the BIF. Under the new assessment schedule, rates were
reduced to a range of 0 to 27 basis points, with approximately 92% of BIF
members paying the statutory minimum annual assessment rate of $2,000. Pursuant
to the Deposit Insurance Fund ("DIF"), which was enacted on September 30, 1996,
the FDIC imposed a special one-time assessment on each depository institution
with SAIF-assessable deposits so that the SAIF may achieve its designated
reserve ratio. The Association's assessment amounted to $2.5 million and was
assessed during the quarter ended September 30, 1996. Beginning January 1, 1997,
the assessment schedule for SAIF members will be the same as that for BIF
members. In addition, beginning January 1, 1997, SAIF members will be charged an
assessment of 0.064% of SAIF-assessable deposits for the purpose of paying
interest on the obligations issued by the Financing Corporation ("FICO") in the
1980s to help fund the thrift industry cleanup. BIF-assessable deposits will be
charged an assessment to help pay interest on the FICO bonds at a rate of
approximately 0.013% until the earlier of December 31, 1999 or the date upon
which the last savings association ceases to exist, after which time the
assessment will be the same for all insured deposits.
The DIF Act provides for the merger of the BIF and the SAIF into the
Deposit Insurance Fund on January 1, 1999, but only if no insured depository
institution is a savings association on that date. The DIF contemplates the
development of a common charter for all federally chartered depository
institutions and the abolition of separate charters for national banks and
federal savings associations. It is not known what form the common charter may
take and what effect, if any, the adoption of a new charter would have on the
operation of the Association.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, order or
any condition imposed by an agreement with the FDIC. It also may suspend deposit
insurance temporarily during the hearing process for the permanent termination
of insurance, if the institution has no tangible capital. If insurance of
accounts is terminated, the accounts at the institution at the time of
termination, less subsequent withdrawals, shall continue to be insured for a
period of six months to two years, as determined by the FDIC. Management is
aware of no existing circumstances that could result in termination of the
deposit insurance of the Association.
Liquidity Requirements. Under OTS regulations, each savings institution is
required to maintain an average daily balance of liquid assets (cash, certain
time deposits and savings accounts, bankers' acceptances, and specified U.S.
Government, state or federal agency obligations and certain other investments)
equal to a monthly average of not less than a specified percentage (currently
5.0%) of its net withdrawable accounts plus short-term borrowings. OTS
regulations also require each savings institution to maintain an average daily
balance of short-term liquid assets at a specified percentage (currently 1.0%)
of the total of its net withdrawable savings accounts and borrowings payable in
one year or less. Monetary penalties may be imposed for failure to meet
liquidity requirements. The Association's short- and long-term monthly liquidity
ratios were 2.70% and 10.47%, respectively, at September 30, 1996.
25
<PAGE>
Prompt Corrective Action. Under the FDIA, each federal banking agency is
required to implement a system of prompt corrective action for institutions that
it regulates. The federal banking agencies have promulgated substantially
similar regulations to implement this system of prompt corrective action. Under
the regulations, an institution shall be deemed to be (i) "well capitalized" if
it has a total risk-based capital ratio of 10.0% or more, has a Tier I
risk-based capital ratio of 6.0% or more, has a leverage ratio of 5.0% or more
and is not subject to specified requirements to meet and maintain a specific
capital level for any capital measure; (ii) "adequately capitalized" if it has a
total risk-based capital ratio of 8.0% or more, a Tier I risk-based capital
ratio of 4.0% or more and a leverage ratio of 4.0% or more (3.0% under certain
circumstances) and does not meet the definition of "well capitalized;" (iii)
"undercapitalized" if it has a total risk-based capital ratio that is less than
8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a leverage
ratio that is less than 4.0% (3.0% under certain circumstances); (iv)
"significantly undercapitalized" if it has a total risk-based capital ratio that
is less than 6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a
leverage ratio that is less than 3.0%; and (v) "critically undercapitalized" if
it has a ratio of tangible equity to total assets that is equal to or less than
2.0%.
A federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized and
may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or has received
in its most recent examination, and has not corrected, a less than satisfactory
rating for asset quality, management, earnings or liquidity. (The OTS may not,
however, reclassify a significantly undercapitalized institution as critically
undercapitalized.)
An institution generally must file a written capital restoration plan that
meets specified requirements, as well as a performance guaranty by each company
that controls the institution, with the appropriate federal banking agency
within 45 days of the date that the institution receives notice or is deemed to
have notice that it is undercapitalized, significantly undercapitalized or
critically undercapitalized. Immediately upon becoming undercapitalized, an
institution shall become subject to various mandatory and discretionary
restrictions on its operations.
At September 30, 1996, the Association was categorized as "well
capitalized" under the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The FDIA requires the federal banking
regulatory agencies to prescribe, by regulation, standards for all insured
depository institutions relating to: (i) internal controls, information systems
and internal audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate risk exposure; (v) asset growth; and (vi) compensation, fees
and benefits. The federal banking agencies adopted regulations and Interagency
Guidelines Prescribing Standards for Safety and Soundness ("Guidelines") to
implement safety and soundness standards required by the FDIA. 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. The agencies also proposed asset quality and earnings
standards which, if adopted, would be added to the Guidelines. If the OTS
determines that the Association fails to meet any standard prescribed by the
Guidelines, the agency may require the Association to submit to the agency an
acceptable plan to achieve compliance with the standard, as required by the
FDIA. OTS regulations establish deadlines for the submission and review of such
safety and soundness compliance plans.
Qualified Thrift Lender Test. All savings associations are required to
meet a qualified thrift lender ("QTL") test to avoid certain restrictions on
their operations. A savings institution that fails to become or remain a QTL
shall either become a national bank or be subject to the following restrictions
on its operations: (i) the association may not make any new investment or engage
in activities that would not be permissible for national banks; (ii) the
association may not establish any new branch office where a national bank
located in the savings institution's home state would not be able to establish a
branch office; (iii) the association shall be ineligible to obtain new advances
from any FHLB; and (iv) the payment of dividends by the association shall be
subject to the
26
<PAGE>
rules regarding the statutory and regulatory dividend restrictions applicable to
national banks. Also, beginning three years after the date on which the savings
institution ceases to be a QTL, the savings institution would be prohibited from
retaining any investment or engaging in any activity not permissible for a
national bank and would be required to repay any outstanding advances to any
FHLB. In addition, within one year of the date on which a savings association
controlled by a company ceases to be a QTL, the company must register as a bank
holding company and become subject to the rules applicable to such companies. A
savings institution may requalify as a QTL if it thereafter complies with the
QTL test.
Currently, the QTL test requires that 65% of an institution's "portfolio
assets" (as defined) consist of certain housing and consumer-related assets on a
monthly average basis in nine out of every 12 months. Assets that qualify
without limit for inclusion as part of the 65% requirement are loans made to
purchase, refinance, construct, improve or repair domestic residential housing
and manufactured housing; home equity loans; mortgage backed securities (where
the mortgages are secured by domestic residential housing or manufactured
housing); FHLB stock; and direct or indirect obligations of the FDIC. In
addition, the following assets, among others, may be included in meeting the
test subject to an overall limit of 20% of the savings institution's portfolio
assets: 50% of residential mortgage loans originated and sold within 90 days of
origination; 100% of consumer and educational loans (limited to 10% of total
portfolio assets); and stock issued by the FHLMC or Fannie Mae. Portfolio assets
consist of total assets minus the sum of (i) goodwill and other intangible
assets, (ii) property used by the savings institution to conduct its business,
and (iii) liquid assets up to 20% of the institution's total assets. At
September 30, 1996, the qualified thrift investments of the Association were
approximately 92.20% of its portfolio assets.
Capital Requirements. Under OTS regulations a savings association must
satisfy three minimum capital requirements: core capital, tangible capital and
risk-based capital. Savings associations must meet all of the standards in order
to comply with the capital requirements.
OTS capital regulations establish a 3% core capital or leverage ratio
(defined as the ratio of core capital to adjusted total assets). Core capital is
defined to include common shareholders' equity, noncumulative perpetual
preferred stock and any related surplus, and minority interests in equity
accounts of consolidated subsidiaries, less (i) any intangible assets, except
for certain qualifying intangible assets; (ii) certain mortgage servicing
rights; and (iii) equity and debt investments in subsidiaries that are not
"includable subsidiaries", which is defined as subsidiaries engaged solely in
activities not impermissible for a national bank, engaged in activities
impermissible for a national bank but only as an agent for its customers, or
engaged solely in mortgage-banking activities. In calculating adjusted total
assets, adjustments are made to total assets to give effect to the exclusion of
certain assets from capital and to account appropriately for the investments in
and assets of both includable and nonincludable subsidiaries. Institutions that
fail to meet the core capital requirement would be required to file with the OTS
a capital plan that details the steps they will take to reach compliance. In
addition, the OTS's prompt corrective action regulation provides that a savings
institution that has a leverage ratio of less than 4% (3% for institutions
receiving the highest CAMEL examination rating) will be deemed to be
"undercapitalized" and may be subject to certain restrictions. See "-- Federal
Regulation of Savings Associations -- Prompt Corrective Action."
As required by federal law, the OTS has proposed a rule revising its
minimum core capital requirement to be no less stringent than that imposed on
national banks. The OTS has proposed that only those savings associations rated
a composite one (the highest rating) under the CAMEL rating system for savings
associations will be permitted to operate at or near the regulatory minimum
leverage ratio of 3%. All other savings associations will be required to
maintain a minimum leverage ratio of 4% to 5%. The OTS will assess each
individual savings association through the supervisory process on a case-by-case
basis to determine the applicable requirement. No assurance can be given as to
the final form of any such regulation, the date of its effectiveness or the
requirement applicable to the Association.
27
<PAGE>
Savings associations also must maintain "tangible capital" not less than
1.5% of the Association's adjusted total assets. "Tangible capital" is defined,
generally, as core capital minus any "intangible assets" other than purchased
mortgage servicing rights.
Each savings institution must maintain total risk-based capital equal to
at least 8% of risk-weighted assets. Total risk-based capital consists of the
sum of core and supplementary capital, provided that supplementary capital
cannot exceed core capital, as previously defined. Supplementary capital
includes (i) permanent capital instruments such as cumulative perpetual
preferred stock, perpetual subordinated debt and mandatory convertible
subordinated debt, (ii) maturing capital instruments such as subordinated debt,
intermediate-term preferred stock and mandatory convertible subordinated debt,
subject to an amortization schedule, and (iii) general valuation loan and lease
loss allowances up to 1.25% of risk-weighted assets.
The risk-based capital regulation assigns each balance sheet asset held by
a savings institution to one of four risk categories based on the amount of
credit risk associated with that particular class of assets. Assets not included
for purposes of calculating capital are not included in calculating
risk-weighted assets. The categories range from 0% for cash and securities that
are backed by the full faith and credit of the U.S. Government to 100% for
repossessed assets or assets more than 90 days past due. Qualifying residential
mortgage loans (including multi-family mortgage loans) are assigned a 50% risk
weight. Consumer, commercial, home equity, land and residential construction
loans are assigned a 100% risk weight, as are nonqualifying residential and
multi-family mortgage loans and nonresidential construction loans. The book
value of assets in each category is multiplied by the weighing factor (from 0%
to 100%) assigned to that category. These products are then totalled to arrive
at total risk-weighted assets. Off-balance sheet items are included in
risk-weighted assets by converting them to an approximate balance sheet "credit
equivalent amount" based on a conversion schedule. These credit equivalent
amounts are then assigned to risk categories in the same manner as balance sheet
assets and included in risk-weighted assets.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. Under the rule, savings associations with "above
normal" interest rate risk exposure would be subject to a deduction from total
capital for purposes of calculating their risk-based capital requirements. A
savings association's interest rate risk is measured by the decline in the net
portfolio value of its assets (i.e., the difference between incoming and
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts) that would result from a hypothetical 200 basis point increase or
decrease in market interest rates divided by the estimated economic value of the
association's assets, as calculated in accordance with guidelines set forth by
the OTS. A savings association whose measured interest rate risk exposure
exceeds 2% must deduct an interest rate risk component in calculating its total
capital under the risk-based capital rule. The interest rate risk component is
an amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
association's assets. That dollar amount is deducted from an association's total
capital in calculating compliance with its risk-based capital requirement. Under
the rule, there is a two quarter lag between the reporting date of an
institution's financial data and the effective date for the new capital
requirement based on that data. A savings association with assets of less than
$300 million and risk-based capital ratios in excess of 12% is not subject to
the interest rate risk component, unless the OTS determines otherwise. The rule
also provides that the Director of the OTS may waive or defer an association's
interest rate risk component on a case-by-case basis. Under certain
circumstances, a savings association may request an adjustment to its interest
rate risk component if it believes that the OTS-calculated interest rate risk
component overstates its interest rate risk exposure. In addition, certain
"well-capitalized" institutions may obtain authorization to use their own
interest rate risk model to calculate their interest rate risk component in lieu
of the OTS-calculated amount. The OTS has postponed the date that the component
will first be deducted from an institution's total capital until savings
associations become familiar with the process for requesting an adjustment to
its interest rate risk component.
28
<PAGE>
<TABLE>
The following table presents the Association's capital levels at September 30, 1996.
<CAPTION>
To Be
Categorized as "Well
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
------------------- ------------------ -------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ----- ----------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Total Capital $121,036,745 42.4% $22,832,496 8.0% $28,540,620 10.0%
(To Risk Weighted Assets)
Tier I Capital 120,108,925 42.1 -- -- 17,124,372 6.0
(To Risk Weighted Assets)
Tier I Capital 120,108,925 19.2 18,746,701 3.0 31,244,502 5.0
(To Total Assets)
Tangible Capital 120,108,925 19.2 9,373,351 1.5 -- --
(To Tangible Capital)
</TABLE>
Limitations on Capital Distributions. OTS regulations impose uniform
limitations on the ability of all savings associations to engage in various
distributions of capital such as dividends, stock repurchases and cash-out
mergers. In addition, OTS regulations require the Association to give the OTS 30
days' advance notice of any proposed capital distributions, and the OTS has the
authority under its supervisory powers to prohibit the capital distributions.
The regulation utilizes a three-tiered approach which permits various levels of
distributions based primarily upon a savings association's capital level.
A Tier 1 savings association has capital in excess of its fully phased-in
capital requirement (both before and after the proposed capital distribution).
Tier 1 savings associations may make (without application but upon prior notice
to, and no objection made by, the OTS) capital distributions during a calendar
year up to 100% of its net income to date during the calendar year plus one-half
its surplus capital ratio (i.e., the amount of capital in excess of its fully
phased-in requirement) at the beginning of the calendar year or the amount
authorized for a Tier 2 association. Capital distributions in excess of such
amount require advance notice to the OTS. A Tier 2 savings association has
capital equal to or in excess of its minimum capital requirement but below its
fully phased-in capital requirement (both before and after the proposed capital
distribution). Such an association may make (without application) capital
distributions up to an amount equal to 75% of its net income during the previous
four quarters depending on how close the association is to meeting its fully
phased-in capital requirement. Capital distributions exceeding this amount
require prior OTS approval. Tier 3 associations are savings associations with
capital below the minimum capital requirement (either before or after the
proposed capital distribution). Tier 3 associations may not make any capital
distributions without prior approval from the OTS.
The Association is currently meeting the criteria to be designated a Tier
1 association and, consequently, could at its option (after prior notice to, and
no objection made by, the OTS) distribute up to 100% of its net income during
the calendar year plus 50% of its surplus capital ratio at the beginning of the
calendar year less any distributions previously paid during the year.
Loans to One Borrower. Under the HOLA, savings institutions are generally
subject to the national bank limit on loans to one borrower. Generally, this
limit is 15% of the Association's unimpaired capital and surplus, plus an
additional 10% of unimpaired capital and surplus, if such loan is secured by
readily-marketable collateral, which is defined to include certain financial
instruments and bullion. The OTS by regulation has amended the loans to one
borrower rule to permit savings associations meeting certain requirements,
including capital requirements, to extend loans to one borrower in additional
amounts under circumstances limited essentially to loans to develop or complete
residential housing units. At September 30, 1996, the Association's limit on
loans to one borrower was $18.0 million. At September 30, 1996, the
Association's largest aggregate amount of loans to one borrower was $1.4
million.
29
<PAGE>
Activities of Associations and Their Subsidiaries. When a savings
association establishes or acquires a subsidiary or elects to conduct any new
activity through a subsidiary that the association controls, the savings
association must notify the FDIC and the OTS 30 days in advance and provide the
information each agency may, by regulation, require. Savings associations also
must conduct the activities of subsidiaries in accordance with existing
regulations and orders.
The OTS may determine that the continuation by a savings association of
its ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary. The FDIC
also may determine by regulation or order that any specific activity poses a
serious threat to the SAIF. If so, it may require that no SAIF member engage in
that activity directly.
Transactions with Affiliates. Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act ("Sections 23A and 23B")
relative to transactions with affiliates in the same manner and to the same
extent as if the savings association were a Federal Reserve member bank. A
savings and loan holding company, its subsidiaries and any other company under
common control are considered affiliates of the subsidiary savings association
under the HOLA. Generally, Sections 23A and 23B: (i) limit the extent to which
the insured association or its subsidiaries may engage in certain covered
transactions with an affiliate to an amount equal to 10% of such institution's
capital and surplus and place an aggregate limit on all such transactions with
affiliates to an amount equal to 20% of such capital and surplus, and (ii)
require that all such transactions be on terms substantially the same, or at
least as favorable to the institution or subsidiary, as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans, the
purchase of assets, the issuance of a guarantee and similar types of
transactions.
Three additional rules apply to savings associations: (i) a savings
association may not make any loan or other extension of credit to an affiliate
unless that affiliate is engaged only in activities permissible for bank holding
companies; (ii) a savings association may not purchase or invest in securities
issued by an affiliate (other than securities of a subsidiary); and (iii) the
OTS may, for reasons of safety and soundness, impose more stringent restrictions
on savings associations but may not exempt transactions from or otherwise
abridge Section 23A or 23B. Exemptions from Section 23A or 23B may be granted
only by the Federal Reserve Board, as is currently the case with respect to all
FDIC-insured banks. The Association has not been significantly affected by the
rules regarding transactions with affiliates.
The Association's authority to extend credit to executive officers,
directors and 10% shareholders, as well as entities controlled by such persons,
is currently governed by Sections 22(g) and 22(h) of the Federal Reserve Act,
and Regulation O thereunder. Among other things, these regulations require that
such loans be made on terms and conditions substantially the same as those
offered to unaffiliated individuals and not involve more than the normal risk of
repayment. Regulation O also places individual and aggregate limits on the
amount of loans the Association may make to such persons based, in part, on the
Association's capital position, and requires certain board approval procedures
to be followed. The OTS regulations, with certain minor variances, apply
Regulation O to savings institutions.
REGULATION OF THE COMPANY
General
The Company is a savings and loan holding company within the meaning of
the HOLA. As such, it is registered with the OTS and is subject to OTS
regulations, examinations, supervision and reporting requirements. The Company
is also subject to the information, proxy solicitation, insider trading
restrictions, and other requirements of the Securities Exchange Act of 1934, as
amended.
30
<PAGE>
Company Acquisitions
The HOLA 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.
Holding Company 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, it would become a multiple savings
and loan holding company. There generally are more restrictions on the
activities of a multiple savings and loan holding company than a unitary savings
and loan holding company. Specifically, if either federally insured subsidiary
savings association fails to meet the QTL test, the activities of the Company
and any of its subsidiaries (other than the Company or other federally insured
subsidiary savings associations) would thereafter be subject to further
restrictions. The HOLA 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 holding company.
Affiliate Restrictions
The affiliate restrictions contained in Sections 23A and 23B of the
Federal Reserve Act apply to all federally insured savings associations and any
such "affiliate." A savings and loan holding company, its subsidiaries and any
other company under common control are considered affiliates of the subsidiary
savings association under the HOLA. Generally, Sections 23A and 23B: (i) limit
the extent to which the insured association or its subsidiaries may engage in
certain covered transactions with an affiliate to an amount equal to 10% of such
institution's capital and surplus, and contain an aggregate limit on all such
transactions with all affiliates to an amount equal to 20% of such capital and
surplus, and (ii) require that all such transactions be on terms substantially
the same, or at least as favorable to the institution or subsidiary, as those
provided to a non-affiliate. The term "covered transaction" includes the making
of loans, purchase of assets, issuance of a guarantee and other similar types of
transactions. Also, a savings association may not make any loan to an affiliate
unless the affiliate is engaged only in activities permissible for bank holding
companies. Only the Federal Reserve may grant exemptions from the restrictions
of Sections 23A and 23B. The OTS, however, may impose more stringent
restrictions on savings associations for reasons of safety and soundness.
Qualified Thrift Lender Test
The HOLA requires any savings and loan holding company that controls a
savings association that fails the QTL test, as explained under "-- Qualified
31
<PAGE>
Thrift Lender Test", must, within one year after the date on which the
association ceases to be a QTL, register as and be deemed a bank holding company
subject to all applicable laws and regulations.
TAXATION
Federal Taxation
General. The Company and the Association 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.
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
Company and the Association.
Tax Bad Debt Reserves. For taxable years beginning prior to January 1,
1996, savings institutions such as the Association which met certain
definitional tests primarily relating to their assets and the nature of their
business ("qualifying thrifts") were permitted to establish a reserve for bad
debts and to make annual additions thereto, which additions may, within
specified formula limits, have been deducted in arriving at their taxable
income. The Association's deduction with respect to "qualifying loans", which
are generally loans secured by certain interests in real property, may have been
computed using an amount based on the Association's actual loss experience, or a
percentage equal to 8% of the Association's taxable income, computed with
certain modifications and reduced by the amount of any permitted additions to
the nonqualifying reserve. Each year the Association selected the most favorable
way to calculate the deduction attributable to an addition to the tax bad debt
reserve.
Recently enacted legislation repealed the reserve method of accounting for
bad debt reserves for tax years beginning after December 31, 1995. As a result,
savings associations will no longer be able to calculate their deduction for bad
debts using the percentage-of-taxable-income method. Instead, savings
associations will be required to compute their deduction based on specific
charge-offs during the taxable year or, if the savings association or its
controlled group had assets of less than $500 million, based on actual loss
experience over a period of years. This legislation also requires savings
associations to recapture into income over a six-year period their post-1987
additions to their bad debt tax reserves, thereby generating additional tax
liability. At September 30, 1996, the Association's post-1987 reserves totalled
approximately $3.8 million. The recapture may be suspended for up to two years
if, during those years, the institution satisfies a residential loan
requirement. The Association anticipates meeting the residential loan
requirement for the taxable year ending September 30, 1997.
Under prior law, if the Association failed to satisfy the qualifying
thrift definitional tests in any taxable year, it would be unable to make
additions to its bad debt reserve. Instead, the Association would be required to
deduct bad debts as they occur and would additionally be required to recapture
its bad debt reserve deductions ratably over a multi-year period. At September
30, 1996, the Association's total bad debt reserve for tax purposes was
approximately $14.3 million. Among other things, the qualifying thrift
definitional tests required the Association to hold at least 60% of its assets
as "qualifying assets." Qualifying assets generally include cash, obligations of
the United States or any agency or instrumentality thereof, certain obligations
of a state or political subdivision thereof, loans secured by interests in
improved residential real property or by savings accounts, student loans and
property used by the Association in the conduct of its banking business. Under
current law, a savings association will not be required to recapture its
pre-1988 bad debt reserves if it ceases to meet the qualifying thrift
definitional tests.
Distributions. To the extent that the Association makes "nondividend
distributions" to the Company that are considered as made: (i) from the reserve
for losses on qualifying real property loans, to the extent the reserve for such
losses exceeds the amount that would have been allowed under the experience
method; or (ii) from the supplemental reserve for losses on loans ("Excess
32
<PAGE>
Distributions"), then an amount based on the amount distributed will be included
in the Association's taxable income. Nondividend distributions include
distributions in excess of the Association'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 Association'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
Association's bad debt reserve. Thus, any dividends to the Company that would
reduce amounts appropriated to the Association's bad debt reserve and deducted
for federal income tax purposes would create a tax liability for the
Association. The amount of additional taxable income attributable to 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 the Association
makes a "nondividend distribution", then approximately one and one-half times
the amount so used would be includable in gross income for federal income tax
purposes, assuming a 35% corporate income tax rate (exclusive of state and local
taxes). See "REGULATION OF THE ASSOCIATION" for limits on the payment of
dividends by the Association. The Association 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 Internal Revenue Code of 1986, as
amended, 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 Association'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 .12% of the excess of AMTI (with certain modification) over
$2.0 million is imposed on corporations, including the Association, whether or
not an Alternative Minimum Tax ("AMT") is paid.
Other Federal Tax Matters. There have not been any Internal Revenue Service
audits of the Association's or the Company's federal income tax returns during
the past five years.
Oregon Taxation
The Company and the Association are subject to an Oregon corporate excise
tax at a statutory rate of 6.6% (3.3% for the fiscal year ended September 30,
1996) of income. Neither the Company's nor the Association's state income tax
returns have been audited during the past five years.
Competition
The Association originates most of its loans to and accepts most of its
deposits from residents of Klamath, Jackson and Deschutes counties. The
Association is the oldest financial institution headquartered in Klamath Falls.
The Association believes that it is a major competitor in the markets in which
it operates. Nonetheless, the Association faces competition in attracting
deposits and making real estate loans from various financial institutions,
including banks, savings associations and mortgage brokers. In addition, the
Association has faced additional significant competition for investors' funds
from short-term money market securities and other corporate and government
securities. The financial institution industry in the Association's market area
is characterized by a mix of local independent financial institutions and
offices of larger out-of-state financial institutions, including several
multi-national bank holding companies. The ability of the Association to attract
and retain savings deposits depends on its ability to generally provide a rate
of return and liquidity risk comparable to that offered by competing investment
opportunities. The Association competes for loans principally through the
interest rates and loan fees it charges and the efficiency and quality of
services it provides borrowers. Competition may increase as restrictions on the
interstate operations of financial institutions continue to be reduced.
33
<PAGE>
Personnel
As of September 30, 1996, the Association had 100 full-time and two
part-time employees. The employees are not represented by a collective
bargaining unit. The Association believes its relationship with its employees is
good.
Executive Officers. The following table sets forth certain information
regarding the executive officers of the Company.
Name Age(1) Position
Gerald V. Brown 60 President and Chief Executive Officer
Robert A. Tucker 48 Senior Vice President and Treasurer
George L. Hall 45 Senior Vice President and Secretary
Marshall J. Alexander 46 Vice President and Chief Financial Officer
- --------------
(1) At September 30, 1996.
Gerald V. Brown was appointed a director and the President of the
Association in June 1994 to succeed the retiring President, James Bocchi. From
1982 until his appointment as President, Mr. Brown served as Senior Vice
President and Secretary, supervising all loan activities of the Association.
Robert A. Tucker has been employed by the Association since 1973. He has
served as Senior Vice President and Treasurer since November 1989.
George L. Hall has been employed by the Association since 1988. He has
served as Senior Vice President and Secretary since June 1994.
Marshall J. Alexander has been employed by the Association since 1986. He
has served as Vice President and Chief Financial Officer since August 1994.
34
<PAGE>
Item 2. Properties
<TABLE>
The following table sets forth the location of the Association's offices
and other facilities used in operations as well as certain additional
information relating to these offices and facilities as of September 30, 1996.
<CAPTION>
Year Square
Description/Address Opened Leased/Owned Footage
- ------------------- ------ ------------ -------
<S> <C> <C> <C>
Main Office
- -----------
540 Main Street 1939 Owned 25,660
Klamath Falls, Oregon
Branch Offices
- --------------
2943 South Sixth Street 1972 Owned 3,820
Klamath Falls, Oregon
2323 Dahlia Street 1979 Owned 1,876
Klamath Falls, Oregon
512 Walker Avenue 1977 Owned 4,216
Ashland, Oregon
1420 East McAndrews Road 1990 Owned 4,006
Medford, Oregon
61515 S. Highway 97 1993 Owned 5,415
Bend, Oregon
2300 Madison Street 1995 Owned 5,000
Klamath Falls, Oregon
Loan Center
- -----------
585 SW 6th, Suite #2 1996 Leased 900
Redmond, Oregon
</TABLE>
The net book value of the Association's investment in office, properties
and equipment totalled $5.0 million at September 30, 1996. See Note 5 of the
Notes to the Consolidated Financial Statements in the Annual Report.
Item 3. Legal Proceedings
Periodically, there have been various claims and lawsuits involving the
Association, mainly as a defendant, such as claims to enforce liens,
condemnation proceedings on properties in which the Association holds security
interests, claims involving the making and servicing of real property loans and
other issues incident to the Association's business. The Association 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 Association.
35
<PAGE>
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 September 30, 1996.
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
The information contained under the section captioned "Common Stock
Information" on page 16 of the Annual Report is incorporated herein by
reference.
Item 6. Selected Financial Data
The information contained under the section captioned "Selected
Consolidated Financial Data" on page 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 8 of the Annual Report is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
(a) Financial Statements
Independent Auditors' Reports*
Consolidated Balance Sheets as of September 30, 1996 and 1995*
Consolidated Statements of Earnings for the Years Ended
September 30, 1996, 1995 and 1994*
Consolidated Statements of Shareholders' Equity for the Years Ended
September 30, 1996, 1995 and 1994*
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1996, 1995 and 1994*
Notes to the Consolidated Financial Statements*
* Included in the Annual Report attached as Exhibit 13 hereto and
incorporated herein by reference. All schedules have been omitted as the
required information is either inapplicable or included in the
Consolidated Financial Statements or related Notes contained in the Annual
Report.
(b) Supplementary Data
The information contained in Note 19 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
Reference is made to the Company's Current Report on Form 8-K dated May
21, 1996, as amended on May 31, 1996, which are incorporated herein by
reference.
36
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The information contained under the section captioned "Proposal I -
Election of Directors" contained in the Company's Proxy Statement, and "Part I
- -- Business -- Personnel -- Executive Officers" of this report, is incorporated
herein by reference. Reference is made to the cover page of this report for
information regarding compliance with Section 16(a) of the Exchange Act.
Item 11. Executive Compensation
The information contained under the sections captioned "Executive
Compensation", "Directors' Compensation" and "Benefits" under "Proposal I -
Election of Directors" in the Proxy Statement is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Security Ownership of Certain
Beneficial Owners and Management" of the Proxy Statement
(b) Security Ownership of Management
The information required by this item is incorporated herein by
reference to the sections captioned "Proposal I - Election of
Directors" and "Security Ownership of Certain Beneficial owners and
Management" of the Proxy Statement.
(c) Changes in Control
The Company is not aware of any arrangements, including any pledge
by any person of securities of the Company, the operation of which
may at a subsequent date result in a change in control of the
Company.
The information required by this item is incorporated herein by reference
to the sections captioned "Proposal I - Election of Directors" and "Security
Ownership of Certain Beneficial Owners and Management" of the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information set forth under the section captioned "Proposal I -
Election of Directors - Certain Transactions with the Association" in the Proxy
Statement is incorporated herein by reference.
37
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Exhibits
3(a) Articles of Incorporation of the Registrant*
3(b) Bylaws of the Registrant*
10(a) Employment Agreement with Gerald V. Brown***
10(b) Employment Agreement with Marshall J. Alexander***
10(c) Employment Agreement with George L. Hall***
10(d) Employment Agreement with Robert A. Tucker***
10(e) 1996 Stock Option Plan**
(13) Annual Report to Shareholders
(22) Subsidiaries of the Registrant
- -------------------
* Incorporated by reference to the Registrant's Registration Statement on
Form S-1, filed on June 19, 1995.
** Incorporated by reference to the Registrant's Definitive Proxy Statement
for the 1996 Annual Meeting of Shareholders.
*** Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended September 30, 1995.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended September
30, 1996.
38
<PAGE>
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.
KLAMATH FIRST BANCORP, INC.
Date: December 24, 1996 By:/s/ Gerald V. Brown
--------------------
Gerald V. Brown
President and Chief Executive Officer
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/ Gerald V. Brown
- ------------------------- President, Chief December 24, 1996
Gerald V. Brown Executive Officer and
Director (Principal
Executive Officer)
/s/ Marshall J. Alexander
- ------------------------- Vice President and December 24, 1996
Marshall J. Alexander Chief Financial Officer
(Principal Financial
and Accounting Officer)
/s/ Rodney N. Murray
- ------------------------- Chairman of the Board December 24, 1996
Rodney N. Murray of Directors
/s/ Bernard Z. Agrons
- ------------------------- Director December 24, 1996
Bernard Z. Agrons
/s/ Timothy A. Bailey
- ------------------------- Director December 24, 1996
Timothy A. Bailey
/s/ James D. Bocchi
- ------------------------- Director December 24, 1996
James D. Bocchi
/s/ William C. Dalton
- ------------------------- Director December 24, 1996
William C. Dalton
/s/ J. Gillis Hannigan
- ------------------------- Director December 24, 1996
J. Gillis Hannigan
/s/ Adolph Zamasky
- ------------------------- Director December 24, 1996
Adolph Zamsky
<PAGE>
EXHIBIT 13
1996 Annual Report to Shareholders
<PAGE>
TABLE OF CONTENTS
-----------------
DIRECTORS AND OFFICERS............................... 3
SELECTED CONSOLIDATED FINANCIAL DATA................. 4-5
LETTER TO OUR SHAREHOLDERS........................... 6-7
EXECUTIVE OFFICERS................................... 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION..... 9-22
COMMON STOCK INFORMATION............................. 23
INDEPENDENT AUDITOR'S REPORT......................... 24-25
CONSOLIDATED BALANCE SHEETS.......................... 26-27
CONSOLIDATED STATEMENTS OF EARNINGS.................. 28-29
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY...... 30
CONSOLIDATED STATEMENTS OF CASH FLOWS................ 31-33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS........... 34-58
BRANCH OFFICERS AND CORPORATE INFORMATION............ 59-60
<PAGE>
KLAMATH FIRST FEDERAL SAVINGS & LOAN ASSOCIATION AND KLAMATH FIRST BANCORP, INC.
BOARD OF DIRECTORS
James D. Bocchi, Retired; President of Klamath First Federal Savings and Loan
Association from 1984 until June 1994
J. Gillis Hannigan, Retired; Executive Vice President of Modoc Lumber in
Klamath Falls, Oregon, until January 1995
Adolph Zamsky, Retired; Certified Public Accountant in both Oregon and
California, working out of Klamath Falls, Oregon from 1945 to 1977
Rodney N. Murray, Director and Chairman of the Board, owner and operator of
Rodney Murray Ranch, former owner and manager and President of Klamath Falls
Creamery, Inc., located in Klamath Falls, Oregon
Gerald V. Brown, President and Chief Executive Officer of Klamath First Federal
Savings and Loan Association since June 1994
Timothy A. Bailey, President of Klamath Medical Service Bureau, a health
insurance company headquartered in Klamath Falls, Oregon
William C. Dalton, Employed by Malin Potato, Merrill, Oregon, potato buyer for
Klamath Potato Distributors from 1988 to 1992, and former owner of W.C. Dalton
and Company, farming
Bernard Z. Agrons, Retired; Weyerhaeuser Company Vice President for the Eastern
Oregon Region until 1981; Former State Representative in the Oregon State
Legislature from 1983 to 1991
KLAMATH FIRST FEDERAL SAVINGS & LOAN ASSOCIATION AND KLAMATH FIRST BANCORP, INC.
OFFICERS
Gerald V. Brown, President and Chief Executive Officer
Robert A. Tucker, Senior Vice President - Treasurer
George L. Hall, Senior Vice President - Secretary
Marshall J. Alexander, Vice President and Chief Financial Officer
Frank X. Hernandez, Human Resources Officer
Robert L. Salley, Vice President
Gerald A. Page, Vice President
Carol Starkweather, Assistant Vice President
Tina M. Douglas, Assistant CFO - Controller
Diane Davis, Branch Manager/Ashland
Phillip Waggoner, Branch Manager/Bend
Gale Ramey, Branch Manager/Campus
Tracie Chandler, Branch Manager/Madison
Richard Knight, Branch Manager/Medford
Ted Eslick, Loan Center Manager/Redmond
Donna Ross, Branch Manager/Shasta
3
<PAGE>
<TABLE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables set forth certain information concerning the consolidated financial position and consolidated
results of operations of Klamath First Bancorp, Inc. (the Company) at the dates and for the periods indicated. This
information does not purport to be complete and should be read in conjunction with, and is qualified in its
entirety by reference to, the Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Annual Report.
<CAPTION>
FINANCIAL CONDITION DATA At September 30,
----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Assets ..................................................... $671,969 $647,840 $448,939 $403,879 $366,864
Cash and cash equivalents .................................. 16,180 175,994 19,557 23,480 36,177
Loans receivable, net ...................................... 473,556 403,544 360,122 310,668 289,222
Investment securities held to maturity ..................... 9,827 42,209 44,564 57,997 30,878
Investment securities available for sale ................... 75,987 12,606 12,224 -- --
Mortgage backed & related securities held to maturity ...... 6,783 -- -- -- --
Mortgage backed & related securities available for sale .... 74,109 -- -- -- --
Stock in FHLB of Seattle, at cost .......................... 4,774 4,426 4,156 3,804 3,289
Advances from FHLB of Seattle .............................. 90,000 20,000 -- -- --
Savings deposits ........................................... 399,673 384,380 389,751 349,952 320,430
Shareholders' equity ....................................... 153,411 164,685 49,308 44,949 37,792
<CAPTION>
SELECTED OPERATING DATA Year Ended September 30,
------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- ---------- --------- ---------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Total interest income ..................... $ 45,649 $ 35,107 $ 32,408 $ 31,091 $ 30,690
Total interest expense .................... 23,286 20,441 16,555 16,070 18,941
-------- ---------- --------- ---------- --------
Net interest income ....................... 22,363 14,666 15,853 15,021 11,749
Provision for loan losses ................. 120 120 150 120 120
-------- ---------- --------- ---------- --------
Net interest income after provision
for loan losses ........................... 22,243 14,546 15,703 14,901 11,629
Non-interest income ....................... 522 381 352 1,112 343
BIF/SAIF Assessment ....................... 2,473 - - - -
Non-interest expense ...................... 9,769 6,004 6,034 5,191 4,563
-------- ---------- --------- ---------- --------
Earnings before income taxes and
cumulative effect of a change in
accounting principle ...................... 10,523 8,923 10,021 10,822 7,409
Provision for income tax .................. 4,413 3,349 3,867 3,665 2,664
-------- ---------- --------- ---------- --------
Earnings before cumulative effect
of a change in accounting principle ....... 6,110 5,574 6,154 7,157 4,745
Cumulative effect at October 1,1993
of a change in accounting for
income taxes .............................. - - 866 - -
-------- ---------- --------- ---------- --------
Net Earnings .............................. $ 6,110 $ 5,574 $ 5,288 $ 7,157 $ 4,745
======== ========== ========= ========== ========
4
<PAGE>
<CAPTION>
At or For the Year Ended September 30,
----------------------------------------------------------
KEY OPERATING RATIOS 1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS
Return on average assets
(net income divided by average assets) ..................... 0.99% 1.19% 1.26% 1.88% 1.34%
Return on average equity
(net income divided by average equity) ..................... 3.69% 10.44% 10.93% 16.87% 13.11%
Interest rate spread (difference between average yield on
interest-earning assets and average cost of
interest-bearing liabilities) .............................. 2.22% 2.73% 3.40% 3.58% 2.91%
Net interest margin (net interest income as a percentage
of average interest-earning assets) ........................ 3.65% 3.24% 3.84% 4.04% 3.42%
Average interest-earning assets to average interest-bearing
liabilities ................................................ 137.78% 111.29% 111.13% 110.61% 109.16%
Net interest income after provision for loan losses to total
non-interest expenses ...................................... 181.69% 242.27% 260.24% 287.05% 254.85%
Non-interest expense to average total assets ............... 1.99% 1.29% 1.43% 1.36% 1.29%
Dividend payout ratio (dividends declared per share
divided by net income per share) ........................... 44.64% - - - -
ASSET QUALITY RATIOS
Allowance for loan losses to total loans at end of period .. 0.19% 0.19% 0.20% 0.20% 0.19%
Non-performing assets to total assets ...................... 0.04% 0.12% 0.05% 0.07% 0.46%
Non-performing loans to total loans, before net items ...... 0.04% 0.18% 0.05% 0.06% 0.45%
CAPITAL RATIOS
Equity to assets ........................................... 22.83% 25.42% 10.98% 11.13% 10.30%
Tangible capital ratio ..................................... 19.22% 18.57% 10.98% 11.13% 10.30%
Core capital ratio ......................................... 19.22% 18.57% 10.98% 11.13% 10.30%
Risk-based capital ratio ................................... 42.41% 36.87% 22.61% 23.15% 20.82%
OTHER DATA
NUMBER OF
Real estate loans outstanding .............................. 7,704 7,110 6,654 6,169 5,867
Deposit accounts ........................................... 38,651 38,260 35,205 33,147 31,945
Full service offices ....................................... 7 7 6 6 5
</TABLE>
5
<PAGE>
Dear Shareholder:
October 4, 1996 marked our first anniversary as a stock company. During this
past year we have been busy and, we believe, successful in implementing many of
the strategies to enhance shareholder value that we outlined at our first Annual
Shareholders' Meeting last April.
Growth in our core savings and loan business resulted in loan and deposit
growth and good earnings this past year. Fiscal 1996 net earnings were $6.1
million, which includes the effect of a $2.5 million one-time assessment
recorded on September 30, 1996 to recapitalize the Savings Association Insurance
Fund and also a loss-on-sale of $1.6 million on the Association's investment in
a U.S. federal securities mutual bond fund.
New loan originations were approximately $135.6 million, which resulted in
a 17.3% increase in our total loan portfolio. This was accomplished through
competitive loan pricing, aggressive marketing, excellent customer service and
the opening in March 1996 of a new lending office in Redmond, Oregon. The
Redmond office has shown good acceptance and we are excited about its prospects
in that fast growing community. By the new year we hope to add to our loan
product mix by introducing a new "Equity Credit Line."
Our deposit base increased $15.3 million or 4.0% during the year. We
introduced two new checking accounts this past year: a "Basic Checking" account
for customers who write a limited number of checks each month and a "Small
Business Checking" account to offer our small business customers an alternative
to the traditional commercial checking account.
In addition to taking measures aimed at increasing our core business of
deposit taking and residential mortgage lending, we have sought other means to
leverage our capital. We have aggressively used borrowed funds to purchase
investment securities with the aim of earning the difference between the cost of
the borrowings and the return earned on the investment securities. This is
commonly known as "wholesale leveraging." At September 30, 1996, we had $104.9
million in borrowed funds, of which $56.9 million was primarily used for
liquidity to fund loan growth and $48.0 million was used to purchase investment
securities. This strategy has been successful as evidenced by a 1.23% return on
assets on these activities. Subject to market conditions, we plan to continue
and expand this activity.
Another shareholder value enhancement strategy is our dividend policy.
Since becoming a stock company we have paid a dividend each quarter, increasing
from $0.05 per share in January to $0.065 in April to our currently announced
level of $0.07 per share.
Many of our shareholders are aware that several newly converted thrift
institutions have authorized special "return of capital" distributions, which
were entirely or substantially tax free. In each instance that we know of, the
institution never filed a consolidated tax return, which, under complex federal
income tax regulations, is a critical factor in determining whether a special
distribution will be taxable or not. After extensive analysis and discussions
with the Internal Revenue Service, we have concluded that, at this time, current
federal income tax regulations effectively preclude a tax-free "return of
capital" distribution to our shareholders. Nevertheless, the Board of Directors
will continue to assess the viability of all other shareholder enhancement
strategies that suggest a comparable long-term benefit to our shareholders.
Stock repurchases are another element of our shareholder value enhancement
strategy that we implemented last year. This past September we completed the
repurchase of 5.07% of our outstanding common shares by repurchasing 620,655
shares at an average price of $14.33 per share. These repurchases increased
earnings per share by $0.01 and return on equity by 17 basis points.
6
<PAGE>
The final element of our shareholder value enhancement strategy that we
discussed at last year's Annual Meeting was the expansion of our franchise
through the acquisition of other institutions or their branches. We continue to
explore such expansion opportunities.
We appreciate your support. "We'd Be Honored" if you stopped by one of our
branches to say hello or call us if you have any questions.
Sincerely,
/s/ Gerald V. Brown
- --------------------
Gerald V. Brown,
President and Chief Executive Officer
/s/ Rodney N. Murray
- ---------------------
Rodney N. Murray,
Chairman of the Board
7
<PAGE>
CORPORATE EXECUTIVE OFFICERS
George L. Hall has been with Klamath First Federal Savings and Loan Association
since 1988. He is Senior Vice President-Lending/Secretary responsible for all
lending activities of the Association. Mr. Hall brought over twelve years of
expertise in mortgage lending to Klamath First Federal. He has also served the
institution as a Loan Officer and Branch Manager.
Robert A. Tucker has been with Klamath First Federal Savings & Loan Association
since 1973. He is Senior Vice President-Operations/Treasurer responsible for all
operations of the Association. In his 23 years with Klamath First Federal, Mr.
Tucker has served as Loan Officer, Assistant Secretary, Branch Manager,
Assistant Vice President and Vice President.
Gerald V. Brown has been with Klamath First Federal since 1957. He began as a
teller, and, in his 39 years with Klamath First Federal, has progressed up
through the ranks to his current position as President and Chief Executive
Officer. Mr. Brown has served on the Board of Directors for Klamath First
Federal Savings & Loan Association since 1994.
Marshall J. Alexander has been with Klamath First Federal Savings & Loan
Association since 1986. He began as the Association's Controller, and became
Vice President and Chief Financial Officer in August of 1994. Mr. Alexander
brought over ten years experience in financial management to the Association. He
supervises the accounting department as well as manages the assets of the
Association.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Klamath First Bancorp, Inc. (the "Company"), an Oregon corporation, became
the unitary savings and loan holding company for Klamath First Federal Savings
and Loan Association (the "Association").
The Association is a traditional, community-oriented, savings and loan
association that focuses on customer service within its primary market area.
Accordingly, the Association is primarily engaged in attracting deposits from
the general public through its offices and using those and other available
sources of funds to originate permanent residential one- to four-family real
estate loans within its market area and to a lesser extent on commercial
property and multi-family dwellings.
The Company's profitability depends primarily on its net interest income,
which is the difference between interest and dividend income on interest-earning
assets, principally loans and investment securities, and interest expense on
interest-bearing deposits and borrowings. Because the Company is primarily
dependent on net interest income for its earnings, the focus of the Company's
planning is to devise and employ strategies that provide stable, positive
spreads between the yield on interest-earning assets and the cost of
interest-bearing liabilities in order to maximize the dollar amount of net
interest income. The Company's net earnings are dependent, to a lesser extent,
on the level of its non-interest income, such as service charges and other fees,
and its non-interest expense, such as employee compensation and benefits,
occupancy and equipment expense, deposit insurance premiums and miscellaneous
other expenses, as well as federal and state income tax expense.
The Association 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 Association is a member of the Federal Home Loan Bank system. The
Association conducts its business through seven office facilities, and one loan
production office, with the main office located in Klamath Falls, Oregon. The
Association considers its primary market area to be the counties of Klamath,
Deschutes and Jackson in Southern and Central Oregon.
9
<PAGE>
FEDERAL LEGISLATION
On September 30, 1996, the President signed into law an omnibus
appropriations act (the "Act") that includes several changes that affect the
Association. The signed Act (i) recapitalizes the SAIF through a one-time
special assessment; (ii) provides for the conditional merger of the Bank
Insurance Fund ("BIF") and the SAIF as of January 1, 1999 into one Deposit
Insurance Fund ("DIF"), at which time banks and thrifts would pay the same
deposit insurance premiums; and (iii) grants financial institutions limited
regulatory relief.
With respect to the assessment to recapitalize SAIF, the Act requires
SAIF-insured institutions to recapitalize the SAIF through a one-time special
assessment of 65.7 basis points on the SAIF deposit assessment base, payable no
later than November 29, 1996. Based on the Association's assessment base of
$376.4 million at March 31, 1995, the date used in the Act, the one-time
assessment is $2.5 million and was accrued during the quarter ended September
30, 1996.
In separate legislation enacted this past year, the reserve method of
accounting for thrift and bad debt reserves (including the percentage of taxable
income method) was repealed for tax years beginning after December 31, 1995. The
resulting change in accounting method triggers bad debt reserve recapture for
post-1987 reserves over a six-year period, thereby generating an additional tax
liability. At September 30, 1996, the Association's post-1987 reserves amounted
to $3.8 million. Pre-1988 reserves would only be subject to recapture if the
institution fails to qualify as a thrift. A special provision suspends recapture
of post-1987 reserves for up to two years if, during those years, the
institution satisfies a "residential loan requirement." Notwithstanding this
special provision, however, recapture would be required to begin no later than
the first taxable year beginning after December 31, 1997.
<TABLE>
(Graph in hardcopy report)
TOTAL ASSETS
(in thousands)
<CAPTION>
TOTAL
YEAR ASSETS
<S> <C>
1996 $671,969
1995 647,840
1994 448,939
1993 403,879
1992 366,864
</TABLE>
10
<PAGE>
CHANGE IN INDEPENDENT AUDITORS
On May 21, 1996, the Company's Board of Directors, at the recommendation of
the Audit Committee, terminated the engagement of KPMG Peat Marwick LLP and
engaged Deloitte & Touche LLP, as the Company's auditors.
The report of KPMG Peat Marwick LLP on the Company's financial statements
for either of the last two fiscal years preceding the date of termination did
not contain an adverse opinion or a disclaimer of opinion and was not qualified
or modified as to uncertainty, audit scope, or accounting principles, except
that the report of KPMG Peat Marwick LLP dated November 3, 1995 with respect to
the Company's financial statements at September 30, 1994 and 1995 and for the
three years in the period ended September 30, 1995 disclosed that the Company
changed its method of accounting for certain investments in debt and equity
securities and its method of accounting for income taxes in fiscal 1994 to adopt
the provisions of Statement of Financial Accounting Standard ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", and SFAS No.
109, "Accounting for Income Taxes", respectively.
During the Company's two most recent fiscal years and subsequent interim
periods preceding the date of the termination of the engagement of KPMG Peat
Marwick LLP, the company was not in disagreement with KPMG Peat Marwick LLP on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreement, if not resolved
to the satisfaction of KPMG Peat Marwick LLP, would have caused KPMG Peat
Marwick LLP to make reference to the subject matter of the disagreement in
connection with its report.
The Company had not consulted with Deloitte & Touche LLP during its two
most recent fiscal years nor during any subsequent interim period prior to its
engagement regarding the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on the Company's financial statements.
ASSET AND LIABILITY MANAGEMENT AND INTEREST RATE RISK
The ability to maximize net interest income is largely dependent upon the
achievement of a positive interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Interest rate sensitivity is a
measure of the difference between amounts of interest-earning assets and
interest-bearing liabilities which either reprice or mature within a given
period of time. The difference, or the interest rate repricing "gap", provides
an indication of the extent to which an institution's interest rate spread will
be affected by changes in interest rates. A gap is considered positive when the
amount of interest-rate sensitive assets exceeds the amount of interest-rate
sensitive liabilities, and is considered negative when the amount of
interest-rate sensitive liabilities exceeds the amount of interest-rate
sensitive assets. Generally, during a period of rising interest rates, a
negative gap within shorter maturities would result in a decrease in net
interest income. Conversely, during a period of falling interest rates, a
negative gap within shorter maturities would result in an increase in net
interest income.
At September 30, 1996, the Association's one-year cumulative gap was a
negative 25.88% of total assets compared to a negative 1.07% of total assets at
September 30, 1995 and a negative 30.05% at September 30, 1994. The September
30, 1995 one-year cumulative gap was unusually low and was a substantial
improvement for the Company compared to prior years. This was a result of the
subscription funds from the initial stock offering being invested in overnight
funds, or for gap, the less than one-year repricing period. The cumulative
one-year gap has remained improved.
11
<PAGE>
The Association continues to primarily originate fixed rate residential
loans for its portfolio. In an effort to reduce its exposure to interest rate
risk, the Association has: (i) purchased adjustable rate mortgage-backed
securities, (ii) placed greater emphasis on the origination of adjustable-rate
residential loans, and (iii) emphasized longer term fixed rate deposits. We will
continue to explore opportunities in these areas.
<TABLE>
The following table sets forth certain historical information relating to the Company's
interest-earning assets and interest-bearing liabilities that are estimated to mature or
are scheduled to reprice within one year.
<CAPTION>
At September 30,
-----------------------------------------------
1996 1995 1994
-------- -------- -------
(In thousands)
<S> <C> <C> <C>
Earning assets maturing or repricing
within one year ....................... $174,921 $253,115 $84,926
Interest-bearing liabilities
maturing or repricing within one
year .................................. 348,852 260,073 219,845
Deficiency of earning assets over
interest-bearing liabilities as a
percent of total assets ............... (25.88)% ( 1.07)% (30.05)%
Percent of assets to liabilities
maturing or repricing within one
year .................................. 50.14% 97.32% 38.63%
12
<PAGE>
INTEREST SENSITIVITY GAP ANALYSIS
The following table presents the difference between the Company's interest-earning assets and interest-bearing liabilities within
specified maturities at September 30, 1996. This table does not necessarily indicate the impact of general interest rate movements
on the Company's net interest income because the repricing of certain assets and liabilities is subject to competitive and other
limitations. As a result, certain assets and liabilities indicated as maturing or otherwise repricing within a stated period may in
fact mature or reprice at different times and at different volumes.
<CAPTION>
Greater Greater Greater Greater Greater Greater Greater
than than than than than than than
3 Months 3 Months 6 Months 1 to 3 3 to 5 5 to 10 10 to 20 20
ASSETS or Less to 6 Months to 1 Year Years Years Years Years Years TOTAL
-------- ----------- ----------- ---------- ----------- ----------- --------- ---------- -----------
PERMANENT 1-4 MORTGAGES (In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Adjustable Rate ........ $ 18,946 $ 4,788 $17,415 $ 1,109 $ - $ - $ - $ - $ 42,258
Fixed Rate ............. 198 146 540 308 790 10,912 79,686 317,552 410,132
OTHER MORTGAGE LOANS
Adjustable Rate ........ 2,673 466 5,604 249 - - - - 8,992
Fixed Rate ............. - - 96 106 1,982 2,157 10,062 74 14,477
Mortgage Backed and
Related Securities ..... 48,520 16,259 16,253 - - - - - 81,032
Non-Real Estate Loans .. 451 337 371 494 342 583 1,341 - 3,919
Investment Securities .. 33,077 2,000 6,781 4,914 37,592 16,507 - - 100,871
-------- ----------- ----------- ---------- ----------- ----------- --------- ---------- -----------
Total Rate Sensitive
Assets ................. $103,865 $23,996 $47,060 $ 7,180 $40,706 $30,159 $91,089 $317,626 $ 661,681
======== =========== =========== ========== =========== =========== ========= ========== ===========
LIABILITIES
Deposits
- Fixed Maturity .. $52,085 $50,307 $74,463 $67,092 $20,736 $24,505 $ - $ - $ 289,188
Deposits - Now ......... 1,821 1,821 3,642 8,499 8,499 - - - 24,282
Deposits
- Money Market .... 13,607 14,129 14,129 10,466 - - - - 52,331
Deposits - Passbook .... 2,528 2,528 5,057 11,799 11,799 - - - 33,711
Other Interest
Bearing Liabilities .... 98,735 14,000 - - - - - - 112,735
-------- ----------- ----------- ---------- ----------- ----------- --------- ---------- -----------
Total Rate Sensitive
Liabilities ............ $168,776 $82,785 $97,291 $97,856 $41,034 $24,505 $ - $ - $ 512,247
======== =========== =========== ========== =========== =========== ========= ========== ===========
Interest Rate
Sensitivity Gap ........ $(64,911) $ (58,789) $ (50,231) $(90,676) $ (328) $ 5,654 $ 91,089 $317,626 $ 149,434
Cumulative Interest
Rate Sensitivity Gap ... $(64,911) $(123,700) $(173,931) $264,607) $(264,935) $(259,281) $(168,192) $149,434
Sensitivity Gap to
Total Assets ........... (9.66%) (8.75%) (7.48%) (13.49%) (0.05%) 0.84% 13.56% 47.27%
Cumulative Interest
Rate Sensitivity Gap
To Total Assets ........ (9.66%) (18.41%) (25.88%) (39.38%) (39.43%) (38.59%) (25.03%) 22.24%
</TABLE>
13
<PAGE>
Certain shortcomings are inherent in gap analysis that may result in an
institution with a nominally negative gap having interest rate behavior
associated with a positive gap. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may react
in different degrees to changes in market interest rates.
LIQUIDITY AND CAPITAL RESOURCES
The Company generates cash through operating activities, primarily as a
result of net income. The adjustments to reconcile net income to net cash
provided by operations during the periods presented consisted primarily of the
provision for loan losses, depreciation and amortization expense, amortization
of deferred loan origination fees, increases or decreases in various escrow
accounts and increases or decreases in other assets and liabilities. The primary
investing activity of the Association is lending, which is funded with cash
provided from operations and financing activities, as well as proceeds from
amortization and prepayments on existing loans and mortgage backed and related
securities and proceeds from maturities of other investment securities. For
additional information about cash flows from operating, financing and investing
activities, see the Consolidated Statements of Cash Flows included in the
Consolidated Financial Statements.
The Association is required under applicable federal regulations to
maintain specified levels of "liquid" investments in qualifying types of U.S.
Government, federal agency and other investments having maturities of five years
or less. Current OTS regulations require that a savings association maintain
liquid assets of not less than 5.00% of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less, of
which short-term liquid assets must consist of not less than 1.00%. At September
30, 1996, the Association's regulatory liquidity, as measured for regulatory
purposes, was 10.47%.
Under capital standards mandated by the Financial Institution Reform,
Recovery, and Enforcement Act, the Association must have: (i) tangible capital
equal to 1.5% of adjusted total assets, (ii) core capital equal to 3.0% of
adjusted total assets, and (iii) total risk-based capital equal to 8.0% of
risk-weighted assets. At September 30, 1996, the Association was in compliance
with all regulatory capital requirements effective as of such date, with
tangible, core and risk-based capital of 19.2%, 19.2% and 42.4%, respectively.
(See Note 15 To Consolidated Financial Statements).
ASSET QUALITY
NON-PERFORMING ASSETS
At September 30, 1996, the ratio of non-performing assets (including
non-accrual loans, accruing loans greater than 90 days delinquent, real estate
owned and other repossessed assets) to total assets was .04%. The Association
intends to seek to maintain asset quality by continuing its focus on one-to-four
family lending. However, in its efforts to expand and diversify its loan
portfolio, the Association intends to evaluate other available lending options
such as credit cards, equity lines of credit, and other consumer loan products.
In doing this, the Association will evaluate the trade off associated with
planned loan growth and the greater credit risk associated with such forms of
lending.
14
<PAGE>
CLASSIFIED ASSETS
The Association has established a Classification of Assets Committee that
meets at least quarterly to approve and develop action plans to resolve the
problems associated with the assets, to review recommendations for new
classifications, and to make any changes in present classifications, as well as
making recommendations for the adequacy of reserves.
In accordance with regulatory requirements, the Association reviews and
classifies on a regular basis, and as appropriate, its assets as "special
mention", "substandard", "doubtful" and "loss". In 1996 the Classification of
Assets Committee changed its classification of asset categories to include the
more common classification category Special Mention. In the past the Association
included what normally was considered Special Mention in the Substandard
category. However, to conform to the more common practice, the assets previously
classified Substandard are now classified as either Special Mention or
Substandard per the category's definitions. All non-accrual loans and
non-performing assets are included in classified assets.
The following table sets forth at the dates indicated the amounts of classified
assets:
<TABLE>
<CAPTION>
At September 30,
----------------------
1996 1995 1994
---- ----- -----
(In thousands)
<S> <C> <C> <C>
Loss ................................... $ - $ - $ 33
Doubtful ............................... - - 59
Substandard ............................ 281 1,095 1,018
Special Mention ........................ 645 - -
---- ----- -----
$ 926 $1,095 $1,110
==== ===== =====
</TABLE>
ALLOWANCE FOR LOAN LOSSES
The Association has established a systematic methodology for 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. Provision for
loan losses are recorded based on the Association's evaluation of specific loans
in its portfolio, historical loan loss experience, the volume and type of
lending, general economic conditions and the existing level of the Association's
allowance for loan losses.
15
<PAGE>
<TABLE>
The following table sets forth at the dates indicated the loan loss allowance
and charge-offs:
<CAPTION>
At September 30,
------------------
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Loan loss allowance .................... $928 $808 $755
Charge-offs ............................ - 67 23
</TABLE>
<TABLE>
AVERAGE BALANCES, NET INTEREST INCOME AND YIELDS EARNED AND RATES PAID
The following table presents, for the periods indicated, information 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, resultant yields, interest rate spread, net interest margin and the ratio of average interest-earning assets to average
interest-bearing liabilities. Dividends received are included as interest income. The table does not reflect any effect of income
taxes. All average balances are based on month-end balances. Non-accrual loans are reflected as carrying a zero yield.
<CAPTION>
Years Ended September 30,
--------------------------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- ---------------------------- ----------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------- -------- ------ --------- --------- ------ -------- -------- ------
INTEREST-EARNING ASSETS
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable ....... $440,510 $ 35,262 8.00% $381,689 $ 30,117 7.89% $338,679 $ 27,511 8.12%
Mortgage backed and
related securities ..... 52,275 3,005 5.75% - - - - -
Investment securities .. 87,929 5,514 6.27% 52,097 3,869 7.43% 56,995 4,041 7.09%
Federal funds sold ..... 23,011 1,259 5.47% 13,005 722 5.55% 9,359 320 3.42%
Interest bearing
deposit ................ 4,882 262 5.37% 2,454 130 5.30% 3,394 183 5.39%
FHLB Stock ............. 4,552 348 7.64% 3,935 270 6.86% 3,969 353 8.89%
-------- -------- --------- --------- -------- --------
Total interest-earning
assets ................. 613,159 45,650 7.45% 453,180 35,108 7.75% 412,396 32,408 7.86%
Non-interest-earning
assets ................. 2,130 13,661 8,216
-------- -------- --------- --------- -------- --------
Total Assets ........... $615,289 $466,841 $420,612
======== ========= ========
16
<PAGE>
<CAPTION>
Years Ended September 30,
--------------------------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- ---------------------------- ----------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------- -------- ------ -------- --------- ------ -------- -------- ------
INTEREST-BEARING
LIABILITIES
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Tax and insurance
reserve ................ $ 4,490 $ 148 3.30% $ 4,533 $ 180 3.97% $ 4,489 $ 184 4.10%
Passbook accounts ...... 34,198 983 2.87% 44,345 1,235 2.78% 44,237 1,183 2.67%
Now accounts ........... 22,064 546 2.47% 22,242 542 2.44% 21,654 558 2.58%
Money market accounts .. 50,308 1,950 3.88% 55,891 2,206 3.95% 65,944 2,193 3.33%
Certificate accounts ... 282,446 16,772 5.94% 264,873 15,327 5.79% 234,772 12,436 5.30%
FHLB advances/Short
term borrowings ........ 51,517 2,888 5.60% 15,305 950 6.21% - -
-------- -------- --------- --------- -------- --------
Total interest-bearing
liabilities ............ 445,023 23,287 5.23% 407,189 20,440 5.02% 371,096 16,554 4.46%
Non-interest-bearing
liabilities ............ 4,892 6,279 1,132
-------- -------- --------- --------- -------- --------
Total liabilities ...... 449,915 413,468 372,228
-------- --------- --------
Shareholders' equity 165,374 53,373 48,384
-------- --------- --------
Total liabilities
and shareholders'
equity ................. $615,289 $466,841 $420,612
======== ========= ========
Net interest income .... $ 22,363 $ 14,668 $15,854
======== ========= ========
Interest rate spread ... 2.22% 2.73% 3.40%
====== ======= ======
Net interest margin .... 3.65% 3.24% 3.84%
====== ======= ======
Average interest-earning
assets to average
interest-bearing
liabilities ............ 137.78% 111.29% 111.13%
====== ======= ======
17
<PAGE>
RATE/VOLUME ANALYSIS
The following table sets forth the effects of changing rates and volumes on net interest income of the Company. Information is
provided with respect to (i) effects on interest income attributable to changes in volume (changes in average volume multiplied by
prior rate); (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior average volume);
and (iii) changes in rate/volume (change in rate multiplied by change in average volume).
<CAPTION>
For the Years Ended September 30, For the Years Ended September 30,
------------------------------------------------ ---------------------------------------------
1995 VS 1996 1995 VS 1994
------------------------------------------------ ---------------------------------------------
Increase (Decrease) Due To Increase (Decrease) Due To
Net Increase Net Increase
Rate Volume Rate/Vol (Decrease) Rate Volume Rate/Vol (Decrease)
-------- --------- --------- ------------ -------- -------- -------- -----------
(In thousands)
INTEREST EARNING ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans ..................... $ 420 $ 4,641 $ 85 $ 5,146 $ (788) $ 3,494 $ (100) $ 2,606
Mortgage backed and
related securities ........ - - 3,006 3,006 - - - -
Investment securities ..... (604) 2,662 (416) 1,642 191 (347) (16) (172)
Federal funds sold ........ (10) 555 (8) 537 199 125 78 402
Interest bearing
deposits .................. 2 129 2 133 (3) (51) 1 (53)
FHLB stock ................ 31 42 5 78 (81) (3) 1 (83)
-------- --------- --------- ------------ -------- -------- -------- -----------
Total Interest-Earning
Assets .................... $ (161) $ 8,029 $ 2,674 $ 10,542 $ (482) $ 3,218 $ (36) $ 2,700
======== ========= ========= ============ ======== ======== ======== ===========
INTEREST BEARING LIABILITIES
Tax and insurance reserves $ (30) $ (2) $ - $ (32) $ (6) $ 2 $ - $ (4)
Passbook accounts ......... 40 (282) (9) (251) 49 3 - 52
Now accounts .............. 7 (4) - 3 (30) 15 (1) (16)
Money market accounts ..... (39) (221) 4 (256) 409 (334) (62) 13
Certificate accounts ...... 397 1,017 32 1,446 1,150 1,594 147 2,891
FHLB advances/Short term
borrowings ................ (93) 2,249 (221) 1,935 - - 950 950
-------- --------- --------- ------------ -------- -------- -------- -----------
Total Interest-Bearing
Liabilities ............... $ 282 $ 2,757 $ (194) $ 2,845 $ 1,572 $ 1,280 $ 1,034 $ 3,886
======== ========= ========= ============ ======== ======== ======== ===========
Increase (Decrease) in Net
Interest Income ........... $ 7,697 $ (1,186)
============ ===========
</TABLE>
18
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1995 AND 1996.
GENERAL
Net earnings increased $500,000 or 8.9% from $5.6 million for the year
ended September 30, 1995, to $6.1 million for the year ended September 30, 1996.
This increase was attributable to several factors. Net interest income increased
$7.7 million or 52.4% from $14.7 million for the year ended September 30, 1995
to $22.4 million for the year ended September 30, 1996. This increase was
primarily attributable to an increase in total average interest-earning assets
from $453.2 at September 30, 1995 to $613.2 at September 30, 1996. The increase
in net interest income was partially offset by an increase in non-interest
expense of $6.2 million or 103.3% from $6.0 million for the year ended September
30, 1995 to $12.2 million for the year ended September 30, 1996. This increase
is primarily attributable to a $1.7 million increase in compensation expense,
due largely to the Employee Stock Option Plan ("ESOP"), the $2.5 million
BIF/SAIF assessment, and the $1.6 million loss on sale of an investment
subsequent to year end.
INTEREST INCOME
Additional interest income generated by the $146.4 million increase in
average interest earning assets contributed to an increase of $10.5 million or
29.9% from $35.1 million for the year ended September 30, 1995 to $45.6 million
for the year ended September 30, 1996. Of this increase, $5.1 million is
attributable to additional loan income due to an increase in loans receivable.
The increase in loans receivable was primarily a result of strong new purchase
loan originations exceeding loan refinancing which resulted in greater net loan
growth for 1996.
The remaining increase of $5.4 million was a result of investing the
proceeds of the stock sale and borrowings in 30 year adjustable rate agency
mortgage backed securities ("MBS"), fixed rate U.S. agency securities with
maturities of less than five years, fixed and adjustable corporate securities
and overnight funds. The average balance of investments increased by $101.2
million for the year ended September 30, 1996 compared with the comparable
period in 1995.
INTEREST EXPENSE
Interest expense increased $2.8 million due to increases in deposits and
borrowings. Interest expense on deposits increased $1.0 million or 5.2% from
$19.3 million for the year ended September 30, 1995 to $20.3 million for the
year ended September 30, 1996. Total deposits increased by $15.3 million from
September 30, 1995 to September 30, 1996, and the average interest paid on
interest-bearing deposits increased 22 basis points from 4.99% for the year
ended September 30, 1995 to 5.21% for the year ended September 30, 1996. This
increase was a result of the increased pricing competition in the Company's
market area. Interest expense on borrowings increased $1.9 million due to
increased borrowings of $84.9 million. The Company will continue to rely on
borrowings to fund loan growth as long as we can borrow at lower rates for
comparable maturities than required to attract similar structured deposits.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $120,000 with no recoveries or charge
offs during the year ended September 30, 1996 compared to $120,000 and charge
offs of $67,000 during the year ended September 30, 1995, for a net increase in
provision for the year of $120,000. At September 30, 1996, the allowance for
loan losses was equal to 356.9% of non-performing assets compared to 106.6% at
September 30, 1995. The increase in the coverage ratio at year end 1996 was the
result of a decrease in non-accrual loans which were foreclosed and sold during
the year.
19
<PAGE>
NON-INTEREST INCOME
Non-interest income increased $141,000 or 37.0% to $522,000 for the year
ended September 30, 1996 from $381,000 for the year ended September 30, 1995.
The increase was attributable to increases in fees and service charges and other
income, as a result of increased loan activity, ATM fees and service charges on
checking accounts.
NON-INTEREST EXPENSE
Non-interest expense increased $6.2 million, or 103.3%, for the year ended
September 30, 1996, from a total of $6.0 million for the prior year to $12.2
million for the year ended September 30, 1996. Of this increase, $2.5 million
was attributable to the BIF/SAIF special assessment, $1.6 million was
attributable to the loss on sale of an investment subsequent to year end, and
$1.7 million is attributable to an increase in compensation expense. Of the $1.7
million increase in compensation expense, $1.4 million is due to compensation
expense associated with the ESOP. The ratio of non-interest expense to average
total assets was 1.99% and 1.29% for the years ended September 30, 1996 and
1995, respectively.
INCOME TAXES
The provision for income taxes increased $1.0 million for the year ended
September 30, 1996 compared with the prior year, primarily as a result of higher
pretax earnings.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1994 AND 1995
GENERAL
Earnings decreased $580,000 or 9.4%, from $6.2 million for the year ended
September 30, 1994 to $5.6 million for the year ended September 30, 1995, before
the cumulative effect of a change in method of accounting for income taxes due
to the adoption of SFAS No. 109 on October 1, 1993. This decrease was mainly
attributable to a decrease in interest rate spread from 3.4% at September 30,
1994 to 2.7% at September 30, 1995 which resulted in net interest income
decreasing by $1.2 million, or 7.5%.
Net earnings increased $286,000, or 5.4%, from $5.3 million for the year
ended September 30, 1994 to $5.6 million for the year ended September 30, 1995
in the absence of the prior year's $866,000 cumulative effect of the change in
method of accounting for income taxes. The additional reasons for the changes in
net earnings are discussed more specifically below.
INTEREST INCOME
The additional interest income generated by the $43.0 million increase in
average balance of loans receivable in 1995 over the prior year slightly offset
the 23 basis point decrease in loan yield from the prior year to produce a $2.6
million increase in interest income from loans. The increase in loans receivable
was primarily a result of strong loan demand and less loan refinancing which
resulted in greater net loan growth for 1995 despite less loan production. The
decrease in loan yield was primarily a result of the refinancing to lower
yielding loans over the previous year while rates were still declining and
initiating an adjustable rate program this year emphasizing rates below market
rates (teaser rates) to generate adjustable rate loan volume.
20
<PAGE>
The average balance of investment securities decreased by $4.9 million in
1995 compared with 1994. A 34 basis point increase in the yield on investment
securities from the prior year did not offset the decrease in volume, resulting
in a $172,000 decrease in interest income from investment securities. Interest
income on federal funds sold increased $401,845 in 1995 from 1994 as a result of
investing the proceeds of the stock sale during the subscription period.
Investment securities include an investment of $12.6 million in a U.S. Federal
securities mutual bond fund classified as available for sale. A decrease in
interest rates during 1995 resulted in increasing the carrying value of the U.S.
Federal securities mutual bond fund at September 30, 1995 by $382,000.
INTEREST EXPENSE
Savings deposit interest expense increased $2.9 million for the year ended
September 30, 1995 as compared to the comparable period in 1994. The increase
was attributable to a $20.8 million increase in the average balance of deposits
during this period, which can be primarily attributed to the increase in savings
account activity during the stock sale subscription period. The weighted average
rate paid on deposits increased 51 basis points from 4.46% during the year ended
September 30, 1994 to 4.97% during the year ended September 30, 1995. Average
FHLB advances outstanding during this period were $15.3 million with a weighted
average rate of 6.21%.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $120,000, recoveries were zero, and
charge offs were $67,000 during the year ended September 30, 1995 compared to
$150,000 and charge offs of $23,000 during the year ended September 30, 1994,
for a net increase in provision for the year of $53,000. At September 30, 1995,
the allowance for loan losses was equal to 106.60% of non-performing assets
compared to 311.98% at September 30, 1994. The decrease in the coverage ratio at
year end 1995 was the result of foreclosure proceedings initiated against two
properties, which totalled $445,343 of the total non-performing assets of
$758,000. No losses are expected on these loans as the loans are well secured
with an estimated value of $745,000, or an excess loan to value of $299,657.
NON-INTEREST INCOME
Non-interest income increased $29,000, or 8.2%, to $381,000 for the year
ended September 30, 1995 from $352,000 for the year ended September 30, 1994.
The increase was mainly attributable to increased income from the sale of real
estate owned.
NON-INTEREST EXPENSE
Non-interest expense decreased $30,000, or 0.5%, for the year ended
September 30, 1995, from a total of $6.03 million for the prior year to $6.00
million for the year ended September 30, 1995. Of this decrease, $200,000 was
attributable to a decrease in compensation and benefit expense in 1995,
primarily reflecting certain one-time increased bonus payments to employees and
increased fees paid to directors in the prior year. This was partially offset by
an increase in SAIF insurance premiums, primarily as a result of growth in
deposits, costs incident to greater loan volume and increased occupancy and
personnel expenses as a result of the new Klamath Falls, Oregon branch. The
ratio of non-interest expense to average total assets was 1.43% and 1.29% for
the years ended September 30, 1994 and 1995, respectively
21
<PAGE>
INCOME TAXES
Effective October 1, 1993, the Association adopted SFAS No. 109 which
requires a change from the deferred method of accounting for income taxes of
Accounting Principles Board ("APB") No. 11 to the asset and liability method of
accounting for income taxes. The implementation of SFAS No. 109 decreased net
earnings by $866,000 for the year ended September 30, 1994.
The provision for income taxes decreased $517,000 for the year ended
September 30, 1995 compared with the prior year, primarily as a result of lower
pretax earnings.
<TABLE>
(Graph in hardcopy report)
TOTAL NET EARNINGS
(in thousands)
<CAPTION>
NET
YEAR EARNINGS
<S> <C>
1996 $6,110
1995 5,574
1994 5,288
1993 7,157
1992 4,745
</TABLE>
22
<PAGE>
COMMON STOCK INFORMATION
Since October 4, 1995, Klamath First Bancorp's common stock has traded on
the National Association of Security Dealers Automated Quotations ("NASDAQ")
National Market System under the symbol "KFBI". As of October 11, 1996, there
were approximately 4,400 shareholders of record or through nominee or street
name accounts with brokers.
The following represents reported high and low trading price and dividends
declared each respective quarter of fiscal 1996. Information as to market prices
for the Company's common stock is not presented for fiscal year 1995 because the
shares were not yet issued and outstanding.
<TABLE>
<CAPTION>
DIVIDEND
FISCAL 1996 HIGH LOW DECLARED
------ ------- ----------
<S> <C> <C> <C>
First Quarter ........... 13 3/4 12 1/16 $ 0.050
Second Quarter .......... 13 3/4 12 1/2 $ 0.065
Third Quarter ........... 14 5/8 13 $ 0.065
Fourth Quarter .......... 14 3/4 13 3/8 $ 0.070
</TABLE>
Any dividend payments by the Company are subject to the sole discretion of
the Board of Directors and depend primarily on the ability of the Association to
pay dividends to the Company at least annually. Under Federal regulations, the
dollar amount of dividends a federal savings association may pay depends on the
Association's capital surplus position and recent net income. Generally, if an
association satisfies its regulatory capital requirements, it may make dividend
payments up to the limits prescribed in the OTS regulations. However,
institutions that have converted to the stock form of ownership may not declare
or pay a dividend on, or repurchase any of, its common stock if the effect
thereof would cause the regulatory capital of the institution to be reduced
below the amount required for the liquidation account which was established in
accordance with OTS regulations and the Association's Plan of Conversion. In
addition, earnings of the Association appropriated to bad debt reserves and
deducted for federal income tax purposes are not available for payment of cash
dividends without payment of taxes at the then current tax rate by the
Association on the amount removed from the reserves for such distributions. The
Association does not contemplate any distributions that would limit the
Association's bad debt deduction or create federal tax liabilities.
23
<PAGE>
INDEPENDENT AUDITORS' REPORTS
Board of Directors
Klamath First Bancorp, Inc.
Klamath Falls, Oregon
We have audited the accompanying consolidated balance sheet of Klamath
First Bancorp, Inc. and subsidiary (the "Company") as of September 30, 1996, and
the related consolidated statement of earnings, shareholders' equity, and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Klamath First Bancorp, Inc. and
subsidiary as of September 30, 1996, and the results of their operations and
their cash flows for the year then ended, in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
- --------------------------
Deloitte & Touche LLP
Portland, Oregon
November 25, 1996
24
<PAGE>
Board of Directors
Klamath First Bancorp, Inc.
Klamath Falls, Oregon
We have audited the accompanying consolidated balance sheet of Klamath
First Bancorp, Inc. and subsidiaries as of September 30, 1995, and the related
consolidated statements of earnings, stockholders' equity and cash flows for the
two years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Klamath
First Bancorp, Inc. and subsidiaries as of September 30, 1995 and the results of
their operations and their cash flows for the two years then ended in conformity
with generally accepted accounting principles.
As discussed in note 1 to the consolidated financial statements, the
Company changed its method of accounting for certain investments in debt and
equity securities and its method of accounting for income taxes in fiscal 1994
to adopt the provisions of Financial Accounting Standards Board's Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities", and SFAS No. 109, "Accounting for
Income Taxes", respectively.
/s/ KPMG Peat Marwick LLP
- --------------------------
KPMG Peat Marwick LLP
Portland, Oregon
November 3, 1995
25
<PAGE>
<TABLE>
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 30,
------------------------------
ASSETS 1996 1995
------------- -------------
<S> <C> <C>
Cash and due from banks ............................ $ 6,841,554 $ 4,033,723
Interest bearing deposits .......................... - 994,157
Federal funds sold ................................. 9,338,079 170,966,390
------------- -------------
Total cash and cash equivalents .................... 16,179,633 175,994,270
Investment securities available for sale,
at fair value (amortized cost:
$77,071,211 and $13,723,044) ....................... 75,986,611 12,605,654
Investment securities held to maturity,
at amortized cost (fair value:
$9,860,165 and $42,178,800) ........................ 9,827,193 42,209,497
Mortgage backed and related securities
available for sale, at fair value
(amortized cost: $74,249,350) ...................... 74,109,321 -
Mortgage backed and related securities
held to maturity, at amortized cost
(fair value: $6,736,007) ........................... 6,783,001 -
Loans receivable, net .............................. 473,555,988 403,543,725
Real estate owned .................................. 69,483 24,384
Premises and equipment, net ........................ 4,964,262 5,231,903
Stock in Federal Home Loan Bank of
Seattle, at cost ................................... 4,773,800 4,425,900
Accrued interest receivable, net ................... 5,037,285 3,431,594
Other assets ....................................... 682,814 372,654
------------- -------------
Total assets ....................................... $ 671,969,391 $ 647,839,581
============= =============
26
<PAGE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<CAPTION>
September 30,
------------------------------
LIABILITIES 1996 1995
------------- -------------
<S> <C> <C>
Savings deposits ................................... $ 399,673,180 $ 384,379,531
Stock over subscription ............................ - 65,685,300
Accrued interest on savings deposits ............... 712,408 1,028,766
Advances from borrowers for taxes
and insurance ...................................... 7,831,127 7,966,422
Advances from Federal Home Loan Bank
of Seattle ......................................... 90,000,000 20,000,000
Short term borrowings .............................. 14,904,400 -
Accrued interest on borrowings ..................... 323,163 -
Pension liability .................................. 668,088 616,035
Deferred federal and state income taxes ............ 735,596 896,876
Other liabilities .................................. 3,710,455 2,581,586
------------- -------------
Total liabilities .................................. 518,558,417 483,154,516
------------- -------------
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value,
500,000 shares authorized; none issued - -
Common stock, $.01 par value,
35,000,000 shares authorized,
1996 - 11,612,470
issued, 10,242,360 outstanding;
1995 - issued and outstanding 12,233,125 shares .... 116,124 122,331
Additional paid-in capital ......................... 110,762,678 119,230,653
Retained earnings - substantially restricted ....... 59,082,479 55,811,362
Unearned shares issued to ESOP ..................... (8,807,850) (9,786,500)
Unearned shares issued to MRDP ..................... (6,694,470) -
Net unrealized loss on securities available for sale (1,047,987) (692,781)
------------- -------------
Total shareholders' equity ......................... 153,410,974 164,685,065
------------- -------------
Total liabilities and shareholders' equity ......... $ 671,969,391 $ 647,839,581
============= =============
See notes to consolidated financial statements.
</TABLE>
27
<PAGE>
<TABLE>
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF EARNINGS
<CAPTION>
Years ended September 30,
---------------------------------------
INTEREST INCOME 1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Loans receivable ....................... $35,261,655 $30,116,911 $27,511,193
Mortgage backed and related securities . 3,004,823 - -
Investment securities .................. 5,862,520 4,138,524 4,393,812
Federal funds sold ..................... 1,258,614 721,940 320,095
Interest bearing deposits .............. 261,811 129,716 182,516
----------- ----------- -----------
Total interest income .................. 45,649,423 35,107,091 32,407,616
----------- ----------- -----------
INTEREST EXPENSE
Savings deposits ....................... 20,251,039 19,310,599 16,370,065
FHLB advances .......................... 2,689,790 949,059 -
Other .................................. 345,698 181,515 184,336
----------- ----------- -----------
Total interest expense ................. 23,362,896 20,441,173 16,554,401
----------- ----------- -----------
Net interest income .................... 23,286,527 14,665,918 15,853,215
Provision for loan losses .............. 120,000 120,000 150,000
----------- ----------- -----------
Net interest income after provision
for loan losses ........................ 22,242,896 14,545,918 15,703,215
----------- ----------- -----------
NON-INTEREST INCOME
Fees and service charges ............... 260,320 185,053 143,829
Gain on sale of real estate owned ...... 22,233 84,022 49,725
Other income ........................... 239,105 112,090 158,544
----------- ----------- -----------
Total non-interest income .............. 521,658 381,165 352,098
----------- ----------- -----------
NON-INTEREST EXPENSE
Compensation, employee benefits and
related expense ........................ 4,476,052 2,753,726 2,953,508
Occupancy expense ...................... 971,431 917,364 821,365
Data processing expense ................ 343,319 318,819 282,064
Insurance premium expense .............. 907,825 877,366 818,311
Special SAIF assessment ................ 2,472,954 - -
Loss on sale of real estate owned ...... 6,271 - -
Realized loss on U.S. Federal
securities mutual bond fund ............ 1,642,625 - -
Other expense .......................... 1,421,753 1,136,780 1,159,210
----------- ----------- -----------
Total non-interest expense ............. 12,242,230 6,004,055 6,034,458
----------- ----------- -----------
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Years ended September 30,
---------------------------------------
INTEREST INCOME 1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Earnings before income taxes and
cumulative effect of a change
in accounting principle ................ 10,522,324 8,923,028 10,020,855
Provision for income tax ............... 4,412,527 3,348,925 3,866,001
----------- ----------- -----------
Net earnings before cumulative
effect of a change in accounting
principle .............................. 6,109,797 5,574,103 6,154,854
Cumulative effect at October 1, 1993
of a change in accounting
for income taxes ....................... - - 866,518
----------- ----------- -----------
Net earnings ........................... $ 6,109,797 $ 5,574,103 $ 5,288,336
=========== =========== ===========
Earnings per common share (based on
weighted average shares outstanding) ... $ .56 N/A N/A
Weighted average number of shares
outstanding ............................ 11,004,939 N/A N/A
See notes to consolidated financial statements.
</TABLE>
29
<PAGE>
<TABLE>
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<CAPTION>
Additional Unearned Unrealized Unearned Total
Common Stock Common Stock paid-in Retained ESOP shares gain(loss) on shares issued shareholders'
Shares Amount capital earnings at cost securities to MRDP equity
------------ ------------ ------------- ------------ ------------ ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
October 1, 1993 ..... $ - $ - $ - $44,948,923 $ - $ - $ - $ 44,948,923
Unrealized loss on
securities available
for sale ............ - - - - - (929,615) - (929,615)
Net earnings ........ - - - 5,288,336 - - - 5,288,336
------------ ------------ ------------- ------------ ------------ ------------- -------------- ---------------
Balance at
September 30, 1994 .. - - - 50,237,259 - (929,615) - 49,307,644
Issuance of common
stock ............... 12,233,125 122,331 119,230,653 - (9,786,500) - - 109,566,484
Unrealized gain on
securities avail-
able for sale ....... - - - - - 236,834 - 236,834
Net earnings ........ - - - 5,574,103 - - - 5,574,103
------------ ------------ ------------- ------------ ------------ ------------- -------------- ---------------
Balance at
September 30, 1995 .. 12,233,125 122,331 119,230,653 55,811,362 (9,786,500) (692,781) - 164,685,065
Cash dividends ...... - - - (2,838,680) - - - (2,838,680)
Earned ESOP shares .. - - 417,652 - 978,650 - - 1,396,302
Unrealized loss on
investments available
for sale ............ - - - - - (355,206) - (355,206)
Unearned shares issued
to MRDP Trust ....... - - - - - - (6,694,470) (6,694,470)
Stock retirement ..... (620,655) (6,207) (8,885,627) - - - - (8,891,834)
Net earnings ......... - - - 6,109,797 - - - 6,109,797
------------ ------------ ------------ ------------ ------------ ------------- -------------- ---------------
Balance at September
30, 1996 .............$11,612,470 $116,124 $110,762,678 $59,082,479 ($8,807,850) ($1,047,987) ($6,694,47) $153,410,974
============ ============ ============ ============ ============ ============= ============== ===============
See notes to consolidated financial statements.
30
<PAGE>
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Years ended September 30,
-----------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES 1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Net earnings .......................................... $ 6,109,797 $ 5,574,103 $ 5,288,336
------------- ------------- -------------
ADJUSTMENTS TO RECONCILE NET EARNINGS
TO NET CASH PROVIDED BY OPERATING
ACTIVITIES
Depreciation ......................................... 403,074 360,069 317,589
Provision for loan losses ............................. 120,000 120,000 150,000
Compensation expense related to ESOP benefit .......... 1,396,302 - -
Net amortization of premiums paid
on investment and mortgage backed
and related securities ................................ 210,599 204,444 246,771
Realized loss on sale of U.S. Federal
securities mutual bond fund ........................... 1,642,625 - -
Increase in deferred loan fees, net of amortization ... 703,055 490,802 914,139
Accretion of discounts on purchased loans ............. (14,683) (7,239) (26,359)
Net gain on sale of real estate owned and premises and
equipment ............................................. (5,209) (33,544) (58,811)
FHLB stock dividends .................................. (347,900) (269,600) (352,600)
CHANGES IN ASSETS AND LIABILITIES
Accrued interest receivable ........................... (1,605,691) (160,744) (166,118)
Other assets .......................................... (310,160) 188,504 (23,691)
Accrued interest on savings deposits .................. (316,358) 630,370 (34,495)
Accrued interest on borrowings ........................ 323,163 - -
Pension liabilities ................................... 52,053 58,020 -
Deferred federal and state income taxes ............... (409,246) 746,966 532,517
Other liabilities ..................................... 315,996 (185,361) 478,936
------------- ------------- -------------
Total adjustments ..................................... 2,157,620 2,142,687 1,977,878
------------- ------------- -------------
Net cash provided by operating activities ............. 8,267,417 7,716,790 7,266,214
------------- ------------- -------------
31
<PAGE>
<CAPTION>
Years ended September 30,
-----------------------------------------------
1996 1995 1994
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
<S> <C> <C> <C>
Proceeds from maturity of investment securities held to
maturity .............................................. 69,552,392 7,006,177 -
Principal repayments received on mortgage backed and
related securities .................................... 12,083,872 - -
Principal repayments received on loans ................ 64,529,602 40,398,099 79,225,557
Loan originations ..................................... (135,566,747) (84,714,297) (130,024,113)
Purchase of investment securities held to maturity .... (42,971,553) (4,855,539) (537,478)
Purchase of investment securities available for sale .. (60,969,781) - -
Purchase of mortgage backed and related securities held
to maturity ........................................... (7,423,182) - -
Purchase of mortgage backed and related securities
available for sale .................................... (84,123,187) - -
Proceeds from sale of real estate owned and premises
and equipment ......................................... 177,595 359,033 406,417
Purchases of premises and equipment ................... (136,406) (1,167,757) (553,602)
------------- ------------- -------------
Net cash used in investing activities ................. (184,847,395) (42,974,284) (51,483,219)
------------- ------------- -------------
32
<PAGE>
<CAPTION>
Years ended September 30,
-----------------------------------------------
1996 1995 1994
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
<S> <C> <C> <C>
Increase/(decrease) in savings deposits,
net of withdrawal ..................................... $ 15,293,649 $ (5,370,987) $ 39,798,168
Proceeds from FHLB advances ........................... 105,000,000 20,000,000 -
Repayments of FHLB advances ........................... (35,000,000) - -
Proceeds from short term borrowings ................... 21,938,300 - -
Repayments of short term borrowings ................... (7,033,900) - -
Proceeds from issuance of common stock ................ - 121,268,633 -
Proceeds from stock over subscription ................. - 65,685,300 -
Repayment from stock over subscription ................ (65,685,300) - -
Funding provided to ESOP for purchase of common
stock ................................................. - (9,786,500) -
Funding provided to MRDP Trust for purchase of common
stock ................................................. (6,694,470) - -
Stock retirement ...................................... (8,891,834) - -
Advances from borrowers for tax and insurance ......... (135,297) (101,700) 496,161
Dividends paid ........................................ (2,025,807) - -
------------- ------------- -------------
Net cash provided by financing activities ............. 16,765,341 191,694,746 40,294,329
------------- ------------- -------------
Net (decrease) increase in cash and cash equivalents .. (159,814,637) 156,437,252 (3,922,676)
Cash and cash equivalents at beginning of year ........ 175,994,270 19,557,018 23,479,694
------------- ------------- -------------
Cash and cash equivalents at end of year .............. $ 16,179,633 $ 175,994,270 $ 19,557,018
============= ============= ============
SUPPLEMENTAL SCHEDULE OF INTEREST AND INCOME TAXES PAID
Interest paid ......................................... $ 23,483,212 $ 19,810,803 $ 16,589,906
Income taxes paid ..................................... 4,555,053 2,570,000 4,020,000
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
Transfer of investment securities from held to
maturity to available for sale at estimated fair
market value .......................................... $ 27,171,074 $- $-
Transfer of mortgage backed and related securities
from held to maturity to available for sale at
estimated fair value................................... 1,717,890 - -
Net unrealized gain (loss) on securities available
for sale .............................................. (355,206) 236,834 (929,615)
Dividends declared and accrued in other liabilities ... 812,873 - -
See notes to consolidated financial statements.
</TABLE>
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1)Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Klamath First Bancorp, Inc. (the Company) and its wholly-owned subsidiary
Klamath First Federal Savings and Loan Association (the Association). The
Company became the holding company of the Association upon conversion of the
Association from a federally-chartered mutual savings and loan association to a
federally-chartered capital stock savings and loan association (Note 11). This
transaction has been accounted for in a manner similar to a "pooling of
interests" in accordance with APB Opinion No. 16, "Business Combinations."
The Company's consolidated financial statements also include the assets and
liabilities of First Service Corporation of Southern Oregon ("FSC") which was
wholly-owned by the Association. As of July 31, 1996, FSC was officially
liquidated into the Association. All significant intercompany balances and
transactions have been eliminated in consolidation for September 30, 1995.
Nature of Operations
The Company and subsidiary provide banking and limited nonbanking services
to its customers who are located principally in the Klamath, Jackson, and
Deschutes counties of Southern and Central Oregon. These services primarily
include attracting deposits from the general public and using such funds,
together with other borrowings, to invest in various real estate loans,
investment securities, and mortgage backed and related securities.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make assumptions that
result in estimates that affect the reported amounts of certain assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of related revenue and expense
during the reporting period. Actual results could differ from those estimates.
Investment Securities
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". Under this pronouncement, securities held to maturity are stated at
cost only if the Company has the positive intent and the ability to hold the
securities to maturity. Securities available for sale, including mutual funds,
and trading securities are stated at fair value. Realized gains and losses on
the sale of securities, recognized on a specific identification basis, and
valuation adjustments of trading account securities are included in non-interest
income or expense. Net unrealized gains or losses on securities available for
sale are included as a component of shareholders' equity, net of tax, until
realized. Unrealized losses on securities resulting from an other than temporary
decline in the fair value are recognized in earnings when incurred.
During December 1995, the Association reclassified $27,171,074 of
investment securities and $1,717,890 of mortgage backed and related securities
from held to maturity to available for sale at fair values, with unrealized
gains and losses of $200,508 and $100,421, respectively. The reclassification
was made in accordance with the Financial Accounting Standards Board ("FASB")
special report, "A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities", that permitted a one-time
reassessment of the appropriateness of the held to maturity classification,
without affecting the classification of the remaining securities held to
maturity.
Stock Investments
The Company held stock in the Federal Home Loan Bank ("FHLB") and U.S.
Federal securities mutual bond fund at September 30, 1996 and 1995. These
investments are carried at the lower of cost or fair value.
34
<PAGE>
Provision for Loan Losses
Allowances for losses on specific problem real estate 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 general provisions for loan losses
based on evaluating known and inherent risks in the loan portfolio, including
management's continuing analysis of the factors underlying the quality of the
loan portfolio. These factors include changes in the size and composition of the
loan portfolio, actual loan loss experience, current and anticipated economic
conditions, detailed analysis of individual loans for which full collectibility
may not be assured, and determination of the existence and realizable value of
the collateral and guarantees securing the loans. The reserve is an estimate
based upon factors and trends identified by management at the time financial
statements are prepared. The ultimate recovery of loans is susceptible to future
market factors beyond the Company's control, which may result in losses or
recoveries differing significantly from those provided in the consolidated
financial statements. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Company's valuation
allowances on loans and real estate owned.
Delinquent interest on loans past due 90 days or more is charged off or an
allowance established by a charge to income equal to all interest previously
accrued and interest is subsequently recognized only to the extent cash payments
are received until delinquent interest is paid in full and, in management's
judgment, the borrower's ability to make periodic interest and principal
payments is back to normal, in which case the loan is returned to accrual
status.
Effective October 1, 1995, the Company adopted 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 credit 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.
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, the current fair value
of the collateral, reduced by costs to sell, is used. 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 unamortized premium or
discount), an impairment is recognized by creating or adjusting an allocation of
the allowance for credit losses. SFAS No. 114, as amended, does not change the
timing of charge-offs of loans to reflect the amount ultimately expected to be
collected. At September 30, 1996, the Company had no loans deemed to be impaired
as defined by SFAS 114.
Depreciation of Premises and Equipment
Premises and equipment are depreciated on the straight-line basis over the
estimated useful lives of the various classes of assets from their respective
dates of acquisition.
Taxes on Income
The Company has adopted SFAS No. 109, "Accounting for Income Taxes", which
caused a cumulative effect of $866,518 in the September 30, 1994 consolidated
statement of earnings. Under the asset and liability method of SFAS No. 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
Loan Origination Fees
Loan origination fees and direct costs are deferred and recognized over the
contractual lives of the related loans as an adjustment of the loans' yield
using the level-yield method.
35
<PAGE>
Unearned Discounts
Loan discounts are accreted to income over the average lives of the related
loans using the level-yield interest method, adjusted for estimated prepayments.
Real Estate Owned
Property acquired by foreclosure or deed in lieu of foreclosure is carried
at the lower of estimated fair value, less estimated costs to sell, or the
balance of the loan on the property at date of acquisition, not to exceed net
realizable value. Costs, excluding interest, relating to the improvement of
property are capitalized, whereas those relating to holding the property are
charged to expense.
Pension Cost
It is Company policy to fund retirement costs accrued. All such costs are
computed on the basis of accepted actuarial methods.
Earnings Per Common Share
Earnings per common share is computed based on weighted average number of
shares of common stock and common stock equivalents assumed to be outstanding
during the period. Earnings per common share were not calculated for September
30, 1995, as no shares were outstanding during the year. (Note 11).
Cash Equivalents
Cash equivalents are considered to be cash held as demand deposits at
various banks and regulatory agencies. In the consolidated financial statements,
"cash and due from banks", "interest bearing cash deposits" and "Federal funds
sold" are considered to be cash equivalents.
(2) Cash and Due from Banks
The Company is required to maintain an average reserve balance with the
Federal Reserve Bank, or maintain such reserve balance in the form of cash. The
amount of this required reserve balance was approximately $475,000 and $469,000
at September 30, 1996 and 1995, respectively, and was met by holding cash and
maintaining an average balance with the Federal Reserve Bank in excess of this
amount.
36
<PAGE>
(3)Investments and Mortgage Backed and Related Securities
Amortized cost and approximate fair value of securities available for sale
and held to maturity are summarized by type and maturity as follows:
<TABLE>
<CAPTION>
September 30, 1996
----------------------------------------------
Cost Basis or Gross Unrealized Fair
Amortized Cost Gains Losses Value
-------------- ------ ---------- -----------
Investment securities available for sale
<S> <C> <C> <C> <C>
U.S. Federal securities
mutual bond fund ........................... $12,080,418 $ - $ - $12,080,418
U.S. GOVERNMENT OBLIGATIONS
Maturing after one year through five years . 43,720,065 - 875,092 42,844,973
Maturing after five years through ten years 15,996,758 - 217,858 15,778,900
STATE AND MUNICIPAL OBLIGATIONS
Maturing after one year through five years . 250,000 820 - 250,820
CORPORATE OBLIGATIONS
Maturing after one year through five years . 5,023,970 7,530 - 5,031,500
-------------- ------ ---------- -----------
$77,071,211 $8,350 $1,092,950 $75,986,611
============== ====== ========== ===========
On October 31, 1996 the Company sold its interest in the U.S. Federal securities
mutual bond in the amount of $12,080,418 resulting in a realized loss of $1,642,625. The
realized loss has been appropriately reflected in the consolidated financial statements
as of September 30, 1996.
<CAPTION>
September 30, 1996
--------------------------------------------
Amortized Gross Unrealized Fair
Cost Gains Losses Value
---------- -------- ---------- ---------
Investment securities held
to maturity:
STATE AND MUNICIPAL
OBLIGATIONS
<S> <C> <C> <C> <C>
Maturing within one year .................... $ 181,351 $ - $ 523 $ 180,828
Maturing after one year through five years .. 535,680 - 5,893 529,787
Maturing after five years through ten years . 510,388 28,262 - 538,650
CORPORATE OBLIGATIONS
Maturing within one year .................... 6,599,774 11,926 - 6,611,700
Maturing after one year through five years... 2,000,000 - 800 1,999,200
---------- -------- ---------- ---------
$9,827,193 $ 40,188 $ 7,216 $9,860,165
========== ========= ======= ==========
37
<PAGE>
<CAPTION>
September 30, 1995
--------------------------------------------------------
Cost Basis Or Gross Unrealized Fair
Amortized Cost Gains Losses Value
-------------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Investment securities available for sale
U.S. Federal securities mutual bond fund ... $13,723,044 $- $ 1,117,390 $12,605,654
============== =========== =========== ===========
Investment securities held to maturity
U.S. GOVERNMENT OBLIGATIONS
Maturing after one year through five years . $13,079,782 $- $ 143,532 $12,936,250
Maturing after five years through ten years 13,996,443 62,597 - 14,059,040
Maturing after ten years ................... 1,885,225 - 7,282 1,877,943
STATE AND MUNICIPAL OBLIGATIONS
Maturing after five years through ten years 511,874 40,493 - 552,367
CORPORATE OBLIGATIONS
Maturing within one year ................... 6,032,223 21,097 - 6,053,320
Maturing after one year through five years . 6,703,950 - 4,070 6,699,880
-------------- ----------- ----------- ------------
$42,209,497 $ 124,187 $ 154,884 $42,178,800
============== =========== =========== ===========
<CAPTION>
September 30, 1996
--------------------------------------------------------
Gross Unrealized Fair
Amortized Cost Gains Losses Value
-------------- ---------- ----------- ------------
MORTGAGE BACKED AND RELATED SECURITIES
AVAILABLE FOR SALE
<S> <C> <C> <C> <C>
FNMA maturing after ten years .............. $15,905,450 $ 68,004 $ 14,292 $15,959,162
FHLMC maturing after ten years ............. 39,204,476 61,911 87,527 39,178,860
SBA maturing after ten years ............... 19,139,424 1,902 170,027 18,971,299
-------------- ---------- ----------- ------------
$74,249,350 $ 131,817 $ 271,846 $74,109,321
============== =========== =========== ===========
38
<PAGE>
<CAPTION>
September 30, 1996
--------------------------------------------------------
Gross Unrealized Fair
Amortized Cost Gains Losses Value
-------------- ---------- ----------- ------------
MORTGAGE BACKED AND RELATED SECURITIES
HELD TO MATURITY
<S> <C> <C> <C> <C>
GNMA maturing after ten years .............. $ 6,783,001 $- $ 46,994 $ 6,736,007
============== ====== =========== ============
</TABLE>
Expected maturities of mortgage backed and related securities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
The Company pledged investment securities of $10,146,000 and $8,990,000 to
secure public deposits at September 30, 1996 and 1995, respectively.
The Company has also pledged securities of $15,177,000 to secure short-term
borrowings of reverse repurchase agreements at September 30, 1996. (Note 9)
39
<PAGE>
4) Loans Receivable
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
September 30,
---------------------------
1996 1995
------------ ------------
REAL ESTATE LOANS
<S> <C> <C>
Permanent residential 1-4 family ............ $447,004,234 $381,683,453
Multi-family residential .................... 6,555,483 7,432,704
Construction ................................ 14,276,158 9,806,875
Commercial .................................. 15,644,797 13,984,331
Land ........................................ 1,151,573 1,072,019
------------ ------------
Total real estate loans ..................... 484,632,245 413,979,382
------------ ------------
NON-REAL ESTATE LOANS
Savings account ............................. 1,640,294 1,965,531
Home improvement ............................ 1,976,728 -
Other ....................................... 302,397 366,828
------------ ------------
Total non-real estate loans ................. 3,919,419 2,332,359
------------ ------------
Total loans ................................. 488,551,664 416,311,741
LESS
Undisbursed portion of loans ................ 8,622,476 7,203,187
Deferred loan fees .......................... 5,445,380 4,757,009
Allowance for loan losses ................... 927,820 807,820
------------ ------------
$473,555,988 $403,543,725
============ ============
</TABLE>
The weighted average interest rate on loans at September 30, 1996 and
1995 was 7.74% and 7.73%, respectively.
The Company serviced loans owned by others of $1,240,003, $1,692,000,
and $1,981,000 at September 30, 1996, 1995 and 1994, respectively.
40
<PAGE>
<TABLE>
<CAPTION>
Activity in allowance for loan losses is summarized as follows:
Years ended September 30,
----------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Balance, beginning of year .......... $ 807,820 $ 754,803 $ 627,550
Charge-offs ......................... - (66,983) (22,747)
Additions ........................... 120,000 120,000 150,000
--------- --------- ---------
Balance, end of year ................ $ 927,820 $ 807,820 $ 754,803
========= ========= =========
</TABLE>
5) Premises and Equipment
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
September 30,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Land ........................................ $ 1,056,269 $ 1,056,269
Office buildings and construction in progress 5,384,136 5,377,006
Furniture, fixtures and equipment ........... 1,874,784 1,746,527
Automobiles ................................. 36,226 36,226
Less accumulated depreciation ............... (3,387,153) (2,984,125)
----------- -----------
$ 4,964,262 $ 5,231,903
=========== ===========
</TABLE>
(6) Accrued Interest Receivable
The following is a summary of accrued interest receivable:
<TABLE>
<CAPTION>
September 30,
--------------------------
1996 1995
------------ -----------
<S> <C> <C>
Loans receivable ............................... $3,232,731 $2,774,153
Mortgage backed and related securities ......... 765,187 -
Investment securities .......................... 1,039,367 657,441
------------ -----------
$5,037,285 $3,431,594
============ ===========
</TABLE>
41
<PAGE>
(7) Savings Deposits
The following is a summary of savings deposits:
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------
1996 1995
Amount Percent Amount Percent
-------------- ------- ------------ -------
<S> <C> <C> <C> <C>
Non-interest checking ..................... $ 161,283 0.0% $ - -
-------------- ------- ------------ -------
NOW accounts, 2.53% and 2.50%, respectively 24,282,019 6.1 22,037,105 5.7
-------------- ------- ------------ -------
Passbook accounts, 3.05% to 3.30% and 3.00%
to 3.25%, respectively .................... 33,711,189 8.4 37,237,212 9.7
-------------- ------- ------------ -------
Money market deposit accounts, variable
rates of 2.53% to 4.55% and 2.50% to 4.64%,
respectively .............................. 52,330,731 13.1 48,011,632 12.5
-------------- ------- ------------ -------
CERTIFICATE ACCOUNTS
Less than 4% .............................. 1,633,300 0.4 1,943,080 0.5
4.00% to 5.99% ............................ 220,873,790 55.3 165,112,903 43.0
6.00% to 7.99% ............................ 44,574,877 11.2 83,008,401 21.6
8.00% to 9.99% ............................ 22,105,991 5.5 27,029,198 7.0
-------------- ------- ------------ -------
289,187,958 72.4 277,093,582 72.1
-------------- ------- ------------ -------
$ 399,673,180 100.0% $384,379,531 100.0%
============== ======= ============ =======
42
<PAGE>
Following is a summary of interest expense on deposits:
<CAPTION>
Years ended September 30,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
NOW accounts ........................... $ 546,383 $ 542,169 $ 557,968
Passbook accounts ...................... 982,814 1,235,170 1,183,115
Money market deposit accounts .......... 1,950,419 2,206,038 2,193,356
Certificate accounts ................... 16,835,250 15,395,663 12,489,201
----------- ----------- -----------
20,314,866 19,379,040 16,423,640
Less early withdrawal penalties ........ 63,827 68,441 53,575
----------- ----------- -----------
Net interest on deposits ............... $20,251,039 $19,310,599 $16,370,065
=========== =========== ===========
</TABLE>
The weighted average interest rate of savings deposits was 5.26% and 4.96% at
September 30, 1996 and 1995, respectively.
At September 30, 1996, deposit maturities were as follows:
<TABLE>
<CAPTION>
<S> <C>
Within 1 year ............................................ $212,876,848
1 year to 3 years ........................................ 74,462,772
3 years to 5 years ....................................... 67,092,484
Thereafter ............................................... 45,241,076
-----------
$399,673,180
============
Deposits in excess of $100,000 aggregated $64,936,532 and $67,387,146 at
September 30, 1996 and 1995, respectively. Deposits in excess of $100,000 are
not insured by the Federal Deposit Insurance Corporation ("FDIC").
</TABLE>
43
<PAGE>
(8) Advances from FHLB
As a member of the FHLB, the Association maintains a credit line that is a
percentage of their total regulatory assets, subject to collateralization
requirements. At September 30, 1996, the credit line was 30 percent of total
assets of the Association. Advances are collateralized in aggregate, as provided
for in the Advances, Security and Deposit Agreements with the FHLB, by certain
mortgages or deeds of trust, securities of the U.S. Government and agencies
thereof and cash on deposit with the FHLB. At September 30, 1996 the minimum
book value of eligible collateral pledged for these borrowings was $103,061,850.
<TABLE>
Scheduled maturites of advances from the FHLB were as follows:
<CAPTION>
September 30,
-------------------------------------------------------------------------
1996 1995
Range of Range of
Amount Interest Rates Amount Interest Rates
----------- -------------- -------------- --------------
FHLB ADVANCES
<S> <C> <C> <C> <C>
Due within one year ......................... $65,000,000 5.40%-5.64% $20,000,000 5.94%
After three but within four years ........... 25,000,000 5.53%-5.74% - -
----------- --------------
$90,000,000 $20,000,000
=========== ==============
Financial data pertaining to the weighted average cost, the level of FHLB advances and the related interest expense
were as follows:
<CAPTION>
Year ended September 30,
----------------------------------
1996 1995 1994
----------- ----------- ----
<S> <C> <C> <C>
Weighted average interest rate at end of year ............................. 5.50% 5.94% -
Weighted daily average interest rate during the year ...................... 5.60% 6.21% -
Daily average FHLB advances ............................................... $47,986,339 $15,304,932 $-
Maximum FHLB advances at any month end .................................... 90,000,000 22,000,000 -
Interest expense during the year .......................................... 2,689,790 949,059 -
</TABLE>
44
<PAGE>
(9) Short Term Borrowings
Securities sold under agreements to repurchase in 1996 consisted of the
following:
Reverse repurchase agreements $14,904,400
The Company sold, under agreements to repurchase, specific securities of
the U.S. government and its agencies and other approved investments to a
broker-dealer. The securities underlying the agreement with the broker-dealer
were delivered to the dealer who arranged the transaction. Securities delivered
to broker-dealers may be loaned out in the ordinary course of operations.
All of the reverse repurchase agreements were due within 30 days and were
renewed subsequent to year end with additional principal outstanding of
approximately $53,000 and an interest rate of 5.65%.
<TABLE>
Financial data pertaining to the weighted average cost, the level of securities sold under
agreements to repurchase and the related interest expense were as follows:
<CAPTION>
Year ended September 30,
---------------------------
1996 1995 1994
------------ ------ ------
<S> <C> <C> <C>
Weighted average interest rate at end of year ......................... 5.65% - -
Weighted daily average interest rate during the year .................. 5.55% - -
Daily average of securities sold under agreements to repurchase ....... $ 3,530,795 $ - $ -
Maximum securities sold under agreements to repurchase at any month end 14,904,000 - -
Interest expense during the year ...................................... 196,130 - -
The Company has an unused line of credit totaling $15.0 million with U.S. National Bank of Oregon at
September 30, 1996 and 1995.
45
<PAGE>
(10) Taxes on Income
<CAPTION>
The following is a summary of income tax expense:
Years ended September 30,
----------------------------------------
1996 1995 1994
----------- ----------- -----------
CURRENT TAXES
<S> <C> <C> <C>
Federal ................................... $ 4,384,720 $ 2,154,240 $ 3,302,357
State ..................................... 437,053 447,719 677,646
----------- ----------- -----------
Current tax provision ..................... 4,821,773 2,601,959 3,980,003
----------- ----------- -----------
DEFERRED TAXES
Federal ................................... (372,005) 618,488 (94,385)
State ..................................... (37,241) 128,478 (19,617)
----------- ----------- -----------
Deferred tax provision .................... (409,246) 746,966 (114,002)
----------- ----------- -----------
Provision for income taxes ................ $ 4,412,527 $ 3,348,925 $ 3,866,001
=========== =========== ===========
An analysis of income tax expense, setting forth the reasons for the variation
from the "expected" Federal corporate income tax rate of 34.0% and the effective
rate provided, is as follows:
<CAPTION>
Years ended September 30,
---------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Federal "expected" corporate income tax rate ........ 34.0% 34.0% 34.0%
State income taxes, net of Federal income tax benefit 2.2 4.4 4.4
Nondeductible ESOP compensation expense ............. 4.0 - -
Other ............................................... 1.7 (.9) .2
------ ------ ------
41.9% 37.5% 38.6%
====== ====== ======
</TABLE>
46
<PAGE>
Deferred income taxes for the years ended September 30, 1996 and 1995
reflect the impact of "temporary differences" between amounts of assets and
liabilities for financial reporting purposes and such amounts as measured by tax
laws.
<TABLE>
The tax effects of temporary differences which give rise to a significant
portion of deferred tax assets and deferred tax liabilities are as follows:
<CAPTION>
September 30,
----------------------
1996 1995
--------- ----------
DEFERRED TAX ASSETS
<S> <C> <C>
Deferred loan fees ................................ $ 525,560 $1,157,492
Allowance for losses on loans ..................... 369,768 324,634
Unrealized loss on securities available for sale .. 176,643 424,608
Pension liability ................................. 263,893 237,173
SAIF special assessment ........................... 976,319 -
Unearned ESOP shares .............................. 129,076 -
Other ............................................. - 3,811
--------- ----------
Total gross deferred tax assets ................... 2,441,259 2,147,718
--------- ----------
DEFERRED TAX LIABILITIES
FHLB stock dividends .............................. 1,256,630 1,090,832
Tax bad debt reserve in excess of base-year reserve 1,472,206 1,472,206
Other ............................................. 448,019 481,556
--------- ----------
Total gross deferred tax liabilities .............. 3,176,855 3,044,594
--------- ----------
Net deferred tax liability ........................ $ 735,596 $ 896,876
========== ==========
</TABLE>
The company has created a valuation allowance arising from the realized
loss on the U.S. Federal securities mutual bond fund of $648,837 offsetting a
deferred tax asset as of September 30, 1996 because management believes that it
is more likely than not that the tax asset will not be realized by available
carrybacks, offsetting future taxable income from reversing taxable temporary
differences, and anticipated future investment gains. There was no valuation
allowance at September 30, 1995.
The Company has qualified under provisions of the Internal Revenue Code to
compute federal income taxes after deductions of additions to the bad debt
reserves. At September 30, 1996, the Company had a taxable temporary difference
of approximately $10,486,000 that arose before 1988 (base-year amount). In
accordance with SFAS No. 109, a deferred tax liability of approximately
$3,824,000 has not been recognized for the temporary difference. Management does
not expect this temporary difference to reverse in the foreseeable future.
47
<PAGE>
(11) Shareholders' Equity
The Company was incorporated under Oregon law in June 1995 to acquire and
hold all of the outstanding capital stock of the Association, as part of the
Association's conversion from a federally-chartered mutual savings and loan
association. In connection with the conversion, which was consummated on October
4, 1995, the Company issued and sold 12,233,125 shares of common stock (par
value of $.01 per share) at a price of $10.00 per share for net total proceeds
of $119,352,984 after conversion expenses of $2,978,266. The Company retained
one-half of the net proceeds and used the remaining net proceeds to purchase the
newly issued capital stock of the Association. The net conversion proceeds of
$119,352,984 and over subscription proceeds of $65,685,300 were held in
withdrawable accounts at the Association at September 30, 1995. Since, among
other things, all required regulatory approvals to consummate the conversion
were received prior to September 30, 1995, the conversion has been accounted for
as being effective as of September 30, 1995, with the net conversion offering
proceeds of $119,352,984 shown on the statement of shareholders' equity as
proceeds from the sale of common stock and stock oversubscription proceeds of
$65,685,300 recorded as a liability. The oversubscription proceeds were
refunded, with accrued interest, on October 4, 1995.
Subsequent to the ratification of the adoption of the 1996 Management
Recognition and Development Plan ("MRDP") at the annual meeting on April 9,
1996, 489,325 shares of stock were purchased in the open market at a cost of
$6.7 million, to be held in trust for future allocation to management in
accordance with the terms of the MRDP.
During September 1996, the Board of Directors approved and the Company
engaged in a stock repurchase program and retirement of 620,655 shares or 5.07%
of the common stock.
The Association may not declare or pay cash dividends if the effect thereof
would reduce its regulatory capital below the amount required for the
liquidation account discussed below.
At the time of conversion, the Association established a liquidation
account in an amount equal to its retained earnings as of June 30, 1995, the
date of the latest statement of financial condition 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 Association after conversion. In the event of a complete liquidation of
the Association (and only in such an event), eligible depositors who have
continued to maintain accounts will be entitled to receive a distribution from
the liquidation account before any liquidation may be made with respect to
common stock.
The Company's Articles of Incorporation authorize the issuance of 500,000
shares of preferred stock, having a par value of $.01 per share, in series and
to fix and state the powers, designations, preferences and relative rights of
the shares of such series, and the qualifications, limitations and restrictions
thereof.
(12) Employee Benefit Plans
Employee Retirement Plan
The Company is a member of a multiple-employer trusteed pension plan
("Plan") covering all employees with one year of service and pays direct
pensions to certain retired employees. Pension expense of $198,000, $185,000 and
$120,000 was incurred during the years ended September 30, 1996, 1995 and 1994,
respectively. Separate actuarial valuations, including computed value of vested
benefits, are not made with respect to each contributing employer, nor are the
plan assets so segregated by the trustee. The Plan had an over-funded
accumulated benefit of approximately $385 million at June 30, 1996.
Director Deferred Compensation Plan
The Company also has an unfunded supplemental benefits plan to provide
members of the Board of Directors with supplemental retirement benefits.
Supplemental benefits are based on monthly fees approved by the Compensation
Committee of the Board. Pension costs recognized for the years ended September
30, 1996, 1995 and 1994 were $71,053, $70,020 and $0 respectively. At September
30, 1996 and 1995, the projected benefit obligation was $668,088 and $616,035,
respectively.
48
<PAGE>
Management Recognition and Development Plan ("MRDP")
In February 1996, the Board of Directors approved a MRDP plan for the
benefit of officers and non-employee directors which authorizes the grant of
489,325 common stock shares. The MRDP was approved by the Company's shareholders
on April 9, 1996. Those eligible to receive benefits under the MRDP plan are
determined by members of a committee appointed by the Board of Directors of the
Company. MRDP awards vest over a five-year period in equal installments
beginning on April 9, 1997 (the first anniversary of the effective date of the
MRDP) or upon the participant's death or disability. The Company will recognize
compensation expense in the amount of the fair value of the common stock in
accordance with the vesting schedule during the years in which the shares are
payable. There were no shares vested under the plan at September 30, 1996.
Accordingly, the Company recognized no compensation expense for the MRDP for the
year ended September 30, 1996.
Stock Option Plan
In February 1996, the Board of Directors adopted a Stock Option Plan
("Stock Plan") for the benefit of certain employees and directors. The Stock
Plan was approved by the Company's shareholders on April 9, 1996. The maximum
number of common shares which may be issued under the Stock Plan is 1,223,313
shares with a maximum term of ten years for each option from the date of grant.
The initial awards were granted on April 9, 1996 at the fair value of the common
stock on that date ($13.125). All initial awards vest in equal installments over
a five year period from the grant date and expire during April 2006. Unvested
options become immediately exercisable in the event of death or disability. No
options had vested or were exercised as of the year ended September 30, 1996.
(13) Employee Stock Ownership Plan ("ESOP")
As part of the conversion discussed in note 11, an ESOP was established for
all employees that are age 21 or older and have completed two years of service
with the Company. The ESOP borrowed $9,786,500 from the Company and used the
funds to purchase 978,650 shares of the common stock of the Company issued in
the conversion. The loan will be repaid principally from the Company's
discretionary contributions to the ESOP over a period of ten years. The loan had
an outstanding balance of $8,807,850 and $9,786,500 at September 30, 1996 and
1995, respectively, and an interest rate of 8.75%. The loan obligation of the
ESOP is considered unearned compensation and, as such, recorded as a reduction
of the Company's shareholders' equity. Both the loan obligation and the unearned
compensation are reduced by the amount of loan repayments made by the ESOP.
Shares purchased with the loan proceeds are held in a suspense account for
allocation among participants as the loan is repaid. Contributions to the ESOP
and shares released from the suspense account are allocated among participants
on the basis of compensation in the year of allocation. Benefits are fully
vested at all times under the ESOP. Forfeitures are reallocated to remaining
plan participants and may reduce the Company's contributions. Benefits may be
payable upon retirement, death, disability, or separation from service. Since
the Company's annual contributions are discretionary, benefits payable under the
ESOP cannot be estimated. Compensation expense is recognized to the extent of
the fair value of shares committed to be released. The Company recorded
compensation expense under the ESOP of $1.4 million and 97,865 shares were
allocated among the participants in 1996.
49
<PAGE>
<TABLE>
(14) Fair Value of Financial Instruments
Financial instruments have been construed to generally mean cash or a contract that implies an obligation to
deliver cash or another financial instrument to another entity. The estimated fair values of the Company's
financial instruments are as follows:
<CAPTION>
September 30, 1996 September 30, 1995
---------------------------------------------------------
Carrying Fair Carrying Fair
amount value amount value
------------ --------- ----------- -----------
FINANCIAL ASSETS
<S> <C> <C> <C> <C>
Cash and due from banks ................................ $ 6,841,554 $ 6,841,554 $ 5,027,880 $ 5,027,880
Federal funds sold ..................................... 9,338,079 9,338,079 170,966,390 170,966,390
Investment securities available for sale ............... 75,986,611 75,986,611 12,605,654 12,605,654
Investment securities held to maturity ................. 9,827,193 9,860,165 42,209,497 42,178,800
Mortgage backed and related securities available for
sale ................................................... 74,109,321 74,109,321 - -
Mortgage backed and related securities held to maturity 6,783,001 6,736,007 - -
Loans receivable, net .................................. 473,555,988 467,682,131 403,543,725 408,824,175
FHLB stock ............................................. 4,773,800 4,773,800 4,425,900 4,425,900
FINANCIAL LIABILITIES
Savings deposits ....................................... 399,673,180 402,769,799 384,379,531 389,681,552
FHLB advances .......................................... 90,000,000 89,974,165 20,000,000 19,997,055
Short term borrowings .................................. 14,904,400 14,904,400 - -
OFF BALANCE SHEET FINANCIAL INSTRUMENTS
Mortgage loan commitments .............................. 10,840,110 10,840,110 7,937,473 7,937,473
Financial assets and financial liabilities other than securities are not traded in active markets. The above
estimates of fair value require subjective judgments and are approximate. Changes in the following methodologies
and assumptions could significantly affect the estimates. These estimates may also vary significantly from the
amounts that could be realized in actual transactions.
Financial Assets
The estimated fair value approximates the book value of cash, interest bearing cash accounts, and federal
funds sold. 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 book value.
</TABLE>
50
<PAGE>
Financial Liabilities
The estimated fair value of savings deposits, FHLB advances, and short term
borrowings are estimated by discounting the future cash flows using current
rates at which similar deposits, FHLB advances and short term borrowings would
be made.
Off-Balance Sheet Financial Instruments
Off-balance sheet financial instruments are limited to commitments to
originate mortgage loans. Fair value considers the difference between current
levels of interest rates and committed rates. See note 16 to the consolidated
financial statements.
The Company did not hold any derivative financial instruments in its
investment portfolio at or during the years ended September 30, 1996, 1995, or
1994.
(15) Regulatory Capital Requirements
The Company is not subject to any regulatory capital requirements. The
Association however, is subject to various regulatory capital requirements
administered by the Office of Thrift Supervision ("OTS"). 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 Association's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Association must meet specific capital guidelines that involve quantitative
measures of the Association's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Association'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 Association to maintain minimum amounts and ratios of total and Tier
I capital to risk-weighted assets, of Tier I capital to total assets, and
tangible capital to tangible assets (set forth in the table below). Management
believes that the Association meets all capital adequacy requirements to which
it is subject as of September 30, 1996.
As of September 30, 1996, the most recent notification from the OTS
categorized the Association as "well capitalized" under the regulatory framework
for prompt corrective action. To be categorized as "well capitalized", the
Association must maintain minimum total risk-based, Tier I risk-based, and Tier
I leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the institution's
category.
51
<PAGE>
<TABLE>
The Association's actual and required minimum capital ratios are presented in the following table:
<CAPTION>
As of September 30, 1996
-----------------------------------------------------------------------------------
To Be Categorized as
"Well Capitalized"
For Capital Under Prompt Corrective
Adequacy Purposes Action Provision
-------------------- ----------------------
Actual Amount Actual Ratio Amount Ratio Amount Ratio
------------- ------------ ------------ ----- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Total Capital: (to risk
weighted assets).............. $121,036,745 42.4% $ 22,832,496 8.0% $ 28,540,620 10.0%
Tier I Capital: (to risk
weighted assets).............. 120,108,925 42.1% N/A N/A 17,124,372 6.0%
Tier I Capital: (to total
assets)....................... 120,108,925 19.2% 18,746,701 3.0% 31,244,502 5.0%
Tangible Capital: (to
tangible assets).............. 120,108,925 19.2% 9,373,351 1.5% N/A N/A
<CAPTION>
As of September 30, 1995
-----------------------------------------------------------------------------------
To Be Categorized as
"Well Capitalized"
For Capital Under Prompt Corrective
Adequacy Purposes Action Provision
-------------------- ----------------------
Actual Amount Actual Ratio Amount Ratio Amount Ratio
------------- ------------ ------------ ----- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Total Capital: (to risk
weighted assets) ............. $116,279,395 36.9% $ 25,227,600 8.0% $ 31,534,500 10.0%
Tier I Capital: (to risk
weighted assets) ............. 115,471,575 36.6% N/A N/A 18,920,700 6.0%
Tier I Capital: (to total
assets) ...................... 115,471,575 18.6% 18,647,569 3.0% 31,079,281 5.0%
Tangible Capital: (to
tangible assets) ............. 115,471,575 18.6% 9,323,784 1.5% N/A N/A
</TABLE>
<TABLE>
(Graph in Hardcopy Report)
SHARHOLDERS'S EQUITY
(in thousands)
<CAPTION>
TOTAL
YEAR EQUITY
<S> <C>
1996 $153,411
1995 164,685
1994 49,308
1993 44,949
1992 37,792
</TABLE>
52
<PAGE>
The following table is a reconciliation of the Association's capital, calculated
according to generally accepted accounting principles (GAAP), to regulatory
tangible and risked-based capital:
<TABLE>
<CAPTION>
September 30, 1996 SHAREHOLDERS' EQUITY
------------
<S> <C> <C> <C>
Association's Equity ....... $119,820,720 1996 153,411
Unrealized securities loss . 288,205 1995 164,685
------------
Tangible capital ........... $120,108,925 1994 49,308
General valuation allowances 927,820 1993 44,949
------------
Total capital .............. $121,036,745 1992 37,792
============
</TABLE>
On August 23, 1993, the OTS issued a regulation which would add an interest
rate risk component to the risk-based capital standards (the "final IRR rule").
Institutions with a greater than normal interest rate risk exposure will be
required to take a deduction from the total capital available to meet their
risk-based capital requirement. That deduction is equal to one-half of the
difference between the institution's actual measured exposure and the normal
level of exposure as defined by the regulation. Although no such deduction was
required as a result of the Association's most recent regulatory examination, a
deduction may be required as a result of future examinations. The final IRR rule
has been postponed and it is not practicable to determine when it will become
effective.
At periodic intervals, the OTS and the Federal Deposit Insurance
Corporation ("FDIC") routinely examine the Association as part of their legally
prescribed oversight of the thrift industry. Based on these examinations, the
regulators can direct that the Association'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
Association's 1996 financial statements. In view of the uncertain regulatory
environment in which the Association now operates, the extent, if any, to which
a forthcoming regulatory examination may ultimately result in adjustments to the
1996 financial statements cannot presently be determined.
On September 30, 1996, the United States Congress passed and the President
signed into law the omnibus appropriations package, including the Bank Insurance
Fund/Savings Association Insurance Fund ("BIF/SAIF") and Regulatory Burden
Relief packages. Included in this legislation is a requirement for SAIF-insured
institutions to recapitalize the SAIF insurance fund through a one-time special
assessment to be paid within 60 days of the first of the month following
enactment. The FDIC is charged with the ultimate responsibility of determining
the specific assessment amount which is 65.7 basis points of the March 31, 1995
SAIF deposit assessment base. As the Association is insured by the SAIF, this
assessment resulted in a pre-tax charge to non-interest expense for the quarter
ending September 30, 1996 of $2.5 million based on the March 31, 1995 SAIF
deposit assessment base of $376.4 million.
53
<PAGE>
(16) Financial Instruments with Off-Balance Sheet Risk and Concentrations of
Credit Risk
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments generally include commitments to originate mortgage
loans. Those instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the balance sheet. The
Company's maximum exposure to credit loss in the event of nonperformance by the
borrower is represented by the contractual amount of those instruments. The
Company uses the same credit policies in making commitments as it does for
on-balance-sheet instruments. Commitments to extend credit are conditional 60
day agreements to lend to a customer subject to the Company's usual terms and
conditions.
At September 30, 1996, loan commitments amounted to approximately
$10,840,110, comprised of a $146,000 variable rate loan at 6.00%, and
$10,694,110 in fixed rate loans ranging from 7.00% to 10.875%. At September 30,
1995, loan commitments amounted to $7,967,473, comprised of a $31,000 variable
rate loan at 6.38%, and $7,936,473 in fixed rate loans ranging from 7.00% to
9.75%.
The Company originates residential real estate loans and, to a lesser
extent, commercial real estate and consumer loans. Over 95% of the mortgage
loans in the Association's portfolio are secured by properties located in
Klamath, Jackson and Deschutes counties in Southern and Central Oregon.
54
<PAGE>
(17) Parent Company Financial Information
Condensed financial information as of September 30, 1996 and 1995, for Klamath
First Bancorp, Inc. is presented and should be read in conjunction with the
consolidated financial statements and the notes thereto:
<TABLE>
<CAPTION>
At September 30,
------------------------------
Statement of Financial Condition 1996 1995
------------- -------------
ASSETS
<S> <C> <C>
Cash and cash equivalents ................ $ 4,819,110 $ 117,720,840
Investment and mortgage backed securities 43,726,942 -
Investment in wholly-owned subsidiary .... 119,820,720 114,778,794
Other assets ............................. 1,038,320 -
------------- -------------
Total assets ............................. $ 169,405,092 $ 232,499,634
============= =============
LIABILITIES
Short-term borrowings .................... $ 14,904,400 $-
Stock over subscription .................. - 65,685,300
Accrued conversion costs ................. - 1,915,649
Other liabilities ........................ 1,089,718 213,620
------------- -------------
Total liabilities ........................ 15,994,118 67,814,569
------------- -------------
SHAREHOLDERS' EQUITY
Common stock ............................. 116,124 122,331
Additional paid-in capital ............... 110,762,677 119,230,653
Retained earnings ........................ 58,034,493 55,118,581
Unearned ESOP shares at cost ............. (8,807,850) (9,786,500)
Unearned MRDP shares at cost ............. (6,694,470) -
------------- -------------
Total shareholder's equity ............... 153,410,974 164,685,065
------------- -------------
Total liabilities and shareholder's equity $ 169,405,092 $ 232,499,634
============= =============
<CAPTION>
For the year ended September 30,
--------------------------------
Statement of Earnings 1996 1995
---------- ----------
<S> <C> <C>
Equity in undistributed income of subsidiary ...... $4,045,267 $ --
Total interest income ............................. 3,115,776 229,899
Total interest expense ............................ 196,130 203,491
Non-interest income ............................... 857,843 --
Non-interest expense .............................. 484,778 --
---------- ----------
Earnings before income taxes ...................... 7,337,978 26,408
Provision for income tax .......................... 1,228,181 10,129
---------- ----------
Net earnings ...................................... $6,109,797 $ 16,279
========== ==========
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
For the Years Ended September 30,
-------------------------------
Statement of Cash Flows 1996 1995
-------------- ------------
<S> <C> <C>
Net cash flows from operating activities ................... $ (552,188) $ 229,899
-------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in subsidiary ................................... (176,157) (59,676,492)
Maturity of investment and mortgage backed securities ...... 27,734,452 -
Purchase of investment and mortgage backed securities ...... (72,168,427) -
-------------- ------------
Net cash flows from investing activities ................... (44,610,132) (59,676,492)
-------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock ......................... - 121,268,633
Proceeds from stock over subscription ...................... - 65,685,300
Repayments from stock over subscription .................... (65,685,300) -
Proceeds from ESOP loan repayment .......................... 653,601 -
Loan to ESOP ............................................... - (9,786,500)
Proceeds from short-term borrowings ........................ 21,938,300 -
Repayments of short-term borrowings ........................ (7,033,900) -
Purchase of stock for MRDP Trust ........................... (6,694,470) -
Stock retirement ........................................... (8,891,834) -
Dividends paid ............................................. (2,025,807) -
-------------- ------------
Net cash flows from financing activities ................... (67,739,410) 177,167,433
-------------- ------------
Net increase/(decrease) in cash and cash equivalents ....... (112,901,730) 117,720,840
Cash and cash equivalents beginning of year ................ 117,720,840 -
-------------- ------------
Cash and cash equivalents end of year ...................... $ 4,819,110 $117,720,840
============= ============
</TABLE>
56
<PAGE>
(18) Recently Issued Accounting Standards
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation", which applies to all transactions in which an entity acquires
goods or services by issuing equity instruments or by incurring liabilities
where the payment amounts are based on the entity's common stock price, except
for employee stock ownership plans (ESOP's). The SFAS covers transactions with
employees and non-employees and is applicable to both public and non-public
entities.
SFAS No. 123 requires that, except for transactions with employees that are
within the scope of APB Opinion No. 25, all transactions in which goods or
services are the consideration received for the issuance of equity instruments
are to be accounted for based on the fair value of the consideration received or
the fair value of the equity instrument issued, whichever is more reliably
measurable. However, it also allows an entity to continue to measure
compensation costs for those plans using the intrinsic value based method of
accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Entities electing to follow the accounting methods in Opinion No. 25
must make pro forma disclosures of net income and, if presented, earnings per
share, as if the fair value method of accounting defined in the statement had
been applied.
SFAS No. 123 will apply to the Company for the year ending September 30,
1997. The Company has not yet determined which method it will adopt.
In June 1996, FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". SFAS No. 125
is effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after December 31, 1996, and is to be applied
prospectively.
SFAS No. 125 provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. The standards
are based on consistent application of a financial-components approach that
focuses on control. Under the approach, after a transfer of financial assets, an
entity recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. SFAS No. 125
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings.
The Company plans to implement SFAS No. 125 on January 1, 1997 which
complies with the required date of implementation. The Company does not expect
implementation to have a material impact on the Company's financial position or
results of operations.
57
<PAGE>
(19) Selected Quarterly Financial Data
(unaudited)
<TABLE>
<CAPTION>
1996
------------------------------------------
December March June September
-------- ------- -------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Total interest income ............. $ 10,919 $ 11,138 $ 11,444 $ 12,149
Total interest expense ............ 5,567 5,626 5,781 6,314
-------- ------- -------- ----------
Net interest income ............... 5,352 5,512 5,663 5,835
Provision for loan losses ......... 30 30 30 30
-------- ------- -------- ----------
Net interest income after provision 5,322 5,482 5,633 5,805
Non-interest income ............... 79 98 95 249
Non-interest expense .............. 1,840 1,928 1,879 6,595
-------- ------- -------- ----------
Earnings/(loss) before income taxes 3,561 3,652 3,849 (541)
Provision for income tax .......... 1,320 1,245 1,438 409
-------- ------- -------- ----------
Net earnings/(loss) ............... $ 2,241 $ 2,407 $ 2,411 $ (950)
======== ======== ======== =========
Net earnings/(loss) per share ..... $ .20 $ .21 $ .22 $ (.09)
======== ======== ======== =========
In the fourth quarter of 1996, the Company recorded a $2.5 million expense for
the special SAIF assessment and a realized loss on U.S. Federal securities
mutual bond fund of $1.6 million.
<CAPTION>
1995
--------------------------------------
December March June September
-------- ------ ------ ---------
(In thousands)
<S> <C> <C> <C> <C>
Total interest income ................ $8,541 $8,603 $8,945 $9,018
Total interest expense ............... 4,663 4,849 5,208 5,721
-------- ------ ------ ---------
Net interest income .................. 3,878 3,754 3,737 3,297
Provision for loan losses ............ - 60 30 30
-------- ------ ------ ---------
Net interest income after provision .. 3,878 3,694 3,707 3,267
Non-interest income .................. 77 92 81 131
Non-interest expense ................. 1,566 1,555 1,583 1,300
-------- ------ ------ ---------
Earnings before income taxes ......... 2,389 2,231 2,205 2,098
Provision for income tax ............. 898 897 833 721
-------- ------ ------ ---------
Net earnings ......................... $1,491 $1,334 $1,372 $1,377
======== ====== ====== =========
</TABLE>
58
<PAGE>
Earnings per share were not calculated for September 30, 1995, as no shares were
outstanding during the year.
KLAMATH FIRST BANCORP INC. AND SUBSIDIARY
BRANCH OFFICES AND CORPORATE INFORMATION
Main Office
540 Main Street
Klamath Falls, OR 97601
Ashland Branch
512 Walker Ave.
Ashland, OR 97520
Bend Branch
61515 S. HWY 97
Bend, OR 97702
Campus Branch
2323 Dahlia Street
Klamath Falls, OR 97601
Madison Branch
2300 Madison
Klamath Falls, OR 97603
Medford Branch
1420 E. McAndrews Rd.
Medford, OR 97504
Redmond Loan Center
585 SW 6th Suite #2
Redmond, OR 97756
Shasta Branch
2943 South 6th Street
Klamath Falls, OR 97603
Corporate Headquarters
540 Main Street
Klamath Falls, Or 97601
(541) 882-3444
Independent Auditors
Deloitte & Touche LLP
3900 U.S. Bancorp Tower
111 SW Fifth Avenue
Portland, OR 97204-3698
(503) 222-1341
General Counsel
William L. Sisemore, AAL
540 Main Street
Klamath Falls, OR 97601
(541) 882-7139
59
<PAGE>
Special Counsel
Breyer and Aguggia
1300 I Street, NW
Suite 470 East
Washington, DC 20005
(202) 737-7900
Transfer Agent
Registrar & Transfer Co.
10 Commerce Drive
Cranford, NJ 07016-3572
1-800-866-1340
Common Stock
Traded over-the-counter/National Market System
NASDAQ Symbol: KFBI
Form 10-K Information
Available without charge
to shareholders of record
upon written request to
Marshall Alexander,
Chief Financial Officer
Klamath First Bancorp, Inc.
540 Main Street
Klamath Falls, OR 97601
ANNUAL MEETING
The annual meeting of shareholders will be held Wednesday, January 22, 1997,
beginning at 2:00 p.m.,Pacific Time at:
The Shilo Inn
2500 Almond Street
Klamath Falls, OR 97601
Shareholders of record as of the close of business on November 22, 1996 shall be
those entitled to notice of and to vote at the meeting.
60
<PAGE>
EXHIBIT 21
Subsidiary of the Registrant
<PAGE>
Exhibit 21
Subsidiary of Registrant
Percentage Jurisdiction or
Subsidiary (1) Owned State of Incorporation
- ----------------------------- ----- ----------------------
Klamath First Federal Savings
and Loan Association 100% United States
(1) The operations of the Company's subsidiary are included in the Company's
consolidated financial statements.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FOURTH
QUARTER/ FISCAL YEAR END 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 6,842
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 9,338
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 150,096
<INVESTMENTS-CARRYING> 16,610
<INVESTMENTS-MARKET> 16,596
<LOANS> 473,556
<ALLOWANCE> 928
<TOTAL-ASSETS> 671,969
<DEPOSITS> 399,673
<SHORT-TERM> 79,904
<LIABILITIES-OTHER> 13,981
<LONG-TERM> 25,000
0
0
<COMMON> 116
<OTHER-SE> 153,295
<TOTAL-LIABILITIES-AND-EQUITY> 671,969
<INTEREST-LOAN> 35,262
<INTEREST-INVEST> 8,867
<INTEREST-OTHER> 1,520
<INTEREST-TOTAL> 45,649
<INTEREST-DEPOSIT> 20,251
<INTEREST-EXPENSE> 23,287
<INTEREST-INCOME-NET> 22,363
<LOAN-LOSSES> 120
<SECURITIES-GAINS> (1,643)
<EXPENSE-OTHER> 10,600
<INCOME-PRETAX> 10,522
<INCOME-PRE-EXTRAORDINARY> 10,522
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,110
<EPS-PRIMARY> .56
<EPS-DILUTED> .56
<YIELD-ACTUAL> 2.22
<LOANS-NON> 191
<LOANS-PAST> 0
<LOANS-TROUBLED> 79
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 808
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 928
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 928
</TABLE>
