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, 1998
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.
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(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 15, 1998, there were issued and outstanding 9,916,766 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 15, 1998 of $18.38,
was $155,696,649.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Registrant's Annual Report to Shareholders for the Fiscal
Year Ended September 30, 1998 ("Annual Report") (Parts I and II).
2. Portions of Registrant's Definitive Proxy Statement for the 1999 Annual
Meeting of Shareholders (Part III).
<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, 1998, the Company had total assets of $1.0 billion, total
deposits of $689.5 million and shareholders' equity of $145.1 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 through the FHLB of Seattle.
In July 1997, the Association acquired 25 former First Interstate Bank
branches from Wells Fargo Bank, N.A. The new branches are located in rural
communities throughout Oregon, expanding and complementing the existing network
of branches. The acquisition was accounted for as a purchase and resulted in the
addition of approximately $241.3 million in deposits on the acquisition date of
July 18, 1997.
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, 1998, permanent
residential one- to four-family real estate loans totaled $577.5 million, or
81.95% of total loans. While the Association has historically emphasized fixed
rate mortgage lending, it has been diversifying its loan portfolio by focusing
on increasing the number of originations of commercial real estate loans,
multi-family residential loans, residential construction loans, small business
loans and non-mortgage consumer loans. A significant portion of these newer loan
products carry adjustable rates, higher yields, or shorter terms than the
traditional fixed rate mortgages. This lending strategy is designed to enhance
earnings, reduce interest rate risk, and provide a more complete range of
financial services to customers and the local communities served by the
Association. At September 30, 1998, the Association's total loan portfolio
consisted of 89.67% fixed rate and 10.33% adjustable rate loans, after loans in
process and non-performing loans.
Modified Dutch Auction Tender
In September 1998, the Board of Directors authorized the repurchase of up
to 1,983,353 shares of the Company's common stock, which represents
approximately 20% of its outstanding shares as of September 30, 1998. The
repurchase is being made through a "Modified Dutch Auction Tender." Under this
procedure, the Company's shareholders are given the opportunity to sell part or
all of their shares to the Company at a price of not less than $18.00 per share
and not more than $20.00 per share. The Company expects to complete the
repurchase early in 1999.
Market Area
As a result of the branch acquisition in 1997, the Association's market
area expanded to include 33 locations in 22 of Oregon's 36 counties. Two new
branch locations were added in 1998. The Association's primary market area,
which encompasses the state of Oregon and some adjacent areas of California and
Washington, can be characterized as a predominantly rural area containing a
number of communities that are experiencing moderate to rapid population growth.
The favorable population growth in the market area, particularly in Southern
Oregon, has been supported in large part by the favorable climate, and by
favorable real estate values. The economy of the market area is still based
primarily on agriculture and lumber and wood products, but is experiencing
diversification into light manufacturing, health care and other services, and
other sectors. Tourism is a significant industry in many regions of the market
area including Central Oregon and the Southern Oregon coast.
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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.
<TABLE>
<CAPTION>
Years Ended
At September 30,
September 30, ------------------------------------
1998 1998 1997 1996
------------ ---- ---- ----
Weighted average yield:
<S> <C> <C> <C> <C>
Loans receivable ............................ 7.71% 8.06% 7.92% 8.00%
Mortgage backed and related securities ...... 6.26 6.03 6.34 6.00
Investment securities ....................... 6.01 6.05 6.10 6.12
Federal funds sold .......................... 5.70 5.45 5.31 7.09
Interest-earning deposits ................... 5.48 5.35 5.32 4.95
FHLB stock .................................. 7.50 7.73 7.70 7.64
Combined weighted average yield on
interest-bearing assets ....................... 7.22 7.34 7.40 7.45
---- ---- ---- ----
Weighted average rate paid on:
Tax and insurance reserve ................... 2.47 2.47 2.97 3.30
Passbook and statement savings .............. 2.44 2.70 3.15 2.87
Interest-bearing checking ................... 1.33 1.48 2.20 2.47
Money market ................................ 3.92 3.86 3.85 3.88
Certificates of deposit ..................... 5.81 5.69 5.76 5.94
FHLB advances/Short term borrowings ......... 5.29 5.63 5.68 5.60
Combined weighted average rate on
interest-bearing liabilities .................. 4.86 4.77 5.12 5.23
---- ---- ---- ----
Net interest spread ............................ 2.36% 2.57% 2.28% 2.22%
==== ==== ==== ====
</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 16 of the 1998 Annual Report to
Stockholders ("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 12 of the Annual Report, which section is incorporated herein
by reference.
Rate/Volume Analysis
Reference is made to the section entitled "Rate/Volume Analysis" on page 17
of the Annual Report, which section is incorporated herein by reference.
2
<PAGE>
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 86% 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. With the expanded market area provided by the
branch acquisition in 1997, the Association anticipates its mortgage lending
will diversify throughout the state of 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.
However, to enhance interest income and reduce interest rate risk, the
Association is placing increased emphasis on the origination or purchase of
adjustable rate loans secured by multi-family residential and commercial real
estate, the majority of which are located outside Klamath, Jackson, and
Deschutes counties.
Permanent residential one- to four-family mortgage loans amounted to $577.5
million, or 81.95%, of the Association's total loan portfolio before net items,
at September 30, 1998. The Association originates other loans secured by
multi-family residential and commercial real estate, construction and land
loans. Those loans amounted to $115.2 million, or 16.34%, of the total loan
portfolio, before net items, at September 30, 1998. Approximately 1.71%, or
$12.1 million, of the Association's total loan portfolio, before net items, as
of September 30, 1998 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 $14.3 million at September 30, 1998. At September 30, 1998, the
Association had 25 borrowing relationships with outstanding balances in excess
of $1.0 million, the largest of which amounted to $4.8 million and consisted of
ten loans, all of which were secured by land development and single family
construction projects. All of these loans were performing in accordance with
their terms at September 30, 1998.
The Association has placed a growing emphasis on the origination of
adjustable rate loans in order to increase the interest rate sensitivity of its
loan portfolio. In the current interest rate environment, adjustable rate
mortgages (ARMs) are less attractive to borrowers than the low fixed rate
mortgages available. The Association has, however, been successful in expanding
the production of adjustable rate consumer loans and has purchased adjustable
rate multi-family residential and non-residential real estate loans. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Market Risk and Asset/Liability Management" and "INTEREST
SENSITIVITY GAP ANALYSIS" in the Annual Report. At September 30, 1998, $70.0
million, or 10.33% of loans in the Association's total loan portfolio, after
loans in process and non-performing loans, consisted of ARM loans.
3
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<TABLE>
<CAPTION>
Loan Portfolio Analysis. The following table sets forth the composition of
the loan portfolio by type of loan at the dates indicated.
At September 30,
----------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------ ---------------- ----------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
Real estate loans:
Permanent residential
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
one- to four-family .... $577,471 81.95% $498,595 86.47% $447,004 91.50% $381,683 91.68% $337,212 90.06%
Multi-family residential . 19,230 2.73 16,881 2.93 6,555 1.34 7,433 1.79 8,209 2.19
Construction ............. 64,289 9.12 30,487 5.29 14,276 2.92 9,807 2.36 12,625 3.37
Commercial ............... 29,457 4.18 22,639 3.93 15,645 3.20 13,984 3.36 13,425 3.58
Land ..................... 2,185 0.31 1,586 0.27 1,152 0.24 1,072 0.25 1,180 0.32
-------- ------ -------- ------ -------- ------ -------- ------ -------- -----
Total real estate loans .... 692,632 98.29 570,188 98.89 484,632 99.20 413,979 99.44 372,651 99.52
-------- ------ -------- ------ -------- ------ -------- ------ -------- -----
Non-real estate loans:
Savings accounts ......... 1,991 0.28 1,711 0.30 1,640 0.34 1,966 0.47 1,316 0.35
Home improvement and
home equity loans ..... 5,750 0.82 3,486 0.60 1,977 0.40 -- -- -- --
Other .................... 4,330 0.61 1,190 0.21 302 0.06 367 0.09 472 0.13
-------- ------ -------- ------ -------- ------ -------- ------ -------- -----
Total non-real estate loans 12,071 1.71 6,387 1.11 3,919 0.80 2,333 0.56 1,788 0.48
-------- ------ -------- ------ -------- ------ -------- ------ -------- -----
Total loans ............... 704,703 100.00% 576,575 100.00% 488,551 100.00% 416,312 100.00% 374,439 100.00%
====== ====== ====== ====== ======
Less:
Undisbursed portion of loans 26,987 17,096 8,622 7,203 9,310
Deferred loan fees ......... 7,620 6,358 5,445 4,757 4,252
Allowance for loan losses .. 1,950 1,296 928 808 755
-------- -------- -------- -------- -----
Net loans .................. $668,146 $551,825 $473,556 $403,544 $360,122
======== ======== ======== ======== ========
</TABLE>
4
<PAGE>
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.
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------------
1998 1997
--------------------- ----------------------
Amount Percent Amount Percent
(Dollars in thousands)
<S> <C> <C> <C> <C>
Fixed rate ....................................$607,112 89.67% $491,703 87.98%
Adjustable-rate ................................ 69,958 10.33 67,189 12.02
-------- ------- -------- -------
Total ....................................$677,070 100.00% $558,892 100.00%
======== ======= ======== =======
</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, 1998, $577.5 million, or 81.95%, 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
$67,439.
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, 1998,
$573.8 million, or 84.75% of the total loans after loans in process and
non-performing loans were fixed rate one- to four-family loans and $30.2
million, or 4.45%, 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, 1998,
the Association charged origination fees ranging from 1.00% to 1.75% on its ARM
loans.
In an attempt to increase adjustable rate mortgages in the loan portfolio,
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,
for initial rates of interest below the rates which would apply were the
adjustment index used for pricing initially (discounting). These loans are
5
<PAGE>
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. Programs for 95% and 97% loan-to-value are 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 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 branch offices in Bend
and the loan center in Redmond, near popular ski areas and other outdoor
activities, and the branches along the Southern Oregon coast, an increasingly
popular resort and vacation area, the Association believes that there is an
opportunity to engage in such lending within the parameters of its current
underwriting policies. At September 30, 1998, $3.7 million, or 0.52%, of the
Association's loan portfolio consisted of loans on second homes.
Commercial and Multi-Family Real Estate Loans. The Association has
historically engaged in a limited amount of multi-family and commercial real
estate lending. During 1997 and 1998, the Association purchased participations
in loans secured by multi-family and commercial real estate in order to increase
the balance of adjustable rate loans in the portfolio. See "-- Loan
Originations, Purchases, and Sales." At September 30, 1998, $19.2 million, or
2.73%, of the Association's total loan portfolio, before net items, consisted of
loans secured by existing multi-family residential real estate and $29.5
million, or 4.18%, 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 $229,657 at September 30, 1998, the largest of which was a $2.6
million land development loan secured by land and improvements. This loan has
performed in accordance with its terms since origination. Originations of
commercial real estate and multi-family residential real estate amounted to
3.20%, 4.87%, and 2.58% of the Association's total loan originations in the
fiscal years ended September 30, 1998, 1997, and 1996, respectively. The
Association also purchased $4.5 million in multi-family residential loan
participations and $179,000 in commercial real estate participations during the
year ended September 30, 1998.
6
<PAGE>
The Association's commercial and multi-family loans generally 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, 1998, $33.3 million, or 4.92%, after loans in process and
non-performing loans, of other mortgage loans, including commercial and
multi-family residential real estate loans, had adjustable rates of interest.
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 following strict underwriting standards. Loans
considered for purchase are subjected to the same underwriting standards as
those originated in-house.
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"). Permanent construction loans generally begin to amortize as permanent
residential one- to four-family mortgage loans within one year of origination
unless extended. Speculative loans are scheduled to pay off in 12 to 18 months.
At September 30, 1998, construction loans amounted to $64.3 million (including
$28.4 million of speculative loans), or 9.12%, 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 through physical inspections. 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 primary 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.
During 1997, the Association began originating construction loans in the
Portland, Oregon metropolitan area through mortgage brokers. These loans are
underwritten using the same standards as loans from the branch locations.
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 purchase 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%
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<PAGE>
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, 1998, $2.2 million, or 0.31%, 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. During 1997, the Association
introduced several new business and consumer loan products, including home
equity lines of credit, automobile and recreational vehicle loans, and personal
and business lines of credit, among others. Non-real estate loans generally have
shorter terms to maturity or repricing and higher interest rates than real
estate loans. As of September 30, 1998, $12.1 million, or 1.71%, of the
Association's total loan portfolio consisted of non-real estate loans. As of
that date, $2.0 million, or .28%, of total loans were secured by savings
accounts. At September 30, 1998, $1.8 million, or 0.25%, 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.
Loan Maturity and Repricing. The following table sets forth certain
information at September 30, 1998 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.
<TABLE>
<CAPTION>
After One Year
Within One Year Through 5 Years After 5 Years Total
--------------- --------------- ------------- ---------
(In thousands)
Permanent residential
one- to four-family:
<S> <C> <C> <C> <C>
Adjustable rate ........................... $28,754 $1,400 $-- $ 30,154
Fixed rate ................................ 15,860 4,064 553,900 573,824
Other mortgage loans:
Adjustable rate ........................... 23,109 10,183 -- 33,292
Fixed rate ................................ 4,142 8,573 15,006 27,721
Non-real estate loans:
Adjustable rate .......................... 6,365 147 -- 6,512
Fixed rate ............................... 2,461 1,343 1,763 5,567
------- ------- -------- --------
Total loans ............................. $80,691 $25,710 $570,669 $667,070
======= ======= ======== ========
</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, 1998, which have fixed interest rates
and have adjustable rates, was $584.6 million and $11.7 million, respectively.
Loan Commitments. The Association issues commitments for fixed and
adjustable rate 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 $31.2 million at September 30, 1998 consisting of $305,000 of
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<PAGE>
variable rate loans and $30.9 million of fixed rate loans. See Note 18 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 mortgage brokers, 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.
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, 1998, the Association originated
$232.5 million in total loans, compared to $120.1 million in the same period of
1997. The increase in loan originations was attributable to lower interest rates
and expansion of lending throughout the branch network and through mortgage
brokers.
Between 1989 and 1992, 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, 1998, the balance was $2.6 million. These loans were underwritten
on the same basis as permanent residential one- to four-family real estate loans
originated by the Association.
During 1997 and 1998, the Association purchased multi-family and commercial
real estate mortgage loans secured by properties within the Association's
primary market area. At September 30, 1998, the balance of such loans was $20.2
million. These loans were underwritten on the same basis as similar loans
originated by the Association.
9
<PAGE>
The following table shows total loans originated, purchased and sold, loan
reductions and the net increase in the Association's loans during the periods
indicated.
<TABLE>
<CAPTION>
Years Ended September 30,
-----------------------------------
1998 1997 1996
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Total net loans at beginning of period $ 551,825 $ 473,556 $ 403,544
Loans originated:
Real estate loans originated (1) .... 219,790 116,502 133,814
Real estate loans purchased ......... 7,792 15,648 --
Non-real estate loans originated .... 12,684 3,571 1,753
--------- --------- ---------
Total loans originated ............ 240,266 135,721 135,567
--------- --------- ---------
Loan reductions:
Principal paydowns .................. (122,029) (56,157) (64,530)
Loans sold .......................... -- -- --
Other reductions (2) ................ (1,916) (1,295) (1,025)
--------- --------- ---------
Total loan reductions ............ (123,945) (57,452) (65,555)
--------- --------- ---------
Total net loans at end of period ..... $ 668,146 $ 551,825 $ 473,556
========= ========= =========
<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 1.00% 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, 1998, the Association had $7.6 million of net
loan fees which had been deferred and are being recognized as income over the
contractual maturities of the related loans.
10
<PAGE>
Asset Quality
Delinquent Loans. The following table sets forth information concerning
delinquent loans at September 30, 1998, 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.
<TABLE>
<CAPTION>
Permanent
residential Non-real
1-4 family Estate Loans Total
--------------------- ------------------ --------------------
Amount Percentage Amount Percentage Amount Percentage
------ ---------- ------ ---------- ------ ----------
(Dollars in thousands)
Loans delinquent
<S> <C> <C> <C> <C> <C> <C>
for 90 days and more $513 0.07% $ 11 --% $524 0.07%
</TABLE>
Delinquency Procedures. When a borrower fails to make a required payment on
a 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 after the fifteenth day after the
payment is due.
For real estate loans, 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.
For consumer loans, at 60 days past due a letter demanding payment is sent
to the borrower. If the delinquency is not cured prior to becoming 90 days past
due, repossession procedures are implemented for collateralized loans. At 90
days past due, consumer loans are generally charged off.
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 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 as incurred. Valuations
are periodically performed by management and an allowance for losses is
established by a charge to operations if the carrying value of the property
11
<PAGE>
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, 1998, the Association's total non-performing loans
amounted to $524,000, or 0.07% of total loans, before net items, compared with
$254,000, or 0.04% of total loans, before net items, at September 30, 1997. The
increase relates primarily to two loans secured by single family residences that
were 90 days past due at September 30, 1998. The appraised value of the
underlying collateral exceeds the loan balance and foreclosure proceedings have
been commenced related to these properties.
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.
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------
1998 1997 1996 1995 1994
------- ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans (1) .................. $ 524 $ 254 $191 $734 $183
Accruing loans greater than 90
days delinquent ....................... -- -- -- -- --
------- ------ ---- ---- ----
Total non-performing loans .......... 524 254 191 734 183
Real estate owned ....................... -- -- 69 24 59
Other repossessed assets ................ -- -- -- -- --
------- ------ ---- ---- ----
Total repossessed assets ............ -- -- 69 24 59
------- ------ ---- ---- ----
Total non-performing assets ......... $ 524 $ 254 $260 $758 $242
======= ====== ==== ==== ====
Total non-performing assets as a
percentage of total assets ............ 0.05% 0.03% 0.04% 0.12% 0.05%
======= ====== ==== ==== ====
Total non-performing loans as a
percentage of total loans,
before net items ...................... 0.07% 0.04% 0.04% 0.18% 0.05%
======= ====== ==== ==== ====
Allowance for loan losses as a
percentage of total non-performing
assets ................................ 372.14% 510.38% 356.92% 106.80% 311.98%
======= ====== ==== ==== ====
Allowance for loan losses as a percentage
of total non-performing loans ......... 372.14% 510.38% 485.86% 110.08% 412.57%
======= ====== ====== ====== ======
<FN>
(1) Consists of permanent residential one- to four-family mortgage loans and
consumer loans.
</FN>
</TABLE>
For the year ended September 30, 1998, 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
12
<PAGE>
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 are 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 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.
As of September 30, 1998, total classified assets amounted to 0.05% of
total assets. At September 30, 1998 and 1997, the aggregate amounts of the
Association's classified and special mention assets, exclusive of amounts
classified loss and which have been fully reserved, were as follows:
<TABLE>
<CAPTION>
At September 30,
------------------
1998 1997
------ ------
(In thousands)
<S> <C> <C>
Loss ................... $ -- $ --
Doubtful ............... -- --
Substandard assets ..... 521 304
Special mention ........ 2,452 843
General loss allowances 1,947 1,296
Specific loss allowances 3 --
Charge offs ............ 20 2
</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, 1998, the
Association had an allowance for loan losses of $2.0 million, which was equal to
372.14% of non-performing assets and 0.28% 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.
Management considers 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 related to the
collectibility of the Association's loan portfolio in their determination of the
adequacy of the allowance and the provision. The provisions for loan losses
charged against income for the years ended September 30, 1998, 1997 and 1996
were
13
<PAGE>
$674,000, $370,000, and $120,000, respectively. Management believes that the
amount maintained in the allowance will be adequate to absorb possible losses in
the portfolio.
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.
<TABLE>
<CAPTION>
Years Ended September 30,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total loans outstanding ................. $704,703 $576,575 $488,551 $416,312 $374,439
======== ======== ======== ======== ========
Average loans outstanding ............... $614,457 $515,555 $440,510 $381,689 $338,679
======== ======== ======== ======== ========
Allowance at beginning of period ........ $ 1,296 $ 928 $ 808 $755 $628
Charge-offs ............................. (20) (2) -- (67) (23)
Recoveries .............................. -- -- -- -- --
Provision for loan losses ............... 674 370 120 120 150
-------- ------- ------ ----- ----
Allowance at end of period .............. $ 1,950 $ 1,296 $ 928 $808 $755
======== ======= ====== ==== ====
Allowance for loan losses as a percentage
of total loans outstanding ............. 0.28% 0.22% 0.19% 0.19% 0.20%
======== ======= ====== ==== ====
Ratio of net charge-offs to average loans
outstanding during the period .......... --% --% --% 0.02% 0.01%
======== ======= ====== ==== ====
</TABLE>
14
<PAGE>
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.
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------------ ------------------------------------- ------------------------------------
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)
Permanent
residential
one- to
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
four-family .. $ 1,141 0.16% 81.95% $ 887 0.15% 86.51% $ 925 0.19% 91.50%
Multi-family
residential .. 124 0.02 2.73 121 0.02 2.93 -- -- 1.34
Construction ... 116 0.02 9.12 -- -- 5.31 -- -- 2.92
Commercial ..... 444 0.07 4.18 250 0.04 3.93 -- -- 3.20
Land ........... 29 -- 0.31 12 -- 0.27 -- -- 0.24
Non-real estate 96 0.01 1.71 26 0.01 1.05 3 -- 0.80
--------- ------ --------- ------ --------- -------
Total ....... $ 1,950 0.28% 100.00% $ 1,296 0.22% 100.00% $ 928 0.19% 100.00%
========= ====== ========= ====== ========= =======
</TABLE>
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------------------------------------
1995 1994
-------------------------------------- -------------------------------------
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)
Permanent
residential
one-to four-
<S> <C> <C> <C> <C> <C> <C>
family ... $ 807 0.19% 91.68% $ 713 0.19% 90.06%
Multi-family
residential .. -- -- 1.79 -- -- 2.19
Construction ... -- -- 2.36 -- -- 3.37
Commercial ..... -- -- 3.36 41 0.01 3.58
Land ........... -- -- 0.25 -- -- 0.32
Non-real estate 1 -- 0.56 1 -- 0.48
--------- ------ --------- ------
Total ....... $ 808 0.19% 100.00% $ 755 0.20% 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 totaled $95.4 million at September 30, 1998, plus an additional 10% if the
investments are fully secured by readily marketable collateral. See "REGULATION
- -- Federal Regulation of Savings Associations -- Loans to One Borrower" 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 1.0% of total assets of the
Company 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 $10.0 million or 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, 1998,
the investment securities portfolio held to maturity had $888,759 in tax-exempt
securities issued by states and municipalities and $2.0 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 prepayment risks or both. As of September 30, 1998, the portfolio of
securities available for sale consisted of $105.5 million in securities issued
by the U.S. Treasury and other federal government agencies, $18.1 million in tax
exempt securities issued by states and municipalities, and $79.7 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 allowed 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. During the year ended
September 30, 1996, the Association reclassified and transferred $27.2 million
of its debt securities from the held-to-maturity portfolio to the
available-for-sale portfolio.
16
<PAGE>
During the years ended September 30, 1998, 1997 and 1996, 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, "Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments," would apply.
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.
<TABLE>
<CAPTION>
At September 30,
---------------------------------------------------------------
1998 1997 1996
------------------- ------------------- -------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- ----- --------- ------ --------- -----
(In thousands)
Held to maturity:
<S> <C> <C> <C> <C> <C> <C>
State and municipal obligations $ 889 $ 926 $ 1,042 $ 1,069 $ 1,227 $ 1,249
Corporate obligations ......... 2,000 2,002 21,895 21,900 8,600 8,611
Available for sale:
U.S. Federal securities
mutual bond fund ............. -- -- -- -- 12,080 12,080
U.S. Government obligations ... 102,620 105,454 185,861 185,601 59,717 58,624
State and municipal obligations 17,406 18,103 8,861 9,087 250 251
Corporate obligations ......... 79,225 79,667 67,147 67,158 5,024 5,032
-------- -------- -------- -------- -------- --------
Total ....................... $202,140 $206,152 $284,806 $284,815 $ 86,898 $ 85,847
======== ======== ======== ======== ======== ========
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- ---------------------
Amortized Percent of Amortized Percent of Amortized Percent of
Cost Portfolio Cost Portfolio Cost Portfolio
--------- ---------- --------- ---------- --------- ----------
(Dollars in thousands)
Held to maturity:
<S> <C> <C> <C> <C> <C> <C>
State and municipal obligations $ 889 0.44% $ 1,042 0.36% $ 1,227 1.41%
Corporate obligations ......... 2,000 0.99 21,895 7.69 8,600 9.90
Available for sale:
U.S. Federal securities
mutual bond fund ............. -- -- -- -- 12,080 13.90
U.S. Government obligations ... 102,620 50.77 185,861 65.26 59,717 68.72
State and municipal obligations 17,406 8.61 8,861 3.11 250 0.29
Corporate obligations ......... 79,225 39.19 67,147 23.58 5,024 5.78
-------- -------- -------- -------- -------- --------
Total ....................... $202,140 100.00% $284,806 100.00% $ 86,898 100.00%
======== ======== ======== ======== ======== ========
</TABLE>
The following table sets forth the maturities and weighted average yields
of the debt securities in the investment portfolio at September 30, 1998.
<TABLE>
<CAPTION>
One Year After One Through After Five Through After Ten
or Less Five Years Ten Years Years Total
------------------- ------------------- ------------------ --------------------- --------
Amount Yield Amount Yield Amount Yield Amount Yield
-------- ----- -------- ------- ------ ----- -------- ------
(Dollars in thousands)
Held to maturity:
State and municipal
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
obligations ...... $ 211 6.51% $ 678 6.62% $ -- -- $-- -- $ 889
Corporate obligations 2,000 5.89% -- -- -- -- -- -- 2,000
Available for sale:
U.S. Government
obligations ........ 11,555 5.84% 91,065 5.97% -- -- -- -- 102,620
State and municipal
obligations ........ -- -- 891 6.58% -- -- 16,515 7.62% 17,406
Corporate obligations 14,519 5.96% 44,884 6.09% -- -- 19,822 6.29% 79,225
-------- -------- -------- -------- --------
Total ............. $ 28,285 $137,518 $ -- $ 36,337 $202,140
======== ======== ======== ======== ========
</TABLE>
At September 30, 1998 the Association did not hold any securities from a
single issuer, other than the U.S. Government, whose aggregate book value was in
excess of 10% of the Company's stockholders' equity, or $14.5 million.
Mortgage Backed and Related Securities
At September 30, 1998, the Company's net mortgage backed and related
securities totaled $47.0 million at fair value ($46.4 million at amortized cost)
and had a weighted average yield of 6.26%. At September 30, 1998, 92.21% of the
mortgage backed and related securities were adjustable rate securities.
18
<PAGE>
Mortgage backed and related securities (which are also 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 Company. 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 Company. 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 Company may be subject to reinvestment risk because, to the
extent that the Company's mortgage backed securities amortize or prepay faster
than anticipated, the Company may not be able to reinvest the proceeds of such
repayments and prepayments at a comparable rate.
During the year ended September 30, 1996, the Company 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>
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.
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------------------
1998 1997 1996
----------------- ------------------ -------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- ------ --------- ----- --------- -------
(In thousands)
Held to maturity:
<S> <C> <C> <C> <C> <C> <C>
GNMA ............ $ 3,662 $ 3,696 $ 5,447 $ 5,518 $ 6,783 $ 6,736
Available for sale:
FNMA ............ 12,866 12,985 12,775 12,897 15,905 15,959
FHLMC ........... 14,722 15,158 25,881 26,574 39,205 39,179
GNMA ............ 3,619 3,662 9,709 9,808 -- --
SBA ............. 11,535 11,531 15,732 15,590 19,139 18,971
------- ------- ------- ------- ------- -------
Total ......... $46,404 $47,032 $69,544 $70,387 $81,032 $80,845
======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- ----------------------
Amortized Percent of Amortized Percent of Amortized Percent of
Cost Portfolio Cost Portfolio Cost Portfolio
---------- ---------- --------- ---------- --------- -----------
(Dollars in thousands)
Held to maturity:
<S> <C> <C> <C> <C> <C> <C>
GNMA ............ $ 3,662 7.89% $ 5,447 7.83% $ 6,783 8.37%
Available for sale:
FNMA ............ 12,866 27.73 12,775 18.37 15,905 19.63
FHLMC ........... 14,722 31.72 25,881 37.22 39,205 48.38
GNMA ............ 3,619 7.80 9,709 13.96 -- --
SBA ............. 11,535 24.86 15,732 22.62 19,139 23.62
--------- --------- --------- --------- --------- ---------
Total ......... $ 46,404 100.00% $ 69,544 100.00% $ 81,032 100.00%
========= ========= ========= ========= ========= =========
</TABLE>
Interest-Earning Deposits
The Company also had interest-earning deposits in the FHLB of Seattle
amounting to $12.1 million and $1.4 million at September 30, 1998 and 1997,
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 checking accounts, NOW accounts, money market
deposit accounts, passbook and statement savings accounts, and certificates of
deposit. Included among these deposit products are individual retirement account
("IRA") certificates of approximately $87.4 million at September 30, 1998.
Deposit account terms vary, with the principal differences being the minimum
balance required, the time period 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, 1998, these deposits totaled $16.5 million, or 2.39% 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.
In July 1997, the Association acquired 25 Wells Fargo Bank branches in
Oregon, adding $241.3 million in deposit accounts. In addition to the increase
from the acquisition, the Association experienced a net increase in deposits
(before interest credited) of $14.1 million for the year ended September 30,
1997 as customers deposited funds and new customers were added. The acquired
deposit base included a significant proportion of non-interest bearing checking
accounts, thereby reducing the cost of deposits. Concurrent with the
acquisition, the Association's deposit product offerings were expanded, allowing
customers to choose the accounts best suited to their needs, whether their focus
is low cost or additional services. For the year ended September 30, 1998, the
Association experienced a net decrease in deposits (before interest credited) of
$8.8 million as depositors withdrew funds to seek higher yielding alternative
investments. The Association has conducted a special certificate account
promotion and a checking account campaign in an effort to attract and retain
deposits. To offset the deposit outflow, the Association has relied on increased
borrowings from the FHLB of Seattle. See "-- Borrowings."
At September 30, 1998, certificate accounts maturing during the year ending
September 30, 1999 totaled $278.1 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.
21
<PAGE>
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, 1998.
<TABLE>
<CAPTION>
Certificate
Maturity Period Accounts
----------------------------- -----------
(In thousands)
<S> <C>
Three months or less ......... $19,937
Over three through six months 22,107
Over six through twelve months 17,426
Over twelve months ........... 23,132
-------
Total .................... $82,602
=======
</TABLE>
The following table sets forth the deposit balances in the various types of
savings accounts offered by the Association at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------------------------------------------
1998 1997 1996
------------------------------ ----------------------------- ------------------
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>
Certificates of deposit ...... $395,351 57.33% $ 19,748 $375,603 55.73% $ 86,415 $289,188 72.36%
-------- ------ -------- -------- ------ -------- -------- ------
Transaction accounts:
Non-interest checking ........ 47,547 6.90 (5,031) 52,578 7.80 52,417 161 0.04
Interest-bearing checking .... 70,561 10.23 (4,483) 75,044 11.14 50,762 24,282 6.08
Passbook and statement savings 61,414 8.91 (1,765) 63,179 9.37 29,468 33,711 8.43
Money market deposits ........ 114,668 16.63 7,094 107,574 15.96 55,243 52,331 13.09
-------- ------ -------- -------- ------ -------- -------- ------
Total transaction accounts ... 294,190 42.67 (4,185) 298,375 44.27 187,890 110,485 27.64
-------- ------ -------- -------- ------ -------- -------- ------
Total deposits ............... $689,541 100.00% $ 15,563 $673,978 100.00% $274,305 $399,673 100.00%
======== ====== ======== ======== ====== ======== ======== ======
</TABLE>
The following table sets forth the deposit activities of the Association
for the periods indicated.
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------------------
1998 1997 1996
----------- ----------- -----------
(In thousands)
<S> <C> <C> <C>
Beginning balance ..................... $ 673,978 $ 399,673 $ 384,380
----------- ----------- -----------
Increase due to acquired deposits ..... -- 241,272 --
Net inflow (outflow) of deposits before
interest credited .................... (8,753) 14,077 (2,364)
Interest credited ..................... 24,316 18,956 17,657
----------- ----------- -----------
Net increase in deposits .............. 15,563 274,305 15,293
----------- ----------- -----------
Ending balance ........................ $ 689,541 $ 673,978 $ 399,673
=========== =========== ===========
</TABLE>
22
<PAGE>
Borrowings. Deposit liabilities 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 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, 1998, 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, 1998 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, 1998 were due within 48 days and will be renewed subsequent to
year end.
The following table sets forth certain information regarding borrowings by
the Company and Association at the end of and during the periods indicated:
<TABLE>
<CAPTION>
At September 30,
-------------------
1998 1997
------- ------
Weighted average rate paid on:
<S> <C> <C>
FHLB advances ............... 5.26% 5.62%
Reverse repurchase agreements 5.65 5.75
</TABLE>
<TABLE>
<CAPTION>
Years Ended
September 30,
--------------------------
1998 1997
------------ -----------
(Dollars in thousands)
Maximum amount outstanding at any month end:
<S> <C> <C>
FHLB advances ............. $ 167,000 $ 151,000
Reverse repurchase agreements 17,078 19,118
Approximate average balance:
FHLB advances ............. 141,016 110,737
Reverse repurchase agreements 14,669 16,804
Approximate weighted average rate paid on:
FHLB advances ............. 5.62% 5.66%
Reverse repurchase agreements 5.80 5.82
</TABLE>
The Association also has an uncommitted line of credit of $15.0 million
with a commercial bank. At September 30, 1998, the Association had no borrowings
outstanding under this credit facility.
23
<PAGE>
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
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 Company, the Association and their operations.
The Company, as a savings and loan holding company, is also 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 $10.2 million at September 30, 1998.
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 that insures the deposits, up to prescribed statutory limits, of
depository institutions. The FDIC currently maintains two separate insurance
funds: the Bank Insurance Fund ("BIF") and the SAIF. As insurer of the
Association's deposits, the FDIC has examination, supervisory and enforcement
authority over the Association.
24
<PAGE>
The majority of the Association's accounts are insured by the SAIF,
however, the $241.3 million of deposits acquired in July 1997 from Wells Fargo
Bank, N.A., a BIF-insured institution, will continue to be BIF-insured deposits
and will be assessed premiums based on the lower BIF rates. These deposits are
known as Oakar deposits, indicating that they are deposits held by a
SAIF-insured institution, but insured by the BIF. 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 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 under certain circumstances. The Association's
assessments expensed for the year ended September 30, 1998, totaled $289,592.
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 Act ("DIF Act"), 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 became the same as that for
BIF members. In addition, beginning January 1, 1997, SAIF members were 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 in 1999. 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 quarterly average of
25
<PAGE>
not less than a specified percentage (currently 4.0%) of its net withdrawable
accounts plus short-term borrowings. The Association's liquidity ratio was
28.38% at September 30, 1998.
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, 1998, the Association was categorized as "well
capitalized" under the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The federal banking regulatory agencies
have prescribed, by regulation, standards for all insured depository
institutions relating to: (i) internal controls, information systems and
internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv)
interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii)
earnings; and (viii) compensation, fees and benefits ("Guidelines"). The
Guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before capital becomes impaired. If the OTS determines that the Association
fails to meet any standard prescribed by the Guidelines, the OTS may require the
Association to submit 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
26
<PAGE>
from any FHLB; and (iv) the payment of dividends by the association shall be
subject to the 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, 1998, the qualified thrift investments of the Association were
approximately 85.93% 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 are 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 CAMELS examination rating) will be deemed to be
"undercapitalized" and may be subject to certain restrictions. See "-- Federal
Regulation of Savings Associations -- Prompt Corrective Action."
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 and residential construction loans are
assigned a 100% risk weight, as are nonqualifying residential mortgage loans and
that portion of land loans and nonresidential construction loans that do not
exceed 80% loan-to-value ratio. The book value of assets in each category is
multiplied by the weighting factor (from 0% to 100%) assigned to that category.
These products are then totaled 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 following table presents the Association's capital levels at September
30, 1998.
<TABLE>
<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 ............ $ 83,179,044 16.1% $41,257,520 8.0% $51,571,900 10.0%
(To Risk Weighted Assets)
Tier I Capital ........... 81,232,367 15.8 -- -- 30,943,140 6.0
(To Risk Weighted Assets)
Tier I Capital ........... 81,232,367 8.3 29,487,686 3.0 49,146,143 5.0
(To Total Assets)
Tangible Capital ......... 81,232,367 8.3 14,743,843 1.5 -- --
(To Tangible Assets)
</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
28
<PAGE>
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, 1998, the Association's limit on
loans to one borrower was $14.3 million. At September 30, 1998, the
Association's largest aggregate amount of loans to one borrower was $4.8
million.
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
29
<PAGE>
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 (unless the loan or extension of credit is
made under a benefit program generally available to all other employees and does
not give preference to any insider over any other employee) 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 unitary 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.
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
30
<PAGE>
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
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.
Bad Debt Reserve. Historically, savings institutions such as the
Association which met certain definitional tests primarily related to their
assets and the nature of their business ("qualifying thrift") were permitted to
establish a reserve for bad debts and to make annual additions thereto, which
may have been deducted in arriving at their taxable income. The Association's
deductions with respect to "qualifying real property loans," which are generally
loans secured by certain interest in real property, were computed using an
amount based on the Association's actual taxable income, computed with certain
modifications and reduced by the amount of any permitted additions to the
non-qualifying reserve. Each year the Association selected the most favorable
way to calculate the deduction attributable to an addition to the tax bad debt
reserve.
The provisions repealing the current thrift bad debt rules were passed by
Congress as part of "The Small Business Job Protection Act of 1996." The new
rules eliminated the 8% of taxable income method for deducting additions to the
tax bad debt reserves for all thrifts for tax years beginning after December 31,
1995. These rules also require that all institutions recapture all or a portion
of their bad debt reserves added since the base year (last taxable year
beginning before January 1, 1988). The Association has previously recorded a
deferred tax liability equal to the bad debt recapture and as such the new rules
will have no effect on net income or federal income tax expense. For taxable
31
<PAGE>
years beginning after December 31, 1995, the Association's bad debt deduction
will be determined on the basis of net charge-offs during the taxable year. The
new rules allow an institution to suspend bad debt reserve recapture for the
1996 and 1997 tax years if the institution's lending activity for those years is
equal to or greater than the institution's average mortgage lending activity for
the six taxable years preceding 1996 adjusted for inflation. For this purpose,
only home purchase or home improvement loans are included and the institution
can elect to have the tax years with the highest and lowest lending activity
removed from the average calculation. If an institution is permitted to postpone
the reserve recapture, it must begin its six year recapture no later than the
1998 tax year (fiscal year ending September 30, 1999 for the Company). The
unrecaptured base year reserves will not be subject to recapture as long as the
institution continues to carry on the business of banking. In addition, the
balance of the pre-1988 bad debt reserves continue to be subject to provisions
of present law referred to below that require recapture in the case of certain
excess distributions to shareholders.
Distributions. To the extent that the Association makes "nondividend
distributions" to the Company, such distributions will be considered to result
in distributions from the balance of its bad debt reserves as of December 31,
1987 (or a lesser amount if the Association's loan portfolio decreased since
December 31, 1987) and then from the supplemental reserve for losses on loans
("Excess Distributions"), and an amount based on the Excess Distributions will
be included in the 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. The amount of additional taxable income
created from an Excess Distribution is an amount that, when reduced by the tax
attributable to the income, is equal to the amount of the distribution. 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 Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. The excess of the tax bad debt
reserve deduction using the percentage of taxable income method over the
deduction that would have been allowable under the experience method is treated
as a preference item for purposes of computing the AMTI. In addition, only 90%
of AMTI can be offset by net operating loss carryovers. AMTI is increased by an
amount equal to 75% of the amount by which the 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 0.12% 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.
Dividends-Received Deduction. The Company may exclude from its income 100%
of dividends received from the Association as a member of the same affiliated
group of corporations. The corporate dividends-received deduction is generally
70% in the case of dividends received from unaffiliated corporations with which
the Company and the Association will not file a consolidated tax return, except
that if the Company or the Association owns more than 20% of the stock of a
corporation distributing a dividend, then 80% of any dividends received may be
deducted.
Other Federal Tax Matters. There have not been any Internal Revenue Service
audits of the Company's or the Association'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% (4.0% for the fiscal year ended September 30,
1998) of income. Neither the Company's nor the Association's state income tax
returns have been audited during the past five years.
32
<PAGE>
Competition
The Association originates most of its loans to and accepts most of its
deposits from residents of its market area. 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.
Personnel
As of September 30, 1998, the Association had 207 full-time and 72
part-time employees. The employees are not represented by a collective
bargaining unit. The Association believes its relationship with its employees is
good.
33
<PAGE>
Executive Officers. The following table sets forth certain information
regarding the executive officers of the Company.
<TABLE>
<CAPTION>
Name Age(1) Position
<S> <C> <C>
Gerald V. Brown ............. 62 President and Chief Executive Officer
Robert A. Tucker ............ 50 Senior Vice President and Chief Lending Officer/Secretary
Frank X. Hernandez .......... 43 Senior Vice President and Chief Operating Officer
Marshall J. Alexander ....... 48 Senior Vice President and Chief Financial Officer
<FN>
- --------------
(1) At September 30, 1998.
</FN>
</TABLE>
Gerald V. Brown has been employed by the Association since 1957. He 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 since November 1989. He served as Chief
Operating Officer from March 1997 to June 1998 and has served as Chief Lending
Officer and Secretary since July 1998.
Frank X. Hernandez has been employed by the Association since 1991. He
served as Human Resources Officer until July 1998 when he was appointed Senior
Vice President and Chief Operating Officer.
Marshall J. Alexander has been employed by the Association since 1986. He
has served as Vice President and Chief Financial Officer since August 1994 and
was named a Senior Vice President in November 1998.
34
<PAGE>
Item 2. Properties
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, 1998.
<TABLE>
<CAPTION>
Year Square
Description/Address Opened Leased/Owned Footage
- --------------------------------------- ------ ------------ -------
Main Office
<S> <C> <C> <C>
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
721 Chetco Avenue ..................... 1997 Owned 5,409
Brookings, Oregon
293 North Broadway .................... 1997 Owned 5,087
Burns, Oregon
111 West Main Street .................. 1997 Owned 1,958
Carlton, Oregon
103 South Main Street ................. 1997 Owned 2,235
Condon, Oregon
259 North Adams ....................... 1997 Owned 5,803
Coquille, Oregon
106 Southwest 1st Street .............. 1997 Owned 4,700
Enterprise, Oregon
555 1st Street ........................ 1997 Owned 1,844
Fossil, Oregon
35
<PAGE>
<CAPTION>
Year Square
Description/Address Opened Leased/Owned Footage
- --------------------------------------- ------ ------------ -------
708 Garibaldi Avenue .................. 1997 Owned 1,400
Garibaldi, Oregon
29804 Ellensburg Avenue ............... 1997 Owned 3,136
Gold Beach, Oregon
111 North Main Street ................. 1997 Owned 4,586
Heppner, Oregon
810 South Highway 395 ................. 1997 Leased 6,000
Hermiston, Oregon
200 West Main Street .................. 1997 Owned 4,552
John Day, Oregon
1 South E Street ...................... 1997 Owned 5,714
Lakeview, Oregon
206 East Front Street ................. 1997 Owned 2,920
Merrill, Oregon
165 North 5th Street .................. 1997 Owned 2,370
Monroe, Oregon
217 Main Street ....................... 1997 Owned 6,067
Nyssa, Oregon
48257 East 1st Street ................. 1997 Owned 3,290
Oakridge, Oregon
227 West Main Street .................. 1997 Owned 2,182
Pilot Rock, Oregon
716 Northeast Highway 101 ............. 1997 Owned 2,337
Port Orford, Oregon
178 Northwest Front Street ............ 1997 Owned 2,353
Prairie City, Oregon
315 North Main Street ................. 1997 Owned 3,638
Riddle, Oregon
38770 North Main Street ............... 1997 Owned 2,997
Scio, Oregon
508 Main Street ....................... 1997 Owned 2,282
Moro, Oregon
144 South Main Street ................. 1997 Owned 2,146
Union, Oregon
36
<PAGE>
<CAPTION>
Year Square
Description/Address Opened Leased/Owned Footage
- --------------------------------------- ------ ------------ -------
165 North Maple Street ................ 1997 Owned 2,192
Yamhill, Oregon
475 NE Windy Knolls Drive ............. 1998 Owned 3,120
Bend, Oregon
185 East California ................... 1998 Owned 2,116
Jacksonville, Oregon
Loan Center
585 SW 6th, Suite #2 .................. 1996 Leased 900
Redmond, Oregon
Loan Processing Center
600 Main Street ....................... 1998 Leased 2,800
Klamath Falls, Oregon
</TABLE>
The net book value of the Association's investment in office, properties
and equipment totaled $12.3 million at September 30, 1998. See Note 6 of 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.
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, 1998.
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 20 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 pages 1 and 2 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
9 of the Annual Report is incorporated herein by reference. Disclosures
regarding Year 2000 Readiness are included in the above-referenced section of
the Annual Report.
37
<PAGE>
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
The information contained in the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Market Risk and
Asset/Liability Management" beginning on page 9 of the Annual Report is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
(a) Financial Statements
Independent Auditors' Report*
Consolidated Balance Sheets as of September 30, 1998 and
1997*
Consolidated Statements of Earnings for the Years
Ended September 30, 1998, 1997 and 1996*
Consolidated Statements of Shareholders' Equity for the
Years Ended September 30, 1998, 1997 and 1996*
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1998, 1997 and 1996*
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 20 of Notes 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
There have been no changes in or disagreements with Accountants on
accounting and financial disclosure during the year ended September 30, 1998.
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
38
<PAGE>
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.
39
<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 Robert A. Tucker***
10(d) Employment Agreement with Frank X. Hernandez
10(e) 1996 Stock Option Plan**
10(f) 1996 Management Recognition and Development Plan**
13 Annual Report to Shareholders
22 Subsidiaries of the Registrant
23 Consent of Deloitte & Touche LLP with respect to
financial statements of the Registrant
27 Financial Data Schedule
- -------------------
* 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
None.
40
<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 29, 1998 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 29, 1998
- ----------------------------
Gerald V. Brown Executive Officer and
Director (Principal
Executive Officer)
/s/ Marshall J. Alexander Senior Vice President and December 29, 1998
- ---------------------------- Chief Financial Officer
Marshall J. ALexander (Principal Financial
and Accounting Officer)
/s/ Rodney N. Murray Chairman of the Board December 29, 1998
- ---------------------------- of Directors
Rodney N. Murray
/s/ Bernard Z. Agrons Director December 29, 1998
- ----------------------------
Bernard Z. Agrons
/s/ Timothy A. Bailey Director December 29, 1998
- ----------------------------
Timothy A. Bailey
/s/ James D. Bocchi Director December 29, 1998
- ---------------------------
James D. Bocchi
/s/ William C. Dalton Director December 29, 1998
- ---------------------------
William C. Dalton
/s/ J. Gillis Hannigan Director December 29, 1998
- ---------------------------
J. Gillis Hannigan
/s/ Dianne E. Spires Director December 29, 1998
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Dianne E. Spires
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EXHIBIT 10(d)
Employment Agreement with Frank X. Hernandez
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EMPLOYMENT AGREEMENT
THIS AGREEMENT is made effective as of October1, 1998, by and between
KLAMATH FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION (the "Association"), Klamath
Falls, Oregon; KLAMATH FIRST BANCORP, INC. (the "Company"), an Oregon
corporation; and FRANK X. HERNANDEZ (the "Executive").
WHEREAS, the Association wishes to assure itself of the services of
Executive for the period provided in this Agreement; and
WHEREAS, the Executive is willing to serve in the employ of the Association
on a full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of his employment hereunder, Executive agrees to serve as
Senior Vice President/Chief Operating Officer of the Association. During said
period, Executive also agrees to serve, if elected, as an officer of the Company
or any subsidiary or affiliate of the Company or the Association.
2. TERMS AND DUTIES.
(a) The term of this Agreement shall be deemed to have commenced as of the
date first above written and shall continue for a period of twenty-four (24)
full calendar months thereafter. Commencing on the first anniversary date, and
continuing at each anniversary date thereafter, the Board of Directors of the
Association (the "Board") may extend the Agreement for an additional year. Prior
to the extension of the Agreement as provided herein, the Board of Directors of
the Association will conduct a formal performance evaluation of the Executive
for purposes of determining whether to extend the Agreement, and the results
thereof shall be included in the minutes of the Board's meeting.
(b) During the period of his employment hereunder, except for periods of
absence occasioned by illness, reasonable vacation periods, and reasonable
leaves of absence, Executive shall devote substantially all his business time,
attention, skill, and efforts to the faithful performance of his duties
hereunder including activities and services related to the organization,
operation and management of the Association; provided, however, that, with the
approval of the Board, as evidenced by a resolution of such Board, from time to
time, Executive may serve, or continue to serve, on the boards of directors of,
and hold any other offices or positions in, companies or organizations, which,
in such Board's judgment, will not present any conflict of interest with the
Association, or materially affect the performance of Executive's duties pursuant
to this Agreement.
3. COMPENSATION AND REIMBURSEMENT.
(a) The compensation specified under this Agreement shall constitute the
salary and benefits paid for the duties described in Sections 1 and 2. The
Association shall pay Executive as compensation a salary of $74,500.00 per year
("Base Salary"). Such Base Salary shall be payable in accordance with the
customary payroll practices of the Association. During the period of this
Agreement, Executive's Base Salary shall be reviewed at least annually; the
first such review will be made no later than one year from the date of this
Agreement. Such review shall be conducted by a Committee designated by the
Board, and the Board may increase Executive's Base Salary. In addition to the
Base Salary provided in this Section 3(a), the Association shall provide
Executive at no cost to Executive with all such other benefits as are provided
uniformly to permanent full-time employees of the Association.
(b) The Association will provide Executive with employee benefit plans,
arrangements and perquisites substantially equivalent to those in which
Executive was participating or otherwise deriving benefit from immediately
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prior to the beginning of the term of this Agreement, and the Association will
not, without Executive's prior written consent, make any changes in such plans,
arrangements or perquisites which would adversely affect Executive's rights or
benefits thereunder. Without limiting the generality of the foregoing provisions
of this Subsection (b), Executive will be entitled to participate in or receive
benefits under any employee benefit plans including, but not limited to,
retirement plans, supplemental retirement plans, pension plans, profit-sharing
plans, health-and-accident plan, medical coverage or any other employee benefit
plan or arrangement made available by the Association in the future to its
senior executives and key management employees, subject to, and on a basis
consistent with, the terms, conditions and overall administration of such plans
and arrangements. Executive will be entitled to incentive compensation and
bonuses as provided in any plan, or pursuant to any arrangement of the
Association, in which Executive is eligible to participate. Nothing paid to the
Executive under any such plan or arrangement will be deemed to be in lieu of
other compensation to which the Executive is entitled under this Agreement,
except as provided under Section 5(e).
(c) In addition to the Base Salary provided for by paragraph (a) of this
Section 3, the Association shall pay or reimburse Executive for all reasonable
travel and other obligations under this Agreement and may provide such
additional compensation in such form and such amounts as the Board may from time
to time determine.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Executive's term of employment under this Agreement, the provisions
of this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following: (i) the
termination by the Association of Executive's full-time employment hereunder for
any reason other than a Change in Control, as defined in Section 5(a) hereof;
disability, as defined in Section 6(a) hereof; death; retirement, as defined in
Section 7 hereof; or for Cause, as defined in Section 8 hereof; (ii) Executive's
resignation from the Association's employ, upon (A) unless consented to by the
Executive, a material change in Executive's function, duties, or
responsibilities, which change would cause Executive's position to become one of
lesser responsibility, importance, or scope from the position and attributes
thereof described in Sections 1 and 2, above, (any such material change shall be
deemed a continuing breach of this Agreement), (B) a relocation of Executive's
principal place of employment by more than 35 miles from its location at the
effective date of this Agreement, or a material reduction in the benefits and
perquisites to Executive from those being provided as of the effective date of
this Agreement, (C) the liquidation or dissolution of the Association, or (D)
any breach of this Agreement by the Association. Upon the occurrence of any
event described in clauses (A), (B), (C), or (D), above, Executive shall have
the right to elect to terminate his employment under this Agreement by
resignation upon not less than sixty (60) days prior written notice given within
a reasonable period of time not to exceed, except in case of a continuing
breach, four calendar months after the event giving rise to said right to elect.
(b) Upon the occurrence of an Event of Termination, the Association shall
pay Executive, or, in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be, as severance pay or liquidated
damages, or both, a sum equal to the payments due to the Executive for the
remaining term of the Agreement, including Base Salary, bonuses, and any other
cash or deferred compensation paid or to be paid (including the value of
employer contributions that would have been made on the Executive's behalf over
the remaining term of the agreement to any tax-qualified retirement plan
sponsored by the Association as of the Date of Termination), to the Executive
for the term of the Agreement provided, however, that if the Association is not
in compliance with its minimum capital requirements or if such payments would
cause the Association's capital to be reduced below its minimum capital
requirements, such payments shall be deferred until such time as the Association
is in capital compliance. All payments made pursuant to this Section 4(b) shall
be paid in substantially equal monthly installments over the remaining term of
this Agreement following the Executive's termination; provided, however, that if
the remaining term of the Agreement is less than one (1) year (determined as of
the Executive's Date of Termination), such payments and benefits shall be paid
to the Executive in a lump sum within 30 days of the Date of Termination.
(c) Upon the occurrence of an Event of Termination, the Association will
cause to be continued life, medical, dental and disability coverage
substantially identical to the coverage maintained by the Association for
Executive prior to his termination. Such coverage shall cease upon the
expiration of the remaining term of this Agreement.
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5. CHANGE IN CONTROL.
(a) No benefit shall be paid under this Section 5 unless there shall have
occurred a Change in Control of the Company or the Association. For purposes of
this Agreement, a "Change in Control" of the Company or the Association shall be
deemed to occur if and when (a) an offeror other than the Company purchases
shares of the common stock of the Company or the Association pursuant to a
tender or exchange offer for such shares, (b) any person (as such term is used
in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) is or
becomes the beneficial owner, directly or indirectly, of securities of the
Company or the Association representing 25% or more of the combined voting power
of the Company's then outstanding securities, (c) the membership of the board of
directors of the Company or the Association changes as the result of a contested
election, such that individuals who were directors at the beginning of any
twenty-four month period (whether commencing before or after the date of
adoption of this Plan) do not constitute a majority of the Board at the end of
such period, or (d) shareholders of the Company or the Association approve a
merger, consolidation, sale or disposition of all or substantially all of the
Company's or the Association's assets, or a plan of partial or complete
liquidation.
(b) If any of the events described in Section 5(a) hereof constituting a
Change in Control have occurred or the Board of the Association or the Company
has determined that a Change in Control has occurred, Executive shall be
entitled to the benefits provided in paragraphs (c), (d) and (e) of this Section
5 upon his subsequent involuntary termination of employment at any time during
the term of this Agreement (or voluntary termination following a Change of
Control following any demotion, loss of title, office or significant authority,
reduction in his annual compensation or benefits, or relocation of his principal
place of employment by more than 35 miles from its location immediately prior to
the Change in Control), unless such termination is because of his death,
retirement as provided in Section 7, termination for Cause, or termination for
Disability.
(c) Upon the occurrence of a Change in Control followed by the Executive's
termination of employment, the Association shall pay Executive, or in the event
of his subsequent death, his beneficiary or beneficiaries, or his estate, as the
case may be, as severance pay or liquidated damages, or both, a sum equal to
2.99 times the Executive's "base amount," within the meaning of Section
280G(b)(3) of the Internal Revenue Code of 1986 ("Code"), as amended. Such
payment shall be made in a lump sum paid within ten (10) days of the Executive's
Date of Termination.
(d) Upon the occurrence of a Change in Control followed by the Executive's
termination of employment, the Association will cause to be continued life,
medical, dental and disability coverage substantially identical to the coverage
maintained by the Association for Executive prior to his severance. In addition,
Executive shall be entitled to receive the value of employer contributions that
would have been made on the Executive's behalf over the remaining term of the
agreement to any tax-qualified retirement plan sponsored by the Association as
of the Date of Termination. Such coverage and payments shall cease upon the
expiration of thirty-six (36) months.
(e) Upon the occurrence of a Change in Control, the Executive shall be
entitled to receive benefits due him under, or contributed by the Company or the
Association on his behalf, pursuant to any retirement, incentive, profit
sharing, bonus, performance, disability or other employee benefit plan
maintained by the Association or the Company on the Executive's behalf to the
extent that such benefits are not otherwise paid to the Executive upon a Change
in Control.
(f) Notwithstanding the preceding paragraphs of this Section 5, in the
event that the aggregate payments or benefits to be made or afforded to the
Executive under this Section would be deemed to include an "excess parachute
payment" under Section 280G of the Code, such payments or benefits shall be
payable or provided to Executive over the minimum period necessary to reduce the
present value of such payments or benefits to an amount which is one dollar
($1.00) less than three (3) times the Executive's "base amount" under
Section 280G(b)(3) of the Code.
6. TERMINATION FOR DISABILITY.
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(a) If the Executive shall become disabled as defined in the Association's
then current disability plan (or, if no such plan is then in effect, if the
Executive is permanently and totally disabled within the meaning of Section
22(e)(3) of the Code as determined by a physician designated by the Board), the
Association may terminate Executive's employment for "Disability."
(b) Upon the Executive's termination of employment for Disability, the
Association will pay Executive, as disability pay, a bi-weekly payment equal to
three-quarters (3/4) of Executive's bi-weekly rate of Base Salary on the
effective date of such termination. These disability payments shall commence on
the effective date of Executive's termination and will end on the earlier of (i)
the date Executive returns to the full-time employment of the Association in the
same capacity as he was employed prior to his termination for Disability and
pursuant to an employment agreement between Executive and the Association; (ii)
Executive's full-time employment by another employer; (iii) Executive attaining
the age of 65; or (iv) Executive's death; or (v) the expiration of the term of
this Agreement. The disability pay shall be reduced by the amount, if any, paid
to the Executive under any plan of the Association providing disability benefits
to the Executive.
(c) The Association will cause to be continued life, medical, dental and
disability coverage substantially identical to the coverage maintained by the
Association for Executive prior to his termination for Disability. This coverage
and payments shall cease upon the earlier of (i) the date Executive returns to
the full-time employment of the Association, in the same capacity as he was
employed prior to his termination for Disability and pursuant to an employment
agreement between Executive and the Association; (ii) Executive's full-time
employment by another employer; (iii) Executive's attaining the age of 65; or
(iv) the Executive's death; or (v) the expiration of the term of this Agreement.
(d) Notwithstanding the foregoing, there will be no reduction in the
compensation otherwise payable to Executive during any period during which
Executive is incapable of performing his duties hereunder by reason of temporary
disability.
7. TERMINATION UPON RETIREMENT; DEATH OF EXECUTIVE.
Termination by the Association of Executive based on "Retirement" shall
mean retirement at age 65 or in accordance with any retirement arrangement
established with Executive's consent with respect to him. Upon termination of
Executive upon Retirement, Executive shall be entitled to all benefits under any
retirement plan of the Association or the Company and other plans to which
Executive is a party. Upon the death of the Executive during the term of this
Agreement, the Association shall pay to Executive's estate the compensation due
to the Executive through the last day of the calendar month in which his death
occurred.
8. TERMINATION FOR CAUSE.
For purposes of this Agreement, "Termination for Cause" shall include
termination because of the Executive's personal dishonesty, incompetence,
willful misconduct, breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of any law,
rule, or regulation (other than traffic violations or similar offenses) or final
cease-and-desist order, or material breach of any provision of this Agreement.
In addition, "Termination for Cause" shall include termination because of
continuing or repeated problems with the Executive's performance or conduct, the
Executive's inattention to duties, the refusal of the Executive to comply with
the Association's or the Company's instructions, policies or rules or other
conduct of the Executive which reflects adversely on the Association's or the
Company's reputation or operation. For purposes of this Section, no act, or the
failure to act, on Executive's part shall be "willful" unless done, or omitted
to be done, not in good faith and without reasonable belief that the action or
omission was in the best interest of the Association or its affiliates.
Notwithstanding the foregoing, Executive shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered to him a
copy of a resolution duly adopted by the affirmative vote of not less than
three-fourths of the members of the Board at a meeting of the Board called and
held for that purpose (after reasonable notice to Executive and an opportunity
for him, together with counsel, to be heard before the Board), finding that in
the good faith opinion
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of the Board, Executive was guilty of conduct justifying termination for Cause
and specifying the reasons thereof. The Executive shall not have the right to
receive compensation or other benefits for any period after termination for
Cause. Any stock options granted to Executive under any stock option plan or any
unvested awards granted under any other stock benefit plan of the Association,
the Company, or any subsidiary or affiliate thereof, shall become null and void
effective upon Executive's receipt of Notice of Termination for Cause pursuant
to Section 9 hereof, and shall not be exercisable by Executive at any time
subsequent to such Termination for Cause.
9. REQUIRED PROVISIONS.
(a) The Association may terminate Executive's employment at any time, but
any termination by the Association, other than Termination for Cause, shall not
prejudice Executive's right to compensation or other benefits under this
Agreement. Executive shall not have the right to receive compensation or other
benefits for any period after Termination for Cause as defined in Section 8
herein.
(b) If Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Association's affairs by a notice served
under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act ("FDIA")
(12 U.S.C. 1818(e)(3) and (g)(1)), the Association's obligations under the
Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the
Association may, in its discretion, (i) pay Executive all or part of the
compensation withheld while its contract obligations were suspended and (ii)
reinstate (in whole or in part) any of its obligations that were suspended.
(c) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Association's affairs by an order issued
under Section 8(e)(4) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(4) or (g)(1)),
all obligations of the Association under the Agreement shall terminate as of the
effective date of the order, but vested rights of the contracting parties shall
not be affected.
(d) If the Association is in default (as defined in Section 3(x)(1) of the
FDIA), all obligations under this Agreement shall terminate as of the date of
default, but this paragraph shall not affect any vested rights of the parties.
(e) All obligations under this Agreement shall be terminated (except to the
extent determined that continuation of the Agreement is necessary for the
continued operation of the Association): (i) by the Director of the Office of
Thrift Supervision (the "Director") or his or her designee at the time the
Federal Deposit Insurance Corporation or the Resolution Trust Corporation enters
into an agreement to provide assistance to or on behalf of the Association under
the authority contained in Section 13(c) of the FDIA or (ii) by the Director, or
his or her designee at the time the Director or such designee approves a
supervisory merger to resolve problems related to operation of the Association
or when the Association is determined by the Director to be in an unsafe or
unsound condition. Any rights of the parties that have already vested, however,
shall not be affected by such action.
(f) Any payments made to Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
Section 1828(k) and any regulations promulgated thereunder.
10. NOTICE.
(a) Any purported termination by the Association or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes of
this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean (A) if Executive's employment is
terminated for Disability, thirty (30) days after a Notice of Termination is
given (provided that he shall not have returned to the performance of his duties
on a full-time basis during such thirty (30) day period), and (B) if his
employment is terminated for any other reason,
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the date specified in the Notice of Termination (which, in the case of a
Termination for Cause, shall not be less than thirty (30) days from the date
such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, except upon the occurrence of a
Change in Control and voluntary termination by the Executive in which case the
Date of Termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, by a binding arbitration award, or
by a final judgment, order or decree of a court of competent jurisdiction (the
time for appeal there from having expired and no appeal having been perfected)
and provided further that the Date of Termination shall be extended by a notice
of dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Association will continue
to pay Executive his full compensation in effect when the notice giving rise to
the dispute was given (including, but not limited to, Base Salary) and continue
him as a participant in all compensation, benefit and insurance plans in which
he was participating when the notice of dispute was given, until the dispute is
finally resolved in accordance with this Agreement. Amounts paid under this
Section are in addition to all other amounts due under this Agreement and shall
not be offset against or reduce any other amounts due under this Agreement.
11. NON-COMPETITION.
(a) Upon any termination of Executive's employment hereunder pursuant to an
Event of Termination as provided in Section 4 hereof, Executive agrees not to
compete with the Association and/or the Company for a period of one (1) year
following such termination in any city, town or county in which the Association
and/or the Company has an office or has filed an application for regulatory
approval to establish an office, determined as of the effective date of such
termination. Executive agrees that during such period and within said cities,
towns and counties, Executive shall not work for or advise, consult or otherwise
serve with, directly or indirectly, any entity whose business materially
competes with the depository, lending or other business activities of the
Association and/or the Company. The parties hereto, recognizing that irreparable
injury will result to the Association and/or the Company, its business and
property in the event of Executive's breach of this Subsection 11(a) agree that
in the event of any such breach by Executive, the Association and/or the Company
will be entitled, in addition to any other remedies and damages available, to an
injunction to restrain the violation hereof by Executive, Executive's partners,
agents, servants, employers, employees and all persons acting for or with
Executive. Executive represents and admits that in the event of the termination
of his employment pursuant to Section 8 hereof, Executive's experience and
capabilities are such that Executive can obtain employment in a business engaged
in other lines and/or of a different nature than the Association and/or the
Company, and that the enforcement of a remedy by way of injunction will not
prevent Executive from earning a livelihood. Nothing herein will be construed as
prohibiting the Association and/or the Company from pursuing any other remedies
available to the Association and/or the Company for such breach or threatened
breach, including the recovery of damages from Executive.
(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Association and
affiliates thereof, as it may exist from time to time, is a valuable, special
and unique asset of the business of the Association. Executive will not, during
or after the term of his employment, disclose any knowledge of the past,
present, planned or considered business activities of the Association or
affiliates thereof to any person, firm, corporation, or other entity for any
reason or purpose whatsoever. Notwithstanding the foregoing, Executive may
disclose any knowledge of banking, financial and/or economic principles,
concepts or ideas which are not solely and exclusively derived from the business
plans and activities of the Association. In the event of a breach or threatened
breach by the Executive of the provisions of this Section, the Association will
be entitled to an injunction restraining Executive from disclosing, in whole or
in part, the knowledge of the past, present, planned or considered business
activities of the Association or affiliates thereof, or from rendering any
services to any person, firm, corporation, other entity to whom such knowledge,
in whole or in part, has been disclosed or is threatened to be disclosed.
Nothing herein will be construed as prohibiting the Association from pursuing
any other remedies available to the Association for such breach or threatened
breach, including the recovery of damages from Executive.
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12. SOURCE OF PAYMENTS.
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Association. The Company, however,
guarantees all payments and the provision of all amounts and benefits due
hereunder to Executive and, if such payments are not timely paid or provided by
the Association, such amounts and benefits shall be paid or provided by the
Company.
13. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior employment agreement between the Association or any
predecessor of the Association and Executive, except that this Agreement shall
not affect or operate to reduce any benefit or compensation inuring to the
Executive of a kind elsewhere provided. No provision of this Agreement shall be
interpreted to mean that Executive is subject to receiving fewer benefits than
those available to him without reference to this Agreement.
14. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive, the Association, the Company and their respective successors and
assigns.
15. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there by any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
16. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
17. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
18. GOVERNING LAW.
This Agreement shall be governed by the laws of the State of Oregon, unless
otherwise specified herein; provided, however, that in the event of a conflict
between the terms of this Agreement and any applicable federal or state law or
regulation, the provisions of such law or regulation shall prevail.
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19. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the employee within one
hundred (100) miles from the location of the Association, in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction; provided,
however, that Executive shall be entitled to seek specific performance of his
right to be paid until the Date of Termination during the pendency of any
dispute or controversy arising under or in connection with this Agreement.
20. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Association, if successful pursuant to a legal judgment,
arbitration or settlement.
21. INDEMNIFICATION.
The Association shall provide Executive (including his heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense, or in lieu thereof, shall indemnify
Executive (and his heirs, executors and administrators) to the fullest extent
permitted under law against all expenses and liabilities reasonably incurred by
him in connection with or arising out of any action, suit or proceeding in which
he may be involved by reason of his having been a director or officer of the
Association (whether or not he continues to be a directors or officer at the
time of incurring such expenses or liabilities), such expenses and liabilities
to include, but not be limited to, judgment, court costs and attorneys' fees and
the cost of reasonable settlements.
22. SUCCESSOR TO THE ASSOCIATION OR THE COMPANY.
The Association and the Company shall require any successor or assignee,
whether direct or indirect, by purchase, merger, consolidation or otherwise, to
all or substantially all the business or assets of the Association or the
Company, expressly and unconditionally to assume and agree to perform the
Association's or the Company's obligations under this Agreement, in the same
manner and to the same extent that the Association or the Company would be
required to perform if no such succession or assignment had taken place.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and their seal to be affixed hereunto by a duly authorized officer or
director, and Executive has signed this Agreement, all on the 18th day of
November, 1998.
ATTEST: KLAMATH FIRST FEDERAL SAVINGS
AND LOAN ASSOCIATION
BY: /s/ Rodney N. Murray
[SEAL]
ATTEST: KLAMATH FIRST BANCORP, INC.
BY: /s/ Rodney N. Murray
[SEAL]
WITNESS:
/s/ Frank X. Hernandez
Frank X. Hernandez
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EXHIBIT 13
1998 Annual Report to Shareholders
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CORPORATE PROFILE
Klamath First Bancorp, Inc. (Nasdaq: KFBI) is a unitary savings and loan holding
company, headquarterd in Klamath Falls, Oregon. The Company's subsidiary,
Klamath First Federal Savings & Loan Association, has a 64 year history, dating
back to its beginning in 1934. The Company provides a diversified line of loan
and deposit services to individuals, families, and samll business owners. The
Company recognizes there is great value in serving both large and small
communities of Oregon, and will continue to serve these communities through its
traditional "hands on" personal banking style using conventional delivery
channels. The Company will also give customers a choice to use technology such
as ATMs and telephone banking at their convenience and their choice. At
year-end, Klamath First Bancorp, Inc. was operating in 35 offices in 22 counties
throughout Oregon.
1998 HIGHLIGHTS
Total assets, loans, deposits and earnings reach new Company highs.
Total assets reached a Company milestone of $1.0 billion.
Total net loans increased by 21.08% or $116.3 million.
Earnings reached a new high of $9.6 million, 11.61% increase over
prior year.
Opened new full service branches in Bend and Jacksonville, Oregon.
Completed 5% stock buy back in May 1998.
Paid quarterly dividends totaling %.35 per share.
Added 8 new ATM locations.
Opened new loan processing center, with state-of-the-art software,
allowing for much faster loan closings and tracking, and greatly
expanded loan processing and servicing growth.
TABLE OF CONTENTS
Directors and Officers...........................4
Letter to Our Shareholders.......................5
Executive Officers...............................8
Financials....................................9-40
<PAGE>
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.
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
FINANCIAL CONDITION DATA (In thousands)
<S> <C> <C> <C> <C> <C>
Assets ................................................ $1,031,302 $ 980,078 $ 671,969 $ 647,840 $ 448,939
Cash and cash equivalents ............................. 66,985 32,043 16,180 175,994 19,557
Loans receivable, net ................................. 668,146 551,825 473,556 403,544 360,122
Investment securities held to maturity ................ 2,889 22,937 9,827 42,209 44,564
Investment securities available for sale .............. 203,224 261,846 75,987 12,606 12,224
Mortgage backed & related securities held to maturity . 3,662 5,447 6,783 -- --
Mortgage backed & related securities available for sale 43,336 64,869 74,109 -- --
Stock in FHLB of Seattle, at cost ..................... 10,173 7,150 4,774 4,426 4,156
Advances from FHLB of Seattle ......................... 167,000 129,000 90,000 20,000 --
Deposit liabilities ................................... 689,541 673,978 399,673 384,380 389,751
Shareholders' equity .................................. 145,081 144,462 153,411 164,685 49,308
</TABLE>
<TABLE>
<CAPTION>
Years Ended September 30,
--------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
SELECTED OPERATING DATA (In thousands)
<S> <C> <C> <C> <C> <C>
Total interest income ................................. $ 69,733 $ 54,167 $ 45,649 $ 35,107 $ 32,408
Total interest expense ................................ 37,848 29,856 23,286 20,441 16,555
---------- ---------- ---------- ---------- ----------
Net interest income ................................... 31,885 24,311 22,363 14,666 15,853
Provision for loan losses ............................. 674 370 120 120 150
---------- ---------- ---------- ---------- ----------
Net interest income after provision for loan losses ... 31,211 23,941 22,243 14,546 15,703
Non-interest income ................................... 3,202 810 522 381 352
BIF/SAIF Assessment ................................... -- -- 2,473 -- --
Non-interest expense .................................. 19,523 11,764 9,769 6,004 6,034
---------- ---------- ---------- ---------- ----------
Earnings before income taxes and cumulative effect
of a change in accounting principle ................... 14,890 12,987 10,523 8,923 10,021
Provision for income tax .............................. 5,339 4,429 4,413 3,349 3,867
---------- ---------- ---------- ---------- ----------
Earnings before cumulative effect of a change in
accounting principle .................................. 9,551 8,558 6,110 5,574 6,154
Cumulative effect at October 1, 1993 of a change in
accounting for income taxes ........................... -- -- -- -- 866
---------- ---------- ---------- ---------- ----------
Net Earnings .......................................... $ 9,551 $ 8,558 $ 6,110 $ 5,574 $ 5,288
========== ========== ========== ========== ==========
Basic earnings per share .............................. $1.05 $0.91 $0.56 N/A N/A
========== ========== ========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At or For the Years Ended September 30,
------------------------------------------------------------
1998 1997 1996 1995 1994
-------- ------- ------- ------- -------
KEY OPERATING RATIOS
Performance Ratios
Return on average assets
<S> <C> <C> <C> <C> <C>
(net income divided by average assets) ................ 0.96% 1.14% 0.99% 1.19% 1.26%
Return on average equity
(net income divided by average equity) ................ 6.52% 5.85% 3.69% 10.44% 10.93%
Interest rate spread
(difference between average yield on interest-earning
assets and average cost of interest-bearing liabilities) 2.57% 2.28% 2.22% 2.73% 3.40%
Net interest margin (net interest income as a
percentage of average interest-earning assets) ........ 3.36% 3.32% 3.65% 3.24% 3.84%
Average interest-earning assets to average
interest-bearing liabilities .......................... 119.84% 125.58% 137.78% 111.29% 111.13%
Net interest income after provision for loan losses
to total non-interest expenses ........................ 159.87% 203.51% 181.69% 242.27% 260.24%
Non-interest expense to average total assets .......... 1.96% 1.57% 1.99% 1.29% 1.43%
Efficiency ratio (non-interest expense divided by
net interest income plus non-interest income) 55.64% 46.83% 53.49% 39.90% 37.24%
Dividend payout ratio (dividends declared per share
divided by net income per share) ...................... 34.50% 34.09% 44.64% N/A N/A
Book value per share .................................. $16.30 $15.64 $14.98 N/A N/A
Asset Quality Ratios
Allowance for loan losses to total loans at
end of period ......................................... 0.28% 0.22% 0.19% 0.19% 0.20%
Non-performing assets to total assets ................. 0.05% 0.03% 0.04% 0.12% 0.05%
Non-performing loans to total loans, before net items . 0.07% 0.04% 0.04% 0.18% 0.05%
Capital Ratios
Equity to assets ...................................... 14.07% 14.74% 22.83% 25.42% 10.98%
Tangible capital ratio ................................ 8.26% 11.06% 19.22% 18.57% 10.98%
Core capital ratio .................................... 8.26% 11.06% 19.22% 18.57% 10.98%
Risk-based capital ratio .............................. 16.13% 23.12% 42.41% 36.87% 22.61%
Other Data
Number of
Real estate loans outstanding ......................... 9,155 8,393 7,704 7,110 6,654
Deposit accounts ...................................... 82,585 82,032 38,651 38,260 35,205
Full service offices .................................. 34 32 7 7 6
</TABLE>
<PAGE>
KLAMATH FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION AND KLAMATH
FIRST BANCORP, INC. BOARD OF DIRECTORS
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
Timothy A. Bailey
President of Klamath Medical Service Bureau, a health insurance company
headquartered in Klamath Falls, Oregon
James D. Bocchi
Retired; President of Klamath First Federal Savings and Loan Association from
1984 until June 1994
Gerald V. Brown
President and Chief Executive Officer of Klamath First Federal Savings and Loan
Association since June 1994
William C. Dalton
Self employed, and former owner of W. C. Dalton and Company, farming
J. Gillis Hannigan
Retired; Executive Vice President of Modoc Lumber in Klamath Falls, Oregon,
until January 1995
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
Dianne E. Spires, CPA
Partner since 1986 with Rusth, Spires & Menefee, LLP, a public accounting firm
located in Klamath Falls and Lakeview, Oregon
KLAMATH FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION AND KLAMATH FIRST
BANCORP, INC. OFFICERS
Gerald V. Brown
President and Chief Executive Officer
Robert A. Tucker
Senior Vice President - Chief Lending Officer
Marshall J. Alexander
Senior Vice President - Chief Financial Officer
Frank X. Hernandez
Senior Vice President - Chief Operating Officer
Robert L. Salley
Vice President
Gerald A. Page
Vice President
Carol Starkweather
Assistant Vice President
Craig M. Moore
Auditor/Corporate Counsel
Nora L. Boman
Treasurer
and all branch managers
<PAGE>
Dear Shareholder,
In 1934 several businessmen decided Klamath Falls, Oregon needed a
financial institution dedicated to providing the housing and savings needs of
its community. So on August 15, 1934 First Federal Savings & Loan of Klamath
Falls was organized. By December 1934, the board minutes showed total assets of
$5,506.90 with savings deposits of slightly over $5,000.00. Many things have
changed over the last 64 years. Our name has changed to Klamath First Bancorp,
Inc. with its sole subsidiary, Klamath First Federal Savings & Loan Association.
We now serve customers throughout Oregon through our 35 branch offices, and we
now have assets exceeding $1 billion. However, many things have also stayed the
same over those years. We see a continued demand for our products and quality
service through a convenient branch network. People still want to be treated
with respect and courtesy and customers expect to see friendly, knowledgeable
employees willing to help them with their banking needs when they enter one of
our branch offices. Accordingly, we continue to define customer service not by
the latest technological advance or the newest product we have introduced to our
customers, but by the one-on-one, person-to-person relationships we have
developed over the years in our bank lobbies and in the communities we serve.
Our employees take pride in their customer relationships and their ability
to provide quality products and services with reasonable fees or charges. This
attitude is represented in the Association's mission statement. "The mission of
Klamath First Federal Savings & Loan is to become the best provider of
traditional financial products and services in communities we serve throughout
Oregon. We will do this by giving exceptional value to the products we make
available to our customers in the markets we serve. This value will be not only
in terms of cost but also in the premier customer service our employees provide.
This will be accomplished within an atmosphere of commitment to the welfare of
our employees and the communities." Klamath First Federal truly understands
Oregonians and delivers contemporary banking services in the style, manner and
locations that they prefer.
Our retail franchise now covers 22 of Oregon's 36 counties, with 34 full
service branches and one loan production office in Redmond, Oregon. Part of our
continued effort to improve our franchise includes the opening of two new
branches towards the end of our fiscal year.
We opened our second Bend branch in a rapidly growing area of east Bend
across the street from Costco. Bend is in Deschutes County, Oregon's fastest
growing county. The area is noted for its year-round outdoor recreational life
style. Within easy driving distance is the Cascade mountain range which includes
the well known Mount Bachelor ski area, as well as majestic Mt. Jefferson and
the Three Sisters wilderness. Downhill and cross country snow skiing and
snowmobiling are popular winter activities, while popular summertime activities
include hiking, backpacking, mountain climbing, hunting, fishing, white water
rafting, and mountain biking. For the less activity-driven vacationer, the area
includes several destination resorts where one can just relax by the pool or
play a round of golf. This lifestyle has brought many new businesses and
retirees to Deschutes County.
We also opened a branch in Jacksonville, located in Jackson County,
Oregon's sixth largest county. Jacksonville is located about seven miles west of
Medford, and fifteen miles north of Ashland, where we also have branches. The
town of Jacksonville began in 1851 as a thriving mining camp, the result of gold
rush fever in the Rogue Valley. Miners flocked to the area and brought
prosperity in the form of saloons, hotels and gambling halls. The boom years
were short lived, and by the 1890's, agriculture replaced mining as the main
industry. Jacksonville remained relatively unchanged for the next 70 years as
surrounding communities continued to grow. In 1966 the entire town of
Jacksonville was designated a National Historic Landmark District. Today
Jacksonville is a thriving community where several buildings await to show you
"Living History." Activities include the famous Peter Britt Music Festival,
museum tours, shopping and sightseeing in the historic buildings. We are happy
to report that the branch has been open for less than 90 days, and has total
deposits in excess of $4.5 million.
<PAGE>
Klamath First Bancorp's branch franchise is as diverse as the communities
it serves. The two new branches and areas mentioned above are just a reflection
of that diversity and how we have been successful in meeting the banking needs
of Oregon's diverse population.
We ended the fiscal year with assets exceeding the one billion mark, at
$1,031.3 million, a 5.22% growth over last year's total of $980.1 million. With
this growth came record earnings and earnings per share and improved return on
equity. Fiscal year-end earnings grew 11.61% over the prior year and stood at
$9.6 million for the year ended September 30, 1998. This resulted in basic
earnings per share increasing by 15.38%, from $0.91 for the fiscal year-end 1997
to $1.05 for fiscal year-end 1998. Return on average equity improved from 5.85%
for fiscal year 1997 to 6.52% for fiscal year 1998. Considering growth, net
profit and improving shareholder value, this has been a banner year for Klamath
First Bancorp.
Another highlight of the year was in net loans receivable, which reached a
new high of $668.1 million from $551.8 million, a significant $116.3 million, or
21.08%, increase over last year. With this growth came an increase in the
Company's net interest margin from 3.32% to 3.36% for this fiscal year-end. This
improvement came during an overall lower rate environment and flat yield curve,
i.e., little difference in long term and short term interest rates. The Company
continues to experience strong demand for real estate loans, both residential
and commercial, and improving demand for our commercial and consumer loan
products. We will continue to be a traditional savings and loan, emphasizing
mortgage lending. With this in mind, this past year we opened a new loan
processing center across the street from our main office in Klamath Falls,
Oregon. We are now using state-of-the-art PC-based loan processing software,
that allows us to close mortgage loans much faster and track each loan from the
initial application to final closing. We believe the new processing center will
give us greatly expanded mortgage loan processing and servicing growth
potential.
The Company completed a successful 5.0% stock repurchase during the third
quarter. Based upon year-end shareholders' equity of $145.1 million and shares
outstanding of 8,898,972, book value per share increased to $16.30 compared to
$15.64 for the previous fiscal year-end. Since going public, the Company has
completed a total of 20% in stock repurchases. October 5, 1998 was our third
anniversary as a public company. This is significant because the Office of
Thrift Supervision, our primary regulator, ceased to control our share
repurchases. Even with the share repurchases and dividends paid, the Company has
an exceptionally strong capital base that exceeds the amount of capital required
to support the Company's ongoing business plan. After evaluating a variety of
alternatives to utilize this strong capital base more effectively and to attempt
to maximize shareholder value, management and the Board of Directors determined
that an aggressive share repurchase plan is currently the best alternative to
accomplish these objectives. On October 9th the Company announced it plans to
purchase up to 20%, or 1,983,353 shares, of its common stock by means of a
"Modified Dutch Auction Tender." The tender offer is subject to SEC approval and
is expected to be completed early in 1999. Our pro forma analysis indicates this
tender will show an immediate improvement in earnings per share and return on
equity.
Management continues to look at opportunities to improve customer service
and franchise value which equates to improved shareholder value. We believe that
there is great worth in the smaller communities throughout the Northwest and
banking customers still appreciate face-to-face, hands on banking, and support
the traditional community banking product delivery channels. We continue to look
for opportunities to profitably grow the franchise and look to expand in other
communities, both small and large, around the state and the Northwest.
We thank our employees, shareholders and customers for their support and
commitment to our goals. If you're not already a customer, drop by one of our
branches to experience first hand our friendly customer service, and if you are
a satisfied customer, remember to use and recommend Klamath First Federal.
/s/ Gerald V. Brown /s/ Rodney N. Murray
Gerald V. Brown, President Rodney N. Murray, Chairman of
and Chief Executive Officer the Board
<PAGE>
CORPORATE EXECUTIVE OFFICERS
Corporate Executive Officer Profiles
Gerald V. Brown has been with Klamath First Federal since 1957. He began as a
teller, and, in his 41 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.
Robert A. Tucker has been with Klamath First Federal Savings & Loan Association
since 1973. He is currently Senior Vice President - Chief Lending Officer
responsible for all lending functions of the Association. In his 25 years with
the Association, Mr. Tucker has served in various positions including Loan
Officer, Branch Manager, and Chief Operating Officer responsible for the
operations of the Association.
Frank X. Hernandez joined Klamath First Federal in 1991 as Human Resource
Manager after an 11 year career with Oregon's largest commercial bank where he
was a District Operations Officer and Branch Manager. He currently serves as
Chief Operating Officer responsible for all of the Association's non-loan
operations including deposit acquisition, information systems and investor
relations.
Marshall J. Alexander has been with Klamath First Federal Savings & Loan since
1986. He began as the Association's Controller, was promoted to Chief Financial
Officer in August 1994 and was named Senior Vice President and Chief Financial
Officer in November 1998. Mr. Alexander brought over ten years of financial
management experience in both regional banks and small community banks prior to
joining the Association. He is responsible for evaluating strategic shareholder
value enhancements, supervising the accounting department, and managing the
investments of the Company.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General Klamath First Bancorp, Inc. (the "Company"), an Oregon corporation,
is 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 commercial real
estate and multi-family residential loans and loans to consumers and small
businesses.
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-bearing 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 the controlling of 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 taxes.
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 34 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 state of Oregon,
particularly the 22 counties in which the offices are located.
Federal Legislation
On September 30, 1996, the President signed into law an omnibus
appropriations act (the "Act") that included several changes that affected the
Association. The signed Act (i) recapitalized the SAIF through a one-time
special assessment; (ii) provided for the conditional merger of the Bank
Insurance Fund ("BIF") and the SAIF during 1999 into one Deposit Insurance Fund
("DIF"), at which time banks and thrifts would pay the same deposit insurance
premiums; and (iii) granted financial institutions limited regulatory relief.
With respect to the assessment to recapitalize SAIF, the Act required
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 was $2.5 million and was accrued during the quarter ended September
30, 1996.
<PAGE>
In separate legislation enacted in 1996, 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, 1998, 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.
Market Risk and Asset/Liability Management
The Company's financial performance is affected by the success of the fee
generating products it offers to its customers, the credit quality of its loans
and securities, and the extent to which its earnings are affected by changes in
interest rates. Credit risk is the risk that borrowers will become unable to
repay their debts. The Company utilizes no derivatives to mitigate its credit
risk, relying instead on strict underwriting standards, loan review, and an
adequate allowance for loan losses.
Interest rate risk is the risk of loss in principal value and risk of
earning less net interest income due to changes in interest rates. Put
simplistically, savings institutions solicit deposits and lend the funds they
receive to borrowers. The difference between the rate paid on deposits and the
rate received on loans is the interest rate spread. If the rates paid on
deposits change, or reprice, with the same timing and magnitude as the rates
change on the loans, there is perfect matching of interest rate changes and
thus, no change in interest rate spread and no interest rate risk. In actuality,
interest rates on deposits and other liabilities do not reprice at the same time
and/or with the same magnitude as those on loans, investments and other
interest-earning assets. For example, the Association primarily originates fixed
rate residential loans for its portfolio. Because fixed rate loans, by
definition, do not reprice until payoff and because the majority of residential
loans have terms of 15 to 30 years (with actual expected lives of seven to ten
years), the interest rate characteristics of the loan portfolio do not exactly
match the Company's liabilities, which consist of deposits with maturities
ranging up to 10 years and borrowings which mature or reprice in three years or
less. When interest rates change, this mismatch creates changes in interest rate
spread that influence net interest income and result in interest rate risk.
Interest rate risk is also expressed through changes in the net portfolio
value ("NPV"). For example, the market value of investment securities and loans
is impacted by changes in interest rates. Fixed rate loans and investments held
in the Company's portfolio increase in market value if interest rates decline.
Conversely, the market value of fixed rate portfolio assets decrease in an
increasing interest rate environment. Assets with adjustable rates are less
subject to market value changes due to interest rate fluctuations.
Interest rate risk is addressed by the Company's Asset Liability Management
Committee ("ALCO"), which includes senior management representatives. The ALCO
monitors and considers methods of managing interest rate risk by monitoring the
one year interest rate gap and changes in NPV and net interest income under
various interest rate scenarios. The ALCO attempts to manage the various
components of the Company's balance sheet to minimize the impact of sudden and
sustained changes in interest rates on NPV and net interest income.
<PAGE>
NPV is calculated based on the net present value of estimated cash flows
utilizing market prepayment assumptions and market rates of interest provided by
independent broker quotations and other public sources.
Computation of forecasted effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments, and deposit decay, and should not be relied upon as
indicative of actual future results. Further, the computations do not
contemplate any actions the ALCO could undertake in response to changes in
interest rates.
The Company's exposure to interest rate risk is reviewed on at least a
quarterly basis by the Board of Directors and the ALCO. Interest rate risk
exposure is measured using interest rate sensitivity analysis to determine the
Company's change in NPV in the event of hypothetical changes in interest rates.
If potential changes to NPV and net interest income resulting from hypothetical
interest rate swings are not within the limits established by the Board, the
Board may direct management to adjust its asset and liability mix to bring
interest rate risk within Board- approved limits.
The Association continues to primarily originate fixed rate residential
loans for its portfolio. In order to reduce the exposure to interest rate
fluctuations, the Company has developed strategies to manage its liquidity,
shorten the effective maturities and increase the repricing of certain
interest-earning assets, and increase the effective maturities of certain
interest- bearing liabilities. First, the Company has put greater emphasis on
ARMs for residential lending, which generally reprice in one year. In the
current low interest rate environment, ARMs have not been attractive to
borrowers so the Company purchased participations in adjustable rate multi-
family and commercial real estate loans. Second, the Company has focused its
non-residential lending focusing on adjustable or floating rate and/or
short-term loans. Third, the Company has focused its investment activities on
short- and medium-term securities, including adjustable rate mortgage-backed
securities. Fourth, the Company has attempted to maintain and increase its
regular savings and transaction deposit accounts, which are considered to be
relatively resistant to changes in interest rates. The branch acquisition and
new deposit product offerings provided significant progress in attaining this
goal. Fifth, the Company has utilized long-term borrowings and deposit marketing
programs to lengthen the term to repricing of its liabilities. The Company will
continue to explore opportunities in these areas.
Interest rate sensitivity analysis is used to measure the Company's
interest rate risk by computing estimated changes in NPV of its cash flows from
assets and liabilities in the event of a range of assumed changes in market
interest rates. NPV represents the market value of portfolio equity and is equal
to the market value of assets minus the market value of liabilities. This
analysis assesses the risk of loss in market rate sensitive instruments in the
event of sudden and sustained increases and decreases in market interest rates
ranging from one hundred to two hundred basis points. The Company's Board of
Directors has adopted an interest rate risk policy which establishes maximum
decreases in the NPV ranging from 10% to 95% in the event of sudden and
sustained increases and decreases in market interest rates. The following tables
present the Association's projected change in NPV and net interest income for
the various rate shock levels as of September 30, 1998 and 1997. NPV values and
impact on net interest income for the Association only are regularly calculated
by the OTS and internally based on regulatory recommendations. The assets and
liabilities at the parent company level are not considered in the analysis. The
exclusion of holding company assets and liabilities does not have a significant
<PAGE>
effect on the analysis of NPV sensitivity. All market rate sensitive instruments
presented in these tables are classified as either held to maturity or available
for sale. The Association has no trading securities.
<TABLE>
<CAPTION>
CHANGES IN NET PORTFOLIO VALUE as of September 30, 1998
(Dollars in thousands)
- --------------------------------------------------------------------------------------------
Change in Market Value of Actual Actual Percent
Interest Rates Portfolio Equity Increase(Decrease) Increase(Decrease)
- ---------------------------------- ---------------- ------------------ ------------------
<S> <C> <C> <C>
200 basis point rise .............. $ 63,220 ($ 52,597) (45%)
100 basis point rise .............. 92,401 (23,416) (20%)
Base Rate Scenario ................ 115,817 -- --
100 basis point decline ........... 122,858 7,040 6%
200 basis point decline ........... 128,121 12,304 11%
<CAPTION>
CHANGES IN NET INTEREST INCOME as of September 30, 1998
(Dollars in thousands)
- --------------------------------------------------------------------------------------------
Change in Net Interest Actual Actual Percent
Interest Rates Income Increase(Decrease) Increase(Decrease)
- ----------------------------------- ------------- ------------------ ------------------
<S> <C> <C> <C>
200 basis point rise .............. $ 23,335 ($4,097) (15%)
100 basis point rise .............. 25,604 (1,820) (7%)
Base Rate Scenario ................ 27,432 -- --
100 basis point decline ........... 28,018 586 2%
200 basis point decline ........... 27,948 516 2%
<CAPTION>
CHANGES IN NET PORTFOLIO VALUE as of September 30, 1997
(Dollars in thousands)
- ---------------------------------------------------------------------------------------------
Change in Market Value of Actual Actual Percent
Interest Rates Portfolio Equity Increase(Decrease) Increase(Decrease)
- ----------------------------------- ---------------- ------------------ ------------------
<S> <C> <C> <C>
200 basis point rise .............. $ 82,490 ($ 37,576) (31%)
100 basis point rise .............. 102,883 (17,183) (14%)
Base Rate Scenario ................ 120,066 -- --
100 basis point decline ........... 127,433 7,368 6%
200 basis point decline ........... 127,243 7,177 6%
<PAGE>
<CAPTION>
CHANGES IN NET INTEREST INCOME as of September 30, 1997
(Dollars in thousands)
- ---------------------------------------------------------------------------------------------
Change in Net Interest Actual Actual Percent
Interest Rates Income Increase(Decrease) Increase(Decrease)
- ----------------------------------- ------------- ------------------ ------------------
<S> <C> <C> <C>
200 basis point rise .............. $ 23,518 ($3,852) (14%)
100 basis point rise .............. 25,609 (1,761) (6%)
Base Rate Scenario ................ 27,370 -- --
100 basis point decline ........... 28,428 1,058 4%
200 basis point decline ........... 28,925 1,556 6%
</TABLE>
The preceding table indicates that at September 30, 1998 and 1997, in the
event of a sudden and sustained increase in prevailing market interest rates,
the Association's NPV and net interest income would be expected to decrease. At
September 30, 1998 and 1997, the Association's estimated changes in NPV were
within the targets established by the Board of Directors.
Certain shortcomings are inherent in the method of analysis presented in
the computation of NPV. Actual values may differ from those projections
presented, should market conditions vary from assumptions used in the
calculation of NPV. Certain assets, such as adjustable rate loans, have features
which restrict changes in interest rates on a short-term basis and over the life
of the assets. In addition, the proportion of adjustable rate loans in the
Association's portfolio could decrease in future periods if market interest
rates remain at or decrease below current levels due to refinance activity.
Further, in the event of a change in interest rates, prepayment and early
withdrawal levels would likely deviate significantly from those assumed in the
NPV. Finally, the ability of many borrowers to repay their adjustable rate
mortgage loans may decrease in the event of interest rate increases.
A conventional measure of interest rate sensitivity for savings
institutions is the calculation of interest rate "gap." This measure of 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 exceed 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, 1998, the Association's one-year cumulative gap was a
negative 32.19% of total assets compared to a negative 33.22% of total assets at
September 30, 1997. See table on page 12.
<PAGE>
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.
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------
1998 1997 1996
------------- ------------ -------------
(In thousands)
Earning assets maturing
<S> <C> <C> <C>
or repricing within one year ...... $ 220,952 $ 199,320 $ 174,921
Interest-bearing liabilities
maturing or repricing
within one year ................... 529,929 524,942 348,852
Deficiency of earning assets
over interest-bearing liabilities
as a percent of total assets ...... (32.19%) (33.22%) (25.88%)
Percent of assets to liabilities
maturing or repricing
within one year ................... 39.96% 37.97% 50.14%
</TABLE>
<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, 1998. 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.
<TABLE>
<CAPTION>
3 Months > 3 Months > 6 Months > 1 to 3 > 3 to 5 > 5 to 10 > 10 to 20 > 20
or Less to 6 Months to 1 Year Years Years Years Years Years TOTAL
-------- ----------- ---------- -------- -------- --------- ---------- -------- ----------
ASSETS
Permanent 1-4 Mortgages
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Adjustable Rate .... $ 14,208 $ 2,137 $ 12,409 $ 1,400 $-- $-- $-- $-- $ 30,154
Fixed Rate ......... 4,750 4,227 6,883 341 3,723 21,094 93,982 438,824 573,824
Other Mortgage Loans
Adjustable Rate .... 4,231 4,813 14,065 8,410 1,773 -- -- -- 33,292
Fixed Rate ......... 1,180 126 2,836 2,692 5,881 4,879 9,298 829 27,721
Mortgage Backed and .. 33,161 1,274 1,194 3,111 -- 4,045 -- 3,619 46,404
Related Securities
Non-Real Estate Loans
Adjustable Rate .... 4,677 387 1,301 147 -- -- -- -- 6,512
Fixed Rate ......... 1,347 519 595 719 624 548 1,215 -- 5,567
Investment Securities 83,347 -- 21,285 91,755 40,751 1,987 11,494 3,034 253,653
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Rate Sensitive
Assets $146,901 $ 13,483 $ 60,568 $108,575 $ 52,752 $ 32,553 $115,989 $446,306 $977,127
======== ======== ======== ======== ======== ======== ======== ======== ========
LIABILITIES
Deposits - Fixed Maturity$ 94,892 $ 94,311 $ 88,867 $ 68,208 $ 30,039 $ 19,033 $-- $-- $395,350
Deposits - Interest Bearing
Checking ............. 5,292 5,292 10,584 24,697 24,696 -- -- -- 70,561
Deposits - Money Market 29,814 30,960 30,960 22,934 -- -- -- -- 114,668
Deposits - Passbook and
Statement Savings .... 4,606 4,606 9,212 21,495 21,495 -- -- -- 61,414
Other Interest Bearing
Liabilities .......... 91,533 10,000 42,000 45,000 -- -- -- -- 188,533
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Rate Sensitive
Liabilities ..... $226,137 $145,169 $181,623 $182,334 $ 76,230 $ 19,033 $-- $-- $830,526
======== ======== ======== ======== ======== ======== ======== ======== ========
Interest Rate Sensitivity
Gap ($79,236) ($131,686) ($121,055) ($73,759) ($23,478) $ 13,520 $115,989 $446,306 $146,601
Cumulative Interest Rate
Sensitivity Gap ...... ($79,236) ($210,922) ($331,977) ($405,736) ($429,214) ($415,694) ($299,705) $146,601 --
Sensitivity Gap to Total
Assets -7.68% -12.77% -11.74% -7.15% -2.28% 1.31% 11.25% 43.28% --
Cumulative Interest Rate
Sensitivity Gap
to Total Assets ...... -7.68% -20.45% -32.19% -39.34% -41.62% -40.31% -29.06% 14.22% --
</TABLE>
<PAGE>
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, stock-based
compensation expense, amortization of deferred loan origination fees, increases
or decreases in various escrow accounts and increases or decreases in other
assets and liabilities. During the fiscal year ended September 30, 1997, there
was a major one-time adjustment to cash resulting from the Wells Fargo branch
acquisition which contributed approximately $220.9 million in cash. 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. 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 4.00% of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less. At
September 30, 1998, the Association's regulatory liquidity, as measured for
regulatory purposes, was 28.38%.
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, 1998, the Association was in compliance with
all regulatory capital requirements effective as of such date, with tangible,
core and risk-based capital of 8.26%, 8.26% and 16.13%, respectively. (See Note
17 to Consolidated Financial Statements.)
Year 2000 Readiness
As with other organizations, some of the data processing programs used by
the Company were originally designed to recognize calendar years by their last
two digits. Calculations performed using these truncated fields may not work
properly with dates beyond 1999. Correct processing of date oriented information
is critical to the operation of all financial institutions because computer
systems track deposit account and loan balances, record transaction activity in
accounts, and calculate interest amounts, among other activities. Failure of
these processes could severely hinder the ability to continue operations and
provide customer service. Because of the critical nature of the issue, the
Company established a committee early in 1997 to address "Year 2000" issues. The
committee, consisting of executive management, technical staff, and a full time
project manager, has chosen to use the Office of Thrift Supervision Year 2000
Checklist as a guide for Year 2000 preparation. The committee is also using a
Year 2000 Testing Guide and Contingency Guide provided by Alex Information
Systems, Inc. to complement the OTS checklist.
<PAGE>
The Federal Financial Institutions Examination Council ("FFIEC") has also
issued guidelines for Year 2000 project management by financial institutions,
which are being followed by the Company. These guidelines identify the following
five steps for Year 2000 conversion programs:
Awareness Phase - Define the Year 2000 problem and establish a Year 2000
program team and overall strategy. This step was completed by the Company
as of September 30, 1997.
Assessment Phase - Assess the size and complexity of the problem and detail
the magnitude of effort necessary to address Year 2000 issues, including
hardware, software, networks, automated teller machines, etc. This step was
approximately 94% complete by September 30, 1998 and assessment is ongoing.
Renovation Phase - This phase includes hardware and software upgrades,
system replacements, vendor certification and associated changes. This
phase encompasses discussions with and monitoring of outside servicers and
third-party software providers. This step is approximately 95% complete
with full completion expected by December 31, 1998.
Validation/Testing Phase - This process includes testing of hardware and
software components. Testing is completed by performing extensive tests
with the computer dates changed to January 1,2, and 3, 2000. Such testing
will continue through June 30, 1999, with the most critical functions
tested first. This allows time to correct any discovered deficiencies
before the end of 1999. In-house systems are 100% tested, many third party
vendors have been tested and others are scheduled for testing soon.
Overall, this phase is approximately 88% complete as of September 30, 1998.
Implementation Phase - Systems successfully tested will be certified as
Year 2000 compliant. For any system failing validation testing, the
business impact must be assessed and a contingency plan implemented. This
phase is scheduled for completion by June 30, 1999.
All personal computers ("PCs") and related software throughout the Company
have been inventoried and tested for Year 2000 capability. The company is using
two testing methods, BIOS and off line, for PC certification of Year 2000
compatibility. PCs must pass both tests to be considered ready for Year 2000. As
of September 30, 1998, all of the Company's PCs and software are Year 2000
compatible. The Company's Wide Area Network and various Local Area Networks have
also been upgraded, tested, and determined to be Year 2000 prepared.
Data processing for the Company is provided by Fiserv, the nation's largest
third party service bureau serving financial institutions. Fiserv has stated
that all their processing was Year 2000 ready of as June 30, 1998. The Company
has scheduled test procedures for critical service bureau processes in December
1998.
Software purchased from a Fiserv affiliate is used for applications such as
accounts payable, fixed assets, and investment portfolio accounting. The
investment portfolio accounting software is Year 2000 compatible as of September
30, 1998. The Company currently uses DOS-based
<PAGE>
versions of the application software for accounts payable and fixed assets which
are not Year 2000 capable. The Fiserv affiliate has Year 2000 ready versions of
these applications available as of September 30, 1998. The Company will convert
the accounts payable and fixed asset applications to the Year 2000 ready
software in January 1999. Appropriate testing procedures will be performed at
that time.
Other third party vendors identified by the Company were sent
questionnaires in May 1998 regarding their preparations for Year 2000. Responses
have been received and further updates will be requested in order to monitor
vendors' status.
Critical data processing applications, in addition to those provided by the
service bureau, have been identified. These include applications such as
electronic processing through the Federal Reserve Bank and ATM processing.
Testing procedures for these applications are in the process of development.
Contingency plans are also being developed by each department. The contingency
plans address actions to be taken to continue operations in the event of system
failure due to areas that cannot be tested in advance, such as power and
telephone service, which are vital to business continuation.
To assist customers in understanding Year 2000 issues and to inform them of
the Company's actions to prepare, brochures regarding Year 2000 preparedness
have been distributed to all customers. Another mailing is anticipated during
the fiscal year ending September 30, 1999.
The Company believes that the Year 2000 issue will not pose significant
operational problems and is not anticipated to be material to its financial
position or results of operations in any given year. As of September 30, 1998,
the Company estimated that total Year 2000 implementation costs will not exceed
$200,000 and are expected to be expensed over a period of 18 months, affecting
fiscal years 1998, 1999, and 2000. This estimate is based on information
available at September 30, 1998, and may be revised as additional information
and actual costs become available. During the year ended September 30, 1998,
$89,000 of Year 2000 expenses were incurred and expensed.
Asset Quality
Non-Performing Assets
At September 30, 1998, the ratio of non-performing assets (including
nonaccrual loans, accruing loans greater than 90 days delinquent, real estate
owned, and other repossessed assets) to total assets was .05%. The Association
intends to maintain asset quality by continuing its focus on one- to four-family
lending. With the introduction of other lending options such as commercial and
multi-family real estate loans, equity lines of credit, other consumer loan
products, and commercial loans, the Association has evaluated the trade off
associated with planned loan growth and the greater credit risk associated with
such forms of lending.
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. They also review recommendations for new
classifications and 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
<PAGE>
mention," "substandard," "doubtful," and "loss." All nonaccrual 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,
----------------------------------------------
1998 1997 1996
------------- ------------- -------------
(In thousands)
<S> <C> <C> <C>
Loss .............................. $ 3 $ -- $ --
Doubtful .......................... -- -- --
Substandard ....................... 521 304 281
Special Mention ................... 2,452 843 645
_____________ _____________ _____________
$ 2,976 $ 1,147 $ 926
============= ============= =============
</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 is recorded based on the Association's evaluation of specific loans
in its portfolio, historical loan loss experience, the volume and type of
lending, geographic distribution of lending, general economic conditions, and
the existing level of the Association's allowance for loan losses.
The following table sets forth at the dates indicated the loan loss
allowance and charge-offs:
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------
1998 1997 1996
-------------- ------------- --------------
(In thousands)
<S> <C> <C> <C>
General loan loss allowance ....... $ 1,947 $ 1,296 $ 928
Specific loss allowance ........... 3 -- --
Charge-offs ....................... 20 2 --
</TABLE>
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30,
1998 AND 1997
General
The acquisition of 25 branches from Wells Fargo Bank, N.A. late in the
fiscal year ended September 30, 1997 (the "Acquisition") has had significant
positive impact on the operations of the Company. The overnight expansion from
eight branches to thirty-three and the resultant increase in deposits and number
of employees is reflected in increases in non-interest income and expenses.
Additionally, two branches were opened this year, including a branch that the
Company constructed in Bend and a branch the Company purchased from Key Bank in
Jacksonville. The Company ended fiscal year 1998 with 34 full service branches
in operation, and one loan production office.
With the last year's Acquisition and other activities throughout this year,
net earnings increased $1.0 million, or 11.6%, from $8.6 million for the year
ended September 30, 1997, to $9.6 million for the year ended September 30, 1998.
Net interest income increased $7.6 million or 31.2% from $24.3 million for the
year ended September 30, 1997 to $31.9 million for the year ended September 30,
1998. This increase was primarily attributable to an increase in total average
interest-earning assets from $732.3 at September 30, 1997 to $950.1 at September
30, 1998. The increase in net interest income was augmented by a significant
increase in non-interest income from $0.8 million for the year ended September
30, 1997 to $3.2 million for the year ended September 30, 1998. This increase is
primarily attributable to an increase in service fee income due to the addition
of the 25 acquired branches which contributed 42,000 additional deposit
accounts.
Interest Income
The $217.8 million increase in average interest earning assets contributed
to an increase in interest income of $15.6 million or 28.7% from $54.1 million
for the year ended September 30, 1997 to $69.7 million for the year ended
September 30, 1998. A significant portion of the increase in average
interest-earning assets was the result of converting the cash obtained in the
Acquisition into investment securities. This in turn increased the proportion of
investment securities to total earning assets and decreased the proportion of
loans. In most cases, loans will generate higher average yields than
investments. As a result, although total interest income increased for the year,
the average yield on interest earning assets decreased slightly from 7.40% for
the year ended September 30, 1997 to 7.34% for the year ended September 30,
1998.
Of the $15.6 million increase in interest income, $8.7 million is
attributable to additional loan income due to an increase in loans receivable.
The increase in loans receivable was primarily a result of the purchase of
participation loans and loan originations exceeding loan refinancing, which
resulted in greater net loan growth for 1998.
The remaining increase in interest income of $6.9 million was a result of
investing the proceeds of the Acquisition in fixed rate U.S. Government and
agency securities with maturities of less than five years, fixed and adjustable
rate corporate securities and overnight funds. The average balance of
investments and mortgage-backed and related securities increased by $108.0
million, or 57.9%, for the year ended September 30, 1998 compared with the
comparable period in 1997.
Interest Expense
Interest expense increased $8.0 million due to increases in interest
expense on deposits and borrowings. Interest expense on deposits increased $6.5
<PAGE>
million or 28.8% from $22.4 million for the year ended September 30, 1997 to
$28.9 million for the year ended September 30, 1998.
Average deposits increased by $180.3 million for the year ended September
30, 1998 compared to the year ended September 30, 1997, but the average interest
paid on interest-bearing deposits decreased 40 basis points from 4.98% for the
year ended September 30, 1997 to 4.58% for the year ended September 30, 1998.
This decrease was a result of the lower cost of deposits obtained in the
Acquisition and overall lower rates in 1998 over 1997. These lower cost deposits
were outstanding for the entire year ended September 30, 1998 but only two and a
half months during the prior year, thus having a greater impact on the current
year. Interest expense on borrowings increased $1.5 million due to increased
average borrowings of $29.3 million.
The general interest rate environment during the year was one of low rates
and a flat yield curve. Analysts report that the largest 50 public banking
companies experienced a 20-basis-point compression in net interest margin for
the year ended September 30, 1998. In spite of this environment, the Company
improved its net interest margin (net interest income as a percent of average
interest-earning assets) from 3.32% for the fiscal year ended September 30, 1997
to 3.36% for the year ended September 30, 1998. This improvement is related to
the Company's success in converting proceeds from investment securities into
loans which yield a higher return than investment securities as well as
improving the mix of loans originated to include more higher yielding loans than
in the past. Interest rate spread (the difference between average yield on
interest-earning assets and average cost of interest-bearing liabilities) also
improved, from 2.28% for the year ended September 30, 1997 to 2.57% for the
current year. This improvement was primarily the result of the lower cost
transaction accounts obtained with the Acquisition. The addition of
non-interest-bearing checking deposits through the Acquisition had the further
positive impact of reducing overall cost of funds.
<PAGE>
AVERAGE BALANCES, NET INTEREST INCOME and YIELDS EARNED and RATES PAID
The following table presents, for the periods indicated, information regarding
average balances of asset 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. Nonaccrual loans are reflected as
carrying a zero yield.
<TABLE>
<CAPTION>
Years Ended
September 30,
-----------------------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------------- -------------------------------- ---------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
--------------------------------- -------------------------------- ---------------------------------
INTEREST-EARNING ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable ..... $614,457 $ 49,508 8.06% $515,555 $ 40,851 7.92% $440,510 $ 35,262 8.00%
Mortgage backed and
related securities ... 61,000 3,680 6.03% 74,349 4,716 6.34% 52,275 3,137 6.00%
Investment securities 233,715 14,149 6.05% 112,319 6,847 6.10% 87,929 5,382 6.12%
Federal funds sold ... 16,820 917 5.45% 17,533 931 5.31% 6,521 462 7.09%
Interest earning deposits 16,108 862 5.35% 6,132 327 5.32% 21,372 1,059 4.95%
FHLB stock ........... 7,983 617 7.73% 6,431 495 7.70% 4,552 348 7.64%
-------- -------- -------- -------- -------- --------
Total interest-earning
assets 950,083 69,733 7.34% 732,319 54,167 7.40% 613,159 45,650 7.45%
Non-interest-earning
assets 48,202 16,527 2,130
-------- -------- -------
Total Assets ......... $998,285 $748,846 615,289
======== ======== =======
INTEREST-BEARING LIABILITIES
Tax and insurance
reserve $ 5,895 $ 145 2.47% $ 4,614 $ 137 2.97% $ 4,490 $ 148 3.30%
Passbook and
statement savings .... 62,333 1,683 2.70% 40,281 1,271 3.15% 34,198 983 2.87%
Interest-bearing checking 73,806 1,089 1.48% 35,892 791 2.20% 22,064 546 2.47%
Money market ......... 110,650 4,275 3.86% 62,171 2,391 3.85% 50,308 1,950 3.88%
Certificates of deposit 384,400 21,885 5.69% 312,511 18,012 5.76% 282,446 16,772 5.94%
FHLB advances/Short term
borrowings ........... 155,712 8,771 5.63% 127,659 7,254 5.68% 51,517 2,888 5.60%
-------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities .......... 792,796 37,848 4.77% 583,128 29,856 5.12% 445,023 23,287 5.23%
Non-interest-bearing
liabilities .......... 59,037 19,417 4,892
-------- -------- -------- -------- -------- --------
Total liabilities .... 851,833 602,545 449,915
Shareholders' equity . 146,452 146,301 165,374
-------- -------- --------
Total Liabilities and
Shareholders' Equity . $998,285 $748,846 $615,289
======== ======== ========
Net interest income .. $ 31,885 $ 24,311 $22,363
======== ======== ========
Interest rate spread . 2.57% 2.28% 2.22%
======== ======== ========
Net interest margin .. 3.36% 3.32% 3.65%
======== ======== ========
Average interest-earning
assets to average
interest-bearing
liabilities .......... 119.84% 125.58% 137.78%
======= ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For the Years Ended September 30, For the Years Ended September 30,
------------------------------------------------ ----------------------------------------------
1997 VS 1998 Increase (Decrease) Due To 1996 VS 1997 Increase (Decrease) Due To
------------------------------------------------ ----------------------------------------------
Net Increase Net Increase
Rate Volume Rate/Vol (Decrease) Rate Volume Rate/Vol (Decrease)
------- -------- -------- ------------ ------- -------- -------- -------------
INTEREST EARNING ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans ...................... $ 688 $ 7,837 $ 132 $ 8,657 ($ 357) $ 6,007 ($ 61) $ 5,589
Mortgage backed and
related securities ......... (231) (848) 43 (1,036) 179 1,324 76 1,579
Investment securities ...... (47) 7,400 (51) 7,302 (22) 1,493 (6) 1,465
Federal funds sold ......... 25 (37) (2) (14) (116) 781 (196) 469
Interest bearing deposits .. 1 533 1 535 79 (754) (57) (732)
FHLB stock ................. 2 120 -- 122 2 144 1 147
-------- -------- -------- -------- -------- -------- -------- --------
Total Interest-Earning
Assets ..................... $ 438 $ 15,005 $ 123 $ 15,566 ($ 235) $ 8,995 ($ 243) $ 8,517
======== ======== ======== ======== ======== ======== ======== ========
INTEREST BEARING LIABILITIES
Tax and insurance reserves . ($ 24) $ 38 ($ 6) $ 8 ($ 15) $ 4 $-- ($ 11)
Passbook and statement
savings .................... (183) 696 (101) 412 96 175 17 288
Interest bearing checking .. (261) 836 (277) 298 (60) 342 (37) 245
Money market ............... 11 1,864 9 1,884 (15) 460 (4) 441
Certificates of deposit .... (220) 4,143 (50) 3,873 (493) 1,785 (52) 1,240
FHLB advances/Short term
borrowings ................. (63) 1,593 (13) 1,517 40 4,267 59 4,366
-------- -------- -------- -------- -------- -------- -------- --------
Total Interest-Bearing
Liabilities ................ ($ 740) $ 9,170 ($ 438) $ 7,992 ($ 447) $ 7,033 ($ 17) $ 6,569
======== ======== ======== ======== ======== ======== ======== ========
Increase in Net
Interest Income ............ $ 7,574 $ 1,948
======== ========
</TABLE>
<PAGE>
Provision for Loan Losses
The provision for loan losses was $674,000, recoveries were zero, and
charge offs were $20,774 during the year ended September 30, 1998 compared to a
provision of $370,000 with no recoveries and charges offs of $1,369 during the
year ended September 30, 1997. The increase in the provision is a reflection of
the Company's conservative approach of increasing the provision as loan volumes
increase. At September 30, 1998, the allowance for loan losses was equal to
372.1% of non-performing assets compared to 510.2% at September 30, 1997. The
decrease in the coverage ratio at year end 1998 was the result of an increase in
non-performing assets as a result of foreclosure proceedings initiated against
five one- to four-family properties. The loan balances related to these
properties totaled $289,737 at September 30, 1998 compared to fair values of
$565,830.
Non-Interest Income
Non-interest income increased $2.4 million or 295.1 % to $3.2 million for
the year ended September 30, 1998 from $811,000 for the year ended September 30,
1997. The increase was attributable to increases in fees and services charges
and other income, principally as a result of the increase in the number of
deposit accounts subject to service charges obtained in the Acquisition.
Non-Interest Expense
Non-interest expense increased $7.7 million, or 65.9%, for the year ended
September 30, 1998, from a total of $11.8 million for the prior year to $19.5
million for the year ended September 30, 1998. The increase in branches with the
Acquisition as well as the addition of two new branches impacted several
categories of non-interest expense. An increase in number of employees from 100
to 244 produced the $2.5 million increase in compensation and employee benefits.
Occupancy expense increased $1.2 million, or 127.4%, as expected with the
increase from seven branches to 34. Other items correlated to increased volume
and number of locations also increased as expected. For example, postage
increased by $400,759, or 221.3%; telephone increased by $171,570, or 147.7%;
check processing increased by $506,181, or 281.00%; and ATM expense increased
$218,004, or 145.1%.
The recording of core deposit intangible related to the Acquisition
resulted in $1.7 million in amortization expense for the year ended September
30, 1998 compared to $302,991 for the prior year. The ratio of non-interest
expense to average total assets was 1.96% and 1.57% for the years ended
September 30, 1998 and 1997, respectively.
Income Taxes
The provision for income taxes was $5.3 million for the year ended
September 30, 1998, representing an effective tax rate of 35.9% compared with
$4.4 million for the year ended September 30, 1997 representing an effective tax
rate of 34.1%. The effective rate for 1998 reflects the impact of a one year
reduction in the state tax rate for Oregon. The effective tax rate for 1997 was
lower than 1998 because the Company was able to recognize the tax benefit
related to the capital loss on sale of the U.S. Federal securities mutual bond
fund, thereby reducing tax expense for the year. At September 30, 1996, when the
capital loss was recognized for book purposes, a valuation allowance was created
to offset the deferred tax asset because the Company was not assured of being
able to realize a capital gain and the related tax benefit. During the year
ended September 30, 1997, the Company, through the sale of certain investments,
realized a capital gain for tax purposes that assures realization of the tax
benefit and thus reduced the valuation allowance to zero. See "Consolidated
Financial Statements - Note 11: Taxes on Income."
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
General
The most significant event for the Company was the July 1997 acquisition of
25 former First Interstate Bank branches from Wells Fargo Bank, N.A. The
branches are located in rural Oregon communities, complementing the existing
<PAGE>
branch network and expanding the Company's delivery of its "hands-on banking"
style to customers throughout the state of Oregon.
With the Acquisition and other activities throughout the year, net earnings
increased $2.4 million or 40.1% from $6.1 million for the year ended September
30, 1996, to $8.6 million for the year ended September 30, 1997. Net interest
income increased $1.9 million or 8.7% from $22.4 million for the year ended
September 30, 1996 to $24.3 million for the year ended September 30, 1997. This
increase was primarily attributable to an increase in total average interest
earning assets from $613.2 million at September 30, 1996 to $732.3 million at
September 30, 1997. The increase in net interest income was augmented by an
increase in non-interest income from $0.5 million for the year ended September
30, 1996 to $0.8 million for the year ended September 30, 1997. This increase is
primarily attributable to an increase in service fee income due to the addition
of the 25 acquired branches which contributed approximately 42,000 additional
accounts.
Interest Income
The $119.2 million increase in average interest earning assets contributed
to an increase in interest income of $8.5 million or 18.7% from $45.6 million
for the year ended September 30, 1996 to $54.2 million for the year ended
September 30, 1997. A significant portion of the increase in average interest
earning assets was the result of converting the cash obtained in the Acquisition
into investment securities. This in turn increased the proportion of investment
securities to total earning assets and decreased the proportion of loans. In
most cases, loans will generate higher average yields than investment
securities. As a result, the average yield on interest earning assets decreased
slightly from 7.45% for the year ended September 30, 1996 to 7.40% for the year
ended September 30, 1997.
Of the $8.5 million increase in interest income, $5.6 million is
attributable to additional loan income due to an increase in loans receivable.
The increase in loans receivable was primarily a result of new purchase loan
originations exceeding loan refinancing and purchase of participation loans
which resulted in greater net loan growth for 1997.
The remaining increase in interest income of $2.9 million was a result of
investing the proceeds of the Acquisition in fixed rate U.S. Government and
agency securities with maturities of less than five years, fixed and adjustable
rate corporate securities and overnight funds. The average balance of
investments and mortgage backed and related securities increased by $46.5
million for the year ended September 30, 1997 compared with the comparable
period in 1996.
Interest Expense
Interest expense increased $6.6 million due to increases in interest
expense on deposits and borrowings. Interest expense on deposits increased $2.2
million or 10.9% from $20.3 million for the year ended September 30, 1996 to
$22.5 million for the year ended September 30, 1997. Total deposits increased by
$274.3 million from September 30, 1996 to September 30, 1997, arising
principally from the acquisition of the 25 former First Interstate Bank branches
from Wells Fargo Bank, N.A. However, the average interest paid on
interest-bearing deposits decreased 23 basis points from 5.21% for the year
ended September 30, 1996 to 4.98% for the year ended September 30, 1997. This
decrease was a result of the lower cost of deposits acquired in the branch
acquisition. Interest expense on borrowings increased $4.4 million due to a
147.8% increase in average borrowings, from $51.5 million for the year ended
September 30, 1996 to $127.7 million for the year ended September 30, 1997.
Provision for Loan Losses
The provision for loan losses was $370,000, recoveries were zero, and
charge offs were $1,369 during the year ended September 30, 1997 compared to a
provision of $120,000 with no recoveries or charges offs during the year ended
September 30, 1996. At September 30, 1997, the allowance for loan losses was
equal to 510.4% of non-performing assets compared to 356.9% at September 30,
1996. The increase in the coverage ratio at year end 1997 was the result of an
increase in the allowance based on origination and purchase of commercial,
multi-family, and consumer loans which have higher associated risk than the one-
<PAGE>
to four-family loans traditionally made by the Association.
Non-Interest Income
Non-interest income increased $288,950 or 55.4 % to $810,608 for the year
ended September 30, 1997 from $521,658 for the year ended September 30, 1996.
The increase was attributable to increases in fees and services charges and
other income, principally as a result of the increase in the number of deposit
accounts subject to service charges obtained in the branch acquisition.
Non-Interest Expense
Non-interest expense decreased $477,875, or 3.9%, for the year ended
September 30, 1997, from a total of $12.2 million for the prior year, to $11.8
million for the year ended September 30, 1997. Several factors impacted
non-interest expense for the period. Expense for 1996 included $2.5 million for
the BIF/SAIF special assessment and $1.6 million related to the recognition of a
loss on sale of an investment subsequent to year end. These items did not recur
in 1997. The resulting decrease in non-interest expense was offset by a $2.7
million increase in compensation expense for 1997. Of the $2.7 million increase
in compensation expense, $1.1 million is due to compensation expense associated
with the Management Recognition and Development Plan ("MRDP"), which was not in
place in the prior year. An additional $1.1 million is primarily due to an
increase in salaries and wages paid to the additional employees from the branch
acquisition. The ratio of non-interest expense to average total assets was 1.57%
and 1.99% for the years ended September 30, 1997 and 1996, respectively.
Income Taxes
The provision for income taxes was $4.4 million for the year ended
September 30, 1997 representing an effective tax rate of 34.1% compared to
provision of $4.4 million for the year ended September 30, 1996 representing an
effective tax rate of 41.9%. Although earnings for the year ended September 30,
1997 were higher than for the same period of 1996, the Company was able to
recognize the tax benefit related to the capital loss on sale of the U.S.
Federal securities mutual bond fund, thereby reducing the effective rate for the
year. At September 30, 1996, when the capital loss was recognized for book
purposes, a valuation allowance was created to offset the deferred tax asset
because the Company was not assured of being able to realize a capital gain and
the related tax benefit. During the year ended September 30, 1997, the Company,
through the sale of certain investments, realized a capital gain for tax
purposes that assures realization of the tax benefit and thus reduced the
valuation allowance to zero.
<PAGE>
<TABLE>
<CAPTION>
Historical Stock Price Graph
Date Stock Price Date Stock Price
--------- ----------- --------- -----------
Fiscal Year 1996
<S> <C> <C> <C> <C>
05-Oct-95 12.5000 05-Apr-96 13.2500
10-Oct-95 12.8750 10-Apr-96 13.2500
15-Oct-95 13.1250 15-Apr-96 13.6870
20-Oct-95 13.1250 20-Apr-96 13.6250
25-Oct-95 12.8750 25-Apr-96 13.8125
30-Oct-95 12.7500 30-Apr-96 13.7500
05-Nov-95 12.8750 05-May-96 13.6250
10-Nov-95 13.1250 10-May-96 13.2500
15-Nov-95 12.8750 15-May-96 13.6250
20-Nov-95 12.8125 20-May-96 13.7500
25-Nov-95 13.0000 25-May-96 14.0000
30-Nov-95 13.2813 30-May-96 13.8750
05-Dec-95 13.1875 05-Jun-96 14.1250
10-Dec-95 13.3750 10-Jun-96 14.0620
15-Dec-95 13.3750 15-Jun-96 14.1250
20-Dec-95 13.1250 20-Jun-96 13.9370
25-Dec-95 13.6250 25-Jun-96 14.0000
30-Dec-95 13.7500 30-Jun-96 14.5000
05-Jan-96 13.1870 05-Jul-96 14.1250
10-Jan-96 13.1250 10-Jul-96 13.8750
15-Jan-96 12.9375 15-Jul-96 13.7500
20-Jan-96 13.2500 20-Jul-96 14.0000
25-Jan-96 13.1250 25-Jul-96 13.3750
30-Jan-96 13.2500 30-Jul-96 13.3750
05-Feb-96 13.2500 05-Aug-96 13.5620
10-Feb-96 13.5000 10-Aug-96 13.6870
15-Feb-96 13.5000 15-Aug-96 14.0000
20-Feb-96 13.1250 20-Aug-96 13.7500
25-Feb-96 12.8750 25-Aug-96 14.0620
29-Feb-96 13.1250 30-Aug-96 14.1250
05-Mar-96 12.6250 05-Sep-96 14.1870
10-Mar-96 12.8750 10-Sep-96 14.3750
15-Mar-96 12.8750 15-Sep-96 14.3120
20-Mar-96 12.7500 20-Sep-96 14.2500
25-Mar-96 13.0000 25-Sep-96 14.2500
30-Mar-96 13.3800 30-Sep-96 14.2500
(continued)
<PAGE>
<CAPTION>
Historical Stock Price Graph (continued)
Date Stock Price Date Stock Price
--------- ----------- --------- -----------
Fiscal Year 1997
<S> <C> <C> <C> <C>
05-Oct-96 14.5000 05-Apr-97 16.8120
10-Oct-96 14.3750 10-Apr-97 17.3750
15-Oct-96 14.3750 15-Apr-97 16.6563
20-Oct-96 14.3750 20-Apr-97 17.0000
25-Oct-96 14.1250 25-Apr-97 17.2500
30-Oct-96 14.0625 30-Apr-97 17.7500
05-Nov-96 14.0000 05-May-97 18.0000
10-Nov-96 14.5000 10-May-97 18.3750
15-Nov-96 14.6250 15-May-97 18.1250
20-Nov-96 14.5620 20-May-97 18.1250
25-Nov-96 14.0620 25-May-97 18.3120
30-Nov-96 14.7500 30-May-97 18.5000
05-Dec-96 15.0620 05-Jun-97 18.8750
10-Dec-96 15.0000 10-Jun-97 18.9370
15-Dec-96 14.8750 15-Jun-97 19.0000
20-Dec-96 15.7500 20-Jun-97 18.7500
25-Dec-96 15.7500 25-Jun-97 18.7500
30-Dec-96 15.6250 30-Jun-97 19.1250
05-Jan-97 15.8750 05-Jul-97 18.8750
10-Jan-97 15.6250 10-Jul-97 20.1250
15-Jan-97 16.1250 15-Jul-97 19.5000
20-Jan-97 16.0000 20-Jul-97 18.8750
25-Jan-97 15.8750 25-Jul-97 18.7500
30-Jan-97 15.5000 30-Jul-97 19.2500
05-Feb-97 15.0000 05-Aug-97 19.0000
10-Feb-97 15.3750 10-Aug-97 19.2500
15-Feb-97 15.2500 15-Aug-97 19.3125
20-Feb-97 15.4370 20-Aug-97 19.1250
25-Feb-97 15.6250 25-Aug-97 19.1250
28-Feb-97 15.5000 30-Aug-97 19.6250
05-Mar-97 16.5000 05-Sep-97 20.1250
10-Mar-97 18.6250 10-Sep-97 20.5000
15-Mar-97 18.1250 15-Sep-97 20.1250
20-Mar-97 18.0000 20-Sep-97 20.5000
25-Mar-97 17.6250 25-Sep-97 22.3750
30-Mar-97 17.6250 30-Sep-97 22.1250
(continued)
<PAGE>
<CAPTION>
Historical Stock Price Graph (continued)
Date Stock Price Date Stock Price
--------- ----------- --------- -----------
Fiscal year 1998
<S> <C> <C> <C> <C>
05-Oct-97 24.2500 05-Apr-98 22.8750
10-Oct-97 23.0000 10-Apr-98 21.7500
15-Oct-97 23.0000 15-Apr-98 21.6250
20-Oct-97 22.8750 20-Apr-98 21.0000
25-Oct-97 22.8750 25-Apr-98 21.1875
30-Oct-97 22.3750 30-Apr-98 21.3750
05-Nov-97 21.0000 05-May-98 21.4375
10-Nov-97 21.1250 10-May-98 21.3750
15-Nov-97 20.5000 15-May-98 21.3750
20-Nov-97 20.5000 20-May-98 21.5000
25-Nov-97 20.7500 25-May-98 19.9375
30-Nov-97 21.8750 30-May-98 19.8125
05-Dec-97 22.3125 05-Jun-98 19.3750
10-Dec-97 21.8750 10-Jun-98 19.3750
15-Dec-97 21.6563 15-Jun-98 18.7500
20-Dec-97 20.8750 20-Jun-98 18.6250
25-Dec-97 21.1250 25-Jun-98 19.3750
30-Dec-97 21.5000 30-Jun-98 19.0625
05-Jan-98 21.3750 05-Jul-98 19.5000
10-Jan-98 19.5000 10-Jul-98 19.0625
15-Jan-98 21.6250 15-Jul-98 19.8125
20-Jan-98 21.7500 20-Jul-98 19.7500
25-Jan-98 20.8125 25-Jul-98 19.4375
30-Jan-98 22.2500 30-Jul-98 18.0000
05-Feb-98 22.0000 05-Aug-98 17.6250
10-Feb-98 23.0000 10-Aug-98 17.7500
15-Feb-98 23.0000 15-Aug-98 17.4375
20-Feb-98 22.5625 20-Aug-98 17.1250
25-Feb-98 22.3125 25-Aug-98 17.1250
28-Feb-98 22.5000 30-Aug-98 15.5000
05-Mar-98 21.8750 05-Sep-98 14.0000
10-Mar-98 22.1250 10-Sep-98 15.0000
15-Mar-98 22.6875 15-Sep-98 16.1250
20-Mar-98 23.0000 20-Sep-98 17.0000
25-Mar-98 22.8750 25-Sep-98 16.5000
30-Mar-98 23.0000 30-Sep-98 17.3750
</TABLE>
<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 under the symbol "KFBI." As of September 28, 1998, there were
approximately 4,042 shareholders of record or through nominee or street name
accounts with brokers.
The high and low common stock prices by quarter were as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------------
1998 1997
----------------- -----------------
High Low High Low
------ ------ ------ ------
<S> <C> <C> <C> <C>
First quarter $24.25 $20.50 $16.13 $13.94
Second quarter 23.06 19.50 18.63 15.00
Third quarter 23.00 18.63 19.13 16.50
Fourth quarter 20.00 14.00 22.50 18.63
</TABLE>
The cash dividends declared by quarter were as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------
1998 1997
--------- ------------
<S> <C> <C>
First quarter $ 0.080 $ 0.070
Second quarter 0.085 0.075
Third quarter 0.090 0.075
Fourth quarter 0.090 0.080
</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, an
institution that has 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.
<PAGE>
Independent Auditors' Report
Board of Directors
Klamath First Bancorp, Inc.
Klamath Falls, Oregon
We have audited the accompanying consolidated balance sheets of Klamath
First Bancorp, Inc. and Subsidiary (the "Company") as of September 30, 1998 and
1997, and the related consolidated statements of earnings, shareholders' equity,
and cash flows for each of the three years in the period ended September 30,
1998. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. This standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of September 30,
1998 and 1997 and the results of its operations and its cash flows for each of
the three years in the period ended September 30, 1998, in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Portland, Oregon
October 30, 1998
<PAGE>
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
---------------------------------------
1998 1997
ASSETS ------------------ ------------------
<S> <C> <C>
Cash and due from banks .......................................... $ 25,644,460 $ 24,503,768
Interest bearing deposits with banks ............................. 11,496,026 1,431,087
Federal funds sold and securities
purchased under agreements to resell ............................. 29,844,783 6,108,341
--------------- ---------------
Total cash and cash equivalents ............................... 66,985,269 32,043,196
Investment securities available for sale, at fair value .......... 203,224,184 261,846,320
(amortized cost: $199,251,123 and $261,869,234)
Investment securities held to maturity, at amortized cost
(fair value: $2,928,324 and $22,968,997) ......................... 2,888,759 22,937,314
Mortgage backed and related securities available for sale,
at fair value (amortized cost: $42,741,863 and $64,097,246) ...... 43,335,857 64,868,633
Mortgage backed and related securities held to maturity,
at amortized cost (fair value: $3,696,444 and $5,518,648) ........ 3,661,683 5,446,957
Loans receivable, net ............................................ 668,146,380 551,825,440
Real estate owned ................................................ -- --
Premises and equipment, net ...................................... 12,347,467 11,671,124
Stock in Federal Home Loan Bank of Seattle, at cost .............. 10,172,900 7,150,400
Accrued interest receivable ...................................... 7,471,717 7,626,164
Core deposit intangible .......................................... 11,431,018 13,083,695
Other assets ..................................................... 1,637,164 1,578,805
--------------- ---------------
Total assets .................................................. $ 1,031,302,398 $ 980,078,048
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposit liabilities ............................................ $ 689,541,345 $ 673,977,901
Accrued interest on deposit liabilities ........................ 1,291,784 1,215,745
Advances from borrowers for taxes and insurance ................ 9,420,791 8,915,486
Advances from Federal Home Loan Bank of Seattle ................ 167,000,000 129,000,000
Short term borrowings .......................................... 12,112,500 17,077,500
Accrued interest on borrowings ................................. 213,957 512,716
Pension liabilities ............................................ 779,392 727,140
Deferred federal and state income taxes ........................ 3,655,944 1,911,573
Other liabilities .............................................. 2,205,730 2,277,544
--------------- ---------------
Total liabilities ............................................ 886,221,443 835,615,605
--------------- ---------------
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value, 500,000 shares authorized;
none issued .................................................... -- --
Common stock, $.01 par value, 35,000,000 shares authorized,
September 30, 1998 - 9,916,766 issued, 8,898,972 outstanding
September 30, 1997 - 10,429,534 issued, 9,235,582 outstanding . 99,168 104,295
Additional paid-in capital ..................................... 82,486,183 92,601,639
Retained earnings-substantially restricted ..................... 71,051,445 64,744,995
Unearned shares issued to ESOP ................................. (6,850,550) (7,829,200)
Unearned shares issued to MRDP ................................. (4,536,865) (5,623,340)
Net unrealized gain on securities available for sale, net of tax 2,831,574 464,054
--------------- ---------------
Total shareholders' equity ................................... 145,080,955 144,462,443
--------------- ---------------
Total liabilities and shareholders' equity ................... $ 1,031,302,398 $ 980,078,048
=============== ===============
See notes to consolidated financial statements.
</TABLE>
<PAGE>
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
INTEREST INCOME
<S> <C> <C> <C>
Loans receivable ........................................ $ 49,508,126 $ 40,850,478 $ 35,261,655
Mortgage backed and related securities .................. 3,679,740 4,716,184 3,137,046
Investment securities ................................... 14,766,471 7,342,604 5,730,296
Federal funds sold and securities purchased under
agreements to resell ................................. 916,847 930,980 462,140
Interest bearing deposits ............................... 862,086 326,521 1,058,286
--------------- --------------- ---------------
Total interest income ................................. 69,733,270 54,166,767 45,649,423
--------------- --------------- ---------------
INTEREST EXPENSE
Deposit liabilities ..................................... 28,931,749 22,464,345 20,251,039
Advances from FHLB of Seattle ........................... 7,921,570 6,270,615 2,689,790
Other ................................................... 995,032 1,120,858 345,698
--------------- --------------- ---------------
Total interest expense ................................ 37,848,351 29,855,818 23,286,527
--------------- --------------- ---------------
Net interest income ................................... 31,884,919 24,310,949 22,362,896
Provision for loan losses ................................. 674,000 370,000 120,000
--------------- --------------- ---------------
Net interest income after provision for
loan losses ......................................... 31,210,919 23,940,949 22,242,896
--------------- --------------- ---------------
NON-INTEREST INCOME
Fees and service charges ................................ 2,410,239 668,779 260,320
Gain on sale of investments ............................. 440,750 2,144 --
Gain on sale of real estate owned ....................... -- 27,946 22,233
Other income ............................................ 351,365 111,739 239,105
--------------- --------------- ---------------
Total non-interest income ............................. 3,202,354 810,608 521,658
--------------- --------------- ---------------
NON-INTEREST EXPENSE
Compensation, employee benefits and related expense ..... 9,616,323 7,143,516 4,476,052
Occupancy expense ....................................... 2,091,830 919,880 694,912
Data processing expense ................................. 963,475 480,889 343,319
Insurance premium expense ............................... 289,592 376,029 3,380,779
Loss on sale of investments ............................. -- 14,531 1,642,625
Loss on sale of real estate owned ....................... -- -- 6,271
Amortization of core deposit intangible ................ 1,652,677 302,991 --
Other expense ........................................... 4,908,907 2,526,519 1,698,272
--------------- --------------- ---------------
Total non-interest expense ............................ 19,522,804 11,764,355 12,242,230
--------------- --------------- ---------------
Earnings before income taxes .............................. 14,890,469 12,987,202 10,522,324
Provision for income tax .................................. 5,339,432 4,429,452 4,412,527
--------------- --------------- ---------------
Net earnings .............................................. $ 9,551,037 $ 8,557,750 $ 6,109,797
=============== =============== ===============
Earnings per common share - basic ......................... $ 1.05 $ 0.91 $ 0.56
Earnings per common share - fully diluted ................. $ 1.00 $ 0.88 $ 0.55
Weighted average common shares outstanding - basic ........ 9,066,471 9,438,915 11,004,939
Weighted average common shares outstanding - with dilution 9,520,717 9,762,459 11,082,361
See notes to consolidated financial statements.
</TABLE>
<PAGE>
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unearned Unearned Net
Common Common Additional shares shares unrealized Total
Stock Stock paid-in Retained issued issued gain (loss) shareholders'
Shares Amount capital earnings to ESOP to MRDP securities equity
---------- --------- ------------ ----------- ------------- ----------- ----------- ------------
Balance at
<S> <C> <C> <C> <C> <C> <C> <C> <C>
October 1, 1995 .... 11,254,475 $122,331 $119,230,653 $55,811,362 $(9,786,500) $-- $(692,781) $164,685,065
Cash dividends ..... -- -- -- (2,838,680) -- -- -- (2,838,680)
ESOP contribution .. 97,865 -- 417,652 -- 978,650 -- -- 1,396,302
Unrealized loss on
securities available
for sale ........... -- -- -- -- -- -- (355,206) (355,206)
Unearned shares issued
to MRDP Trust ...... (489,325) -- -- -- -- (6,694,470) -- (6,694,470)
Stock repurchased
and retired ........ (620,655) (6,207) (8,885,627) -- -- -- -- (8,891,834)
Net earnings ....... -- -- -- 6,109,797 -- -- -- 6,109,797
-------- ------- ----------- ----------- ----------- ----------- --------- ------------
Balance at
September 30, 1996 . 10,242,360 116,124 110,762,678 59,082,479 (8,807,850) (6,694,470) (1,047,987) 153,410,974
Cash dividends ..... -- -- -- (2,895,234) -- -- -- (2,895,234)
Unrealized gain on
securities available
for sale ........... -- -- -- -- -- -- 1,512,041 1,512,041
Stock repurchased
and retired ........ (1,182,936) (11,829) (18,866,299) -- -- -- -- (18,878,128)
ESOP contribution .. 97,865 -- 705,260 -- 978,650 -- -- 1,683,910
MRDP contribution .. 78,293 -- -- -- -- 1,071,130 -- 1,071,130
Net earnings ....... -- -- -- 8,557,750 -- -- -- 8,557,750
-------- ------- ----------- ----------- ----------- ----------- --------- ------------
Balance at
September 30, 1997 . 9,235,582 104,295 92,601,639 64,744,995 (7,829,200) (5,623,340) 464,054 144,462,443
Cash dividends ..... -- -- -- (3,244,587) -- -- -- (3,244,587)
Unrealized gain on
securities available
for sale ........... -- -- -- -- -- -- 2,367,520 2,367,520
Stock repurchased
and retired ........ (544,085) (5,440) (11,556,044) -- -- -- -- (11,561,484)
ESOP contribution .. 97,865 -- 1,029,866 -- 978,650 -- -- 2,008,516
MRDP contribution .. 78,293 -- -- -- -- 1,086,475 -- 1,086,475
Exercise of stock
options ............ 31,317 313 410,722 -- -- -- -- 411,035
Net earnings ....... -- -- -- 9,551,037 -- -- -- 9,551,037
-------- ------- ----------- ----------- ----------- ----------- --------- ------------
Balance at
September 30, 1998 . 8,898,972 $99,168 $82,486,183 $71,051,445 $(6,850,550) $(4,536,865) $2,831,574 $145,080,955
========= ======= =========== =========== ============ ============ ========== =============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net earnings .......................................... $ 9,551,037 $ 8,557,750 $ 6,109,797
ADJUSTMENTS TO RECONCILE NET EARNINGS TO
NET CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization ......................... 2,815,615 772,204 403,074
Provision for loan losses ............................. 674,000 370,000 120,000
Compensation expense related to ESOP benefit .......... 2,008,515 1,683,910 1,396,302
Compensation expense related to MRDP Trust ............ 1,086,475 1,071,130 --
Net amortization of premiums (discounts) paid on
investment and mortgage backed and related securities 21,994 102,626 210,599
Increase in deferred loan fees, net of amortization ... 1,258,655 912,445 703,055
Accretion of discounts on purchased loans ............. 3,762 (325) (14,683)
Net (gain) loss on sale of real estate owned and
premises and equipment .............................. 3,196 (3,514) (5,209)
Net (gain) loss on sale of investment and mortgage
backed and related securities ....................... (440,750) 12,387 --
FHLB stock dividend ................................... (617,000) (495,000) (347,900)
Increase in core deposit intangible ................... -- (13,386,686) --
Realized loss on sale of U.S. Federal securities
mutual bond fund .................................... -- -- 1,642,625
CHANGES IN ASSETS AND LIABILITIES
Accrued interest receivable ........................... 154,447 (2,583,032) (1,605,691)
Other assets .......................................... (218,359) (1,625,538) (310,160)
Accrued interest on deposit liabilities ............... 76,039 503,337 (316,358)
Accrued interest on borrowings ........................ (298,759) 189,553 323,163
Pension liabilities ................................... 52,252 59,052 52,053
Deferred federal and state income taxes ............... 293,310 714,915 (409,246)
Other liabilities ..................................... 131,343 (1,134,717) 315,996
--------------- --------------- ---------------
Net cash provided by operating activities ................. 16,555,772 (4,279,503) 8,267,417
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of investment securities
held to maturity .................................... 20,150,000 48,680,000 69,552,392
Proceeds from maturity of investment securities
available for sale .................................. 104,180,000 19,009,324 --
Principal repayments received on mortgage
backed and related securities held to maturity ..... 1,755,918 1,313,309 --
Principal repayments received on mortgage
backed and related securities available for sale ... 24,664,174 18,923,262 12,083,872
Principal repayments received on loans ................ 122,009,359 56,879,728 64,529,602
Loan originations ..................................... (232,474,655) (120,072,487) (135,566,747)
Loans purchased ....................................... (7,792,061) (15,648,275) --
Purchase of investment securities held
to maturity ......................................... -- (61,722,409) (42,971,553)
Purchase of investment securities available
for sale ............................................ (60,366,913) (219,697,100) (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 ....................... (13,202,490) (14,850,705) (84,123,187)
Purchase of FHLB stock ................................ (2,405,500) (4,307,500) --
Proceeds from sale of FHLB stock ...................... -- 2,425,900 --
Proceeds from sale of investment securities
available for sale .................................. 19,388,451 16,066,044 --
Proceeds from sale of mortgage backed and related
securities available for sale ....................... 9,656,938 5,743,267 --
Proceeds from sale of real estate owned and
premises and equipment .............................. -- 86,159 177,595
Purchases of premises and equipment ................... (1,682,477) (7,176,075) (136,406)
------------ ------------- -------------
Net cash used in investing activities (16,119,256) (274,347,558) (184,847,395)
</TABLE>
(continued)
<PAGE>
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
Years Ended September 30,
1998 1997 1996
________________ _______________ ______________________
CASH FLOWS FROM FINANCING ACTIVITIES
Increase/(decrease) in deposit liabilities
<S> <C> <C> <C>
deposits, net of withdrawals ......................... $ 15,563,444 $ 274,304,721 $ 15,293,649
Proceeds from FHLB advances ........................... 179,000,000 184,000,000 105,000,000
Repayments of FHLB advances ........................... (141,000,000) (145,000,000) (35,000,000)
Proceeds from short term borrowings ................... 88,343,199 84,750,150 21,938,300
Repayments of short term borrowings ................... (93,308,199) (82,577,050) (7,033,900)
Repayment of stock oversubscription ................... -- -- (65,685,300)
Purchase of stock for MRDP ............................ -- -- (6,694,470)
Stock repurchase and retirement ....................... (11,561,483) (18,878,128) (8,891,834)
Proceeds from exercise of stock options ............... 411,035 -- --
Advances from borrowers for tax and insurance ......... 505,305 1,084,359 (135,297)
Dividends paid ........................................ (3,447,744) (3,193,428) (2,025,807)
--------------- --------------- ---------------
Net cash provided by financing activities ................. 34,505,557 294,490,624 16,765,341
--------------- ---------------
Net (decrease) increase in cash and cash
equivalents ............................................. 34,942,073 15,863,563 (159,814,637)
Cash and cash equivalents at beginning
of year ................................................. 32,043,196 16,179,633 175,994,270
--------------- --------------- ---------------
Cash and cash equivalents at end of quarter ............... $ 66,985,269 $ 32,043,196 $ 16,179,633
=============== =============== ===============
SUPPLEMENTAL SCHEDULE OF INTEREST AND
INCOME
TAXES PAID
Interest paid ......................................... $ 38,071,070 $ 29,162,927 $ 23,483,212
Income taxes paid ..................................... 5,808,299 3,373,457 4,555,053
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES
Transfer of investment securities from held to maturity to
available for sale at estimated fair 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 .................................. 2,367,520 1,512,041 (355,206)
Dividends declared and accrued in other ............... 892,509 834,363 812,873
</TABLE>
See notes to consolidated financial statements
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Klamath First
Bancorp, Inc. and its wholly-owned subsidiary Klamath First Federal Savings and
Loan Association (collectively the "Company"). All intercompany accounts and
transactions have been eliminated in consolidation.
Certain prior year amounts have been reclassified to conform to current
year presentation.
Nature of Operations
The Company provides banking and limited non-banking services to its
customers who are located throughout the state of Oregon, principally in rural
communities. 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, consumer and commercial loans, investment
securities and mortgage backed and related securities.
Use of Estimates in the Presentation of the Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make assumptions. These
assumptions 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.
Cash Equivalents
The Company considers cash and due from banks, interest bearing deposits
held at domestic banks, federal funds sold, and security resale agreements to be
cash and cash equivalents for purposes of the Consolidated Statement of Cash
Flows.
Investment Securities
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities,"
investment 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. Unrealized gains and losses from available for sale
securities are excluded from earnings and reported (net of tax) as a net amount
in a separate component of shareholders' equity until realized. 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
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)
<PAGE>
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. Unrealized gains and losses on securities available for sale are
excluded from earnings and reported net of tax as a separate component of
shareholders' equity until realized.
Stock Investments
The Company holds stock in the Federal Home Loan Bank. At September 30,
1996 the Company also held stock in a U.S. Federal securities mutual bond fund.
These investments are carried at the lower of cost or fair value.
Loans
Loans held for investment are stated at the principal amount outstanding,
net of deferred loan fees and unearned income. Loan origination fees, commitment
fees and certain direct loan origination costs are capitalized and recognized as
a yield adjustment over the lives of the loans using the level- yield method.
Unearned discounts are accreted to income over the average lives of the related
loans using the level yield method, adjusted for estimated prepayments.
Interest income is recorded as earned. Management ceases to accrue interest
income on any loan that becomes 90 days or more delinquent and reverses all
interest accrued up to that time. Thereafter, interest income is accrued only if
and when, in management's opinion, projected cash proceeds are deemed sufficient
to repay both principal and interest. All loans for which interest is not being
accrued are referred to as loans on nonaccrual status.
Allowance for Loan Losses
The allowance for loan losses is established to absorb known and inherent
losses in the loan portfolio. 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. 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.
<PAGE>
Real Estate Owned
Property acquired through 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.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is generally computed on the straight-line basis over the estimated
useful lives of the various classes of assets from their respective dates of
acquisition. Estimated useful lives range up to 30 years for buildings, up to
the lease term for leasehold improvements, three years for automobiles, and
three to fifteen years for furniture and equipment.
Mortgage Servicing
Fees earned for servicing loans are reported as income when the related
mortgage loan payments are collected. Loan servicing costs are charged to
expense as incurred.
The Association records its mortgage servicing rights at fair value in
accordance with SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities," which amended SFAS Nos. 65,
"Accounting for Certain Mortgage Banking Activities," and 122, "Accounting for
Mortgage Servicing Rights." SFAS No. 125 requires the Association to allocate
the total cost of all mortgage loans sold, whether originated or purchased, to
the mortgage servicing rights and the loans (without mortgage servicing rights)
based on their relative fair values if it is practicable to estimate those fair
values. As of September 30, 1998 the Company has no servicing assets.
Core Deposit Intangible
On July 18, 1997 the Company assumed $241.3 million of deposits from Wells
Fargo Bank, N.A. for a core deposit premium of $16.4 million. In conjunction
with the assumption of these deposits the Company also acquired 25 branch
facilities (24 owned and one leased) located throughout Oregon. In accordance
with generally accepted accounting principles for purchase transactions, the
property acquired was recorded at fair value and the recorded core deposit
intangible was reduced by the market value adjustment between the fair value of
the property acquired less the purchase price. The recorded net core deposit
intangible of $13.4 million is being amortized to non-interest expense on a
straight-line basis over 8.1 years.
<PAGE>
Income Taxes
The Company accounts for income taxes in accordance with the provisions of
SFAS No. 109, "Accounting for Income Taxes," which requires the use of the asset
and liability method of accounting for income taxes. Under this method, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled.
Pension Cost
It is the Company's policy to fund retirement costs as they are accrued.
All such costs are computed on the basis of accepted actuarial methods.
Employee Stock Option Plan
The Company sponsors an Employee Stock Ownership Plan ("ESOP"). The ESOP is
accounted for in accordance with the American Institute of Certified Public
Accountants ("AICPA") Statement of Position 93-6, "Employer's Accounting for
Employee Stock Ownership Plans." Accordingly, the shares held by the ESOP are
reported as unearned shares issued to the employee stock ownership plan in the
statement of financial condition. The plan authorizes release of the shares over
a ten-year period, of which seven years are remaining. As shares are released
from collateral, compensation expense is recorded equal to the then current
market price of the shares, and the shares become outstanding for earnings per
share calculations.
Management Recognition and Development Plan
The Company sponsors a Management Recognition and Development Plan
("MRDP"). The MRDP is accounted for in accordance with SFAS No.123, "Accounting
for Stock-Based Compensation," and a modification of FASB Interpretation No. 28,
"Accounting for Stock Appreciation Rights and Other Variable Stock Option or
Award Plans." The plan authorizes the grant of common stock shares to certain
officers and directors, which vest over a five-year period in equal
installments. The Company will recognize compensation expense in the amount of
the cost of the common stock in accordance with the vesting schedule during the
years in which the shares are payable. When the MRDP awards are allocated, the
common stock shares become common stock equivalents for earnings per share
calculations.
Stock Based Compensation
The Company accounts for stock compensation using the intrinsic value
method as prescribed in Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. Under
the intrinsic value based method, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of stock at grant
date over the amount an employee must pay to acquire the stock. Stock options
granted by the Company have no intrinsic value at the grant date and, under APB
No. 25, there is no compensation expense to be recorded.
<PAGE>
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but
does not require, companies to record compensation cost for stock based employee
compensation plans at fair value. The fair value approach measures compensation
costs based on factors such as the term of the option, the market price at grant
date, and the option exercise price, with expense recognized over the vesting
period. See Note 14 for pro forma effect on net income and earnings per share as
if the fair value method had been used.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes requirements for
disclosure of comprehensive income and becomes effective for years beginning
after December 15, 1997. Reclassification of earlier financial statements for
comparative purposes is required.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 redefines how
operating segments are determined and requires disclosure of certain financial
and descriptive information about the Company's operating segments. This
statement supercedes SFAS No. 14, "Financial Reporting for Segments of Business
Enterprises." The new standard becomes effective for years beginning after
December 15, 1997, and requires that comparative information from earlier
periods be restated to conform to the requirements of this standard. The
adoption of these statements is not expected to be material to the Company.
In February 1998, SFAS No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits," was issued. SFAS No. 132 revises employers'
disclosures about pensions and other postretirement benefit plans. It does not
change the measurement or recognition of those plans. It standardizes the
disclosure requirements for pensions and other postretirement benefits to the
extent practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer useful. This
Statement becomes effective for fiscal years beginning after December 15, 1997.
Restatement of disclosures for earlier periods provided for comparative purposes
is required unless the information is not readily available.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as (a) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (c) a hedge of the foreign currency exposure of
a net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. This Statement becomes effective for fiscal years beginning after
June 15, 1999, and should not be applied retroactively to financial statements
of prior periods.
The adoption of these Statements is not expected to have material impact on
the financial statements of the Company.
(2) Acquisition
As of July 18, 1997, the Company, through its subsidiary, completed the
acquisition of 25 former branch offices of First Interstate Bank Oregon from
Wells Fargo Bank, N.A. The transaction, which was accounted for as a purchase,
included acquisition of branch premises (24 owned and one leased) and assumption
of approximately $241.3 million in deposit liabilities. The balance sheet at
September 30, 1997 reflects inclusion of all assets and liabilities related to
the transaction. Income and expense related to the transaction and operation of
the branches for the period from July 18 to September 30, 1997 are reflected in
the income statement. As a result of this transaction, core deposit intangibles
of $13.4 million were recorded which will be amortized over the estimated life
of 8.1 years.
(3) 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 $3.0 million and $1.7
million at September 30, 1998 and 1997, respectively, and was met by holding
cash and maintaining an average balance with the Federal Reserve Bank in excess
of this amount.
<PAGE>
(4) Investments and Mortgage Backed 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, 1998
-------------------------------------------------------
Gross Unrealized
Amortized -------------------------- Fair
cost Gains Losses value
---------- ---------- -------- -------------
Investment securities available for sale:
U.S. Government obligations:
<S> <C> <C> <C> <C>
Maturing within one year ...... $ 11,555,117 $ 95,853 $-- $ 11,650,970
Maturing after one year through
five years ................... 91,064,477 2,738,617 -- 93,803,094
State and municipal obligations:
Maturing after one year through
five years ................... 890,782 21,258 -- 912,040
Maturing after ten years ...... 16,515,526 675,702 567 17,190,661
Corporate obligations:
Maturing within one year ...... 14,518,739 34,576 -- 14,553,315
Maturing after one year through
five years ................... 44,883,935 772,455 12,836 45,643,554
Maturing after ten years ...... 19,822,547 -- 351,997 19,470,550
------------ ------------ ------------ ------------
$199,251,123 $ 4,338,461 $ 365,400 $203,224,184
============ ============ ============ ============
<CAPTION>
September 30, 1997
----------------------------------------------------------
Gross Unrealized
Amortized -------------------------- Fair
cost Gains Losses value
------------ ---------- ---------- ----------
Investment securities available for sale:
U.S. Government obligations:
<S> <C> <C> <C> <C>
Maturing within one year ...... $ 13,965,878 $ 9,375 $ 878 $ 13,974,375
Maturing after one year through
five years ................... 162,907,463 72,214 317,301 162,662,376
Maturing after five years through
ten years .................... 8,988,131 12,454 36,210 8,964,375
State and municipal obligations:
Maturing after one year through
five years ................... 793,692 10,504 -- 804,196
Maturing after five years
through ten years ............. 100,000 730 -- 100,730
Maturing after ten years ...... 7,966,716 225,807 10,348 8,182,175
Corporate obligations:
Maturing within one year ...... 18,220,348 -- 455 18,219,893
Maturing after one year through
five years ................... 48,927,006 38,519 27,325 48,938,200
------------ ------------ ------------ ------------
$261,869,234 $ 369,603 $ 392,517 $261,846,320
============ ============ ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
September 30, 1998
-----------------------------------------------------------
Gross Unrealized
Amortized ------------------------------ Fair
Cost Gains Losses Value
---------- ------------ ---------- -----------
Investment securities held to maturity:
State and municipal obligations:
<S> <C> <C> <C> <C>
Maturing within one year ........... $ 210,837 $ 1,397 $-- $ 212,234
Maturing after one year through
five years ........................ 677,922 36,168 -- 714,090
Corporate obligations:
Maturing within one year ........... 2,000,000 2,000 -- 2,002,000
----------- ----------- ----------------- -----------
$ 2,888,759 $ 39,565 $-- $ 2,928,324
=========== =========== ================= ===========
<CAPTION>
September 30, 1997
-----------------------------------------------------------
Gross Unrealized
Amortized ------------------------------ Fair
Cost Gains Losses Value
---------- ------------ --------------- -----------
Investment securities held to maturity:
State and municipal obligations:
<S> <C> <C> <C> <C>
Maturing within one year ........... $ 150,797 $ 55 $-- $ 150,852
Maturing after one year through
five years ........................ 891,678 26,982 34 918,626
Corporate obligations:
Maturing within one year ........... 19,894,839 -- -- 19,894,839
Maturing after one year through
five years ....................... 2,000,000 4,680 -- 2,004,680
----------- ----------- ----------------- -----------
$22,937,314 $ 31,717 $ 34 $22,968,997
=========== =========== ================= ===========
</TABLE>
<TABLE>
<CAPTION>
September 30, 1998
----------------------------------------------------------
Gross Unrealized
Amortized ------------------------------- Fair
cost Gains Losses value
---------- ----------- ----------------- -----------
MORTGAGE BACKED AND RELATED SECURITIES AVAILABLE FOR SALE:
FNMA maturing after five years
<S> <C> <C> <C> <C>
through ten years ................... $ 4,045,247 $ 40,251 $-- $ 4,085,498
FNMA maturing after ten years .......... 8,820,853 89,676 11,334 8,899,195
FHLMC maturing after ten years ......... 14,722,039 438,394 1,941 15,158,492
GNMA maturing after ten years .......... 3,619,071 43,083 -- 3,662,154
SBA maturing after ten years ........... 11,534,653 1,780 5,915 11,530,518
----------- ----------- ----------------- -----------
$42,741,863 $ 613,184 $ 19,190 $43,335,857
=========== =========== ================= ===========
<PAGE>
<CAPTION>
September 30, 1997
-----------------------------------------------------------
Gross Unrealized
Amortized ------------------------- Fair
cost Gains Losses value
----------- ----------- ----------- -----------
MORTGAGE BACKED AND RELATED SECURITIES AVAILABLE FOR SALE:
<S> <C> <C> <C> <C>
FNMA maturing after ten years ........ $12,775,233 $ 139,212 $ 17,043 $12,897,402
FHLMC maturing after ten years ....... 25,881,492 692,304 -- 26,573,796
GNMA maturing after ten years ........ 9,708,884 98,821 -- 9,807,705
SBA maturing after ten years ......... 15,731,637 1,223 143,130 15,589,730
----------- ----------- ----------- -----------
$64,097,246 $ 931,560 $ 160,173 $64,868,633
=========== =========== =========== ===========
<CAPTION>
September 30, 1998
-----------------------------------------------------------
Gross Unrealized
Amortized ------------------------- Fair
Cost Gains Losses Value
---------- ------------ ---------- -----------
MORTGAGE BACKED AND RELATED SECURITIES HELD TO MATURITY:
<S> <C> <C> <C> <C>
GNMA maturing after ten years ........ $ 3,661,683 $ 34,761 $-- $ 3,696,444
=========== =========== =========== ===========
<CAPTION>
September 30, 1997
-----------------------------------------------------------
Gross Unrealized
Amortized -------------------------- Fair
Cost Gains Losses Value
---------- ------------ ---------- -----------
MORTGAGE BACKED AND RELATED SECURITIES HELD TO MATURITY:
<S> <C> <C> <C> <C>
GNMA maturing after ten years ........ $ 5,446,957 $ 71,691 $-- $ 5,518,648
=========== =========== =========== ===========
</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.
At September 30, 1998 and 1997, the Company pledged securities totaling
$31.2 million and $26.7 million, respectively, to secure certain public deposits
and for other purposes as required or permitted by law.
The Company has also pledged securities of $12.0 million and $17.0 million
to secure short term borrowings of reverse repurchase agreements at September
30, 1998 and 1997, respectively. (See Note 10.)
<PAGE>
(5) Loans Receivable
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
September 30,
---------------------------
1998 1997
------------ ------------
Real estate loans:
<S> <C> <C>
Permanent residential 1-4 family ............... $577,321,223 $498,594,583
Multi-family residential ....................... 19,229,984 16,881,256
Construction ................................... 64,288,949 30,487,341
Commercial ..................................... 29,457,284 22,638,824
Land ........................................... 2,184,595 1,586,418
------------ ------------
Total real estate loans ..................... 692,482,035 570,188,422
Non-real estate loans:
Savings account ................................ 1,990,776 1,710,930
Home improvement and home equity ............... 5,749,969 3,486,651
Other .......................................... 4,480,064 1,189,770
------------ ------------
Total non-real estate loans ................. 12,220,809 6,387,351
------------ ------------
Total loans ................................. 704,702,844 576,575,773
Less:
Undisbursed portion of loans ................... 26,986,869 17,096,382
Deferred loan fees ............................. 7,619,918 6,357,500
Allowance for loan losses ...................... 1,949,677 1,296,451
------------ ------------
$668,146,380 $551,825,440
============ ============
</TABLE>
The weighted average interest rate on loans at September 30, 1998 and 1997
was 7.71% and 7.82%, respectively.
The Company serviced loans owned by others of $724,559, $1.1 million, and
$1.2 million at September 30, 1998, 1997, and 1996, respectively.
Loans to employees, officers, and directors totaled $8.8 million and $6.0
million at September 30, 1998 and 1997, respectively.
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
-----------------------------------------
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Balance, beginning of year $ 1,296,451 $ 927,820 $ 807,820
Charge-offs .............. (20,774) (1,369) --
Additions ................ 674,000 370,000 120,000
----------- ----------- -----------
Balance, end of period ... $ 1,949,677 $ 1,296,451 $ 927,820
=========== =========== ===========
</TABLE>
<PAGE>
(6) Premises and Equipment
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
September 30,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Land ............................................. $ 2,479,807 $ 2,410,937
Office buildings and construction in progress .... 10,403,971 9,419,228
Furniture, fixtures and equipment ................ 4,211,886 3,661,099
Automobiles ...................................... 38,856 36,226
Less accumulated depreciation .................... (4,787,053) (3,856,366)
------------ ------------
$ 12,347,467 $ 11,671,124
============ ============
</TABLE>
Depreciation expense was $1,002,938, $469,208, and $403,074 for the years
ended September 30, 1998, 1997, and 1996, respectively.
(7) Accrued Interest Receivable
The following is a summary of accrued interest receivable:
<TABLE>
<CAPTION>
September 30,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Loans receivable ................................. $ 4,114,533 $ 3,628,624
Mortgage backed and related securities ........... 424,458 644,320
Investment securities ............................ 2,932,726 3,353,220
------------ ------------
$ 7,471,717 $ 7,626,164
============ ============
</TABLE>
<PAGE>
(8) Deposit Liabilities
The following is a summary of deposit liabilities:
<TABLE>
<CAPTION>
September 30,
-------------------------------------------------------------
1998 1997
----------------------------- -----------------------------
Amount Percent Amount Percent
--------------- ---------- --------------- ----------
Checking accounts, non-interest
<S> <C> <C> <C> <C>
bearing ............................... $ 47,547,651 6.9% $ 52,578,155 7.8%
--------------- --------- --------------- ---------
Interest-bearing checking .............. 70,561,435 10.2 75,044,568 11.1
--------------- --------- --------------- ---------
Passbook and statement savings ......... 61,413,910 8.9 63,178,697 9.4
--------------- --------- --------------- ---------
Money market deposits .................. 114,667,649 16.6 107,573,735 16.0
--------------- --------- --------------- ---------
Certificates of deposit
Less than 4% .......................... 1,371,156 0.2 2,783,927 0.4
4.00% to 5.99% ........................ 329,246,772 47.8 310,435,332 46.0
6.00% to 7.99% ........................ 43,853,274 6.4 39,599,328 5.9
8.00% to 9.99% ........................ 20,879,498 3.0 22,784,159 3.4
--------------- --------- --------------- ---------
395,350,700 57.4 375,602,746 55.7
--------------- --------- --------------- ---------
$ 689,541,345 100.0% $ 673,977,901 100.0%
=============== ========= =============== =========
</TABLE>
Following is a summary of interest expense on deposits:
<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Interest-bearing checking .... $ 1,088,777 $ 791,032 $ 546,383
Passbook and statement savings 1,683,101 1,270,468 982,814
Money market ................. 4,275,419 2,391,245 1,950,419
Certificates of deposit ...... 21,990,525 18,075,128 16,835,250
------------ ------------ ------------
29,037,822 22,527,873 20,314,866
Less early withdrawal
penalties ................... 106,073 63,528 63,827
------------ ------------ ------------
Net interest on deposits ... $ 28,931,749 $ 22,464,345 $ 20,251,039
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1998, deposit maturities are as follows:
<S> <C>
Within 1 year ........... $483,393,453
1 year to 3 years ....... 157,075,791
3 years to 5 years ...... 30,038,755
Thereafter .............. 19,033,346
------------
$689,541,345
============
</TABLE>
<PAGE>
Weighted average interest rates at September 30 are as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Interest-bearing checking .............. 1.33% 1.92%
Passbook and statement savings ......... 2.44% 2.75%
Money market ........................... 3.92% 3.92%
Certificates of deposit ................ 5.81% 5.87%
Weighted average rate for all deposits . 4.66% 4.74%
</TABLE>
Deposits in excess of $100,000 totaled $151.0 million and $119.2 million at
September 30, 1998 and 1997, respectively. Deposits in excess of $100,000 are
not insured by the Federal Deposit Insurance Corporation ("FDIC").
(9) Advances from FHLB
As a member of the FHLB of Seattle, the Association maintains a credit line
that is a percentage of its total regulatory assets, subject to
collateralization requirements. At September 30, 1998, 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 of Seattle, by certain mortgages or deeds of trust, and securities of
the U.S. Government and agencies thereof. At September 30, 1998 the minimum book
value of eligible collateral for these borrowings was $183.7 million.
Scheduled maturities of advances from the FHLB were as follows:
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
---------------------------------------------- -------------------------------------------
Range of Weighted Range of Weighted
interest average interest average
Amount rates interest rate Amount rates interest rate
------------ ------------- ------------- ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Due within one year . $ 30,000,000 5.54%-5.56% 5.55% $59,000,000 5.57%-6.70% 5.66%
After one but within
five years .......... 55,000,000 5.39%-5.74% 5.56% 70,000,000 5.39%-5.84% 5.59%
After five but within
ten years ........... 82,000,000 4.77%-5.24% 4.96% -- -- --
------------ ------------
$167,000,000 $129,000,000
============ ============
</TABLE>
<PAGE>
(10) Short Term Borrowings
Securities sold under agreements to repurchase at September 30, 1998
consisted of reverse repurchase agreements of $12.1 million.
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 are due within 48 days and will be
renewed subsequent to year end.
Financial data pertaining to the weighted average cost, the level of securities
sold under agreements to repurchase, and the related interest expense are as
follows:
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------------------------
1998 1997 1996
-------------- -------------- -------------
<S> <C> <C> <C>
Weighted average interest rate at end of year 5.65% 5.75% 5.65%
Weighted daily average interest rate
during the year ............................. 5.80% 5.82% 5.55%
Daily average of securities sold
under agreements to repurchase .............. $ 14,669,203 $ 16,804,520 $ 3,530,795
Maximum securities sold under
agreements to repurchase at any
month end ................................... 17,077,500 19,117,500 14,904,000
Interest expense during the year ............ 850,122 978,023 196,130
</TABLE>
The Company had an unused line of credit totaling $15.0 million with U.S.
National Bank of Oregon at September 30, 1998 and 1997.
(11) Taxes on Income
The following is a summary of income tax expense:
<TABLE>
<CAPTION>
Years ended September 30,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
Current Taxes
<S> <C> <C> <C>
Federal ..................................... $ 4,771,653 $ 3,076,977 $ 4,384,720
State ....................................... 468,978 639,503 437,053
------------ ------------ ------------
Current tax provision ....................... 5,240,631 3,716,480 4,821,773
------------ ------------ ------------
Deferred Taxes
Federal ..................................... 82,204 648,092 (372,005)
State ....................................... 16,597 64,880 (37,241)
------------ ------------ -------------
Deferred tax provision ...................... 98,801 712,972 (409,246)
------------ ------------ -------------
Provision for income taxes .................. $ 5,339,432 $ 4,429,452 $ 4,412,527
============ ============ =============
</TABLE>
<PAGE>
An analysis of income tax expense, setting forth the reasons for the variation
from the "expected" federal corporate income tax rate and the effective rate
provided, is as follows:
<TABLE>
<CAPTION>
Years ended September 30,
-----------------------------------------------
1998 1997 1996
-------------- ------------ -------------
Federal income taxes computed at
<S> <C> <C> <C>
statutory rate .............................. 35.0% 35.0% 35.0%
Tax effect of:
State income taxes, net of Federal
income tax benefit .......................... 2.1 4.4 2.2
Nondeductible ESOP compensation
expense ..................................... 2.4 5.4 4.0
Deductible MRDP compensation
expense ..................................... (1.5) (2.2) --
Elimination of valuation allowance .......... -- (12.6) --
Other ....................................... (0.6) 4.1 0.7
------------- ------------ ------------
Income tax expense included in the
statement of income ......................... 35.9% 34.1% 41.9%
============= ============ ============
</TABLE>
Deferred income taxes at September 30, 1998 and 1997 reflect the impact of
"temporary differences" between amounts of assets and liabilities for financial
reporting purposes and such amounts as measured by tax laws.
The tax effects of temporary differences which give rise to a significant
portion of deferred tax assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
September 30,
--------------------------
1998 1997
----------- ------------
DEFERRED TAX ASSETS
<S> <C> <C>
Deferred loan fees ........................ $-- $ 11,202
Allowance for losses on loans ............. 761,440 515,648
Pension liability ......................... 306,462 287,220
Unearned ESOP shares ...................... 422,071 235,621
Core deposit premium ...................... 359,209 55,054
------------ ------------
Total gross deferred tax assets ........... 1,849,182 1,104,745
------------ ------------
DEFERRED TAX LIABILITIES
FHLB stock dividends ...................... 585,949 801,204
Deferred loan fees ........................ 919,314 --
Tax bad debt reserve in excess of base-
year reserve .............................. 1,469,444 1,469,444
Unrealized gain on securities held for sale 1,735,484 284,522
Other ..................................... 794,935 461,148
------------ ------------
Total gross deferred tax liabilities ...... 5,505,126 3,016,318
------------ ------------
Net deferred tax liability ................ $ 3,655,944 $ 1,911,573
============ ============
</TABLE>
<PAGE>
At September 30, 1996 the Company created a valuation allowance of $648,837
to offset the deferred tax asset associated with the realized capital loss on
the U.S. Federal securities mutual bond fund because management was not assured
of being able to realize a capital gain and the related tax benefit. During the
year ended September 30, 1997, the Company, through sale of certain investments,
realized a capital gain for tax purposes that assures realization of the tax
benefit and thus reduced the valuation allowance to zero. There continues to be
no valuation allowance at September 30, 1998.
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, 1998, the Company had a taxable temporary difference
of approximately $10.5 million that arose before 1988 (base-year amount). In
accordance with SFAS No. 109, a deferred tax liability has not been recognized
for the temporary difference. Management does not expect this temporary
difference to reverse in the foreseeable future.
(12) Shareholders' Equity
During September 1996, the Board of Directors approved and the Company
engaged in a stock repurchase program resulting in the retirement of 620,655
shares or 5.07% of the common stock. During the quarter ended December 31, 1996,
the Company received approval from the OTS to repurchase 10% of its outstanding
shares. This repurchase was completed in January resulting in the reduction of
shares outstanding by 1,161,247 and reducing equity by $18.5 million. The shares
were repurchased at an average price of $15.91. During April 1998, the Board of
Directors approved and the Company engaged in a stock repurchase program
resulting in the retirement of 521,477 shares, or 5%, of the common stock. The
repurchase was completed by May 31, 1998 at an average price of $21.22.
On April 9, 1998 and 1997 the vested portion of awarded MRDP shares were
released. Many of the recipients of this award had the Company withhold and
retire some of their shares to pay the associated taxes. This further reduced
the number of shares outstanding by 22,608 and 21,689 shares, respectively, and
reduced equity by $498,054 and $377,000, respectively.
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 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.
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.
In September 1998, the Board of Directors authorized the repurchase of up
to 1,983,353 shares of the Company's common stock, which represents
approximately 20 percent of its outstanding shares as of September 30, 1998. The
repurchase will be made through a "Modified Dutch Auction Tender." Under this
procedure, the Company's shareholders will be given the opportunity to sell part
or all of their shares to the Company at a price of not less than $18.00 per
share and not more than $20.00 per share. The Company expects to complete the
repurchase early in 1999.
<PAGE>
(13) Earnings Per Share
Earnings per share ("EPS") is computed in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," which was
adopted by the Company as of December 31, 1997. EPS for all prior periods have
been restated to reflect the adoption. Diluted EPS is computed using the
treasury stock method, giving effect to potential additional common shares that
were outstanding during the period. Potential dilutive common shares include
shares held by the Company's Employee Stock Ownership Plan ("ESOP") that are
committed for release, shares awarded but not released under the Company's
Management Recognition and Development Plan ("MRDP"), and stock options granted
under the Stock Option Plan. Following is a summary of the effect of dilutive
securities on weighted average number of shares (denominator) for the basic and
diluted EPS calculations. There are no resulting adjustments to net earnings.
<TABLE>
<CAPTION>
For the Years Ended September 30,
--------------------------------------------
1998 1997 1996
------------ ------------- ------------
Weighted average common
<S> <C> <C> <C>
shares outstanding - basic .................. 9,066,471 9,438,915 11,004,939
------------ ------------ ------------
Effect of Dilutive Securities on Number of Shares:
MRDP shares ................................. 63,656 45,824 2,686
ESOP shares ................................. 48,933 48,933 48,933
Stock options ............................... 341,657 228,787 25,803
------------ ------------ ------------
Total Dilutive Securities ................... 454,246 323,544 77,422
------------ ------------ ------------
Weighted average common shares
outstanding - with dilution ................ 9,520,717 9,762,459 11,082,361
============ ============ ============
</TABLE>
<PAGE>
(14) Employee Benefit Plans
Employee Retirement Plan
The Company is a member of a multiple-employer trusteed pension plan
("Plan") covering all employees with at least one year of service and pays
direct pensions to certain retired employees. Benefits are based on years of
service with the Company and salary excluding bonuses, fees commissions, etc.
Participants are vested in their accrued benefits after five years of service.
Pension expense of $180,000, $170,613, and $198,000 was incurred during the
years ended September 30, 1998, 1997, and 1996, 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
$680.4 million at June 30, 1998.
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, 1998, 1997, and 1996 were $71,052, $71,052, and $71,053, respectively. At
September 30, 1998 and 1997, the projected benefit obligation was $779,392 and
$727,140, respectively.
Management Recognition and Development Plan
In February 1996, the Board of Directors approved a MRDP 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 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. On April 9, 1996, 391,459 shares were awarded
to officers and directors. In accordance with the vesting schedule, 78,293
shares were released to those individuals on April 9, 1997 and an additional
78,293 shares were released on April 9, 1998. On November 19, 1997 a new award
of 6,116 shares was made to a director. Under the plan these shares will vest
over a five year period. During 1998, 17,616 shares awarded under the plan were
forfeited upon resignation of an officer. The Company recognizes compensation
expense in the amount of the cost of the common stock in accordance with the
vesting schedule during the years in which the shares are payable. Compensation
expense for the years ended September 30, 1998 and 1997 was $1.1 million and
$1.1 million, respectively. There was no compensation expense recorded for the
year ended September 30, 1996 because no shares were vested under the plan.
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.
<PAGE>
Option activity under the Stock Plan is as follows:
<TABLE>
<CAPTION>
Weighted
Number of Average
Shares Exercise Price
------------ --------------
<S> <C> <C>
Outstanding, September 30, 1995 ........... -- --
Granted ................................... 971,308 $ 13.125
Exercised ................................. -- --
Canceled .................................. -- --
------------ ------------
Outstanding, September 30, 1996 ........... 971,308 $ 13.125
Granted ................................... -- --
Exercised ................................. -- --
Canceled .................................. -- --
------------ ------------
Outstanding, September 30, 1997 ........... 971,308 $ 13.125
Granted ................................... 23,243 $ 20.577
Exercised ................................. (31,317) $ 13.125
Canceled .................................. (46,976) $ 13.125
------------ ------------
Outstanding, September 30, 1998 ........... 916,258 $ 13.314
============ ============
</TABLE>
At September 30, 1998, 275,738 shares were available for future grants
under the Stock Plan.
Additional information regarding options outstanding as of September 30, 1998 is
as follows:
<TABLE>
<CAPTION>
Weighted Avg.
Range of Options Options Remaining
Exercise Prices Outstanding Exercisable Contractual Life
- ---------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
$ 13.125 893,015 357,206 7.5
$ 20.577 23,243 -- 9.1
------------- -------------
916,258 357,206
============= =============
</TABLE>
Additional Stock Plan Information
As discussed in Note 1, the Company continues to account for its
stock-based awards using the intrinsic value method in accordance with
Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees"
and its related interpretations. Accordingly no compensation expense has been
recognized in the financial statements for employee stock arrangements.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123") requires the disclosure of pro forma
net income and earnings per share had the Company adopted the fair value method
as of the beginning of fiscal 1996. Under SFAS No. 123, the fair value of
stock-based awards to employees is calculated through the use of option pricing
models, even though such models were developed to estimate fair value of freely
tradable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option awards. These models also
require subjective assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the calculated values.
<PAGE>
The Company's calculations were made using the Black-Scholes option pricing
model with the following weighted average assumptions:
<TABLE>
<CAPTION>
November 1997 April 1996
Grant Grant
------------- ----------
<S> <C> <C>
Risk free interest rates .................. 5.79% 6.33%
Expected dividend ......................... 1.75% 1.75%
Expected lives, in years .................. 7.5 7.5
Expected volatility ....................... 23.24% 19.63%
</TABLE>
The weighted average grant-date fair value of options granted during fiscal
years 1998 and 1996 were $6.65 and $4.12, respectively. The Company's
calculations are based on a multiple option valuation approach and forfeitures
are recognized as they occur. Had compensation cost for these awards been
determined with SFAS No. 123, the Company's net income and earnings per share
would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
Year ended September 30,
1998 1997 1996
---------- ---------- ----------
Net earnings:
<S> <C> <C> <C>
As reported $9,551,032 $8,557,750 $6,109,797
Pro forma 9,040,748 8,063,929 5,862,887
Earnings per common
share - basic
As reported $1.05 $0.91 $0.56
Pro forma $1.00 $0.85 $0.53
Earnings per common
share - fully diluted:
As reported $1.00 $0.88 $0.55
Pro forma $0.95 $0.83 $0.53
</TABLE>
(15) Employee Stock Ownership Plan
As part of the stock conversion consummated on October 4, 1995, the Company
established an ESOP 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 which would be distributed over a
ten year period. 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 $6.9 million and $7.8 million at September 30, 1998
and 1997, 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 on 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 $2.0 million, $1.7 million and,
$1.4 million for the years ended September 30, 1998, 1997 and 1996, respectively
and 97,865 shares were allocated among the participants in each of those years.
<PAGE>
(16) Fair Value of Financial Instruments
Financial instruments have been construed to generally mean cash or a
contract the 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:
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
--------------------------------- ---------------------------------
Carrying Fair Carrying Fair
amount value amount value
--------------- --------------- --------------- ---------------
Financial Assets
<S> <C> <C> <C> <C>
Cash and due from banks ................ $ 25,644,460 $ 25,644,460 $ 24,503,768 $ 24,503,768
Interest earning deposits with banks ... 11,496,026 11,496,026 1,431,087 1,431,087
Federal funds sold and
securities purchased under
agreements to resell ................... 29,844,783 29,844,783 6,108,341 6,108,341
Investment securities
available for sale ..................... 203,224,184 203,224,184 261,846,320 261,846,320
Investment securities held
to maturity ............................ 2,888,759 2,928,324 22,937,314 22,968,997
Mortgage backed and related
securities available for sale .......... 43,335,857 43,335,857 64,868,633 64,868,633
Mortgage backed and related
securities held to maturity ............ 3,661,683 3,696,444 5,446,957 5,518,648
Loans receivable, net .................. 668,146,380 721,213,589 551,825,440 568,098,444
FHLB stock ............................. 10,172,900 10,172,900 7,150,400 7,150,400
Financial Liabilities
Deposit liabilities .................... 689,541,345 693,936,011 673,997,901 676,182,990
FHLB advances .......................... 167,000,000 166,432,152 129,000,000 128,358,966
Short term borrowings .................. 12,112,500 12,112,500 17,077,500 17,077,500
</TABLE>
<PAGE>
(17) 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 OTS. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary action 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, 1998.
As of September 30, 1998, 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.
At periodic intervals, the OTS and 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 1998 financial statements. In view of the
uncertain regulatory environment in which the Association now operated, the
extent, if any, to which a forthcoming regulatory examination may ultimately
result in adjustments to the 1998 financial statements cannot be presently
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 was a requirement for SAIF-insured
institutions to recapitalize the SAIF insurance fund through a one-time special
assessment amount which was 65.7 basis points of the March 31, 1995 SAIF deposit
assessment base. As the Association is insured by 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 base of $376.4
million.
<PAGE>
The Association's actual and required minimum capital ratios are presented in
the following table:
<TABLE>
<CAPTION>
To be
Categorized as "Well
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
----------------------- ---------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ------ ------------ ----- ------------ -----
As of September 30, 1998:
<S> <C> <C> <C> <C> <C> <C>
Total Capital: ........... $ 83,179,044 16.1% $ 41,257,520 8.0% $ 51,571,900 10.0%
(To Risk Weighted Assets)
Tier I Capital: .......... 81,232,367 15.8% N/A N/A 30,943,140 6.0%
(To Risk Weighted Assets)
Tier I Capital: .......... 81,232,367 8.3% 29,487,686 3.0% 49,146,143 5.0%
(To Total Assets)
Tangible Capital: ........ 81,232,367 8.3% 14,743,843 1.5% N/A N/A
(To Tangible Assets)
As of September 30, 1997:
Total Capital: ........... 103,325,941 23.1% 35,755,744 8.0% 44,694,680 10.0%
(To Risk Weighted Assets)
Tier I Capital: .......... 102,029,490 22.8% N/A N/A 26,816,808 6.0%
(To Risk Weighted Assets)
Tier I Capital: .......... 102,029,490 11.1% 27,643,595 3.0% 46,072,658 5.0%
(To Total Assets)
Tangible Capital: ........ 102,029,490 11.1% 13,821,797 1.5% N/A N/A
(To Tangible Assets)
</TABLE>
The following table is a reconciliation of the Association's capital, calculated
according to generally accepted accounting principles, to regulatory tangible
and risk-based capital:
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
-------------------- --------------------
<S> <C> <C>
Association's equity ........................ $ 95,448,624 $ 115,678,187
Unrealized securities (gains) losses ........ (2,785,239) (565,002)
Core deposit intangible ..................... (11,431,018) (13,083,695)
-------------------- --------------------
Tangible capital ............................ 81,232,367 102,029,490
General valuation allowances ................ 1,946,677 1,296,451
-------------------- --------------------
Total capital ............................... $ 83,179,044 $ 103,325,941
==================== ====================
</TABLE>
(18) 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
and consumer 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, 1998, loan commitments amounted to approximately $31.2
million comprised of $305,000 in variable rate loans ranging from 8.99% to
14.50% and $30.9 million in fixed rate loans ranging from 6.13% to 10.75%. At
September 30, 1997, loan commitments amounted to approximately $11.5 million
comprised of $4.2 million in variable rate loans ranging from 5.50% to 14.50%
and $7.3 million in fixed rate loans ranging from 7.13% to 11.88%.
<PAGE>
The Company originates residential real estate loans and, to a lesser
extent, commercial and multi-family real estate and consumer loans. Over 86% 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. An economic downturn in these areas would likely have a negative impact
on the Company's results of operations depending on the severity of the
downturn.
(19) Parent Company Financial Information
Condensed financial information as of September 30, 1998 and 1997, for Klamath
First Bancorp, Inc. is presented and should be read in conjunction with the
consolidated financial statements and the notes thereto:
<TABLE>
<CAPTION>
BALANCE SHEETS
September 30,
--------------------------------------------
1998 1997
-------------------- --------------------
Assets
<S> <C> <C>
Cash and cash equivalents ................... $ 41,737,415 $ 10,736,534
Investment and mortgage backed securities ... 20,003,078 34,996,109
Investment in wholly-owned subsidiary ....... 95,448,624 115,678,183
Other assets ................................ 1,099,598 1,033,966
-------------------- --------------------
Total assets ................................ $ 158,288,715 $ 162,444,792
==================== ====================
Liabilities
Short-term borrowings ....................... $ 12,112,500 $ 17,077,500
Other liabilities ........................... 1,095,260 904,849
-------------------- --------------------
Total liabilities ........................... 13,207,760 17,982,349
-------------------- --------------------
Shareholders' equity
Common stock ................................ 99,168 104,295
Additional paid-in capital .................. 82,486,183 92,601,639
Retained earnings ........................... 73,883,019 65,209,049
Unearned ESOP shares at cost ................ (6,850,550) (7,829,200)
Unearned MRDP shares at cost ................ (4,536,865) (5,623,340)
-------------------- --------------------
Total shareholders' equity .................. 145,080,955 144,462,443
-------------------- --------------------
Total liabilities and shareholders' equity .. $ 158,288,715 $ 162,444,792
==================== ====================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF EARNINGS
Years Ended September 30,
--------------------------------------------
1998 1997
-------------------- --------------------
<S> <C> <C>
Equity in undistributed income of subsidiary $ 9,259,035 $ 7,984,527
Total interest income ....................... 2,995,169 3,397,760
Total interest expense ...................... 850,122 978,023
Non-interest income ......................... -- --
Non-interest expense ........................ 1,674,321 1,681,062
-------------------- --------------------
Earnings before income taxes ................ 9,729,761 8,723,202
Provision for income tax .................... 178,724 165,452
-------------------- --------------------
Net earnings ................................ $ 9,551,037 $ 8,557,750
==================== ====================
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
Years Ended September 30,
--------------------------------------------
1998 1997
-------------------- --------------------
<S> <C> <C>
Net cash flows from operating activities .... $ 34,654,657 $ 15,790,720
-------------------- --------------------
Cash flows from investing activities
Investment in subsidiary .................... (261,300) (250,299)
Maturity of investment and mortgage
backed securities ........................... 20,227,224 5,311,184
(Purchase) sale of investment and mortgage
backed securities ........................... (5,035,162) 3,985,625
------------------- --------------------
Net cash flows from investing activities .... 14,930,762 9,046,510
------------------- --------------------
Cash flows from financing activities
Cost of ESOP shares released ................ 978,650 978,650
Proceeds from short-term borrowings ......... 72,503,199 84,750,150
Repayments of short-term borrowings ......... (77,468,199) (82,577,050)
Stock retirement ............................ (11,561,483) (18,878,128)
Stock options exercised ..................... 411,035 --
Dividends paid .............................. (3,447,740) (3,193,428)
------------------- --------------------
Net cash flows from financing activities .... (18,584,538) (18,919,806)
------------------- --------------------
Net increase/(decrease) in cash and cash
equivalents ................................. 31,000,881 5,917,424
Cash and cash equivalents beginning
of year ..................................... 10,736,534 4,819,110
-------------------- --------------------
Cash and cash equivalents end of year ....... $ 41,737,415 $ 10,736,534
==================== ====================
</TABLE>
<PAGE>
(20) Selected Quarterly Financial Data
(unaudited)
<TABLE>
<CAPTION>
Fiscal Year Ended September 30, 1998
---------------------------------------------
December March June September
--------- --------- --------- ---------
(In thousands except per share data)
<S> <C> <C> <C> <C>
Total interest income ................ $ 16,945 $ 17,180 $ 17,710 $ 17,898
Total interest expense ............... 9,186 9,123 9,710 9,829
--------- --------- --------- ---------
Net interest income .................. 7,759 8,057 8,000 8,069
Provision for loan losses ............ 75 91 198 310
--------- --------- --------- ---------
Net interest income after provision .. 7,684 7,966 7,802 7,759
Non-interest income .................. 697 577 823 1,106
Non-interest expense ................. 4,829 4,888 4,832 4,974
--------- --------- --------- ---------
Earnings before income taxes ......... 3,552 3,655 3,793 3,891
Provision for income tax ............. 1,406 1,447 1,302 1,184
--------- --------- --------- ---------
Net earnings ......................... $ 2,146 $ 2,208 $ 2,491 $ 2,707
========= ========= ========= =========
Net earnings per share - basic ....... $ 0.23 $ 0.24 $ 0.28 $ 0.31
========= ========= ========= =========
Net earnings per share - fully diluted $ 0.22 $ 0.23 $ 0.26 $ 0.30
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------
December March June September
--------- --------- --------- ---------
(In thousands except per share data)
<S> <C> <C> <C> <C>
Total interest income ................ $ 12,603 $ 12,409 $ 13,081 $ 16,074
Total interest expense ............... 6,916 6,798 7,304 8,838
--------- --------- --------- ---------
Net interest income .................. 5,687 5,611 5,777 7,236
Provision for loan losses ............ 30 240 45 55
--------- --------- --------- ---------
Net interest income after provision .. 5,657 5,371 5,732 7,181
Non-interest income .................. 112 102 103 493
Non-interest expense ................. 2,604 2,442 2,443 4,275
--------- --------- --------- ---------
Earnings/(loss) before income taxes .. 3,165 3,031 3,392 3,399
Provision for income tax ............. 1,252 550 1,342 1,285
--------- --------- --------- ---------
Net earnings/(loss) .................. $ 1,913 $ 2,481 $ 2,050 $ 2,114
========= ========= ========= =========
Net earnings per share - basic ....... $ 0.19 $ 0.27 $ 0.22 $ 0.23
========= ========= ========= =========
Net earnings per share - fully diluted $ 0.18 $ 0.26 $ 0.22 $ 0.22
========= ========= ========= =========
</TABLE>
As described in Note 2, results of operations for the fourth quarter reflect
increased income and expenses related to the Association's acquisition of 25
branches from Wells Fargo Bank, N.A.
<PAGE>
Klamath First Bancorp, Inc.
Corporate Information
Corporate Common Stock
Headquarters Traded over-the-counter/
540 Main Street Nasdaq National Market
Klamath Falls, OR 97601 Nasdaq Symbol: KFBI
541-882-3444
Form 10-K
Independent Information
Auditors Available without charge
Deloitte & Touche LLP to shareholders of record
3900 U.S. Bancorp Tower upon written request to
111 SW Fifth Avenue Marshall Alexander,
Portland, OR 97204-3698 Senior Vice President -
503-222-1341 Chief Financial Officer
Klamath First Bancorp, Inc.
Corporate Counsel 540 Main Street
Craig M. Moore Klamath Falls, Or 97601
540 Main Street
Klamath Falls, OR 97601 Annual Meeting
541-882-3444 The annual meeting of
shareholders will be held
Special Counsel Wednesday,
Breyer & Associates, PC January 27, 1999
1100 New York Avenue beginning at 2:00 p.m.,
N.W. Pacific Time at:
Suite 700 East The Shilo Inn
Washington, DC 20005 2500 Almond Street
202-737-7900 Klamath Falls, OR 97601.
Shareholders of record as of
Transfer Agent the close of business on
Registrar & Transfer Co. November 24, 1998 shall
10 Commerce Drive be those entitled to notice
Cranford, NJ 07016-3572 of and to vote at the
800-866-1340 meeting.
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.
EXHIBIT 23
Independent Auditors' Consents
<PAGE>
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement of
Klamath First Bancorp, Inc. on Form S-8 (File No. 333-4002) of our report dated
October 30, 1998, on the financial statements appearing in the Annual Report to
stockholders of Klamath First Bancorp, Inc. for the year ended September 30,
1998.
/s/ DELOITTE & TOUCHE LLP
Portland, Oregon
December 23, 1998
<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>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 25,644,460
<INT-BEARING-DEPOSITS> 11,496,026
<FED-FUNDS-SOLD> 29,844,783
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 246,560,041
<INVESTMENTS-CARRYING> 6,550,442
<INVESTMENTS-MARKET> 6,624,768
<LOANS> 668,146,380
<ALLOWANCE> 1,949,677
<TOTAL-ASSETS> 1,031,302,398
<DEPOSITS> 689,541,345
<SHORT-TERM> 12,112,500
<LIABILITIES-OTHER> 17,585,598
<LONG-TERM> 167,000,000
0
0
<COMMON> 99,168
<OTHER-SE> 144,981,787
<TOTAL-LIABILITIES-AND-EQUITY> 1,031,302,398
<INTEREST-LOAN> 49,508,126
<INTEREST-INVEST> 18,446,211
<INTEREST-OTHER> 1,778,933
<INTEREST-TOTAL> 69,733,270
<INTEREST-DEPOSIT> 28,931,749
<INTEREST-EXPENSE> 37,848,351
<INTEREST-INCOME-NET> 31,884,919
<LOAN-LOSSES> 674,000
<SECURITIES-GAINS> 440,750
<EXPENSE-OTHER> 19,522,804
<INCOME-PRETAX> 14,890,469
<INCOME-PRE-EXTRAORDINARY> 14,890,469
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,551,037
<EPS-PRIMARY> 1.05
<EPS-DILUTED> 1.00
<YIELD-ACTUAL> 2.57
<LOANS-NON> 523,671
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,296,451
<CHARGE-OFFS> 20,774
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,949,677
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,949,677
</TABLE>
