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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-26556
KLAMATH FIRST BANCORP, INC.
(Exact name of registrant as specified in its charter)
Oregon 93-1180440
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) I.D. Number)
540 Main Street, Klamath Falls, Oregon 97601
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (541) 882-3444
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant
to Section 12(g) of the Act: Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
Indicate by check mark whether disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or other information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. YES X NO
As of December 3, 1999, there were issued and outstanding 7,908,377 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 3, 1999 of $11.75, was
$75,645,948.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Registrant's Annual Report to Shareholders for the Fiscal
Year Ended September 30, 1999 ("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, 1999, the Company had total assets of $1.0 billion, total
deposits of $720.4 million and shareholders' equity of $109.6 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, 1999, permanent
residential one- to four-family real estate loans totaled $647.1 million, or
83.56% 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, 1999, the Association's total loan portfolio
consisted of 90.59% fixed rate and 9.41% adjustable rate loans, after deducting
loans in process and non-performing loans.
Announcement of Stock Repurchase
On December 1, 1999 the Company announced its intention to repurchase 5% of
its outstanding common stock. The repurchase will be accomplished through the
open market over a twelve month period.
Modified Dutch Auction Tender
In September 1998, the Board of Directors authorized the repurchase of
approximately 20% of the Company's outstanding common stock. The repurchase was
completed through a "Modified Dutch Auction Tender Offer." Under this program,
the Company's shareholders were 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. Results of the offer were finalized on January 15,
1999 when the Company announced the purchase of 1,984,090 shares at $19.50 per
share. This represented approximately 85.9% of the shares tendered at $19.50 per
share or less, and 64.7% of all shares tendered. The cost of the shares
purchased was approximately $39.3 million. The effect of the transaction is
reflected in a reduction in cash and investments and a reduction in equity with
a corresponding impact on the performance ratios for the year ended September
30, 1999.
1
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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
additional 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.
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>
Year Ended
At September 30,
September 30, ------------------------
1999 1999 1998 1997
------------- ---- ---- ----
Weighted average yield:
<S> <C> <C> <C> <C>
Loans receivable ..................... 7.47% 7.80% 8.06% 7.92%
Mortgage backed and related securities 5.89 5.50 6.03 6.34
Investment securities ................ 6.23 5.88 6.05 6.10
Federal funds sold ................... 5.22 4.93 5.45 5.31
Interest-earning deposits ............ 5.28 4.75 5.35 5.32
FHLB stock ........................... 7.25 7.50 7.73 7.70
Combined weighted average yield on
interest-bearing assets ................ 7.15 7.25 7.34 7.40
----- ----- ----- -----
Weighted average rate paid on:
Tax and insurance reserve ............ 1.73 2.07 2.47 2.97
Passbook and statement savings ....... 1.76 2.15 2.70 3.15
Interest-bearing checking ............ 1.14 1.23 1.48 2.20
Money market ......................... 4.04 3.87 3.86 3.85
Certificates of deposit .............. 5.28 5.38 5.69 5.76
FHLB advances/Short term borrowings .. 5.34 5.26 5.63 5.68
Combined weighted average rate on
interest-bearing liabilities ........... 4.64 4.52 4.77 5.12
----- ----- ----- -----
Net interest spread ..................... 2.51% 2.73% 2.57% 2.28%
===== ===== ===== =====
</TABLE>
2
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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 1999 Annual Report to
Shareholders ("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.
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 79% 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's mortgage lending has diversified
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 one-
to four-family residential, multi-family residential and commercial real estate,
the majority of which are located outside Klamath, Jackson, and Deschutes
counties. During the year ended September 30, 1999, the Association initiated a
program to sell loans to the Federal National Mortgage Association ("Fannie
Mae").
Permanent residential one- to four-family mortgage loans amounted to $647.1
million, or 83.56%, of the Association's total loan portfolio before net items,
at September 30, 1999. The Association originates other loans secured by
multi-family residential and commercial real estate, construction and land
loans. Those loans amounted to $110.8 million, or 14.31%, of the total loan
portfolio, before net items, at September 30, 1999. Approximately 2.13%, or
$16.5 million, of the Association's total loan portfolio, before net items, as
of September 30, 1999, 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 $15.2 million at September 30, 1999. At September 30, 1999, the
Association had 25 borrowing relationships with outstanding balances in excess
of $1.0 million, the largest of which amounted to $5.4 million and consisted of
28 loans, 27 of which were secured by commercial real estate construction
projects and single family real estate and one which is an unsecured line of
credit.
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. The Association has 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. Also, in September
1999, the Association purchased $10.0 million of adjustable rate one- to
four-family loans on properties located in the Pacific Northwest from a
Northwest bank. 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, 1999,
$70.3 million, or 9.41% of loans in the Association's total loan portfolio,
after loans in process and non-performing loans, consisted of adjustable rate
loans.
3
<PAGE>
Loan Portfolio Analysis. The following table sets forth the composition of
the loan portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------- ------------------ ------------------ ------------------ ------------------
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 .... $647,130 83.56% $577,471 81.95% $498,595 86.47% $447,004 91.50% $381,683 91.68%
Multi-family residential . 18,412 2.38 19,230 2.73 16,881 2.93 6,555 1.34 7,433 1.79
Construction ............. 53,219 6.87 64,289 9.12 30,487 5.29 14,276 2.92 9,807 2.36
Commercial ............... 37,079 4.79 29,457 4.18 22,639 3.93 15,645 3.20 13,984 3.36
Land ..................... 2,064 0.27 2,185 0.31 1,586 0.27 1,152 0.24 1,072 0.25
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total real estate loans .... 757,904 97.87 692,632 98.29 570,188 98.89 484,632 99.20 413,979 99.44
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Non-real estate loans:
Savings accounts ......... 1,800 0.23 1,991 0.28 1,711 0.30 1,640 0.34 1,966 0.47
Home improvement and
home equity loans ..... 6,726 0.87 5,750 0.82 3,486 0.60 1,977 0.40 -- --
Other .................... 8,011 1.03 4,330 0.61 1,190 0.21 302 0.06 367 0.09
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total non-real estate loans 16,537 2.13 12,071 1.71 6,387 1.11 3,919 0.80 2,333 0.56
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total loans ............... 774,441 100.00% 704,703 100.00% 576,575 100.00% 488,551 100.00% 416,312 100.00%
====== ====== ====== ====== ======
Less:
Undisbursed portion of loans 24,176 26,987 17,096 8,622 7,203
Deferred loan fees ......... 7,988 7,620 6,358 5,445 4,757
Allowance for loan losses .. 2,484 1,950 1,296 928 808
-------- -------- -------- -------- --------
Net loans .................. $739,793 $668,146 $551,825 $473,556 $403,544
======== ======== ======== ======== ========
</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,
------------------------------------------
1999 1998
------------------- --------------------
Amount Percent Amount Percent
-------- -------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Fixed rate .... $676,644 90.59% $607,112 89.67%
Adjustable-rate 70,309 9.41 69,958 10.33
-------- ------ -------- ------
Total .... $746,953 100.00% $677,070 100.00%
======== ====== ======== ======
</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, 1999, $647.1 million, or 83.56%, 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
$73,558.
The Association presently originates both fixed-rate mortgage loans and
adjustable rate mortgages ("ARMs") 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, 1999, $634.6 million, or 84.96% of the total loans
after loans in process and non-performing loans were fixed rate one- to
four-family loans and $33.5 million, or 4.48%, 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, 1999,
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. In October 1999 the Association also introduced
variable rate loan products that bear fixed rates for the first three or five
years and then reprice annually thereafter. As a supplement to origination of
ARM loans, the Association purchases ARMs from other institutions when suitable
loans can be found which meet its underwriting criteria.
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
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<PAGE>
adjustment index used for pricing initially (discounting). These loans are
subject to increased risks of default or delinquency because of this. Another
consideration is that although ARM loans allow the Association to increase the
sensitivity of its asset base to changes in the interest rates, the extent of
this interest sensitivity is limited by the periodic and lifetime interest rate
adjustment limits. Because of these considerations, the Association has no
assurance that yields on ARM loans will be sufficient to offset increases in the
Association's cost of funds.
The loan-to-value ratio, maturity and other provisions of the loans made by
the Association generally have reflected the policy of making less than the
maximum loan permissible under applicable regulations, in accordance with sound
lending practices, market conditions and underwriting standards established by
the Association. The Association's lending policies on permanent residential
one- to four-family mortgage loans generally limit the maximum loan-to-value
ratio to 90% of the lesser of the appraised value or purchase price of the
property and generally all permanent residential one- to four-family mortgage
loans in excess of an 80% loan-to-value ratio require private mortgage
insurance. 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, which is near popular ski areas and other
outdoor activities, and the branches along the Southern Oregon coast, which is
also 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, 1999, $4.2 million, or
0.54%, 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. The Association purchases 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, 1999, $18.4 million, or 2.38%, of the Association's
total loan portfolio, before net items, consisted of loans secured by existing
multi-family residential real estate and $37.1 million, or 4.79%, 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 $246,625 at September 30, 1999, the largest of which was a $2.5
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
5.74%, 3.20%, and 4.87% of the Association's total loan originations in the
fiscal years ended September 30, 1999, 1998, and 1997, respectively. The
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<PAGE>
Association also purchased $2.4 million in multi-family residential loan
participations and $937,000 in commercial real estate participations during the
year ended September 30, 1999.
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, 1999, $28.0 million, or 3.75%, 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 residential and
commercial 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, 1999, construction loans amounted to $53.2 million (including
$22.5 million of speculative loans), or 6.87%, 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% loan-to-value upon completion of construction may be
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<PAGE>
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 20
year amortization periods, with a balloon payment due in five years, and maximum
loan-to-value ratios of 80%. As of September 30, 1999, $2.1 million, or 0.27%,
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, 1999, $16.5 million, or 2.13%, of the
Association's total loan portfolio consisted of non-real estate loans. As of
that date, $1.8 million, or .23%, of total loans were secured by savings
accounts. At September 30, 1999, $1.5 million, or 0.20%, 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, 1999 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 or repricing date. 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>
Within After One Year
One Year Through 5 Years After 5 Years Total
--------- --------------- ------------- ----------
(In thousands)
Permanent residential
one- to four-family:
<S> <C> <C> <C> <C>
Adjustable rate .... $ 24,418 $ 9,070 $ -- $ 33,488
Fixed rate ......... 10,004 3,908 620,724 634,636
Other mortgage loans:
Adjustable rate .... 14,276 13,732 -- 28,008
Fixed rate ......... 1,264 12,788 20,234 34,286
Non-real estate loans:
Adjustable rate ... 8,627 186 -- 8,813
Fixed rate ........ 1,503 4,303 1,916 7,722
--------- --------- --------- ---------
Total loans ...... $ 60,092 $ 43,987 $ 642,874 $ 746,953
========= ========= ========= =========
</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, 1999, which have fixed interest rates
and have adjustable rates, was $663.9 million and $23.0 million, respectively.
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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
45 days from commitment. The Association had outstanding loan commitments of
approximately $11.8 million at September 30, 1999 consisting of $4.4 million of
variable rate loans and $7.4 million of fixed rate loans. See Note 19 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 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. During the year ended September
30, 1999, the Association originated $224.2 million in total loans, compared to
$232.5 million in the same period of 1998. The continued high level of loan
originations was attributable to relatively low interest rates and promotion of
lending throughout the branch network and through mortgage brokers. During the
year ended September 30, 1999, the Association began a program to sell loans to
Fannie Mae. Through this program, $5.6 million in fixed rate loans were sold,
all of which were one- to four-family mortgages. Servicing was retained on all
loans sold.
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, 1999, the balance had declined to $1.3 million. During 1999, the
Association purchased $10.4 million in permanent residential one- to four-family
mortgage loans. These loans were underwritten on the same basis as permanent
residential one- to four-family real estate loans originated by the Association.
The Association also purchases multi-family and commercial real estate
mortgage loans secured by properties within the Association's primary market
area. At September 30, 1999, the balance of such purchased loans was $17.9
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>
Year Ended September 30,
-----------------------------------
1999 1998 1997
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Total net loans at beginning of period $ 668,146 $ 551,825 $ 473,556
--------- --------- ---------
Loans originated:
Real estate loans originated (1) .... 209,723 219,790 116,502
Real estate loans purchased ......... 15,500 7,792 15,648
Non-real estate loans originated .... 14,471 12,684 3,571
--------- --------- ---------
Total loans originated ............ 239,694 240,266 135,721
--------- --------- ---------
Loan reductions:
Principal paydowns .................. (159,161) (122,029) (56,157)
Loans sold .......................... (5,584) -- --
Other reductions (2) ................ (3,302) (1,916) (1,295)
--------- --------- ---------
Total loan reductions ............ (168,047) (123,945) (57,452)
--------- --------- ---------
Total net loans at end of period ..... $ 739,793 $ 668,146 $ 551,825
========= ========= =========
<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, 1999, the Association had $8.0 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, 1999, 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 Multi-family
1-4 family Construction Real Estate Loans Total
--------------------- --------------------- ------------------- ---------------------
Amount Percentage Amount Percentage Amount Percentage Amount Percentage
------- ---------- ------ ---------- ------ ---------- ------- ----------
(Dollars in thousands)
Loans delinquent
<S> <C> <C> <C> <C> <C> <C> <C> <C>
for 90 days and more....... $915 0.12% $1,474 0.19% $926 0.12% $3,315 0.43%
</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 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
exceeds its estimated net realizable value. From time to time, the Association
11
<PAGE>
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, 1999, the Association's total non-performing loans
amounted to $3.3 million, or 0.43% of total loans, before net items, compared
with $524,000, or 0.07% of total loans, before net items, at September 30, 1998.
The increase relates primarily to two loans placed on nonaccrual status during
1999, a $1.5 million land development loan and a $925,711 commercial real estate
loan secured by an apartment complex. The appraised value of the underlying
collateral exceeds the loan balances and foreclosure proceedings have been
commenced related to these properties.
Real estate owned increased from the prior year primarily as a result of
the foreclosure of a commercial real estate property. This property was written
down to its estimated fair value of $1.4 million upon foreclosure.
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,
-----------------------------------------------
1999 1998 1997 1996 1995
----- ------ ------- ------- ------
(Dollars in thousands)
Non-accruing loans
<S> <C> <C> <C> <C> <C>
One- to four-family real estate ..... $ 915 $ 513 $ 245 $ 191 $ 734
Commercial real estate .............. 2,400 -- -- -- --
Consumer ............................ -- 11 9 -- --
Accruing loans greater than 90
days delinquent ....................... -- -- -- -- --
------ ------ ------- ------ ------
Total non-performing loans .......... 3,315 524 254 191 734
------ ------ ------- ------ ------
Real estate owned ....................... 1,495 -- -- 69 24
Other repossessed assets ................ -- -- -- -- --
------ ------ ------- ------ ------
Total repossessed assets ............ 1,495 -- -- 69 24
------ ------- ------- ------ ------
Total non-performing assets ......... $4,810 $ 524 $ 254 $ 260 $ 758
====== ======= ======= ====== ======
Total non-performing assets as a
percentage of total assets ............ 0.46% 0.05% 0.03% 0.04% 0.12%
====== ====== ======= ====== ======
Total non-performing loans as a
percentage of total loans,
before net items ...................... 0.62% 0.07% 0.04% 0.04% 0.18%
====== ====== ======= ====== ======
Allowance for loan losses as a
percentage of total non-performing
assets ................................ 51.64% 372.14% 510.38% 356.92% 106.80%
====== ====== ======= ====== ======
Allowance for loan losses as a percentage
of total non-performing loans ......... 74.93% 372.14% 510.38% 485.86% 110.08%
====== ====== ======= ====== ======
</TABLE>
For the year ended September 30, 1999, 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,
12
<PAGE>
and the amount of interest income on such loans that was included in net income
for each of such periods, were, in both cases, less than 1% of total interest
income.
Classified Assets. Federal regulations require that each insured savings
association classify its assets on a regular basis. In addition, in connection
with examinations of insured institutions, federal examiners have authority to
identify problem assets and, if appropriate, classify them. There are four
categories used to classify problem assets: "special mention," "substandard,"
"doubtful," and "loss." Special mention assets are not considered classified
assets, but 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, 1999, total classified assets amounted to 0.46% of total
assets. At September 30, 1999 and 1998, 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,
-----------------
1999 1998
------ ------
(In thousands)
<S> <C> <C>
Loss ................... $ -- $ --
Doubtful ............... -- --
Substandard assets ..... 4,810 521
Special mention ........ 456 2,452
General loss allowances 2,484 1,947
Specific loss allowances -- 3
Charge offs ............ 398 20
</TABLE>
Assets classified substandard at September 30, 1999 include a $1.5 million
land development loan, a $925,711 loan on a 40-unit apartment complex, and a
$1.4 million commercial real estate property obtained through foreclosure. None
of these assets were classified at September 30, 1998. These problem assets are
not concentrated in any one market area and the Company does not believe they
are indicative of an adverse market trend in the Northwest. The increase in
charge offs for the year ended September 30, 1999 relates primarily to the
write-down of the commercial real estate property to fair value. The loan on the
commercial real estate was originally a participation with another lender.
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
13
<PAGE>
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, 1999, the
Association had an allowance for loan losses of $2.5 million, which was equal to
51.64% of non-performing assets and 0.32% 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, 1999, 1998 and 1997
were $932,000, $674,000, and $370,000, 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>
Year Ended September 30,
----------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total loans outstanding ................. $ 774,441 $ 704,703 $ 576,575 $ 488,551 $ 416,312
========= ========= ========= ========= =========
Average loans outstanding ............... $ 721,658 $ 614,457 $ 515,555 $ 440,510 $ 381,689
========= ========= ========= ========= =========
Allowance at beginning of period ........ $ 1,950 $ 1,296 $ 928 $ 808 $ 755
Charge-offs ............................. (398) (20) (2) -- (67)
Recoveries .............................. -- -- -- -- --
Provision for loan losses ............... 932 674 370 120 120
--------- --------- --------- --------- ---------
Allowance at end of period .............. $ 2,484 $ 1,950 $ 1,296 $ 928 $ 808
========= ========= ========= ========= =========
Allowance for loan losses as a percentage
of total loans outstanding ............. 0.32% 0.28% 0.22% 0.19% 0.19%
==== ==== ==== ==== ====
Ratio of net charge-offs to average loans
outstanding during the period .......... 0.06% --% --% --% 0.02%
==== ==== ==== ==== ====
</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,
-------------------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------------ ----------------------------------- -----------------------------------
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
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1-4 family ........... $1,103 0.14% 83.56% $1,141 0.16% 81.95% $ 887 0.15% 86.51%
Multi-family
residential .......... 267 0.03 2.38 124 0.02 2.73 121 0.02 2.93
Construction ........... 221 0.03 6.87 116 0.02 9.12 -- -- 5.31
Commercial ............. 730 0.09 4.79 444 0.07 4.18 250 0.04 3.93
Land ................... 28 -- 0.27 29 -- 0.31 12 -- 0.27
Non-real estate ........ 135 0.02 2.13 96 0.01 1.71 26 0.01 1.05
------ ------ ------ ------ ----- ------ ------ ---- ------
Total ............... $2,484 0.31% 100.00% $1,950 0.28% 100.00% $1,296 0.22% 100.00%
====== ===== ====== ====== ==== ====== ====== ==== ======
</TABLE>
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------------------------
1996 1995
------------------------------------ -----------------------------------
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
<S> <C> <C> <C> <C> <C> <C>
1-4 family............ $925 0.19% 91.50% $807 0.19% 91.68%
Multi-family
residential........... -- -- 1.34 -- -- 1.79
Construction............ -- -- 2.92 -- -- 2.36
Commercial.............. -- -- 3.20 -- -- 3.36
Land.................... -- -- 0.24 -- -- 0.25
Non-real estate......... 3 -- 0.80 1 -- 0.56
------ ----- ------- ---- ---- ------
Total................ $928 0.19% 100.00% $808 0.19% 100.00%
====== ===== ======= ==== ==== ======
</TABLE>
15
<PAGE>
Although the Association believes that it has established its allowance for
loan losses in accordance with generally accepted accounting principles
("GAAP"), there can be no assurance that regulators, in reviewing the
Association's loan portfolio, will not request the Association to significantly
increase its allowance for loan losses, thereby reducing the Association's net
worth and earnings. In addition, because future events affecting borrowers and
collateral cannot be predicted with certainty, there can be no assurance that
the existing allowance for loan losses is adequate or that substantial increases
will not be necessary should the quality of any loans deteriorate as a result of
the factors discussed above. Any material increase in the allowance may
adversely affect the Association's financial condition and results of operation.
Investment Activities
Federally chartered savings institutions have the authority to invest in
securities of various federal agencies, certain insured certificates of deposit
of banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in commercial paper,
investment grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally chartered savings institution is otherwise
authorized to make directly. OTS regulations restrict investments in corporate
debt securities of any one issuer in excess of 15% of the Association's
unimpaired capital and unimpaired surplus, as defined by federal regulations,
which totaled $101.0 million at September 30, 1999, 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, 1999,
the investment securities portfolio held to maturity consisted of $559,512 in
tax-exempt securities issued by states and municipalities. 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,
1999, the portfolio of securities available for sale consisted of $73.9 million
in securities issued by the U.S. Treasury and other federal government agencies,
$23.9 million in tax exempt securities issued by states and municipalities, and
$102.6 million in investment grade corporate investments.
During the years ended September 30, 1999, 1998 and 1997, 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.
16
<PAGE>
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,
---------------------------------------------------------------------------
1999 1998 1997
----------------------- ----------------------- -----------------------
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 ...... $ 560 $ 577 $ 889 $ 926 $ 1,042 $ 1,069
Corporate obligations ................ -- -- 2,000 2,002 21,895 21,900
Available for sale:
U.S. Government obligations .......... 74,227 73,960 102,620 105,454 185,861 185,601
State and municipal obligations ...... 24,848 23,881 17,406 18,103 8,861 9,087
Corporate obligations ................ 62,037 60,807 79,225 79,667 67,147 67,158
-------- ----------- -------- ----------- -------- -----------
Total .............................. $161,672 $ 159,225 $202,140 $ 206,152 $284,806 $ 284,815
======== =========== ======== =========== ======== ===========
</TABLE>
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------------------------------
1999 1998 1997
--------------------- ---------------------- ---------------------
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 $ 560 0.35% $ 889 0.44% $ 1,042 0.36%
Corporate obligations ......... -- -- 2,000 0.99 21,895 7.69
Available for sale:
U.S. Government obligations ... 74,227 45.91 102,620 50.77 185,861 65.26
State and municipal obligations 24,848 15.37 17,406 8.61 8,861 3.11
Corporate obligations ......... 62,037 38.37 79,225 39.19 67,147 23.58
-------- ------ -------- ------ -------- ------
Total ....................... $161,672 100.00% $202,140 100.00% $284,806 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
17
<PAGE>
The following table sets forth the maturities and weighted average yields
of the debt securities in the investment portfolio at September 30, 1999.
<TABLE>
<CAPTION>
One Year After One Through After Five Through After Ten
or Less Five Years Ten Years Years Totals
--------------------- -------------------- --------------------- -------------------- --------
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 ...... $ 171 6.82% $ 389 5.60% $ -- -- $ -- -- $ 560
Available for sale:
U.S. Government
obligations ...... 15,014 5.69% 59,213 6.01% -- -- -- -- 74,227
State and municipal
obligations ...... 572 6.49% 802 6.25% 198 6.12% 23,276 7.57% 24,848
Corporate obligations . 21,053 6.14% 21,159 6.12% -- -- 19,825 5.94% 62,037
-------- ------- ------- -------- --------
Total.................. $ 36,810 $81,563 $ 198 $ 43,101 $161,672
======== ======= ======= ======== ========
</TABLE>
At September 30, 1999 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 $11.0 million.
18
<PAGE>
Mortgage-Backed and Related Securities
At September 30, 1999, the Company's net mortgage-backed and related
securities totaled $75.3 million at fair value ($75.7 million at amortized cost)
and had a weighted average yield of 5.88%. At September 30, 1999, 82.37% of the
mortgage-backed and related securities were adjustable rate securities.
Mortgage-backed and related securities ("MBS") can be divided into two main
groups. The first group, called mortgage participation certificates or
pass-through certificates, typically represents 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 (formerly the Federal National Mortgage
Association), the Government National Mortgage Association ("GNMA") and the U.S.
Small Business Administration ("SBA").
The second group, called collateralized mortgage obligations ("CMOs"),
consists of securities created from and secured by the securities in the first
group described above. CMOs are an example of a security called a derivative,
because they are derived from mortgage pass-through securities. Underwriters of
CMOs create these securities by dividing up the interest and principal cash
flows from the pools of mortgages and selling these different slices of cash
flows as a new and different class of individual securities or "tranches." The
Company invested in $18.1 million of CMOs during 1999, comprised of two classes,
planned amortization class tranches ("PACs") and Floaters. The least volatile
CMOs are PACs. With PAC tranches, the yields, average lives, and lockout periods
when no payments are received are designed to closely follow the actual
performance of the underlying MBS. PACs are available in a variety of short term
maturities, usually two, three, five, or seven years. CMO floaters are similar
to adjustable rate mortgages; they carry an interest rate that changes in a
fixed relationship to an interest rate index, typically the London Interbank
Offer Rate ("LIBOR"). Floaters usually have caps that determine the highest
interest that can be paid by the securities. Except for caps on floaters, PACs
and floaters may help to manage interest rate risk by reducing asset duration.
They also may help manage price volatility since they typically have short
maturities or coupons that reset monthly or quarterly to reflect changes in the
index rate.
MBS 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. MBS generally yield less
than the loans that underlie such securities because of the cost of payment
guarantees and credit enhancements. In addition, MBS 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 MBS 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 MBS 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.
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,
---------------------------------------------------------------------------
1999 1998 1997
----------------------- ----------------------- -----------------------
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 ................................. $ 2,601 $ 2,596 $ 3,662 $ 3,696 $ 5,447 $ 5,518
Available for sale:
Fannie Mae ........................... 24,319 24,410 12,866 12,985 12,775 12,897
FHLMC ................................ 18,375 18,371 14,722 15,158 25,881 26,574
GNMA ................................. 11,783 11,768 3,619 3,662 9,709 9,808
SBA .................................. -- -- 11,535 11,531 15,732 15,590
CMOs ................................. 18,598 18,146 -- -- -- --
-------- ----------- -------- ----------- -------- -----------
Total .............................. $ 75,676 $ 75,291 $ 46,404 $ 47,032 $ 69,544 $ 70,387
======== =========== ======== =========== ======== ===========
</TABLE>
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------------------------------------
1999 1998 1997
---------------------------- -------------------------- --------------------------
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 ............ $ 2,601 3.44% $ 3,662 7.89% $ 5,447 7.83%
Available for sale:
Fannie Mae ...... 24,319 32.13 12,866 27.73 12,775 18.37
FHLMC ........... 18,375 24.28 14,722 31.72 25,881 37.22
GNMA ............ 11,783 15.57 3,619 7.80 9,709 13.96
SBA ............. -- -- 11,535 24.86 15,732 22.62
CMOs ............ 18,598 24.58 -- -- -- --
---------- ------ -------- ------ ------- ------
Total ......... $ 75,676 100.00% $ 46,404 100.00% $69,544 100.00%
========== ====== ======== ====== ======= ======
</TABLE>
Interest-Earning Deposits
The Company also had interest-earning deposits in the FHLB of Seattle
amounting to $1.3 million and $12.1 million at September 30, 1999 and 1998,
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
20
<PAGE>
interest rates and money market conditions. Borrowings may be used on a
short-term basis to compensate for 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, negotiable order of
withdrawal ("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, 1999. 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.
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, 1999, these deposits totaled $35.2 million, or 4.89% 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, 1999, the
Association experienced a net increase in deposits (before interest credited) of
$6.3 million as customers deposited funds and new customers were added. The
Association has conducted a special checking account campaign in an effort to
attract and retain deposits. To augment this deposit growth, the Association has
relied on increased borrowings from the FHLB of Seattle. See "-- Borrowings."
At September 30, 1999, certificate accounts maturing during the year ending
September 30, 2000 totaled $266.0 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, 1999.
<TABLE>
<CAPTION>
Certificate
Maturity Period Accounts
------------------------------------ -----------
(In thousands)
<S> <C>
Three months or less................ $17,824
Over three through six months....... 18,692
Over six through twelve months...... 22,841
Over twelve months.................. 25,289
-------
Total........................... $84,646
=======
</TABLE>
The following table sets forth the deposit balances in the various types of
deposit accounts offered by the Association at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------- -------------------------------- ---------------------
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 .. $392,086 54.43% ($ 3,265) $395,351 57.33% $ 19,748 $375,603 55.73%
-------- ----- -------- -------- ----- -------- -------- -----
Transaction accounts:
Non-interest checking .... 52,319 7.26 4,772 47,547 6.90 (5,031) 52,578 7.80
Interest-bearing checking 67,303 9.34 (3,258) 70,561 10.23 (4,483) 75,044 11.14
Passbook and
statement savings .... 59,790 8.30 (1,624) 61,414 8.91 (1,765) 63,179 9.37
Money market deposits .... 148,903 20.67 34,235 114,668 16.63 7,094 107,574 15.96
-------- ------ -------- ------- ------ -------- -------- ------
Total transaction accounts 328,315 45.57 34,125 294,190 42.67 (4,185) 298,375 44.27
-------- ------ -------- -------- ------ -------- -------- ------
Total deposits ........... $720,401 100.00% $ 30,860 $689,541 100.00% $ 15,563 $673,978 100.00%
======== ====== ======== ======== ====== ======== ======== ======
</TABLE>
The following table sets forth the deposit activities of the Association
for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------
1999 1998 1997
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Beginning balance .................... $ 689,541 $ 673,978 $ 399,673
--------- --------- ---------
Increase due to acquired deposits .... -- -- 241,272
Net inflow (outflow) of deposits before
interest credited ................... 6,251 (8,753) 14,077
Interest credited .................... 24,609 24,316 18,956
--------- --------- ---------
Net increase in deposits ............. 30,860 15,563 274,305
--------- --------- ---------
Ending balance ....................... $ 720,401 $ 689,541 $ 673,978
========= ========= =========
</TABLE>
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,
22
<PAGE>
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, 1999, 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 matured during the quarter ended March 31, 1999 and were not
renewed.
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,
-------------------------
1999 1998
---------- -----------
Weighted average rate paid on:
<S> <C> <C>
FHLB advances .................................. 5.34% 5.26%
Reverse repurchase agreements .................. -- 5.65
</TABLE>
<TABLE>
<CAPTION>
Year Ended
September 30,
-------------------------
1999 1998
---------- -----------
(Dollars in thousands)
Maximum amount outstanding at any month
end:
<S> <C> <C>
FHLB advances .................................. $ 197,000 $ 167,000
Reverse repurchase agreements .................. 8,095 17,078
Approximate average balance:
FHLB advances .................................. 173,740 141,016
Reverse repurchase agreements .................. 3,105 14,669
Approximate weighted average rate paid on:
FHLB advances .................................. 5.25% 5.62%
Reverse repurchase agreements .................. 5.72 5.80
</TABLE>
The Association also has an uncommitted line of credit of $15.0 million
with a commercial bank. At September 30, 1999, 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 $11.0 million at September 30, 1999.
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.
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
24
<PAGE>
and will be assessed premiums based on BIF rates, which have been lower than the
SAIF rates since 1995. 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, 1999 totaled $295,950.
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. After December 31, 1999, the
insurance assessment will be the same for all insured deposits. This should
result in a significant reduction in future deposit insurance premiums for 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 not less than a specified percentage (currently
4.0%) of its net withdrawable accounts plus short-term borrowings. The
Association's liquidity ratio was 22.38% at September 30, 1999.
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
25
<PAGE>
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, 1999, 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
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
26
<PAGE>
(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 88.90% 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."
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
27
<PAGE>
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, 1999.
<TABLE>
<CAPTION>
To Be
Categorized as "Well
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
-------------------------- ----------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ------ ------- ------ ------- ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Capital ............ $ 95,495 17.4% $42,889 8.0% $53,611 10.0%
(To Risk Weighted Assets)
Tier I Capital ........... 93,012 17.0 -- -- 32,166 6.0
(To Risk Weighted Assets)
Tier I Capital ........... 93,012 8.9 30,833 3.0 51,388 5.0
(To Total Assets)
Tangible Capital ......... 93,012 8.9 15,416 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
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, 1999, the Association's limit on
28
<PAGE>
loans to one borrower was $15.2 million. At September 30, 1999, the
Association's largest aggregate amount of loans to one borrower was $5.4
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
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.
29
<PAGE>
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
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.
Potential Impact of Current Legislation on Future Results of Operations
On November 12, 1999, the Gramm-Leach-Bliley Act (the "GLB Act") was
enacted into law. The GLB Act makes sweeping changes in the financial services
in which various types of financial institutions may engage. The Glass-Steagull
Act, which generally prevented banks from affiliating with securities and
insurance firms, was repealed. A new "financial holding company," which owns
only well capitalized and well managed depository institutions, will be
permitted to engage in a variety of financial activities, including insurance
and securities underwriting and agency activities.
The GLB Act permits unitary savings and loan holding companies in existence
on May 4, 1999, including the Company, to continue to engage in all activities
that they were permitted to engage in prior to the enactment of the Act. Such
activities are essentially unlimited, provided that the thrift subsidiary
remains a qualified thrift lender. Any thrift holding company formed after may
4, 1999, will be subject to the same restrictions as a multiple thrift holding
company. In addition, a unitary thrift holding company in existence on May 4,
1999, may be sold only to a financial holding company engaged in activities
permissible for multiple savings and loan holding companies.
30
<PAGE>
The GLB Act is not expected to have a material effect on the activities in
which the Company and the Association currently engage, except to the extent
that competition with other types of financial institutions may increase as they
engage in activities not permitted prior to enactment of the GLB Act.
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 Internal Revenue Code of 1986, as
amended ("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, 1999, the Association had 249 full-time and 70
part-time employees. The employees are not represented by a collective
bargaining unit. The Association believes its relationship with its employees is
good.
Executive Officers. The following table sets forth certain information
regarding the executive officers of the Company.
<TABLE>
<CAPTION>
Name Age(1) Position
<S> <C> <C>
Gerald V. Brown 63 President and Chief Executive Officer
Robert A. Tucker 51 Senior Vice President and Chief Lending
Officer/Secretary
Frank X. Hernandez 44 Senior Vice President and Chief Operating Officer
Marshall J. Alexander 49 Senior Vice President and Chief Financial Officer
<FN>
______________
(1) At September 30, 1999.
</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.
33
<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, 1999.
<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
34
<PAGE>
<CAPTION>
Year Square
Description/Address Opened Leased/Owned Footage
555 1st Street .................... 1997 Owned 1,844
Fossil, Oregon
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
35
<PAGE>
<CAPTION>
Year Square
Description/Address Opened Leased/Owned Footage
508 Main Street ................... 1997 Owned 2,282
Moro, Oregon
144 South Main Street ............. 1997 Owned 2,146
Union, Oregon
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 $11.6 million at September 30, 1999. See Note 5 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, 1999.
36
<PAGE>
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 2 and 3 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.
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, 1999 and 1998*
Consolidated Statements of Earnings for the Years Ended
September 30, 1999, 1998 and 1997*
Consolidated Statements of Shareholders' Equity for the Years
Ended September 30, 1999, 1998 and 1997*
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1999, 1998 and 1997*
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 entitled "Consolidated Supplemental Data - Selected
Quarterly Financial Data" on page 39 of 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, 1999.
37
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The information contained under the section captioned "Proposal I -
Election of Directors" contained in the Company's Proxy Statement, and "Part I
- -- Business -- Personnel -- Executive Officers" of this report, is incorporated
herein by reference. Reference is made to the cover page of this report for
information regarding compliance with Section 16(a) of the Exchange Act.
Item 11. Executive Compensation
The information contained under the sections captioned "Executive
Compensation", "Directors' Compensation" and "Benefits" under "Proposal I -
Election of Directors" in the Proxy Statement is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference
to the section captioned "Security Ownership of Certain Beneficial
Owners and Management" of the Proxy Statement.
(b) Security Ownership of Management
The information required by this item is incorporated herein by
reference to the sections captioned "Proposal I - Election of
Directors" and "Security Ownership of Certain Beneficial owners and
Management" of the Proxy Statement.
(c) Changes in Control
The Company is not aware of any arrangements, including any pledge by
any person of securities of the Company, the operation of which may at
a subsequent date result in a change in control of the Company.
The information required by this item is incorporated herein by reference
to the sections captioned "Proposal I - Election of Directors" and "Security
Ownership of Certain Beneficial Owners and Management" of the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information set forth under the section captioned "Proposal I -
Election of Directors - Certain Transactions with the Association" in the Proxy
Statement is incorporated herein by reference.
38
<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.
**** Incorporated by reference to the Registrant's Annual Report on Form
10-K for the year ended September 30, 1998.
(b) Reports on Form 8-K
None.
39
<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, 1999 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, 1999
Gerald V. Brown Executive Officer and
Director (Principal
Executive Officer)
/s/ Marshall J. Alexander Senior Vice President and December 29, 1999
Marshall J. Alexander Chief Financial Officer
(Principal Financial
and Accounting Officer)
/s/ Rodney N. Murray Chairman of the Board December 29, 1999
Rodney N. Murray of Directors
/s/ Bernard Z. Agrons Director December 29, 1999
Bernard Z. Agrons
/s/ Timothy A. Bailey Director December 29, 1999
Timothy A. Bailey
/s/ James D. Bocchi Director December 29, 1999
James D. Bocchi
/s/ William C. Dalton Director December 29, 1999
William C. Dalton
/s/ J. Gillis Hannigan Director December 29, 1999
J. Gillis Hannigan
/s/ Dianne E. Spires Director December 29, 1999
Dianne E. Spires
<PAGE>
<PAGE>
EXHIBIT 13
1999 Annual Report to Shareholders
<PAGE>
CORPORATE PROFILE Klamath First Bancorp, Inc. (Nasdaq: KFBI) is a unitary
savings and loan holding company, headquartered in Klamath Falls, Oregon. The
Company's subsidiary, Klamath First Federal Savings and Loan Association, has a
65 year history, dating back to 1934. The Company provides a diversified line of
loan and deposit services to individuals, families and small 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 whether to use
alternative delivery channels such as ATMs, telephone banking, and Internet
banking. At year-end, Klamath First Bancorp, Inc. was operating from 35 offices
in 22 counties throughout Oregon.
1999 HIGHLIGHTS
Total assets, loans, deposits and earnings per share reach new Company highs.
Total assets reached high of $1,041.6 million.
Total net loans increased by 10.72% or $71.6 million.
Total deposits grew to $720.4 million.
Earnings per share reached new high of $1.21, a 15.24% increase over
prior year.
Completed 20% Modified Dutch Auction Tender Offer (stock buy back) in
January 1999.
Paid quarterly dividends totaling $.46 per share, 38.98% pay out ratio.
Added 2 new ATM locations.
Klamath First Financial Services began operations in July 1999, offering
investment services and retirement planning for customers throughout Oregon.
Went online with our informational web site, www.klamathfirstfederal.com in
September 1999. We are planning a fully transactional and bill paying site in
2000.
TABLE OF CONTENTS
Selected Consolidated Financial Data................................2-3
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,
---------- ---------- ---------- ---------- ----------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
FINANCIAL CONDITION DATA (In thousands)
<S> <C> <C> <C> <C> <C>
Assets ...................................... $1,041,641 $1,031,302 $ 980,078 $ 671,969 $ 647,840
Cash and cash equivalents ................... 24,523 66,985 32,043 16,180 175,994
Loans receivable, net ....................... 739,793 668,146 551,825 473,556 403,544
Investment securities held to maturity ...... 560 2,889 22,937 9,827 42,209
Investment securities available for sale .... 158,648 203,224 261,846 75,987 12,606
Mortgage-backed & related securities
held to maturity ............................ 2,601 3,662 5,447 6,783 --
Mortgage-backed & related securities
available for sale .......................... 72,695 43,336 64,869 74,109 --
Stock in FHLB of Seattle, at cost ........... 10,957 10,173 7,150 4,774 4,426
Advances from FHLB of Seattle ............... 197,000 167,000 129,000 90,000 20,000
Deposit liabilities ......................... 720,401 689,541 673,978 399,673 384,380
Shareholders' equity ........................ 109,585 145,081 144,462 153,411 164,685
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30,
---------- ---------- ---------- ---------- ----------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
SELECTED OPERATING DATA (In thousands)
<S> <C> <C> <C> <C> <C>
Total interest income ....................... $ 71,691 $ 69,733 $ 54,167 $ 45,649 $ 35,107
Total interest expense ...................... 38,382 37,848 29,856 23,286 20,441
---------- ---------- ---------- ---------- ----------
Net interest income ......................... 33,309 31,885 24,311 22,363 14,666
Provision for loan losses ................... 932 674 370 120 120
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses ................... 32,377 31,211 23,941 22,243 14,546
Non-interest income ......................... 3,629 3,202 810 522 381
BIF/SAIF Assessment ......................... -- -- -- 2,473 --
Non-interest expense ........................ 21,186 19,523 11,764 9,769 6,004
---------- ---------- ---------- ---------- ----------
Earnings before income taxes 14,820 14,890 12,987 10,523 8,923
Provision for income taxes 5,665 5,339 4,429 4,413 3,349
---------- ---------- ---------- ---------- ----------
Net Earnings ................................ $ 9,155 $ 9,551 $ 8,558 $ 6,110 $ 5,574
========== ========== ========== ========== ==========
Basic earnings per share .................... $ 1.21 $ 1.05 $ 0.91 $ 0.56 N/A
========== ========== ========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At or for the Year Ended September 30,
-------------------------------------------------------------
1999 1998 1997 1996 1995
--------- -------- ---------- -------- --------
KEY OPERATING RATIOS
Performance Ratios
Return on average assets
<S> <C> <C> <C> <C> <C>
(net earnings divided by average assets) .... 0.88% 0.96% 1.14% 0.99% 1.19%
Return on average equity
(net earnings divided by average equity) .... 7.55% 6.52% 5.85% 3.69% 10.44%
Interest rate spread
(difference between average yield on
interest-earning assets and average cost of
interest-bearing liabilities 2.73% 2.57% 2.28% 2.22% 2.73%
Net interest margin (net interest income as a
percentage of average interest-earning assets) 3.37% 3.36% 3.32% 3.65% 3.24%
Average interest-earning assets to average
interest-bearing liabilities ................ 116.47% 119.84% 125.58% 137.78% 111.29%
Net interest income after provision for loan losses
to total non-interest expenses .............. 152.82% 159.87% 203.51% 181.69% 242.27%
Non-interest expense to average total assets 2.05% 1.96% 1.57% 1.99% 1.29%
Efficiency ratio (non-interest expense divided by
net interest income plus non-interest income) 57.36% 55.64% 46.83% 53.49% 39.90%
Dividend payout ratio (dividends declared per share
divided by net earnings per share) .......... 38.98% 34.50% 34.09% 44.64% --
Book value per share ........................ $ 15.52 $ 16.30 $ 15.64 $ 14.98 N/A
Asset Quality Ratios
Allowance for loan losses to total loans .... 0.32% 0.28% 0.22% 0.19% 0.19%
Non-performing assets to total assets ....... 0.46% 0.05% 0.03% 0.04% 0.12%
Non-performing loans to total loans, before
net items ................................... 0.43% 0.07% 0.04% 0.04% 0.18%
Capital Ratios
Equity to assets ratio ...................... 10.52% 14.07% 14.74% 22.83% 25.42%
Tangible capital ratio ...................... 8.91% 8.26% 11.06% 19.22% 18.57%
Core capital ratio .......................... 8.91% 8.26% 11.06% 19.22% 18.57%
Risk-based capital ratio .................... 17.41% 16.13% 23.12% 42.41% 36.87%
Other Data
Number of
Real estate loans outstanding ............... 9,297 9,155 8,393 7,704 7,110
Deposit accounts ............................ 85,112 82,585 82,032 38,651 38,260
Full service offices ........................ 34 34 32 7 7
</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 Senior Vice President - Klamath Operations for Regence
Blue Cross/Blue Shield, a health insurance company
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 Retired; 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
OFFICERS OF KLAMATH FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION
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
* Indicates an officer of Klamath First Bancorp, Inc.
<PAGE>
Dear Shareholder,
When we started this fiscal year 1999, we initiated a major shareholder
enhancement called a "Modified Dutch Auction Tender Offer". We planned to buy
back 20% of our outstanding shares to improve earnings per share ("EPS") and
return on equity ("ROE"). This was just as successful as we had planned. We
ended the year with EPS of $1.21 as compared to $1.05 for fiscal 1998, a 15.24%
increase. Our ROE was 7.55% as compared to 6.52% the year before, a 15.80%
increase. It is interesting to note, however, that these enhancements were not
only because of the tender offer. We had an excellent earnings year. Our net
earnings were very good even though we took $39 million out of our earnings
stream to purchase the 1,984,090 shares. The $39 million, if invested at lower
yielding overnight funds rates averaging 5.06% for the last quarter, would have
represented $1.5 million greater interest income for the year. Our net earnings
for the year were $9.2 million as compared to $9.6 million the previous year. We
will continue to consider all shareholder and earnings enhancements that are
accretive to both EPS and ROE.
This year the Company formed Klamath First Financial Services, Inc. The new
subsidiary is offering general securities trading as well as financial and
retirement planning to customers of the Company and the public at large. The
primary area served at present is Klamath County, but we have plans in place to
expand with representatives in Jackson and Deschutes Counties.
We are striving to achieve an 8% to 10% asset growth this year. We plan to
accomplish this through new branches in growth areas such as Jackson and
Deschutes counties. We will also continue to look for acquisition opportunities
that fit into our corporate structure. We'll continue our primary business as a
thrift, with emphasis on one to four family lending, however, we plan to expand
our lending in multi-family residential lending and commercial real estate. We
also plan to emphasize our consumer and commercial lending by hiring commercial
loan officers for our high growth areas.
We currently offer a telephone banking voice response system which receives
over 20,000 calls per month. We opened our web site
(www.klamathfirstfederal.com) which at present is an informational site. We plan
on expanding this during the coming fiscal year to a full transactional site to
include bill paying. Although new technologies are, and will be, available to
our customers who choose to use them, we will continue to provide our
traditional "hands on" service at the teller windows.
Our deposits increased 4.5% last year when the thrift industry overall
showed a 2.4% loss from June of 1998 to June of 1999 according to the Office of
Thrift Supervision. We believe this gain is because of our friendly, courteous
personnel and their dedication to excellent customer service. We will continue
to offer the products and services our customers want. KFBI's mission statement
is clear: "The mission of KFBI is to be the preferred provider of financial
products and services. This will be accomplished within an atmosphere of
commitment to our shareholders, employees, customers and the communities we
serve."
With our large loan volume, $224.2 million in new loans, we entered the
secondary market and started selling loans to the Federal National Mortgage
Association ("Fannie Mae"). We sold our first loan to them in May of 1999, the
eighth month of our fiscal year. We started this program primarily to improve
fee income through the retained servicing rights and servicing fees. We plan to
retain servicing on all loans sold for fee income and to retain customer service
and relationships. From May through September this new activity generated
<PAGE>
$72,000 in non-interest income. Total fees and service charges grew from $2.41
million in 1998 to $2.94 million in 1999, a 21.79% increase. We plan to continue
this program while retaining non-conforming and higher yielding loans in our
portfolio.
The big issue for all financial institutions this year has been the Year
2000 issue (Y2K) with the computer turn-over to that date. We have tested all
our critical systems with the computer date advanced to 2000. Every type of
transaction has been run and they all went through the system well. We also
developed a contingency plan in the event any of our branches have problems and
transactions must be run off-line. Each of our 34 branches were tested and they
all performed successfully. This is an issue that all financial institutions
have taken very seriously.
We are looking forward to another good year and we thank you, our
shareholders, employees and customers, for your support and assistance with our
goals.
/s/ Gerald V. Brown /s/ Rodney N. Murray
Gerald V. Brown Rodney N. Murray
President and Chief Executive Officer Chairman of the Board
<PAGE>
OUR BUSINESS
LENDING
Klamath First Federal continues to strive to be a market leader in the real
estate lending market throughout Oregon. Our tradition of excellence started
more than 65 years ago when we were originally formed to meet the housing needs
of our customers. We continue that tradition today and have financed single and
multi-family homes throughout the state. Real estate loans remain the core
earning asset of the Company. This includes owner and non-owner occupied
residences, second home loans, construction loans, and our all-in-one
construction loan (both the construction and term financing in one package).
Multi-family homes have also been in our product line for many years. Today we
have expanded these products throughout the state. Our real estate lending
includes apartment buildings, manufactured home parks, commercial real estate
projects, such as motels, medical buildings, warehouses, resorts and office
complexes. When it comes to real estate lending, we do it all.
When we purchased the 25 branches of Wells Fargo a few years back, both the
customers and the Company went through some changes. In several of the
communities, we were the only financial institution in town and many of the
offices had not offered real estate loans, but they were familiar with offering
consumer and small business loans. Klamath First Federal has a profound
commitment to serving the financial needs of our communities. As a result,
training for both customers and staff about real estate lending was necessary in
addition to increasing staffing levels to originate consumer, commercial and
small business loans. Our product line in consumer loans now includes all of the
expected products from automobiles to recreational vehicles, secured and
unsecured. Our track record has been very good in both originations and credit
quality throughout our branch network.
Additionally, our branch network provides the opportunity to attract more small
business and commercial loans. Our plans for the next year and the future are to
further capitalize on our consumer and small business lending with the addition
of seasoned lending officers in several key branch locations in our more
populated market areas. Our "hands-on" approach to customer service continues to
attract customers who still want their bankers to be a part of their
communities.
Real estate lending will continue to be the Company's primary focus because we
are very successful and efficient in this product line. However, we will also
continue to expand and emphasize our diversified lending products in consumer,
commercial and small business lending.
DEPOSITS
Klamath First Federal offers our deposit customers an array of competitive terms
and rates to help meet their savings needs. These include the traditional
savings certificates ("CDs"), IRAs including SEPP, Keogh, Roth and Education,
statement savings and money market accounts with tiered rates based on account
balances. Throughout the year we have offered specials on CDs that have rates
superior to the competition and often have odd maturities that help offset
automatic rollovers of our current customers and tend to attract a higher degree
of new money.
The last few years we have been very successful in marketing our various
checking account products to both our personal and business customers. We have
<PAGE>
a variety of checking account products from free checking to interest checking.
We intend to continue emphasizing checking accounts in our marketing efforts as
a source of lower cost funds as well as an anchor account from which to cross
sell other banking products and loans. This year we will introduce a club
account that offers customers various travel discounts, shopping discounts and
other add-on options that provide customers a variety of consumer friendly
products as well as a source for additional fee income for Klamath First
Federal. We are very encouraged by the potential of this account as a
value-added service for our growing customer base.
Our customers continue to benefit from technological advances which provide
economical and convenient choices for them to conduct their banking. We offer a
combined ATM, Check Guarantee and Debit Card to qualified customers. This allows
them access to their checking or savings balances 24 hours a day either through
ATMs or merchants with point-of-sale terminals. We offer combined statements
that itemize on one convenient monthly statement multiple account information
including checking, savings, time deposits, and mortgage, consumer or commercial
loans if the customer desires. Our automated 24-hour telephone banking system
allows customers to get instant up-to-date account information and perform
routine transfer and payment transactions real-time over the telephone.
Our various business accounts continue to grow and have new added options for
customer convenience. This past year we added an option allowing our business
customers to dial up their accounts and see their account activity directly by
use of a modem and personal computer. Customers with a high volume of account
activity find this service to be a great advantage over alternative choices.
Last, Klamath First Federal has moved into the Internet with our informational
web site www.klamathfirstfederal.com. The site will be updated with new features
as they are developed, including a bill paying feature as well as a fully
transactional site allowing such transactions as account inquiries, balance
transfers and making loan payments. The site currently has hot links to Nasdaq,
Klamath First Financial Services( see below) and Klamath First Bancorp, Inc. The
Bancorp's link will feature Company highlights, and recent news and earnings
releases. Our entry into the Internet will allow our customers to have one more
choice in how they do their banking with us and access their accounts.
INVESTMENT ALTERNATIVES
Consolidation of the financial marketplace continues to rapidly blur the line
between banks, stockbrokers, and insurance companies. The trend is clear, and
customers now expect to be able to have one-stop shopping for their financial
needs and retirement planning. With this is mind, Klamath First Federal formed a
new subsidiary, Klamath First Financial Services ("KFFS"), whose activities
include securities brokerage, insurance and related services to retail bank
customers. The subsidiary, through a third party-broker dealer, Fintegra
Financial Solutions ("Fintegra"), will offer common and preferred stocks,
corporate and municipal bonds, mutual funds, unit investment trusts, variable
and fixed annuities, and long term care insurance. Customers are able to access
their account histories on the Internet, use optional on-line trading, and have
access to market research using the technological advances that Fintegra
provides.
<PAGE>
Wes Handley, Vice President and Program Manager of KFFS operates out of the main
office in Klamath Falls. He has been covering all of our branches throughout the
state on an appointment basis. This next year we plan to add additional licensed
investment professionals to cover our state-wide branch network. Additionally,
new accounts personnel are obtaining insurance licenses to offer annuity
products to appropriate customers. This subsidiary has the potential to help
increase our non-interest income, but more importantly, adds another
relationship and valued service for our growing customer base.
THE FUTURE
The Company looks forward to the rapidly changing future with great
anticipation. Our asset size, market capitalization, and current and future
branch locations allow us to capitalize on market synergies, economies of scale
and product diversification. We plan to add an experienced marketing and
training professional to our management staff this coming year. This new
position will develop marketing campaigns to inform present and potential
customers of our quality service and varied financial product lines, as well as
train and motivate branch staff to better market our products. We will continue
to look for opportunities to expand the franchise and our market reach through
acquisitions, strategic alliances, branching, and technology. Klamath First
Bancorp, Inc. and the financial industry have many challenges ahead of it.
Management will continue to meet these challenges and provide quality service
and financial products through a variety of delivery channels. This should
translate into a stronger financial institution creating good returns for our
shareholders.
<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 42 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 and Chief Lending Officer
responsible for all lending functions of the Association. In his 26 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
Senior Vice President and 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
Special Note Regarding Forward-Looking Statements
Management's Discussion and Analysis of Financial Condition and Results of
Operations and other portions of this Annual Report contain certain
"forward-looking statements" concerning the future operations of Klamath First
Bancorp, Inc. Management desires to take advantage of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995 and is
including this statement for the express purpose of availing the Company of the
protections of such safe harbor with respect to all "forward-looking statements"
used in our Annual Report. We have used "forward-looking statements"
to describe future plans and strategies, including our expectations of the
Company's future financial results. Management's ability to predict results or
the effect of future plans or strategies is inherently uncertain. Factors which
could affect actual results include interest rate trends, the general economic
climate in the Company's market area and the country as a whole which could
affect the collectibility of loan balances, the ability to increase non-
interest income through expansion of new lines of business, the ability of the
Company to control costs and expenses, the ability of the Company to
successfully address year 2000 ("Y2K") issues, competitive products and pricing,
loan delinquency rates, and changes in federal and state regulation. These
factors should be considered in evaluating the "forward-looking statements," and
undue reliance should not be placed on such statements.
General
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 hands-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 but growing 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- earning assets and the cost of
interest-bearing liabilities in order to maximize the dollar amount of net
interest income. The Company's net earnings are dependent, to a lesser extent,
on the level of its non- interest income, such as service charges and other
fees, and 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
<PAGE>
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
In Federal legislation enacted in 1996, the reserve method of accounting
for thrift 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, 1999, 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 was required to begin during the tax year ended
September 30, 1999.
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 ten years and borrowings which mature or reprice in five 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.
Changes in interest rates also impact the fair value of the assets and
liabilities on the Company's balance sheet, expressed as changes in the net
portfolio value ("NPV"). NPV represents the market value of portfolio equity and
is equal to the market value of assets minus the market value of liabilities
plus or minus the estimated market value of off-balance-sheet instruments. 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. It is generally assumed that assets with
adjustable rates are less subject to market value changes due to interest rate
fluctuations based on the premise that their rates will adjust with the market.
<PAGE>
In December 1998, the OTS issued Thrift Bulletin 13a ("TB 13a") containing
guidance on the management of interest rate risk and providing a description of
how the "Sensitivity to Market Risk" rating would be determined. Sensitivity to
Market Risk represents the "S" component of the CAMELS rating which is used by
regulators in their evaluation of financial institutions. The OTS has
established detailed minimum guidelines for two areas of interest rate risk
management. These guidelines establish minimum expectations for (1) the
establishment and maintenance of board-approved risk limits and (2) an
institution's ability to measure their interest rate risk exposure. Each
thrift's board of directors is responsible for establishing risk limits for the
institution. The interest rate risk limits are expected to include limits on the
change in NPV as well as limits on earnings sensitivity.
NPV limits include minimums for the NPV ratio which is calculated by
dividing the NPV by the present value of the institution's assets for a given
rate scenario. The board should specify the minimum NPV ratio it is willing to
allow under interest rate shifts of 100, 200, and 300 basis points up and down.
Both the NPV limits and the actual NPV forecast calculations play a role in
determining a thrift's Sensitivity to Market Risk. The prudence of the limits
and the compliance with board-prescribed limits are factors in the determination
of whether or not the institution's risk management is sufficient. In addition,
the NPV ratio permitted by the institution's policies under an adverse 200 basis
point rate shift scenario is combined with the institution's current interest
rate sensitivity to determine the institution's "Level of Interest Rate Risk."
The level of interest rate risk is then utilized in conjunction with an
assessment of the "Quality of Risk Management Practices" to determine the "S"
component of the CAMELS rating.
The Company's exposure to interest rate risk is reviewed on at least a
quarterly basis by the Board of Directors and the Asset Liability Management
Committee ("ALCO"), which includes senior management representatives. The ALCO
monitors and considers methods of managing interest rate risk by monitoring
changes in NPV, the NPV ratio, 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 the NPV ratio. If potential changes to NPV and the
NPV ratio 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.
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 Association continues to originate primarily fixed-rate residential
loans. Some of these loans are sold to Fannie Mae with servicing retained while
others are held in 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
<PAGE>
interest-bearing liabilities. During the year ended September 30, 1999, the
Company took several actions to reduce interest rate risk. First, the Company
purchased a $10 million block of adjustable-rate single family mortgages, which
generally reprice in one year. The Company also purchased participations in
adjustable-rate multi-family and commercial real estate loans. Second, the
Company has focused its non-residential lending 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 and collateralized mortgage obligations ("CMOs").
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. New deposit product offerings and
promotion of checking accounts 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. During 1999
adjustable-rate borrowings from FHLB of Seattle were converted to longer term
fixed-rate borrowings. The Company will continue to explore opportunities in
these areas.
The Company's Board of Directors had established risk limits under the
previous OTS guidance. These limits have been revised and approved to bring them
into compliance with TB 13a. NPV values for the Association are regularly
calculated internally and by the OTS based on regulatory guidelines. The
following table presents the Association's projected change in NPV and the NPV
ratio for the various rate shock levels as of September 30, 1999 using the
internally generated calculations. 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 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>
PROJECTED CHANGES IN NET PORTFOLIO VALUE
as of September 30, 1999
Change in NPV Sensitivity
Interest Rates Ratio Measure
(Basis points)
<S> <C> <C>
200 basis point increase ........................ 6.53% (327)
100 basis point increase ........................ 8.21% (159)
Base Rate Scenario .............................. 9.80% --
100 basis point decline ......................... 11.14% 134
200 basis point decline ......................... 11.18% 138
</TABLE>
<PAGE>
The preceding table indicates that at September 30, 1999, in the event of a
sudden and sustained increase in prevailing market interest rates, the
Association's NPV and NPV ratio would be expected to decrease. At September 30,
1999, the Association's estimated changes in these measures 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, 1999, the Association's one-year cumulative gap was a
negative 31.49% of total assets compared to a negative 32.19% of total assets at
September 30, 1998.
<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,
-----------------------------------------
1999 1998 1997
--------- -------- ----------
(In thousands)
Earning assets maturing
<S> <C> <C> <C>
or repricing within one year .... $ 188,286 $ 220,952 $ 199,320
Interest-bearing liabilities
maturing or repricing
within one year ................. 516,161 552,929 524,942
Deficiency of earning assets
over interest-bearing liabilities
as a percent of total assets .... (31.49%) (32.19%) (33.22%)
Percent of assets to liabilities
maturing or repricing
within one year ................. 36.48% 39.96% 37.97%
</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, 1999. 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>
ASSETS 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
--------- ----------- ---------- --------- --------- --------- ---------- --------- --------
Permanent 1-4 Mortgages
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Adjustable-rate ....... $ 11,519 $ 3,638 $ 9,261 $ 3,962 $ 5,108 $-- $-- $-- $ 33,488
Fixed-rate ............ 2,927 2,705 4,372 1,355 2,553 25,381 96,983 498,360 634,636
Other Mortgage Loans
Adjustable-rate ....... 2,494 3,176 8,606 6,321 7,411 -- -- -- 28,008
Fixed-rate ............ 195 224 845 5,657 7,131 9,522 6,514 4,198 34,286
Mortgage Backed and Related
Securities 48,780 946 10,696 1,879 4,969 2,469 4,018 1,919 75,676
Non-Real Estate Loans
Adjustable-rate ....... 6,896 469 1,262 186 -- -- -- -- 8,813
Fixed-rate ............ 653 303 547 1,106 3,197 838 1,078 -- 7,722
Investment Securities ... 39,186 -- 28,586 74,025 10,471 2,235 20,289 1,237 176,029
-------- -------- -------- -------- ------- ------- -------- -------- --------
Total Rate Sensitive
Assets $112,650 $ 11,461 $ 64,175 $ 94,491 $40,840 $40,445 $128,882 $505,714 $998,658
======== ======== ======== ======== ======= ======= ======== ======== ========
LIABILITIES
Deposits-Fixed Maturity $ 97,557 $ 80,259 $ 88,208 $ 67,166 $ 37,459 $20,703 $ 594 $ 140 $392,086
Deposits-Interest Bearing 5,741 5,250 9,200 24,034 11,771 9,409 1,844 54 67,303
Deposits-Money Market 47,440 31,865 35,945 29,870 2,442 1,132 208 -- 148,902
Deposits-Passbook and
Statement Savings 5,100 4,664 8,173 21,351 10,457 8,359 1,638 48 59,790
Other Interest-Bearing
Liabilities 71,759 25,000 -- 100,000 10,000 -- -- -- 206,759
-------- -------- -------- -------- -------- ------- -------- -------- --------
Total Rate Sensitive
Liabilities $227,597 $147,038 $141,526 $242,421 $ 72,129 $39,603 $ 4,284 $ 242 $874,840
======== ======== ======== ======== ======== ======= ======== ======== ========
Interest Rate
Sensitivity Gap ($114,947) ($135,577) ($77,351) ($147,930) ($31,289) $ 842 $124,598 $505,472 $123,818
Cumulative Interest Rate
Sensitivity Gap ($114,947) ($250,524) ($327,875) ($475,805) ($507,094) ($506,252) ($381,654) $123,818
Sensitivity Gap to
Total Assets -11.04% -13.02% -7.43% -14.20% -3.00% 0.08% 11.96% 48.53%
Cumulative Interest Rate
Sensitivity Gap
to Total Assets -11.04% -24.06% -31.49% -45.69% -48.69% -48.61% -36.65% 11.88%
</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, 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, 1999, the Association's regulatory liquidity, as measured for
regulatory purposes, was 22.38%. The Company has borrowing agreements with banks
that can be used if funds are needed. (See Notes 9 and 10 to the Consolidated
Financial Statements.)
OTS capital regulations require the Association to 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, 1999, the Association was in compliance
with all regulatory capital requirements effective as of such date, with
tangible, core and risk-based capital of 8.9%, 8.9% and 17.4%, respectively.
(See Note 18 to Consolidated Financial Statements.)
Year 2000 Readiness
The Company has taken all possible steps to ensure computer systems and
infrastructure are ready for the Year 2000. The following information explains
the process that the Company used to achieve Year 2000 readiness.
Background. 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, chose to use the OTS Year 2000 checklist as a guide
<PAGE>
for Year 2000 preparation. The committee also used a Year 2000 Testing Guide and
Contingency Guide provided by Alex Information Systems, Inc. to complement the
OTS checklist.
Process. The Federal Financial Institutions Examination Council ("FFIEC") issued
guidelines for Year 2000 project management by financial institutions, which
were followed by the Company. These guidelines identified 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 100% complete by June 30, 1999 and assessment will be ongoing
until the Year 2000.
Renovation Phase - This phase includes hardware and software upgrades and
system replacements. This step was 100% complete for in-house systems at
December 31, 1998. This phase also encompasses ongoing discussions with and
monitoring of outside servicers and third-party software providers.
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
continued through September 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 and third party service bureaus
are 100% tested as of September 30, 1999. The Company is either testing or
reviewing test documents of additional third party vendors that are deemed
critical to the operations of the Company. Overall, the validation phase is
considered 100% complete as of September 30, 1999.
Implementation Phase - Systems successfully tested will be designated as
Year 2000 compliant. For any system failing validation testing, the
business impact must be assessed and a contingency plan implemented. This
phase was completed as of June 30, 1999.
All personal computers ("PCs") and related software throughout the Company have
been inventoried and tested for Year 2000 capability. The Company used two
testing methods, BIOS and off line, for PC certification of Year 2000
compatibility. PCs were required to pass both tests to be considered ready for
Year 2000. As of September 30, 1998, all of the Company's PCs were Year 2000
compatible. The Company's Wide Area Network and various Local Area Networks were
also 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
successfully performed test procedures for critical service bureau processes in
December 1998 and in April 1999.
Software purchased from a Fiserv affiliate is used for applications such as
accounts payable, fixed assets and investment portfolio accounting. The
<PAGE>
investment portfolio accounting software was Year 2000 compatible as of
September 30, 1998. During the quarter ended March 31, 1999, the Company
converted the accounts payable and fixed asset applications to the Year 2000
ready software provided by the Fiserv affiliate.
Other third party vendors identified by the Company were monitored for Year 2000
readiness. Validation with critical vendors was 100% complete as of June 30,
1999.
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 with the Federal Reserve Bank has been successfully completed. All ATM
machines have been upgraded and are now ready for Year 2000.
Contingency plans were developed by the committee. 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. Contingency planning was 100% complete
as of June 30, 1999. The Company continues to make last minute plans and to
prepare its staff for the rollover period of December 20, 1999 to January 7,
2000.
For many financial institutions, the Year 2000 readiness of borrowers to whom
the institution has commercial operating loans is a concern. Lack of Year 2000
preparedness could cause disruptions of borrowers' businesses significant enough
to compromise their ability to repay indebtedness. The Company's loans of this
type represent less than one half of one percent of the total loan portfolio,
and are not considered to represent a significant risk of loss.
To assist in understanding Year 2000 issues and to inform them of the Company's
preparation activities, brochures regarding Year 2000 preparedness have been
distributed to all customers. Another mailing was made during the quarter ending
September 30, 1999. In addition, the Company has published advertisements in
local newspapers and has placed "Year 2000" bulletin boards in all branches,
which contain current information on Year 2000 readiness for the Company and the
financial services industry.
Conclusion. 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, 1999, the Company estimated that total Year 2000 implementation costs will
be approximately $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, 1999, and may be revised as additional
information and actual costs become available. During the years ended September
30, 1999 and 1998, $82,000 and $89,000 of Year 2000 expenses were incurred and
expensed, respectively.
Changes in Financial Condition
At September 30, 1999, the consolidated assets of the Company totaled $1.04
billion, an increase of $10.3 million, or 1.0%, from $1.03 billion at September
30, 1998. The increase in total assets was primarily a result of $71.6 million
growth in loans which offset the Company's repurchase of 20% of the outstanding
common stock in January 1999, which reduced cash and investments by $39.0
million.
<PAGE>
Total cash and cash equivalents decreased $42.5 million, or 63.4%, from
$67.0 million at September 30, 1998 to $24.5 million at September 30, 1999. The
decrease is primarily the result of using cash to fund the stock repurchase in
January 1999.
Net loans receivable increased by $71.6 million, or 10.7%, to $739.8
million at September 30, 1999, compared to $668.1 million at September 30, 1998.
The increase was primarily the result of continued new loan demand exceeding
loan repayments, augmented by the Company's purchase of $5.1 million in higher
yielding loans on multi-family residential and commercial properties in Oregon
and $10.0 million in adjustable-rate one- to four- family mortgages during the
year ended September 30, 1999.
Investment securities decreased $46.9 million, or 22.8%, from $206.1
million at September 30, 1998 to $159.2 million at September 30, 1999. This
decrease was the result of scheduled maturities, primarily maturities of short
term commercial paper. The proceeds from these maturities were used to fund the
stock repurchase. During the year ended September 30, 1999, $16.4 million of
principal payments were received on mortgage backed and related securities
("MBS") and $9.5 million of MBS were sold, thus reducing the balance of MBS.
This reduction was more than offset by the purchase of $18.8 million in CMOs and
$36.7 million in other mortgage-backed securities, resulting in a net increase
in total MBS from $47.0 million at September 30, 1998 to $75.3 million at
September 30, 1999.
Real estate owned increased from zero at September 30, 1998 to $1.5 million
at September 30, 1999. This balance primarily relates to the foreclosure of a
motel with an estimated fair value of $1.4 million that was a participation loan
originated by another lender.
Deposit liabilities increased $30.9 million, or 4.5%, from $689.5 million
at September 30, 1998 to $720.4 million at September 30,1999. Management
attributes the increase to the maintaining of competitive rates in its market
areas as well as the use of an automated on-line personal computer-based system
to market deposits nationally. The increase in deposits has been experienced
throughout the network of 34 full service branches.
Advances from the FHLB of Seattle increased from $167.0 million at
September 30, 1998 to $197.0 million at September 30, 1999. The increase was
used to fund loan growth. During the quarter ended June 30, 1999, the Company
converted adjustable-rate FHLB borrowings to fixed-rate three- to five-year
maturity borrowings as a strategic move to manage interest rate risk. Short term
borrowings at September 30, 1998 consisted of $12.1 million in reverse
repurchase agreements. These agreements matured during the quarter ended March
31, 1999, and they were not renewed.
Total shareholders' equity decreased $35.5 million, or 24.5%, from $145.1
million at September 30, 1998 to $109.6 million at September 30, 1999. The
decrease is primarily attributable to $39.0 million paid out for the 20% stock
repurchase completed in January 1999. Equity was also decreased by a $4.6
million decrease in unrealized gains on securities available for sale during the
year ended September 30, 1999. These decreases were partially offset by $9.2
million in earnings for the year.
Asset Quality
Non-Performing Assets
At September 30, 1999, 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 .46% as compared to
.05% at September 30, 1999. 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
<PAGE>
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
mention," "substandard," "doubtful," and "loss." All nonaccrual loans and
non-performing assets are included in classified assets.
<TABLE>
<CAPTION>
The following table sets forth at the dates indicated the amounts of classified
assets:
At September 30,
---------------------------------
1999 1998 1997
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Loss .......... $ -- $ 3 $ --
Doubtful ...... -- -- --
Substandard ... 4,810 521 304
Special Mention 456 2,452 843
_________ _________ _________
$ 5,266 $ 2,976 $ 1,147
========= ========= =========
</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 a 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.
<TABLE>
<CAPTION>
The following table sets forth at the dates indicated the loan loss allowance
and charge-offs:
At September 30,
-----------------------------------------
1999 1998 1997
------- -------- ------
(In thousands)
<S> <C> <C> <C>
General loan loss allowance $2,484 $1,947 $1,296
Specific loss allowance -- 3 --
Charge-offs 398 20 2
</TABLE>
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1999
AND 1998
General
In September 1998, the Company's Board of Directors authorized the
repurchase of 20% of the Company's outstanding common stock via a "Modified
Dutch Auction Tender Offer" (the "Offer"). The transaction was completed in
January 1999. The Offer contributed to the 15.24% increase in earnings per share
from $1.05 for the year ended September 30, 1998 to $1.21 for the year ended
September 30, 1999. Similarly, the Company's return on average equity improved
by 15.80% from 6.52% for the year ended September 30, 1998 to 7.55% for the year
ended September 30, 1999.
Interest Income
The $39.1 million increase in average interest earning assets contributed
to an increase in interest income of $2.0 million or 2.8% from $69.7 million for
the year ended September 30, 1998 to $71.7 million for the year ended September
30, 1999. An increase in average loans receivable provided a net increase in
interest income that more than offset the decrease in interest income resulting
from completion of the Offer in January 1999 which reduced earning assets by
$39.0 million. The general interest rate environment during the year was one of
low but gradually increasing rates. During the year ended September 30, 1998,
interest rates were stable throughout most of the year, declining only in the
last quarter, from July through September. As a result, interest rates were
lower overall during fiscal 1999 than in 1998. This is reflected in the average
yield on interest-earning assets which decreased slightly from 7.34% for the
year ended September 30, 1998 to 7.25% for the year ended September 30, 1999.
An increase in loans receivable contributed to a $6.8 million increase in
interest income on loans. The increase in loans receivable was primarily a
result of the purchase of participation loans and loan originations exceeding
loan refinancing, which resulted in net loan growth of $71.6 million for 1999.
The increase in interest income on loans was partially offset by decreases
in interest income on investment securities, mortgage backed and related
securities and interest-earning deposits. Cash and investment securities were
liquidated to provide funds for completion of the Offer in January 1999. For
example the average balance of investments decreased by $49.3 million, or 21.1%,
for the year ended September 30, 1999 compared with the same period in 1998.
Interest Expense
Interest expense increased $533,255 due to increases in interest expense on
FHLB borrowings. Interest expense on deposits remained stable at $29.0 million
for the year ended September 30, 1999 compared to $28.9 million for the year
ended September 30, 1998.
Average deposits increased by $35.9 million for the year ended September
30, 1999 compared to the year ended September 30, 1998, but the average interest
paid on interest-bearing deposits decreased 24 basis points from 4.58% for the
year ended September 30, 1998 to 4.34% for the year ended September 30, 1999.
This decrease was a result of the lower interest rate scenario during the year.
Interest expense on FHLB borrowings increased $1.2 million due to increased
average borrowings of $32.7 million.
As noted previously, the general interest rate environment during the year
was one of low rates which gradually increased during the year. In this
<PAGE>
environment, the Company improved its interest rate spread from 2.57% for the
year ended September 30, 1998 to 2.73% for the year ended September 30, 1999.
While yields on assets decreased by 9 basis points, cost of interest-bearing
liabilities decreased by 25 basis points, resulting in a greater spread for the
current year. Net interest margin (net interest income as a percent of average
interest-earning assets) remained constant comparing the fiscal year ended
September 30, 1999 to 1998. The increase in non-interest-bearing checking
deposits through checking account campaigns had a positive impact by reducing
overall cost of funds.
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCES, NET INTEREST INCOME and YIELDS EARNED and RATES PAID
The following table presents, for the periods indicated, information regarding
average balances of assets and liabilities, as well as the total dollar amounts
of interest income from average interest-earning assets and interest expense on
average interest-bearing liabilities, resultant yields, interest rate spread,
net interest margin and the ratio of average interest-earning assets to average
interest-bearing liabilities. Dividends received are included as interest
income. The table does not reflect any effect of income taxes. All average
balances are based on month-end balances. Nonaccrual loans are reflected as
carrying a zero yield.
Year Ended September 30,
------------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------- -------------------------------- -----------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
--------- ---------- ------ --------- ---------- ------ -------- -------- -------
INTEREST-EARNING ASSETS (In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable ........ $ 721,658 $ 56,290 7.80% $614,457 $ 49,508 8.06% $515,555 $ 40,851 7.92%
Mortgage backed and
related securities 38,284 2,104 5.50% 61,000 3,680 6.03% 74,349 4,716 6.34%
Investment securities ... 184,428 10,847 5.88% 233,715 14,149 6.05% 112,319 6,847 6.10%
Federal funds sold ...... 18,555 914 4.93% 16,820 917 5.45% 17,533 931 5.31%
Interest earning deposits 15,801 751 4.75% 16,108 862 5.35% 6,132 327 5.32%
FHLB stock .............. 10,471 785 7.50% 7,983 617 7.73% 6,431 495 7.70%
---------- ---------- -------- ---------- --------- --------
Total interest-earning assets 989,197 71,691 7.25% 950,083 69,733 7.34% 732,319 54,167 7.40%
Non-interest-earning assets 45,314 ---------- 48,202 ---------- 16,527 --------
---------- ---------- --------
Total Assets ............ $1,034,511 $ 998,285 $748,846
========== ========== ========
INTEREST-BEARING LIABILITIES
Tax and insurance reserve $ 5,326 $ 110 2.07%$ 5,895 $ 145 2.47%$ 4,614 $ 137 2.97%
Passbook and statement
savings 61,674 1,326 2.15% 62,333 1,683 2.70% 40,281 1,271 3.15%
Interest-bearing checking 71,107 873 1.23% 73,806 1,089 1.48% 35,892 791 2.20%
Money market ............ 131,534 5,096 3.87% 110,650 4,275 3.86% 62,171 2,391 3.85%
Certificates of deposit . 402,809 21,679 5.38% 384,400 21,885 5.69% 312,511 18,012 5.76%
FHLB advances/Short term
borrowings 176,851 9,298 5.26% 155,712 8,771 5.63% 127,659 7,254 5.68%
---------- ---------- --------- --------- -------- --------
Total interest-bearing
liabilities 849,301 38,382 4.52% 792,796 37,848 4.77% 583,128 29,856 5.12%
Non-interest-bearing
liabilities 63,975 59,037 19,417
---------- ---------- ---------- ----------- --------- -------
Total liabilities ....... 913,276 851,833 602,545
Shareholders' equity .... 121,235 146,452 146,301
---------- ---------- --------
Total Liabilities and
Shareholders' Equity $1,034,511 $ 998,285 $748,846
========== ========== ========
Net interest income ..... $ 33,309 $ 31,885 $24,311
========== ========== =======
Interest rate spread .... 2.73% 2.57% 2.28%
======= ===== =====
Net interest margin ..... 3.37% 3.36% 3.32%
======= ===== ======
Average interest-earning assets to
average interest-bearing liabilities 116.47% 125.58% 137.78%
======= ======= =======
</TABLE>
<PAGE>
RATE VOLUME ANALYSIS
The following table sets forth the effects of changing rates and volumes on net
interest income of the Company. Information is provided with respect to (i)
effects on interest income attributable to changes in volume (changes in average
volume multiplied by prior rate); (ii) effects on interest income attributable
to changes in rate (changes in rate multiplied by prior average volume); and
(iii) changes in rate/volume (change in rate multiplied by change in average
volume.
<TABLE>
<CAPTION>
For the Year Ended September 30,
-------------------------------------------------------------------------------------------
1998 VS 1999 Increase (Decrease) Due to 1997 VS 1998 Increase (Decrease) Due to
--------------------------------------------- ----------------------------------------
Net Increase Net Increase
Rate Volume Rate/Vol (Decrease) Rate Volume Rate/Vol (Decrease)
-------- -------- -------- ------------ ------- -------- -------- ------------
INTEREST EARNING ASSETS (In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans ............................... ($ 1,580) $ 8,637 ($ 275) $ 6,782 $ 688 $ 7,837 $ 132 $ 8,657
Mortgage backed and related
securities ..................... (328) (1,370) 122 (1,576) (231) (848) 43 (1,036)
Investment securities ............... (403) (2,984) 85 (3,302) (47) 7,400 (51) 7,302
Federal funds sold .................. (88) 95 (10) (3) 25 (37) (2) (14)
Interest bearing deposits ........... (96) (16) 1 (111) 1 533 1 535
FHLB stock .......................... (19) 192 (5) 168 2 120 -- 122
-------- -------- -------- -------- -------- -------- ------ --------
Total Interest-Earning Assets ($ 2,514) $ 4,554 ($ 82) $ 1,958 $ 438 $ 15,005 $ 123 $ 15,566
======== ======== ======== ======== ======== ======== ====== ========
INTEREST-BEARING LIABILITIES
Tax and insurance reserves .......... ($ 23) ($ 14) $ 2 ($ 35) ($ 24) $ 38 ($ 6) $ 8
Passbook and statement savings ...... (343) (18) 4 (357) (183) 696 (101) 412
Interest-bearing checking ........... (183) (40) 7 (216) (261) 836 (277) 298
Money market ........................ 12 807 2 821 11 1,864 9 1,884
Certificates of deposit ............. (1,197) 1,048 (57) (206) (220) 4,143 (50) 3,873
FHLB advances/Short term borrowings.. (584) 1,191 (80) 527 (63) 1,593 (13) 1,517
-------- -------- -------- -------- -------- -------- ------- --------
Total Interest-Bearing Liabilities ($ 2,318) $ 2,974 ($ 122) $ 534 ($ 740) $ 9,170 ($ 438) $ 7,992
======== ======== ======== ======== ======== ======== ======= ========
Increase in Net Interest Income...... $1,424 $ 7,574
======== ========
</TABLE>
<PAGE>
Provision for Loan Losses
The provision for loan losses was $932,000, recoveries were zero, and
charge offs were $398,052 during the year ended September 30, 1999 compared to a
provision of $674,000, with no recoveries, and charge offs of $20,774 during the
year ended September 30, 1998. Charge offs for the year ended September 30, 1999
primarily relate to the write-down of a $1.6 million commercial real estate
loan. The underlying property was acquired through foreclosure in September
1999.
As the Company has grown over the last twelve months, the composition of
the loan portfolio has changed, with relatively high levels of construction
loans and increases in commercial and consumer loans, which are considered to
have more associated risk than the Company's traditional portfolio of one- to
four-family residential mortgages. Because of the Company's history of
relatively low loan loss experience, it has historically maintained an allowance
for loan losses at a lower percentage of total loans as compared with other
institutions with higher risk loan portfolios and higher loss experience. The
increased provision for loan losses reflects such changes in the composition of
the loan portfolio, although the Company's recent experience has not indicated a
deterioration in loan quality. The balance of non-performing loans has increased
during the current fiscal year, primarily as a result of the addition of a $1.5
million land development loan. The Company is not anticipating any material loss
on this loan at this time. At September 30, 1998, the allowance for loan losses
was equal to 372.1% of non-performing assets compared to 51.64% at September 30,
1999. The decrease in the coverage ratio at year end 1999 was the result of an
increase in non-performing assets as a result of the aforementioned
nonperforming land development loan and foreclosure of a $1.6 million commercial
real estate property. The foreclosed real estate has been recorded at estimated
fair value of $1.4 million. The Company views these as isolated problem assets,
not a market or underwriting trend.
Non-Interest Income
Non-interest income increased $427,264, or 13.3%, to $3.6 million for the
year ended September 30, 1999 from $3.2 million for the year ended September 30,
1998. The increase was primarily attributable to increases in fee income related
to the increase in deposit accounts subject to service charges.
Non-Interest Expense
Non-interest expense increased $1.7 million, or 8.5%, from a total of $19.5
million for the prior year to $21.2 million for the year ended September 30,
1999. Compensation, employee benefits, and related expense increased $479,677,
or 5.0%, from $9.6 million for the year ended September 30, 1998 to $10.1
million for the same period of 1999. Occupancy expense increased from $2.1
million for the year ended September 30, 1998 to $2.2 million for the year ended
September 30, 1999. These modest increases are due to the addition of two
branches and expenditures on equipment related to preparing for the Year 2000.
Sale of mortgage backed and related securities and real estate owned resulted in
a loss of $137,140 during the year ended September 30, 1999 compared to zero in
the previous year. Other expense increased $1.0 million, from $4.9 million for
the year ended September 30, 1998 to $5.9 million for the current year. The
increase primarily resulted from recognition of $515,000 of losses in the third
quarter of this year related to the Wells Fargo branch integration. Management
believes this loss is an isolated item and does not anticipate additional
charges. The ratio of non-interest expense to average total assets was 2.05% and
1.96% for the years ended September 30, 1999 and 1998, respectively.
<PAGE>
Income Taxes
The provision for income taxes was $5.7 million for the year ended
September 30, 1999, representing an effective tax rate of 38.2% compared with
$5.3 million for the year ended September 30, 1998 representing an effective tax
rate of 35.9%. The lower effective rate for 1998 reflects the impact of a one
year reduction in the state tax rate for Oregon. (See Note 11 to the
Consolidated Financial Statements.)
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") had significant
positive impact on the operations of the Company. The overnight expansion from
eight branches to 33 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 during fiscal year 1998, 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 Acquisition during the year ended September 30, 1997 and other
activities throughout 1998, 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 million at
September 30, 1997 to $950.1 million at September 30, 1998. The increase in net
interest income was augmented by a significant increase in non-interest income
from $810,608 for the year ended September 30, 1997 to $3.2 million for the year
ended September 30, 1998. This increase was 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.
<PAGE>
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
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 fiscal year
1998. Interest expense on FHLB borrowings increased $1.7 million due to
increased average borrowings of $30.3 million.
The general interest rate environment during the year was one of low rates
and a flat yield curve. Analysts reported 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 from 3.32% for the fiscal year ended September
30, 1997 to 3.36% for the year ended September 30, 1998. This improvement was
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 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.
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 charge offs of $1,369 during the
year ended September 30, 1997. The increase in the provision is a reflection of
the Company's 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 service charges
<PAGE>
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 281.0%; 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 Note 11 to the
Consolidated Financial Statements.)
<PAGE>
COMMON STOCK INFORMATION
Since October 4, 1995, Klamath First Bancorp's common stock has traded on
the National Association of Security Dealers Automated Quotation ("Nasdaq")
National Market under the symbol "KFBI". As of September 30, 1999, there were
approximately 1,511 shareholders of record. This total does not reflect the
number of persons or entities who hold stock in nominee or "street" name through
various brokerage firms.
The high and low common stock prices by quarter were as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
________________________________________________
1999 1998
__________________ __________________
High Low High Low
______ ______ ______ ______
<S> <C> <C> <C> <C>
First quarter $19.38 $16.00 $24.25 $20.50
Second quarter 19.00 15.00 23.06 19.50
Third quarter 17.00 14.63 23.00 18.63
Fourth quarter 15.06 12.63 20.00 14.00
</TABLE>
The cash dividends declared by quarter were as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
________________________
1999 1998
_________ _________
<S> <C> <C>
First quarter $0.095 $0.080
Second quarter 0.120 0.085
Third quarter 0.120 0.090
Fourth quarter 0.125 0.090
</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. 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, 1999 and
1998, and the related consolidated statements of earnings, shareholders' equity,
and cash flows for each of the three years in the period ended September 30,
1999. 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. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Klamath First Bancorp, Inc. and
Subsidiary as of September 30, 1999 and 1998 and the results of their operations
and their cash flows for each of the three years in the period ended September
30, 1999, in conformity with generally accepted accounting principles.
\s\ Deloitte & Touche LLP
Portland, Oregon
October 29, 1999
<PAGE>
<TABLE>
<CAPTION>
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30,
-----------------------------------
1999 1998
ASSETS ---------------- ---------------
<S> <C> <C>
Cash and due from banks ................................................. $ 21,123,217 $ 25,644,460
Interest bearing deposits with banks .................................... 1,231,516 11,496,026
Federal funds sold and securities purchased under agreements to resell .. 2,167,856 29,844,783
--------------- ---------------
Total cash and cash equivalents ...................................... 24,522,589 66,985,269
Investment securities available for sale, at fair value
(amortized cost: $161,112,272 and $199,251,123) ....................... 158,648,057 203,224,184
Investment securities held to maturity, at amortized cost (fair
value: $577,455 and $2,928,324) ....................................... 559,512 2,888,759
Mortgage backed and related securities available for sale, at fair
value (amortized cost: $73,075,553 and $42,741,863) ................... 72,695,555 43,335,857
Mortgage backed and related securities held to maturity, at amortized
cost (fair value: $2,596,408 and $3,696,444) .......................... 2,600,920 3,661,683
Loans receivable, net ................................................... 739,793,403 668,146,380
Real estate owned and repossessed assets ................................ 1,494,890 --
Premises and equipment, net ............................................. 11,581,923 12,347,467
Stock in Federal Home Loan Bank of Seattle, at cost ..................... 10,957,300 10,172,900
Accrued interest receivable ............................................. 7,153,818 7,471,717
Core deposit intangible ................................................. 9,778,341 11,431,018
Other assets ............................................................ 1,855,032 1,637,164
--------------- ---------------
Total assets ......................................................... $ 1,041,641,340 $ 1,031,302,398
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposit liabilities ................................................... $ 720,401,112 $ 689,541,345
Accrued interest on deposit liabilities ............................... 1,184,471 1,291,784
Advances from borrowers for taxes and insurance ....................... 9,758,627 9,420,791
Advances from Federal Home Loan Bank of Seattle ....................... 197,000,000 167,000,000
Short term borrowings ................................................. -- 12,112,500
Accrued interest on borrowings ........................................ 34,484 213,957
Pension liabilities ................................................... 833,644 779,392
Deferred federal and state income taxes ............................... 579,727 3,655,944
Other liabilities ..................................................... 2,263,812 2,205,730
--------------- ---------------
Total liabilities ................................................... 932,055,877 886,221,443
--------------- ---------------
Commitments and contingencies
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, 1999 - 7,908,377 issued, 7,062,092 outstanding
September 30, 1998 - 9,916,766 issued, 8,898,972 outstanding ......... 79,084 99,168
Additional paid-in capital ............................................ 43,794,535 82,486,183
Retained earnings-substantially restricted ............................ 76,866,452 71,051,445
Unearned shares issued to ESOP ........................................ (5,871,900) (6,850,550)
Unearned shares issued to MRDP ........................................ (3,519,296) (4,536,865)
Net unrealized gain (loss) on securities available for sale, net of tax (1,763,412) 2,831,574
--------------- ---------------
Total shareholders' equity .......................................... 109,585,463 145,080,955
--------------- ---------------
Total liabilities and shareholders' equity .......................... $ 1,041,641,340 $ 1,031,302,398
=============== ===============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------
1999 1998 1997
----------- ----------- ------------
INTEREST INCOME
<S> <C> <C> <C>
Loans receivable ........................................ $56,289,718 $49,508,126 $40,850,478
Mortgage backed and related securities .................. 2,103,881 3,679,740 4,716,184
Investment securities ................................... 11,631,439 14,766,471 7,342,604
Federal funds sold and securities purchased under
agreements to resell ................................. 914,584 916,847 930,980
Interest bearing deposits ............................... 751,218 862,086 326,521
----------- ----------- -----------
Total interest income ................................. 71,690,840 69,733,270 54,166,767
----------- ----------- -----------
INTEREST EXPENSE
Deposit liabilities ..................................... 28,974,568 28,931,749 22,464,345
Advances from FHLB of Seattle ........................... 9,121,190 7,921,570 6,270,615
Other ................................................... 285,848 995,032 1,120,858
----------- ----------- -----------
Total interest expense ................................ 38,381,606 37,848,351 29,855,818
----------- ----------- -----------
Net interest income ................................... 33,309,234 31,884,919 24,310,949
Provision for loan losses ................................. 932,000 674,000 370,000
----------- ----------- -----------
Net interest income after provision for
loan losses ......................................... 32,377,234 31,210,919 23,940,949
----------- ----------- -----------
NON-INTEREST INCOME
Fees and service charges ................................ 2,935,700 2,410,239 668,779
Gain on sale of investments ............................. 329,435 440,750 2,144
Gain on sale of real estate owned ....................... 29,266 -- 27,946
Other income ............................................ 335,217 351,365 111,739
----------- ----------- -----------
Total non-interest income ............................. 3,629,618 3,202,354 810,608
----------- ----------- -----------
NON-INTEREST EXPENSE
Compensation, employee benefits and related expense ..... 10,096,000 9,616,323 7,143,516
Occupancy expense ....................................... 2,221,900 2,091,830 919,880
Data processing expense ................................. 915,434 963,475 480,889
Insurance premium expense ............................... 295,950 289,592 376,029
Loss on sale of investments ............................. 112,255 -- 14,531
Loss on sale of real estate owned ....................... 24,885 -- --
Amortization of core deposit intangible ................. 1,652,677 1,652,677 302,991
Other expense ........................................... 5,867,155 4,908,907 2,526,519
----------- ----------- -----------
Total non-interest expense ............................ 21,186,256 19,522,804 11,764,355
----------- ----------- -----------
Earnings before income taxes .............................. 14,820,596 14,890,469 12,987,202
Provision for income taxes ................................ 5,665,403 5,339,432 4,429,452
----------- ----------- -----------
Net earnings .............................................. $ 9,155,193 $ 9,551,037 $ 8,557,750
=========== =========== ===========
Earnings per common share - basic ......................... $ 1.21 $ 1.05 $ 0.90
Earnings per common share - fully diluted ................. $ 1.18 $ 1.00 $ 0.88
Weighted average common shares outstanding - basic ........ 7,564,415 9,115,404 9,487,848
Weighted average common shares outstanding - with dilution 7,748,527 9,521,249 9,762,459
</TABLE>
See notes to consolidated financial statements.
<PAGE>
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unearned Unearned Accumulated
Common Common Additional shares shares other Total
stock stock paid-in Retained issued issued comprehensive shareholders'
shares amount capital earnings to ESOP to MRDP income (loss) equity
----------- --------- ------------ ----------- ------------ ------------ ------------ -------------
Balance at
<S> <C> <C> <C> <C> <C> <C> <C> <C>
October 1, 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)
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
---------- ------- ---------- ----------- ---------- --------- ---------- ------------
9,235,582 104,295 92,601,639 56,187,245 (7,829,200) (5,623,340) (1,047,987) 134,392,652
Comprehensive income
Net earnings ...... 8,557,750 8,557,750
Other comprehensive
income:
Unrealized gain on
securities, net of
tax and reclassifi-
cation adjustment (1) 1,512,041 1,512,041
------------
Total comprehensive
income 10,069,791
---------- ------- ---------- ----------- ---------- ---------- ---------- ------------
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)
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
---------- ------- ---------- ----------- ---------- ---------- ---------- -----------
8,898,972 99,168 82,486,183 61,500,408 (6,850,550) (4,536,865) 464,054 133,162,398
Comprehensive income
Net earnings ...... 9,551,037 9,551,037
Other comprehensive
income:
Unrealized gain on
securities, net of
tax and reclassifi-
cation adjustment (2) 2,367,520 2,367,520
------------
Total comprehensive
income 11,918,557
---------- ------- ---------- ----------- ---------- ---------- ---------- ------------
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>
<PAGE>
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Continued)
<TABLE>
<CAPTION>
Unearned Unearned Accumulated
Common Common Additional shares shares other Total
stock stock paid-in Retained issued issued comprehensive shareholders'
shares amount capital earnings to ESOP to MRDP income (loss) equity
----------- --------- ------------ ----------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash dividends ..... -- -- -- (3,340,186) -- -- -- (3,340,186)
Stock repurchased
and retired ...... (2,008,389) (20,084) (39,314,056) -- -- -- -- (39,334,140)
ESOP contribution .. 97,865 -- 602,287 -- 978,650 -- -- 1,580,937
MRDP contribution .. 73,644 -- 20,121 -- -- 1,017,569 -- 1,037,690
---------- ------- ---------- ----------- ---------- ---------- ---------- -----------
7,062,092 79,084 43,794,535 67,711,259 (5,871,900) (3,519,296) 2,831,574 105,025,256
Comprehensive income
Net earnings ...... 9,155,193 9,155,193
Other comprehensive income:
Unrealized loss on
securities, net of
tax and reclassifi-
cation adjustment (3) (4,594,986) (4,594,986)
------------
Total comprehensive
income 4,560,207
---------- ------- ---------- ----------- ---------- ---------- ---------- ------------
Balance at
September 30, 1999 7,062,092 $79,084 $43,794,535 $76,866,452 ($5,871,900) ($3,519,296) ($1,763,412) $109,585,463
========== ======= ========== =========== ========== ========== ========== ============
<FN>
(1) Net unrealized holding gain on securities of $1,476,538 (net of $461,062
tax expense) less reclassification adjustment for losses included in net
earnings of $35,503 (net of $21,760 tax benefit).
(2) Net unrealized holding gain on securities of $2,429,643 (net of $1,451,061
tax expense) less reclassification adjustment for gains included in net
earnings of $62,123 (net of $38,075 tax expense).
(3) Net unrealized holding loss on securities of $4,332,997 (net of $2,816,282
tax benefit) less reclassification adjustment for gains included in net
earnings of $261,989 (net of $160,574 tax expense).
</FN>
</TABLE>
See notes to consolidated financial statements.
<PAGE>
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net earnings .......................................... $ 9,155,193 $ 9,551,037 $ 8,557,750
ADJUSTMENTS TO RECONCILE NET EARNINGS TO
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Depreciation and amortization ......................... 2,896,271 2,815,615 772,204
Provision for deferred taxes .......................... (259,935) 293,310 714,915
Provision for loan losses ............................. 932,000 674,000 370,000
Compensation expense related to ESOP benefit .......... 1,580,937 2,008,516 1,683,910
Compensation expense related to MRDP Trust ............ 1,037,690 1,086,475 1,071,130
Net amortization of premiums (discounts) paid on
investment and mortgage backed and related securities 134,979 21,994 102,626
Increase in deferred loan fees, net of amortization ... 405,237 1,258,655 912,445
Accretion of discounts on purchased loans ............. (37,456) 3,763 (325)
Net (gain) loss on sale of real estate owned and
premises and equipment .............................. (4,381) 3,196 (3,514)
Net (gain) loss on sale of investment and mortgage
backed and related securities ....................... (217,179) (440,750) 12,387
FHLB stock dividend ................................... (784,400) (617,000) (495,000)
Increase in core deposit intangible ................... -- -- (13,386,686)
CHANGES IN ASSETS AND LIABILITIES
Accrued interest receivable ........................... 317,899 154,447 (2,583,032)
Other assets .......................................... (377,868) (218,359) (1,625,538)
Accrued interest on deposit liabilities ............... (107,313) 76,039 503,337
Accrued interest on borrowings ........................ (179,473) (298,759) 189,553
Pension liabilities ................................... 54,252 52,252 59,052
Other liabilities ..................................... 264,936 131,341 (1,134,717)
----------- ----------- -----------
Net cash provided by (used in) operating activities ....... 14,811,389 16,555,772 (4,279,503)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of investment securities
held to maturity .................................... 82,455,000 20,150,000 48,680,000
Proceeds from maturity of investment securities
available for sale .................................. 48,572,000 104,180,000 19,009,324
Principal repayments received on mortgage
backed and related securities held to maturity ..... 1,044,871 1,755,918 1,313,309
Principal repayments received on mortgage
backed and related securities available for sale ... 15,311,695 24,664,174 18,923,262
Principal repayments received on loans ................ 159,160,842 122,009,359 56,879,728
Loan originations ..................................... (224,193,434) (232,474,655) (120,072,487)
Loans purchased ....................................... (15,500,495) (7,792,061) (15,648,275)
Loans sold ............................................ 5,584,065 -- --
Purchase of investment securities held
to maturity ......................................... (79,711,523) -- (61,722,409)
Purchase of investment securities available
for sale ............................................ (22,147,855) (60,366,913) (219,697,100)
Purchase of mortgage backed and related
securities available for sale ....................... (55,536,014) (13,202,490) (14,850,705)
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 .................................. 11,834,420 19,388,451 16,066,044
Proceeds from sale of mortgage backed and related
securities available for sale ....................... 9,454,776 9,656,938 5,743,267
Proceeds from sale of real estate owned and
premises and equipment .............................. 514,710 -- 86,159
Purchases of premises and equipment ................... (321,050) (1,682,477) (7,176,075)
----------- ----------- -----------
Net cash used in investing activities ..................... (63,477,992) (16,119,256) (274,347,558)
----------- ----------- -----------
</TABLE>
<PAGE>
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------
1999 1998 1997
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in deposit liabilities,
<S> <C> <C> <C>
net of withdrawals ................................... $30,859,767 $15,563,444 $274,304,721
Proceeds from FHLB advances ........................... 160,000,000 179,000,000 184,000,000
Repayments of FHLB advances ........................... (130,000,000) (141,000,000) (145,000,000)
Proceeds from short term borrowings ................... 8,595,000 88,343,199 84,750,150
Repayments of short term borrowings ................... (20,707,500) (93,308,199) (82,577,050)
Stock repurchase and retirement ...................... (39,334,140) (11,561,483) (18,878,128)
Proceeds from exercise of stock options ............... -- 411,035 --
Advances from borrowers for taxes and insurance ....... 337,836 505,305 1,084,359
Dividends paid ........................................ (3,547,040) (3,447,744) (3,193,428)
----------- ----------- -----------
Net cash provided by financing activities ................. 6,203,923 34,505,557 294,490,624
----------- ----------- -----------
Net (decrease) increase in cash and cash
equivalents ............................................. (42,462,680) 34,942,073 15,863,563
Cash and cash equivalents at beginning
of year ................................................. 66,985,269 32,043,196 16,179,633
----------- ----------- -----------
Cash and cash equivalents at end of year .................. $24,522,589 $66,985,269 $32,043,196
=========== =========== ===========
SUPPLEMENTAL SCHEDULE OF INTEREST AND
INCOME TAXES PAID
Interest paid ......................................... $38,668,392 $38,071,070 $29,162,927
Income taxes paid ..................................... 5,866,000 5,808,299 3,373,457
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES
Net unrealized gain (loss) on securities
available for sale .................................. ($4,594,986) $ 2,367,520 $ 1,512,041
Dividends declared and accrued in other
liabilities ......................................... 988,547 892,509 834,363
</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. (the "Company") and its wholly-owned subsidiary Klamath First
Federal Savings and Loan Association (the "Association"), including the
Association's subsidiary, Klamath First Financial Services. All intercompany
accounts and transactions have been eliminated in consolidation.
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 Statements 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 amortized 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.
Stock Investments
The Company holds stock in the Federal Home Loan Bank of Seattle ("FHLB of
Seattle"). This investment is carried at the lower of cost or fair value.
<PAGE>
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.
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 15 years for furniture and equipment.
<PAGE>
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.
Effective January 1, 1997, the Company adopted SFAS No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities.
SFAS No. 125 requires the Company 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.
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
assets acquired and liabilities assumed were recorded at fair value and the core
deposit premium was allocated to premises and equipment in the amount of $3.0
million and to core deposit intangible in the amount of $13.4 million. The
recorded core deposit intangible is being amortized to non-interest expense on a
straight-line basis over 8.1 years.
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 Ownership Plan
The Company sponsors an Employee Stock Ownership Plan ("ESOP"). The ESOP is
accounted for in accordance with the American Institute of Certified Public
Accountants ("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
balance sheets. The plan authorizes release of the shares over a ten-year
period, of which six 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. The plan authorizes the grant of common stock
<PAGE>
shares to certain officers and directors, which vest over a five-year period in
equal installments. The Company recognizes compensation expense in the amount of
the fair value of the common stock in accordance with the vesting schedule
during the years in which the shares are payable. 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 option grants 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 the stock at grant date over
the amount an employee must pay to acquire the stock. Stock options granted by
the Company have no intrinsic value at the grant date and, under APB No. 25,
there is no compensation expense to be recorded.
SFAS No. 123, 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 15 for the pro forma effect on net earnings and earnings per
share as if the fair value method had been used.
Recently Issued Accounting Pronouncements
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, was issued. SFAS No. 133 establishes the 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 balance sheet 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 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. The effective date of this Statement was deferred by the
issuance of SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133. This
Statement is now effective for fiscal years beginning after June 15, 2000.
The Company has determined that it currently has no instruments or contracts
that meet the scope of SFAS No. 133. Accordingly, the adoption of this Statement
in 2001 is not expected to have a material impact on the financial statements of
the Company.
(2) Cash and Due from Banks
The Company is required to maintain an average reserve balance with the Federal
Reserve Bank, or maintain such reserve balance in the form of cash. The amount
of this required reserve balance was approximately $3.0 million at September 30,
1999 and 1998, and was met by holding cash and maintaining an average balance
with the Federal Reserve Bank in excess of this amount.
<PAGE>
(3) 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, 1999
--------------------------------------------------------
Amortized Gross Unrealized Fair
cost Gains Losses value
----------- ------------ ------------ ------------
Investment securities available for sale
U.S. Government obligations
<S> <C> <C> <C> <C>
Maturing within one year ........... $ 15,014,112 $ 18,266 $ 40,190 $ 14,992,188
Maturing after one year through
five years ........................ 59,212,960 88,398 333,544 58,967,814
State and municipal obligations
Maturing within one year ........... 572,115 4,223 -- 576,338
Maturing after one year through
five years ........................ 801,572 2,701 17,217 787,056
Maturing after five years through
ten years ......................... 198,414 -- 10,190 188,224
Maturing after ten years ........... 23,275,612 15,017 961,272 22,329,357
Corporate obligations
Maturing within one year ........... 21,053,101 36,346 171,277 20,918,170
Maturing after one year through
five years ........................ 21,159,327 -- 289,867 20,869,460
Maturing after ten years ........... 19,825,059 -- 805,609 19,019,450
------------ ------------ ------------ ------------
$161,112,272 $ 164,951 $ 2,629,166 $158,648,057
============ ============ ============ ============
<CAPTION>
September 30, 1998
--------------------------------------------------------
Amortized Gross Unrealized 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, 1999
--------------------------------------------------------
Amortized Gross Unrealized Fair
cost Gains Losses value
----------- ------------ ------------ ------------
Investment securities held to maturity
State and municipal obligations
<S> <C> <C> <C> <C>
Maturing within one year ........... $ 170,376 $ 438 $-- $ 170,814
Maturing after one year through
five years ........................ 389,136 17,505 -- 406,641
------------ ------------ ------------ ------------
$ 559,512 $ 17,943 $-- $ 577,455
============ ============ ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
September 30, 1998
--------------------------------------------------------
Amortized Gross Unrealized Fair
cost Gains Losses value
---------- ---------- ---------- -------------
Investment securities held to maturity
State and municipal obligations
<S> <C> <C> <C> <C>
Maturing within one year ........... $ 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
============ ============ ============ ============
</TABLE>
MORTGAGE BACKED AND RELATED SECURITIES
<TABLE>
<CAPTION>
September 30, 1999
--------------------------------------------------------
Amortized Gross Unrealized 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 ................. $ 2,469,286 $-- $ 25,043 $ 2,444,243
CMO's maturing after one year
through five years ................. 4,969,296 -- 55,346 4,913,950
FNMA maturing after ten years ........ 21,849,523 116,867 228 21,966,162
FHLMC maturing after ten years ....... 18,375,619 26,201 31,314 18,370,506
GNMA maturing after ten years ........ 11,783,245 3,738 18,918 11,768,065
CMO's maturing after ten years ...... 13,628,584 -- 395,955 13,232,629
------------ ------------ ------------ ------------
$ 73,075,553 $ 146,806 $ 526,804 $ 72,695,555
============ ============ ============ ============
<CAPTION>
September 30, 1998
--------------------------------------------------------
Amortized Gross Unrealized 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
============ ============ ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
September 30, 1999
--------------------------------------------------------
Amortized Gross Unrealized Fair
cost Gains Losses value
----------- ------------ ------------ ------------
Mortgage backed and related securities held to maturity
<S> <C> <C> <C> <C>
GNMA maturing after ten years ........ $ 2,600,920 $ 3,289 $ 7,801 $ 2,596,408
============ ============ ============ ============
<CAPTION>
September 30, 1998
--------------------------------------------------------
Amortized Gross Unrealized 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
============ ============ ============ ============
</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, 1999 and 1998, the Company pledged securities totaling
$35.6 million and $31.2 million, respectively, to secure certain public deposits
and for other purposes as required or permitted by law.
The Company has also pledged securities of zero and $12.0 million to secure
short term borrowings of reverse repurchase agreements at September 30, 1999 and
1998, respectively. (See Note 10.)
(4) Loans Receivable
<TABLE>
<CAPTION>
September 30,
---------------------------
1999 1998
------------ ------------
Real estate loans
<S> <C> <C>
Permanent residential 1-4 family ..... $647,130,329 $577,321,223
Multi-family residential ............. 18,411,762 19,229,984
Construction ......................... 53,219,452 64,288,949
Commercial ........................... 37,078,809 29,457,284
Land ................................. 2,064,037 2,184,595
------------ ------------
Total real estate loans ........... 757,904,389 692,482,035
------------ ------------
Non-real estate loans
Savings account ...................... 1,800,234 1,990,776
Home improvement and home equity ..... 6,725,721 5,749,969
Other ................................ 8,010,808 4,480,064
------------ ------------
Total non-real estate loans ....... 16,536,763 12,220,809
------------ ------------
Total loans ....................... 774,441,152 704,702,844
Less
Undisbursed portion of loans ......... 24,176,425 26,986,869
Deferred loan fees ................... 7,987,699 7,619,918
Allowance for loan losses ............ 2,483,625 1,949,677
------------ ------------
$739,793,403 $668,146,380
============ ============
</TABLE>
<PAGE>
The weighted average interest rate on loans at September 30, 1999 and 1998
was 7.47% and 7.71%, respectively.
Included in loans receivable are $379,662 of loans held for sale. All these
loans are one- to four-family mortgage loans. In the aggregate there was no
lower of cost or market adjustment required; fair value approximates cost.
Loans to employees, officers, and directors totaled $10.9 million and $8.8
million at September 30, 1999 and 1998, respectively.
<PAGE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------
1999 1998 1997
----------- ------------ ------------
<S> <C> <C> <C>
Balance, beginning of year ... $ 1,949,677 $ 1,296,451 $ 927,820
Charge offs .................. (398,052) (20,774) (1,369)
Additions .................... 932,000 674,000 370,000
----------- ----------- -----------
Balance, end of year ......... $ 2,483,625 $ 1,949,677 $ 1,296,451
=========== =========== ===========
</TABLE>
(5) Premises and Equipment
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
September 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Land ............................................. $ 2,476,807 $ 2,479,807
Office buildings and construction in progress..... 10,470,855 10,403,971
Furniture, fixtures and equipment ................ 4,464,622 4,211,886
Automobiles ...................................... 38,856 38,856
Less accumulated depreciation .................... (5,869,217) (4,787,053)
------------ ------------
$ 11,581,923 $ 12,347,467
============ ============
</TABLE>
Depreciation expense was $1.1 million, $1.0 million, and $469,208 for the
years ended September 30, 1999, 1998, and 1997, respectively.
(6) Accrued Interest Receivable
The following is a summary of accrued interest receivable:
<TABLE>
<CAPTION>
September 30,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Loans receivable ....................... $ 4,335,013 $ 4,114,533
Mortgage backed and related securities . 478,635 424,458
Investment securities .................. 2,340,170 2,932,726
------------ ------------
$ 7,153,818 $ 7,471,717
============ ============
</TABLE>
<PAGE>
(7) Mortgage Servicing Rights
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balance of mortgage loans
serviced for others was $6.1 million and $724,559 at September 30, 1999 and
1998, respectively. During the year ended September 30, 1999 the Company
initiated a program to sell loans to the Federal National Mortgage Association
("Fannie Mae") which resulted in the significant increase in loans serviced for
others.
Capitalized mortgage servicing rights were $52,432 and zero at September
30, 1999 and 1998, respectively.
The changes in the balance of mortgage servicing rights were as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Balance, beginning of year ...................... $-- $--
Additions ....................................... 53,789 --
Amortization of mortgage servicing rights ....... (1,357) --
------------ ------------
Balance, end of year ............................ $ 52,432 $--
============ ============
</TABLE>
(8) Deposit Liabilities
The following is a summary of deposit liabilities:
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------
1999 1998
----------------------- -----------------------
Amount Percent Amount Percent
------------ --------- ------------ --------
Checking accounts, non-interest
<S> <C> <C> <C> <C>
bearing ...................... $ 52,318,958 7.3% $ 47,547,651 6.9%
------------ ------- ------------ -------
Interest-bearing checking ..... 67,303,245 9.3 70,561,435 10.2
------------ ------- ------------ -------
Passbook and statement savings 59,790,124 8.3 61,413,910 8.9
------------ ------- ------------ -------
Money market deposits ......... 148,902,589 20.7 114,667,649 16.6
------------ ------- ------------ -------
Certificates of deposit
Less than 4% ................. 4,893,194 0.7 1,371,156 0.2
4.00% to 5.99% ............... 340,945,349 47.3 329,246,772 47.8
6.00% to 7.99% ............... 36,072,270 5.0 43,853,274 6.4
8.00% to 9.99% ............... 10,175,383 1.4 20,879,498 3.0
------------ ------- ------------ -------
392,086,196 54.4 395,350,700 57.4
------------ ------- ------------ -------
$720,401,112 100.0% $689,541,345 100.0%
============ ======= ============ =======
</TABLE>
<PAGE>
Following is a summary of interest expense on deposits:
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Interest-bearing checking ................................. $ 873,211 $ 1,088,777 $ 791,032
Passbook and statement savings ............................ 1,326,259 1,683,101 1,270,468
Money market .............................................. 5,096,134 4,275,419 2,391,245
Certificates of deposit ................................... 21,767,895 21,990,525 18,075,128
----------- ----------- -----------
29,063,499 29,037,822 22,527,873
Less early withdrawal
penalties ................................................ 88,931 106,073 63,528
----------- ----------- -----------
Net interest on deposits ................................ $28,974,568 $28,931,749 $22,464,345
=========== =========== ===========
</TABLE>
At September 30, 1999, deposit maturities are as follows:
<TABLE>
<CAPTION>
<S> <C>
Within 1 year $594,338,934
1 year to 3 years 67,166,011
3 years to 5 years 37,459,409
Thereafter 21,436,758
------------
$720,401,112
============
</TABLE>
<TABLE>
<CAPTION>
Weighted average interest rates at September 30 are as follows:
1999 1998
---------- ----------
<S> <C> <C>
Interest-bearing checking .............. 1.14% 1.33%
Passbook and statement savings ......... 1.76% 2.44%
Money market ........................... 4.04% 3.92%
Certificates of deposit ................ 5.28% 5.81%
Weighted average rate for all deposits . 4.27% 4.66%
</TABLE>
Deposits in excess of $100,000 totaled $149.9 million and $151.0 million at
September 30, 1999 and 1998, respectively. Deposits in excess of $100,000 may
not be 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, 1999, the credit line was 30%
of total assets of the Association. Advances are collateralized in the
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
<PAGE>
the U.S. Government and agencies thereof. At September 30, 1999 the minimum book
value of eligible collateral for these borrowings was $216.2 million.
Scheduled maturities of advances from the FHLB were as follows:
<TABLE>
<CAPTION>
September 30, 1999 September 30, 1998
------------------------------------------ ----------------------------------------------
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%
After one but within
five years .......... 40,000,000 5.39%-5.70% 5.43% 55,000,000 5.39%-5.74% 5.56%
After five but within
ten years ........... 157,000,000 4.77%-5.87% 5.32% 82,000,000 4.77%-5.24% 4.96%
------------ -------------
$197,000,000 $ 167,000,000
============ =============
</TABLE>
Financial data pertaining to the weighted average cost, the level of FHLB
advances and the related interest expense are as follows:
<TABLE>
<CAPTION>
Year ended September 30,
-----------------------------------------
1999 1998 1997
------------- ------------ ------------
<S> <C> <C> <C>
Weighted average interest rate at end of year ............. 5.34% 5.26% 5.62%
Weighted daily average interest rate
during the year ........................................... 5.25% 5.62% 5.66%
Daily average FHLB advances ............................... $173,739,726 $141,016,438 $110,736,986
Maximum FHLB advances at any month end .................... 197,000,000 167,000,000 151,000,000
Interest expense during the year .......................... 9,121,190 7,921,570 6,270,615
</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. All these
agreements matured during the quarter ended March 31, 1999 and were not renewed.
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.
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>
Year Ended September 30,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Weighted average interest rate at end of year ............. -- 5.65% 5.75%
Weighted daily average interest rate
during the year ........................................... 5.72% 5.80% 5.82%
Daily average of securities sold
under agreements to repurchase ............................ $ 3,105,336 $14,669,203 $16,804,520
Maximum securities sold under
agreements to repurchase at any
month end ................................................. 8,095,000 17,077,500 19,117,500
Interest expense during the year .......................... 177,568 850,122 978,023
</TABLE>
The Company had an unused line of credit totaling $15.0 million with U.S.
National Bank of Oregon at September 30, 1999 and 1998.
<PAGE>
(11) Taxes on Income
The following is a summary of income tax expense:
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
Current Taxes
<S> <C> <C> <C>
Federal ................................................... $ 4,842,232 $ 4,771,653 $ 3,076,977
State ..................................................... 1,065,157 468,978 639,503
----------- ----------- -----------
Current tax provision ..................................... 5,907,389 5,240,631 3,716,480
----------- ----------- -----------
Deferred Taxes
Federal ................................................... (201,337) 82,204 648,092
State ..................................................... (40,649) 16,597 64,880
----------- ----------- -----------
Deferred tax provision (benefit) .......................... (241,986) 98,801 712,972
----------- ----------- -----------
Provision for income taxes ................................ $ 5,665,403 $ 5,339,432 $ 4,429,452
=========== =========== ===========
</TABLE>
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>
Year Ended September 30,
----------------------------------
1999 1998 1997
------ ----- -----
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 ........................................ 4.5 2.1 4.4
Nondeductible ESOP compensation
expense ................................................... 1.4 2.4 5.4
Deductible MRDP compensation
expense ................................................... (0.1) (1.5) (2.2)
Interest income on municipal securities ................... (2.2) -- --
Elimination of valuation allowance ........................ -- (1.5) (12.6)
Other ..................................................... (0.4) (0.6) 4.1
------- ------ ------
Income tax expense included in the
consolidated statement of earnings ........................ 38.2% 35.9% 34.1%
====== ===== ====
</TABLE>
Deferred income taxes at September 30, 1999 and 1998 reflect the impact of
"temporary differences" between amounts of assets and liabilities for financial
reporting purposes and such amounts as measured by tax laws.
<PAGE>
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,
---------------------------
1999 1998
------------ ------------
DEFERRED TAX ASSETS
<S> <C> <C>
Allowance for losses on loans .................... $ 975,816 $ 761,440
Pension liability ................................ 327,539 306,462
Unearned ESOP shares ............................. 371,290 422,071
Unrealized loss on securities available for sale . 1,080,801 --
Core deposit premium ............................. 657,904 359,209
------------ ------------
Total gross deferred tax assets .................. 3,413,350 1,849,182
------------ ------------
DEFERRED TAX LIABILITIES
FHLB stock dividends ............................. 894,222 585,949
Deferred loan fees ............................... 1,262,694 919,314
Tax bad debt reserve in excess of base-
year reserve ..................................... 1,224,537 1,469,444
Unrealized gain on securities held for sale ...... -- 1,735,484
Other ............................................ 611,624 794,935
------------ ------------
Total gross deferred tax liabilities ............. 3,993,077 5,505,126
------------ ------------
Net deferred tax liability ....................... $ 579,727 $ 3,655,944
============ ============
</TABLE>
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 assured realization of the tax
benefit and thus reduced the valuation allowance to zero. There continues to be
no valuation allowance at September 30, 1999.
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, 1999, 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.
<PAGE>
(12) Commitments and Contingencies
In the ordinary course of business, the Company has various outstanding
commitments and contingencies that are not reflected in the accompanying
consolidated financial statements. In addition, the Company is a defendant in
certain claims and legal actions arising in the ordinary course of business. In
the opinion of management, after consultation with legal counsel, the ultimate
disposition of these matters is not expected to have a material adverse effect
on the consolidated financial condition of the Company.
(13) Shareholders' Equity
In September 1998, the Board of Directors authorized the repurchase of
approximately 20% of the Company's outstanding common stock. The repurchase was
completed through a "Modified Dutch Auction Tender." Under this procedure, the
Company's shareholders were 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. Results of the offer were finalized on January 15, 1999
when the Company announced purchase of 1,984,090 shares at $19.50 per share.
This represents approximately 85.9% of the shares tendered at $19.50 per share
or below, and 64.7% of all shares tendered. The cost of the shares purchased was
approximately $39.3 million. The effect of the transaction is reflected in a
reduction in cash and investments and a reduction in equity.
The table below summarizes repurchases of the Company's common stock which
were approved by the Board of Directors and completed by management.
<TABLE>
<CAPTION>
Number Average
Month Completed of Shares Price
- ---------------------------------------- --------- --------
<S> <C> <C>
September 1996 ......................... 620,655 $14.33
January 1997 ........................... 1,161,247 15.91
May 1998 ............................... 521,477 21.22
January 1999 ........................... 1,984,040 19.50
</TABLE>
In 1999, 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 24,299, 22,608 and 21,689 shares,
respectively, and reduced equity by $353,407, $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.
<PAGE>
(14) Earnings Per Share
Earnings per share ("EPS") is computed in accordance with 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. Shares
held by the Company's ESOP that are committed for release are considered
contingently issuable shares and are included in the computation of basic EPS.
Diluted EPS is computed using the treasury stock method, giving effect to
potential additional common shares that were outstanding during the period.
Potential dilutive common shares include shares awarded but not released under
the Company's MRDP, and stock options granted under the Stock Option Plan.
Following is a summary of the effect of dilutive securities on weighted average
number of shares (denominator) for the basic and diluted EPS calculations. There
are no resulting adjustments to net earnings.
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
Weighted average common
<S> <C> <C> <C>
shares outstanding - basic ................................ 7,564,415 9,115,404 9,487,848
----------- ----------- -----------
Effect of Dilutive Securities on Number of Shares:
MRDP shares ............................................... 23,923 64,188 45,824
Stock options ............................................. 160,189 341,657 228,787
----------- ----------- -----------
Total Dilutive Securities ................................. 184,112 405,845 274,611
----------- ----------- -----------
Weighted average common shares
outstanding - with dilution .............................. 7,748,527 9,521,249 9,762,459
=========== =========== ===========
</TABLE>
(15) 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 $40,828, $180,000, and $170,613 was incurred during the years
ended September 30, 1999, 1998, and 1997, 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
$564.7 million at June 30, 1999.
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, 1999, 1998, and 1997 were $71,052, $71,052, and $71,052, respectively. At
September 30, 1999 and 1998, the projected benefit obligation was $833,644 and
$779,392, respectively.
<PAGE>
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. On November 19, 1997 a new award of 6,116
shares was made to a director. On January 4, 1999 a new award of 4,893 was made
to an officer. During 1998, 17,616 shares awarded under the plan were forfeited
upon resignation of an officer. The Company recognizes compensation expense in
accordance with the vesting schedule during the years in which the shares are
payable based on the fair value of the common stock on the grant date.
Compensation expense for the years ended September 30, 1999, 1998 and 1997 was
$1.0 million, $1.1 million and $1.1 million, respectively.
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.
Option activity under the Stock Plan is as follows:
<TABLE>
<CAPTION>
Weighted
Number of Average
Shares Exercise Price
------------ --------------
<S> <C> <C>
Outstanding, October 1, 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
Granted ................................ -- --
Exercised .............................. -- --
Canceled ............................... -- --
----------
Outstanding, September 30, 1999 ........ 916,258 $13.314
========== =======
</TABLE>
At September 30, 1999, 275,738 shares were available for future grants
under the Stock Plan.
Additional information regarding options outstanding as of September 30, 1999 is
as follows:
<TABLE>
<CAPTION>
Weighted Avg.
Options Options Remaining
Exercise Price Outstanding Exercisable Contractual Life
- -------------- ----------- ----------- ----------------
<S> <C> <C> <C> <C>
$13.125 893,015 535,809 6.5
$20.577 23,243 4,649 8.1
----------- -----------
916,258 540,458
=========== ===========
</TABLE>
<PAGE>
Additional Stock Plan Information
As discussed in Note 1, the Company continues to account for its
stock-based awards using the intrinsic value method in accordance with APB
Opinion 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.
SFAS No. 123, Accounting for Stock-Based Compensation, 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.
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
<PAGE>
are recognized as they occur. Had compensation cost for these awards been
determined under SFAS No. 123, the Company's net earnings and earnings per share
would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
Year ended September 30,
-----------------------------------------
1999 1998 1997
---------- ---------- ----------
Net earnings:
<S> <C> <C> <C>
As reported $9,155,193 $9,551,037 $8,557,750
Pro forma 8,642,299 9,040,753 8,063,929
Earnings per common share - basic
As reported $1.21 $1.05 $0.90
Pro forma $1.14 $0.99 $0.85
Earnings per common share - fully diluted
As reported $1.18 $1.00 $0.88
Pro forma $1.12 $0.95 $0.83
</TABLE>
(16) 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 $5.9 million and $6.9 million at September 30, 1999
and 1998, 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 $1.6 million, $2.0 million, and
$1.7 million for the years ended September 30, 1999, 1998 and 1997,
respectively, and 97,865 shares were allocated among the participants in each of
those years.
<PAGE>
(17) Fair Value of Financial Instruments
Financial instruments have been construed to generally mean cash or a
contract that implies an obligation to deliver cash or another financial
instrument to another entity.
<TABLE>
<CAPTION>
September 30, 1999 September 30, 1998
--------------------------- ---------------------------
Carrying Fair Carrying Fair
amount value amount value
Financial Assets ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash and due from banks ............ $ 21,123,217 $ 21,123,217 $ 25,644,460 $ 25,644,460
Interest earning deposits with banks 1,231,516 1,231,516 11,496,026 11,496,026
Federal funds sold and
securities purchased under
agreements to resell ............... 2,167,856 2,167,856 29,844,783 29,844,783
Investment securities
available for sale ................. 158,648,057 158,648,057 203,224,184 203,224,184
Investment securities held
to maturity ........................ 559,512 577,455 2,888,759 2,928,324
Mortgage backed and related
securities available for sale ...... 72,695,555 72,695,555 43,335,857 43,335,857
Mortgage backed and related
securities held to maturity ........ 2,600,920 2,596,408 3,661,683 3,696,444
Loans receivable, net .............. 739,793,403 714,285,234 668,146,380 721,213,589
FHLB stock ......................... 10,957,300 10,957,300 10,172,900 10,172,900
Financial Liabilities
Deposit liabilities ................ 720,401,112 722,373,174 689,541,345 693,936,011
FHLB advances ...................... 197,000,000 192,637,192 167,000,000 166,432,152
Short term borrowings .............. -- -- 12,112,500 12,112,500
</TABLE>
(18) Regulatory Capital Requirements
The Company is not subject to any regulatory capital requirements. The
Association, however, is subject to various regulatory capital requirements
administered by the Office of Thrift Supervision ("OTS"). Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary 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
<PAGE>
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, 1999.
As of September 30, 1999, 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
tangible capital 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 1999 financial statements. In view of the
uncertain regulatory environment in which the Association now operates, the
extent, if any, to which a forthcoming regulatory examination may ultimately
result in adjustments to the 1999 financial statements cannot be presently
determined.
<PAGE>
<TABLE>
<CAPTION>
Categorized as "Well
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
--------------------- -------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----- ----------- ----- ----------- -----
As of September 30, 1999
<S> <C> <C> <C> <C> <C> <C>
Total Capital: ........... $95,495,327 17.4% $42,888,616 8.0% $53,610,770 10.0%
(To Risk Weighted Assets)
Tier I Capital: .......... 93,011,702 17.0% N/A N/A 32,166,462 6.0%
(To Risk Weighted Assets)
Tier I Capital: .......... 93,011,702 8.9% 30,832,614 3.0% 51,387,690 5.0%
(To Total Assets)
Tangible Capital: ........ 93,011,702 8.9% 15,416,307 1.5% N/A N/A
(To Tangible Assets)
As of September 30, 1998
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)
</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, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
Association's equity $101,042,299 $95,448,624
Unrealized securities (gains) losses 1,747,744 (2,785,239)
Core deposit intangible (9,778,341) (11,431,018)
----------- -----------
Tangible capital 93,011,702 81,232,367
General valuation allowances 2,483,625 1,946,677
----------- -----------
Total capital $ 95,495,327 $83,179,044
========== ==========
</TABLE>
<PAGE>
(19) Financial Instruments with Off-Balance Sheet Risk and Concentrations of
Credit Risk
The Company is 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 45 day agreements to lend to a customer subject to the Company's
usual terms and conditions.
At September 30, 1999, loan commitments amounted to approximately $11.8
million comprised of $4.4 million in variable rate loans ranging from 5.50% to
10.50% and $7.4 million in fixed rate loans ranging from 6.75% to 10.50%. At
September 30, 1998 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, 1999, the Company also had $2.0 million in commitments to
sell loans to FNMA.
The Company originates residential real estate loans and, to a lesser
extent, commercial and multi-family real estate, commercial business and
consumer loans. Over 79% 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.
(20) Parent Company Financial Information
Condensed financial information as of September 30, 1999 and 1998, and for
the years then ended, 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,
------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Cash and cash equivalents ........................ $ 5,844,155 $ 41,737,415
Investment and mortgage-backed securities ........ 2,762,506 20,003,078
Investment in wholly-owned subsidiary ............ 101,042,299 95,448,624
Other assets ..................................... 1,034,776 1,099,598
------------- -------------
Total assets ..................................... $ 110,683,736 $ 158,288,715
============= =============
Liabilities
Short-term borrowings ............................ $ -- $ 12,112,500
Other liabilities ................................ 1,098,273 1,095,260
------------- -------------
Total liabilities ................................ 1,098,273 13,207,760
------------- -------------
Shareholders' equity
Common stock ..................................... 79,084 99,168
Additional paid-in capital ....................... 43,794,535 82,486,183
Retained earnings ................................ 75,103,040 73,883,019
Unearned ESOP shares at cost ..................... (5,871,900) (6,850,550)
Unearned MRDP shares at cost ..................... (3,519,296) (4,536,865)
------------- -------------
Total shareholders' equity ....................... 109,585,463 145,080,955
------------- -------------
Total liabilities and shareholders' equity ....... $ 110,683,736 $ 158,288,715
============= =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF EARNINGS
Year Ended September 30,
------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Equity in undistributed income of subsidiary ..... $ 9,221,480 $ 9,259,035
Total interest income ............................ 1,675,756 2,995,169
Total interest expense ........................... 177,568 850,122
Non-interest income .............................. 77 --
Non-interest expense ............................. 1,631,674 1,674,321
------------- -------------
Earnings before income taxes ..................... 9,088,071 9,729,761
Provision (benefit) for income taxes ............. (67,122) 178,724
------------- -------------
Net earnings ..................................... $ 9,155,193 $ 9,551,037
============= =============
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
Year Ended September 30,
------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Net cash flows from operating activities ......... $ 963,814 $ 34,654,657
------------- -------------
Cash flows from investing activities
Investment in subsidiary ......................... (302,892) (261,300)
Maturity of investment and mortgage-
backed securities ................................ 76,275,337 20,227,224
(Purchase) sale of investment and mortgage-
backed securities ................................ (58,814,489) (5,035,162)
------------- -------------
Net cash flows provided by investing activities .. 17,157,956 14,930,762
------------- -------------
Cash flows from financing activities
Cost of ESOP shares released ..................... 978,650 978,650
Proceeds from short-term borrowings .............. 8,095,000 72,503,199
Repayments of short-term borrowings .............. (20,207,500) (77,468,199)
Stock repurchase and retirement .................. (39,334,140) (11,561,483)
Proceeds from exercise of stock options .......... -- 411,035
Dividends paid ................................... (3,547,040) (3,447,740)
------------- -------------
Net cash flows used in financing activities ...... (54,015,030) (18,584,538)
------------- -------------
Net increase/(decrease) in cash and cash
equivalents ...................................... (35,893,260) 31,000,881
Cash and cash equivalents beginning of year ...... 41,737,415 10,736,534
------------- -------------
Cash and cash equivalents end of year ............ $ 5,844,155 $ 41,737,415
============= =============
</TABLE>
<PAGE>
Consolidated Supplemental Data
Selected Quarterly Financial Data
(unaudited)
<TABLE>
<CAPTION>
Year Ended September 30, 1999
---------------------------------------------
December March June September
--------- --------- --------- ---------
(In thousands except per share data)
<S> <C> <C> <C> <C>
Total interest income ............................ $ 18,278 $ 17,686 $ 17,802 $ 17,925
Total interest expense ........................... 9,788 9,461 9,441 9,692
--------- --------- --------- ---------
Net interest income .............................. 8,490 8,225 8,361 8,233
Provision for loan losses ........................ 123 303 243 263
--------- --------- --------- ---------
Net interest income after provision .............. 8,367 7,922 8,118 7,970
Non-interest income .............................. 899 946 827 957
Non-interest expense ............................. 5,075 5,064 5,763 5,284
--------- --------- --------- ---------
Earnings before income taxes ..................... 4,191 3,804 3,182 3,643
Provision for income taxes ....................... 1,737 1,509 1,292 1,127
--------- --------- --------- ---------
Net earnings ..................................... $ 2,454 $ 2,295 $ 1,890 $ 2,516
========= ========= ========= =========
Net earnings per share - basic ................... $ 0.28 $ 0.32 $ 0.27 $ 0.36
========= ========= ========= =========
Net earnings per share - fully diluted ........... $ 0.27 $ 0.31 $ 0.26 $ 0.35
========= ========= ========= =========
<CAPTION>
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 taxes ....................... 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>
<PAGE>
Klamath First Bancorp, Inc.
Corporate Information
Corporate Special Counsel
Headquarters Breyer & Associates PC
540 Main Street 1100 New York Ave. N.W.
Klamath Falls, OR 97601 Suite 700 East
541-882-3444 Washington, DC 20005
www.klamathfirstfederal.com (202)737-7900
Independent Transfer Agent
Auditors Registrar & Transfer Co.
Deloitte & Touche LLP 10 Commerce Drive
3900 U.S. Bancorp Tower Cranford, NJ 07016-3572
111 SW Fifth Avenue (800) 866-1340
Portland, OR 97204-3698
503-222-1341
Corporate Counsel
Craig M. Moore
540 Main Street
Klamath Falls, OR 97601
541-882-3444
Common Stock
Traded over-the-counter/Nasdaq National Market
Nasdaq Symbol: KFBI
Form 10-K Information
A copy of the Form 10-K, as filed with the Securities and Exchange Commission,
will be furnished without charge to shareholders as of the record date for
voting at the annual meeting of shareholders upon written request to:
Marshall Alexander,
Senior Vice President - Chief Financial Officer
Klamath First Bancorp, Inc.
540 Main Street
Klamath Falls, OR 97601
Annual Meeting
The annual meeting of shareholders will be held Wednesday, January 26, 2000
beginning at 2:00 p.m., Pacific Time at:
The Shilo Inn
2500 Almond Street
Klamath Falls, OR 97601.
Shareholders of record as of the close of business on November 29, 1999 shall be
those entitled to notice of and to vote at the meeting.
<PAGE>
EXHIBIT 21
Subsidiary of the Registrant
<PAGE>
Exhibit 21
Subsidiary of Registrant
Percentage Jurisdiction or
Subsidiary (1) Owned State of Incorporation
Klamath First Federal Savings
and Loan Association 100% United States
(1) The operations of the Company's subsidiary are included in the Company's
consolidated financial statements.
<PAGE>
EXHIBIT 23
Independent Auditors' Consent
<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 29, 1999, on the financial statements appearing in the Annual
Report to stockholders of Klamath First Bancorp, Inc. for the year ended
September 30, 1999.
/s/ DELOITTE & TOUCHE LLP
Portland, Oregon
December 28, 1999
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
EXHIBIT 27
Financial Data Schedule
<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-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 21,123,217
<INT-BEARING-DEPOSITS> 1,231,516
<FED-FUNDS-SOLD> 2,167,856
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 231,043,612
<INVESTMENTS-CARRYING> 3,160,432
<INVESTMENTS-MARKET> 3,173,863
<LOANS> 739,793,403
<ALLOWANCE> 2,483,625
<TOTAL-ASSETS> 1,041,641,340
<DEPOSITS> 720,401,112
<SHORT-TERM> 0
<LIABILITIES-OTHER> 14,754,178
<LONG-TERM> 197,000,000
0
0
<COMMON> 79,084
<OTHER-SE> 109,506,379
<TOTAL-LIABILITIES-AND-EQUITY> 1,041,641,340
<INTEREST-LOAN> 56,289,718
<INTEREST-INVEST> 13,735,320
<INTEREST-OTHER> 1,665,802
<INTEREST-TOTAL> 71,690,840
<INTEREST-DEPOSIT> 28,974,568
<INTEREST-EXPENSE> 38,381,606
<INTEREST-INCOME-NET> 33,309,234
<LOAN-LOSSES> 932,000
<SECURITIES-GAINS> 217,180
<EXPENSE-OTHER> 21,074,001
<INCOME-PRETAX> 14,820,596
<INCOME-PRE-EXTRAORDINARY> 14,820,596
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,155,193
<EPS-BASIC> 1.21
<EPS-DILUTED> 1.18
<YIELD-ACTUAL> 2.73
<LOANS-NON> 3,314,641
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,949,677
<CHARGE-OFFS> 398,052
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 2,483,625
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,483,625
</TABLE>
