<PAGE>
EXHIBIT 13
2000 Annual Report to Shareholders
41
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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
66 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 36 offices
in 22 counties throughout Oregon.
TABLE OF CONTENTS
Letter to our Shareholders...................................... 2
Directors and Officers...........................................3
Selected Consolidated Financial Data...........................4-5
Financials....................................................7-36
1
<PAGE>
LETTER TO OUR SHAREHOLDERS
Dear Shareholder:
The first year of the new millennium has been both interesting and challenging
for our company, Klamath First Bancorp, Inc. The effects of rising interest
rates and a slowing economy have adversely impacted the construction and home
buying sales activities in our marketplace which, as you know, have been our
mainstay for quite some time. Consumer fascination with the stock market has
also had a negative impact on the savings and deposit growth at our bank and at
financial institutions across the country.
Several new strategic initiatives were implemented this year to improve the
competitiveness of our company in the commercial and small business lending
areas. One initiative has been expanding our lending activities to include
operating lines of credit and inventory loans for professional and business
operations. In addition, we are pursuing a whole new look in the way we lend
money for residential real estate purchases. Although the cost of taking these
new initiatives may have impacted our earnings in 2000, we are encouraged by the
significant growth in these new lending areas and are confident that we are
heading in the right direction for the long-term growth and profitability of our
company.
The focus of the company has gradually changed from the traditional "single
family" home savings and loan association to a viable competitor as a community
oriented full service financial institution. Part of that transition was the
addition of our new subsidiary, Klamath First Financial Services, which is a
full service brokerage operation that offers a wide range of financial and
investment services.
Also evident of our new direction are the technological advances we are making
in the delivery of our services to our customers. Twenty-four hour telephone
banking has quickly changed the way our customers do their banking. This
service, complemented with expanding our Web site to offer full transaction
access to customer accounts through the Internet, will further enhance our
commitment to providing the latest and most innovative products and services
available today.
Other significant activities during the year included the opening of our fourth
Jackson County branch in Central Point. Additionally, we have purchased property
to further expand our competitive positioning in some very strategic markets.
These activities include a full service office in Redmond, which is presently
under construction, and the purchase of property for a new branch in southwest
Medford. Both of these locations are in major growth areas and we believe that
these branches will add significant value to our franchise.
After 43 years with Klamath First Federal, President and CEO Gerald Brown
retired. An extensive search was undertaken to select a successor to lead the
company into the 21st Century. This has been completed and our new President and
CEO, Kermit Houser, will be in place November 15, 2000.
I am confident that we are laying the foundation to position Klamath First
Federal as the Community Bank in Oregon.
/s/ Rodney N. Murray
Chairman of the Board
Klamath First Bancorp, Inc.
2
<PAGE>
DIRECTORS AND CORPORATE EXECUTIVE OFFICERS
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
William C. Dalton Self employed, and former owner of W. C. Dalton and
Company, farming
J. Gillis Hannigan Retired; Executive Vice President of Modoc Lumber in
Klamath Falls, Oregon, until January 1995
Kermit K. Houser President and Chief Executive Officer of Klamath First
Federal Savings and Loan Association from November 2000
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
CORPORATE EXECUTIVE OFFICERS
Kermit K. Houser joined Klamath First Federal in November 2000 as President and
Chief Executive Officer after a 29 year commercial banking career that included
a variety of West Coast management positions in national, regional and state
chartered banks.
Robert A. Tucker has been with Klamath First Federal Savings and Loan
Association since 1973. He is currently Senior Vice President and Chief Lending
Officer responsible for all lending functions of the Association. In his 27
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 and 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.
ADDITIONAL OFFICERS OF KLAMATH FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION
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
3
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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,
-------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------- ---------- ---------- -------- --------
FINANCIAL CONDITION DATA (In thousands)
<S> <C> <C> <C> <C> <C>
Assets $995,575 $1,041,641 $1,031,302 $980,078 $671,969
Cash and cash equivalents 29,947 24,523 66,985 32,043 16,180
Loans receivable, net 729,037 739,793 668,146 551,825 473,556
Investment securities held to maturity 724 560 2,889 22,937 9,827
Investment securities available for sale 116,628 158,648 203,224 261,846 75,987
Mortgage-backed & related securities held to maturity 2,160 2,601 3,662 5,447 6,783
Mortgage-backed & related securities available for sale 75,331 72,695 43,336 64,869 74,109
Stock in FHLB of Seattle, at cost 11,877 10,957 10,173 7,150 4,774
Advances from FHLB of Seattle 173,000 197,000 167,000 129,000 90,000
Deposit liabilities 695,381 720,401 689,541 673,978 399,673
Shareholders' equity 108,725 109,585 145,081 144,462 153,411
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------- ---------- ---------- -------- --------
SELECTED OPERATING DATA (In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Total interest income $72,158 $71,691 $69,733 $54,167 $45,649
Total interest expense 40,756 38,382 37,848 29,856 23,286
-------- ---------- ---------- -------- --------
Net interest income 31,402 33,309 31,885 24,311 22,363
Provision for loan losses 1,764 932 674 370 120
-------- ---------- ---------- -------- --------
Net interest income after provision for loan losses 29,638 32,377 31,211 23,941 22,243
Non-interest income 4,094 3,629 3,202 810 522
BIF/SAIF Assessment -- -- -- -- 2,473
Non-interest expense 23,773 21,186 19,523 11,764 9,769
-------- ---------- ---------- -------- --------
Earnings before income taxes 9,959 14,820 14,890 12,987 10,523
Provision for income tax 3,533 5,665 5,339 4,429 4,413
-------- ---------- ---------- -------- --------
Net Earnings $6,426 $9,155 $9,551 $8,558 $6,110
======== ========== ========== ======== ========
Basic earnings per share $0.94 $1.21 $1.05 $0.91 $0.56
</TABLE>
4
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<TABLE>
<CAPTION>
At or For the Year Ended September 30,
------------------------------------------------------------------------
2000 1999 1998 1997 1996
------- ------ ------ ----- -------
KEY OPERATING RATIOS
Performance Ratios
Return on average assets
<S> <C> <C> <C> <C> <C>
(net earnings divided by average assets) 0.62% 0.88% 0.96% 1.14% 0.99%
Return on average equity
(net earnings divided by average equity) 5.82% 7.55% 6.52% 5.85% 3.69%
Interest rate spread
(difference between average yield on interest-earning
assets and average cost of interest-bearing liabilities) 2.50% 2.73% 2.57% 2.28% 2.22%
Net interest margin (net interest income as a
percentage of average interest-earning assets) 3.14% 3.37% 3.36% 3.32% 3.65%
Average interest-earning assets to average
interest-bearing liabilities 115.71% 116.47% 119.84% 125.58% 137.78%
Net interest income after provision for loan losses
to total non-interest expenses 124.39% 152.82% 159.87% 203.51% 181.69%
Non-interest expense to average total assets 2.29% 2.05% 1.96% 1.57% 1.99%
Efficiency ratio (non-interest expense divided by
net interest income plus non-interest income) 66.97% 57.36% 55.64% 46.83% 53.49%
Dividend payout ratio (dividends declared per share
divided by net earnings per share) 54.79% 38.98% 34.50% 34.09% 44.64%
Book value per share $16.25 $15.52 $16.30 $15.64 $14.98
Asset Quality Ratios
Allowance for loan losses to total loans at
end of period 0.54% 0.32% 0.28% 0.22% 0.19%
Non-performing assets to total assets 0.16% 0.46% 0.05% 0.03% 0.04%
Non-performing loans to total loans, before net items 0.11% 0.43% 0.07% 0.04% 0.04%
Capital Ratios
Equity to assets ratio 10.92% 10.52% 14.07% 14.74% 22.83%
Tangible capital ratio 10.35% 8.91% 8.26% 11.06% 19.22%
Core capital ratio 10.35% 8.91% 8.26% 11.06% 19.22%
Risk-based capital ratio 20.30% 17.41% 16.13% 23.12% 42.41%
Other Data
Number of
Real estate loans outstanding 8,807 9,297 9,155 8,393 7,704
Deposit accounts 85,706 85,112 82,585 82,032 38,651
Full service offices 35 34 34 32 7
</TABLE>
5
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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"
contained in the 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, 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- bearing assets and the cost of
interest-bearing liabilities in order to maximize the dollar amount of net
interest income. The Company's net earnings are dependent, to a lesser extent,
on the level of its non-interest income, such as service charges and other fees,
and the controlling of its non-interest expense, such as employee compensation
and benefits, occupancy and equipment expense, deposit insurance premiums and
miscellaneous other expenses, as well as federal and state income taxes.
The Association is regulated by the Office of Thrift Supervision ("OTS") and its
deposits are insured up to applicable limits under the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC").
The Association is a member of the Federal Home Loan Bank system. The
Association conducts its business through 35 office facilities and one loan
production office, with the main office located in Klamath Falls, Oregon. The
Association considers its primary market area to be the state of Oregon,
particularly the 22 counties in which the offices are located.
6
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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, 2000 and 1999, the Association's post-1987 reserves amounted to
$3.2 million and $3.8 million, respectively. 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 Company 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 decreases 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.
7
<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 Company continues to originate primarily fixed-rate residential loans. Some
of these loans are sold to Federal National Mortgage Association ("FNMA") 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 interest-bearing liabilities. The Company has taken
several actions to reduce interest rate risk. As part of the interest rate risk
management plan, 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
8
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estate loans. Adjustable-rate borrowings from the FHLB of Seattle were converted
to longer term fixed-rate borrowings. The Company has utilized long-term
borrowings and deposit marketing programs to lengthen the term to repricing of
its liabilities. During 2000, when originations of adjustable-rate mortgage
loans did not meet expectations, the Company accomplished its plan by purchasing
adjustable-rate mortgage-backed securities. 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, 2000 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, 2000
(Dollars in thousands)
Change in NPV Sensitivity
Interest Rates Ratio Measure
(Basis points)
<S> <C> <C>
200 basis point rise 10.79% (352)
100 basis point rise 12.61% (170)
Base Rate Scenario 14.31% --
100 basis point decline 15.20% 89
200 basis point decline 14.81% 50
</TABLE>
The preceding table indicates that at September 30, 2000, 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,
2000, 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, 2000, the Association's one-year cumulative gap was a negative
8.31% of total assets compared to a negative 31.49% of total assets at September
30, 1999.
9
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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,
---------------------------------------
2000 1999 1998
-------- -------- --------
(In thousands)
Earning assets maturing
<S> <C> <C> <C>
or repricing within one year $209,072 $188,286 $220,952
Interest-bearing liabilities
maturing or repricing
within one year 291,681 516,161 552,929
Deficiency of earning assets
over interest-bearing liabilities
as a percent of total assets (8.31%) (31.49%) (32.19%)
Percent of assets to liabilities
maturing or repricing
within one year 71.68% 36.48% 39.96%
</TABLE>
10
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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, 2000. 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 $3,543 $7,237 $14,635 $2,728 $7,228 $220 $-- $-- $35,591
Fixed-rate 3,206 1,406 1,009 1,532 1,045 23,040 90,585 490,064 611,887
Other Mortgage Loans:
Adjustable-rate 907 8,369 5,002 9,869 7,378 -- -- -- 31,525
Fixed-rate 397 113 4,886 4,077 8,040 8,725 5,890 6,953 39,081
Mortgage-Backed and
Related Securities 62,024 784 2,415 4,978 2,004 -- 4,028 1,410 77,643
Non-Real Estate Loans:
Adjustable-rate 9,632 275 1,409 150 16 -- -- -- 11,482
Fixed-rate 811 450 436 1,445 4,845 901 1,304 -- 10,192
Investment Securities 41,651 15,000 23,475 30,379 5,399 2,434 21,662 1,237 141,237
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Rate
Sensitive Assets $122,171 $33,634 $53,267 $55,158 $35,955 $35,320 $123,469 $499,664 $958,638
======== ======== ======== ======== ======== ======== ======== ======== ========
LIABILITIES
Deposits - Fixed
Maturity $85,711 $76,452 $67,095 $82,170 $39,686 $20,929 $605 $100 $372,748
Deposits - Interest
Bearing Checking 476 476 953 6,684 12,041 23,367 22,991 5,197 72,185
Deposits - Money Market 7,915 7,915 15,831 29,351 15,053 25,158 46,582 355 148,160
Deposits - Passbook and
Statement Savings 787 787 1,575 6,478 5,639 11,402 9,772 11,507 47,947
Other Interest Bearing
Liabilities 13,000 7,708 5,000 123,000 35,000 -- -- -- 183,708
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Rate Sensitive
Liabilities $107,889 $93,338 $90,454 $247,683 $107,419 $80,856 $79,950 $17,159 $824,748
======== ======== ======== ======== ======== ======== ======== ======== ========
Interest Rate
Sensitivity Gap $14,282 ($59,704) ($37,187) ($192,525) ($71,464) ($45,536) $43,519 $482,505 $133,890
Cumulative Interest Rate
Sensitivity $14,282 ($45,422) ($82,609) ($275,134) ($346,598) ($392,134) ($348,615) $133,890
Sensitivity Gap to
Total Assets 1.43% (6.00%) (3.74%) (19.34%) (7.18%) (4.57%) 4.37% 48.46%
Cumulative Interest Rate
Sensitivity Gap
to Total Assets 1.43% (4.57%) (8.31%) (27.65%) (34.83%) (39.40%) (35.03%) 13.43%
</TABLE>
11
<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. 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,
2000, the Association's liquidity, as measured for regulatory purposes, was
7.61%. 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 4.0% of
adjusted total assets, and (iii) total risk-based capital equal to 8.0% of
risk-weighted assets. At September 30, 2000, the Association was in compliance
with all regulatory capital requirements effective as of such date, with
tangible, core and risk-based capital of 10.4%, 10.4% and 20.3%, respectively.
(See Note 19 to Consolidated Financial Statements.)
Changes in Financial Condition
At September 30, 2000, the consolidated assets of the Company totaled $995.6
million, a decrease of $46.0 million, or 4.4%, from $1,041.6 million at
September 30, 1999. The decrease in total assets was primarily a result of a
$10.8 million net decrease in loans and a $41.9 million decrease in investment
securities due to sales and maturities.
Total cash and cash equivalents increased $5.4 million, or 22.1%, from $24.5
million at September 30, 1999 to $29.9 million at September 30, 2000. The
increase is primarily the result of investing the proceeds of investment
securities maturities in Federal funds.
Net loans receivable decreased by $10.8 million, or 1.5%, to $729.0 million at
September 30, 2000, compared to $739.8 million at September 30, 1999. The
decrease was primarily the result of reduced loan demand causing loan repayments
to exceed loan originations.
Investment securities decreased $41.8 million, or 26.3%, from $159.2 million at
September 30, 1999 to $117.4 million at September 30, 2000. This decrease was
the result of $33.7 million in scheduled maturities and sale of $10.1 million of
investment securities available for sale. The proceeds from the sale and
maturities were invested in Federal funds and used to reduce borrowings. During
the year ended September 30, 2000, $27.3 million of principal payments were
received on mortgage backed and related securities ("MBS") thus reducing the
balance of MBS. This reduction was more than offset by the purchase of $29.4
12
<PAGE>
million in MBS, resulting in a net increase in total MBS from $75.3 million at
September 30, 1999 to $77.5 million at September 30, 2000.
Real estate owned decreased from $1.5 million at September 30, 1999 to $788,400
at September 30, 2000. The balance at September 30, 1999 consisted primarily of
a motel property which was sold during the year ended September 30, 2000. The
balance at September 30, 2000 consists of four single family residences that
were previously construction loans.
Deposit liabilities decreased $25.0 million, or 3.5%, from $720.4 million at
September 30, 1999 to $695.4 million at September 30, 2000. The decrease is
primarily related to certificates of deposit and reflects the Company's strategy
to rely on FHLB of Seattle borrowed funds which could be acquired at lower rates
than deposits with corresponding terms. This approach controls interest expense
as well as managing scheduled liability maturities.
Advances from the FHLB of Seattle decreased from $197.0 million at September 30,
1999 to $173.0 million at September 30, 2000. Proceeds from maturities of
investment securities were used to reduce borrowings during the fourth quarter
of 2000.
Total shareholders' equity decreased $860,902 from $109.6 million at September
30, 1999 to $108.7 million at September 30, 2000. The decrease is the combined
effect of $6.3 million paid for stock repurchases and $3.6 million in dividends
paid on common shares offset by net earnings for the year.
Asset Quality
Non-Performing Assets
At September 30, 2000, 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 0.16%, down from 0.46% at
September 30, 1999. The decrease is primarily due to the sale of a significant
property from real estate owned and payoff of a $1.5 million land loan that was
accounted for on a nonaccrual basis 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 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.
Allowance for Loan Losses
The Association has established a systematic methodology for determination of
provisions for loan losses. The methodology is set forth in a formal policy and
takes into consideration the need for an overall general valuation allowance as
well as specific allowances that are tied to individual loans. Provision for
loan losses is recorded based on the Association's evaluation of specific loans
in its portfolio, historical loan loss experience, the volume and type of
lending, geographic distribution of lending, general economic conditions, and
the existing level of the Association's allowance for loan losses.
The following table sets forth at the dates indicated the loan loss allowance,
charge-offs, and recoveries:
<TABLE>
<CAPTION>
At or For the Year Ended September 30,
-----------------------------------------
2000 1999 1998
------- ------ ------
(In thousands)
<S> <C> <C> <C>
General loan loss allowance $4,062 $2,484 $1,947
Specific loss allowance 20 -- 3
Charge-offs 607 398 20
Recoveries 441 -- --
</TABLE>
13
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 2000
AND 1999
General
The higher interest rate environment, the inverted yield curve, and low loan
volume had an adverse effect on earnings, primarily by lowering loan demand
throughout the Company's statewide market. This past fiscal year, the Company
operated in an economy that began with rising rates and a flat yield curve,
where there was very little difference between short term and long term rates,
compared to the inverted yield curve at the end of the year wherein short term
rates were higher than long term rates. Since most of the Company's deposit
products are priced to the short end of the maturity curve and loans are priced
to the longer end of the maturity curve, interest rate spread was reduced.
Additionally, retirement of the Company's President and Chief Executive Officer
resulted in one-time charges to expense. Net earnings decreased by $2.8 million,
or 29.8% from $9.2 million for the year ended September 30, 1999 to $6.4 million
for the year ended September 30, 2000.
Interest Income
Interest income increased slightly from $71.7 million for the year ended
September 30, 1999 to $72.2 million for the year ended September 30, 2000. The
general interest rate environment during the year showed movement toward an
inverted yield curve. Thus, yield on loans, which are long term, decreased while
yield on investment securities and MBS increased for the year. The combined
result of these movements is reflected in the average yield on interest earning
assets which decreased slightly from 7.25% for the year ended September 30, 1999
to 7.22% for the year ended September 30, 2000.
While average loans receivable increased $26.2 million, the yield on loans
decreased 16 basis points, contributing to the modest $843,704 increase in
interest income on loans. Purchases of MBS boosted interest income on MBS by
$2.9 million. This increase was offset by a $2.1 million decrease in interest
income on investment securities. The average balance of investments decreased by
$38.9 million, or 21.1%, for the year ended September 30, 2000 compared with the
same period in 1999.
Interest Expense
Interest expense increased $2.4 million due to increases in interest expense on
FHLB borrowings. Interest expense on deposits remained stable at $28.4 million
for the year ended September 30, 2000 compared to $29.0 million for the year
ended September 30, 1999.
Average deposits decreased by $16.4 million for the year ended September 30,
2000 compared to the year ended September 30, 1999 while the average interest
paid on interest-bearing deposits increased slightly from 4.34% for the year
ended September 30, 1999 to 4.36% for the year ended September 30,2000. Interest
expense on FHLB borrowings increased $3.1 million due to increased average
borrowings of $31.7 million.
As noted previously, the general interest rate environment during the year was
represented by an inverted yield curve. The impact of this environment is
evident in the decrease in interest rate spread from 2.73% for the year ended
September 30, 1999 to 2.50% for the year ended September 30, 2000. While yields
on assets decreased by 3 basis points, cost of interest bearing liabilities
increased by 20 basis points, resulting in a lower spread for the current year.
Net interest margin (net interest income as a percent of average
interest-earning assets) also decreased from 3.37% for the fiscal year ended
September 30, 1999 to 3.14% for the year ended September 30, 2000.
14
<PAGE>
AVERAGE BALANCES, NET INTEREST INCOME and YIELDS EARNED and RATES PAID
The following table presents, for the periods indicated, information regarding
average balances of 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.
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------ ------------------------------ ------------------------------
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 $747,842 $57,134 7.64% $721,658 $56,290 7.80% $614,457 $49,508 8.06%
Mortgage backed and
related securities 85,874 5,036 5.86% 38,284 2,104 5.50% 61,000 3,680 6.03%
Investment securities 145,504 8,737 6.00% 184,428 10,847 5.88% 233,715 14,149 6.05%
Federal funds sold 3,224 180 5.59% 18,555 914 4.93% 16,820 917 5.45%
Interest earning deposits 5,552 312 5.63% 15,801 751 4.75% 16,108 862 5.35%
FHLB stock 11,345 759 6.69% 10,471 785 7.50% 7,983 617 7.73%
--------- ------- -------- ------- -------- -------
Total interest-earning assets 999,341 72,158 7.22% 989,197 71,691 7.25% 950,083 69,733 7.34%
Non-interest-earning assets 40,566 45,314 48,202
--------- -------- -------- -------- -------- --------
Total Assets $1,039,907 $1,034,511 $998,285
========== ========== ========
INTEREST-BEARING LIABILITIES
Tax and insurance reserve $4,401 $ 89 2.02% $5,326 $110 2.07% $5,895 $145 2.47%
Passbook and statement
savings 53,890 959 1.78% 61,674 1,326 2.15% 62,333 1,683 2.70%
Interest-bearing checking 69,831 779 1.12% 71,107 873 1.23% 73,806 1,089 1.48%
Money market 149,088 6,218 4.17% 131,534 5,096 3.87% 110,650 4,275 3.86%
Certificates of deposit 377,934 20,408 5.40% 402,809 21,679 5.38% 384,400 21,885 5.69%
FHLB advances/Short term
borrowings 208,508 12,303 5.90% 176,851 9,298 5.26% 155,712 8,771 5.63%
--------- ------ ------- ------ -------- ------
Total interest-bearing
liabilities 863,652 40,756 4.72% 849,301 38,382 4.52% 792,796 37,848 4.77%
Non-interest-bearing
liabilities 65,762 63,975 59,037
--------- -------- -------- -------- -------- --------
Total liabilities 929,414 913,276 851,833
Shareholders' equity 110,493 121,235 146,452
--------- ------- -------
Total Liabilities and
Shareholders' Equity $1,039,907 $1,034,511 $998,285
========== ------- ========== ------- ======== -------
Net interest income $31,402 $33,309 $31,885
======= ======= =======
Interest rate spread 2.50% 2.73% 2.57%
==== ==== ====
Net interest margin 3.14% 3.37% 3.36%
==== ==== ====
Average interest-earning assets to
average interest-bearing liabilities 115.71% 116.47% 119.84%
====== ====== ======
</TABLE>
15
<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,
--------------------------------------------------------------------------------------
1999 vs. 2000 Increase (Decrease) Due To 1998 vs. 1999 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 ............................. ($1,156) $ 2,042 ($ 42) $ 844 ($1,580) $ 8,637 ($ 275) $ 6,782
Mortgage backed and
related securities .............. 141 2,615 176 2,932 (328) (1,370) 122 (1,576)
Investment securities ............. 227 (2,289) (48) (2,110) (403) (2,984) 85 (3,302)
Federal funds sold ................ 122 (755) (101) (734) (88) 95 (10) (3)
Interest bearing deposits ......... 137 (487) (89) (439) (96) (16) 1 (111)
FHLB stock ........................ (85) 66 (7) (26) (19) 192 (5) 168
------- ------- ------- ------- ------- ------- ------- -------
Total Interest-Earning Assets ..... ($ 614) $ 1,192 ($ 111) $ 467 ($2,514) $ 4,554 ($ 82) $ 1,958
======= ======= ======= ======= ======= ======= ======= =======
INTEREST BEARING LIABILITIES
Tax and insurance reserves ........ ($ 2) ($ 19) $-- ($ 21) ($ 23) ($ 14) $ 2 ($ 35)
Savings ........................... (228) (167) 28 (367) (343) (18) 4 (357)
Interest bearing checking ......... (80) (16) 2 (94) (183) (40) 7 (216)
Money market ...................... 390 680 52 1,122 12 807 2 821
Certificates of deposit ........... 72 (1,339) (4) (1,271) (1,197) 1,048 (57) (206)
FHLB advances/Short term borrowings 1,137 1,664 204 3,005 (584) 1,191 (80) 527
----------------------------------- ------- ------- ------- ------- ------- ------- ------- -------
Total Interest-Bearing Liabilities $ 1,289 $ 803 $ 282 $ 2,374 ($2,318) $ 2,974 ($ 122) $ 534
======= ======= ======= ======= ======= ======= ======= =======
Increase (Decrease) in Net Interest ($1,907) $ 1,424
Income ======= =======
</TABLE>
16
<PAGE>
Provision for Loan Losses
The provision for loan losses was $1.8 million, recoveries were $441,639, and
charge offs were $606,999 during the year ended September 30, 2000 compared to a
provision for loan losses of $932,000, with no recoveries, and charge offs of
$398,052 during the year ended September 30, 1999. Charge offs during the year
ended September 30, 2000 primarily related to write downs on commercial real
estate. The related loans were paid off or the properties were sold during
fiscal year 2000. Charge offs for the year ended September 30, 1999 primarily
related to the write-down of a $1.6 million commercial real estate loan. The
underlying property was acquired through foreclosure in September 1999 and was
sold in September 2000.
Over the last 12 months, the composition of the loan portfolio has changed, with
increases in commercial and consumer loans, which are considered to have more
associated credit 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. Based
on changes in the composition of the loan portfolio and concerns about an
economic slow down in Oregon, the Company made the decision to increase the
allowance for loan losses during the year ended September 30, 2000. 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. At September 30, 1999, the allowance for loan
losses was equal to 51.6% of non-performing assets compared to 251.5% at
September 30, 2000. The increase in the coverage ratio at year end 2000 was the
result of a decrease in non-performing assets as a result of the payoff of a
nonperforming land development loan and the sale of a significant commercial
real estate property held as real estate owned at September 30, 1999.
Non-Interest Income
Non-interest income increased $465,056 or 12.8% to $4.1 million for the year
ended September 30, 2000 from $3.6 million for the year ended September 30,
1999. During the fourth quarter of 1999, the Company established a retail
investment subsidiary. This business activity added $164,025 to other
non-interest income during the year ended September 30, 2000.
Non-Interest Expense
Non-interest expense increased $2.6 million, or 12.2%, from a total of $21.2
million for the prior year to $23.8 million for the year ended September 30,
2000. Compensation, employee benefits, and related expense increased $1.8
million, or17.9%, from $10.1 million for the year ended September 30, 1999 to
$11.9 million for the same period of 2000. Of this increase, $570,000 relates to
severance accruals associated with the retirement of the Company's President and
Chief Executive Officer. The remaining increase in compensation expense is a
function of a routine accounting procedure wherein a portion of compensation
expense is allocated to the cost of originating loans and such cost is deferred
and taken to expense over the life of the loans. Because the number of loan
originations decreased significantly for the year ended September 30, 2000
compared to the previous year, less compensation cost was allocated to loan
originations and deferred, resulting in an increase in compensation expense.
Other expense increased $833,733, or 14.21%, from $5.9 million for the year
ended September 30, 1999 to $6.7 million for the current year. Of this increase,
$466,173 relates to expenses associated with foreclosure and disposition of real
estate owned and $248,945 relates to professional service fees for recruitment
of executives and the hiring of a consulting firm for an operational efficiency
project. The ratio of non-interest expense to average total assets was 2.29% and
2.05% for the years ended September 30, 2000 and1999, respectively.
17
<PAGE>
Income Taxes
The provision for income taxes was $3.5 million for the year ended September 30,
2000, representing an effective tax rate of 35.5% compared with $5.7 million for
the year ended September 30, 1999 representing an effective tax rate of 38.2%.
The lower effective rate for 2000 reflects the impact of increased income on
tax-exempt municipal securities. (See Note 11 to the Consolidated Financial
Statements.)
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" (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.
18
<PAGE>
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 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.
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
participation loan. The underlying property was acquired through foreclosure in
September 1999.
As the Company grew during fiscal 1999, the composition of the loan portfolio
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 reflected such changes in the composition of the loan portfolio,
although the Company's recent experience had not indicated a deterioration in
loan quality. The balance of non-performing loans had increased during fiscal
year 1999, primarily as a result of the addition of a $1.5 million land
development loan which was paid off in fiscal 2000. At September 30, 1998, the
allowance for loan losses was equal to 372.1% of non-performing assets compared
to 51.6% 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
19
<PAGE>
million for the year ended September 30, 1998 to $2.2 million for the year ended
September 30, 1999. These modest increases were 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 year ended September
30, 1999. The increase primarily resulted from recognition of $515,000 of losses
in the third quarter of 1999 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.
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.)
20
<PAGE>
COMMON STOCK INFORMATION
Since October 4, 1995, the Company'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, 2000, there were approximately
1,386 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,
------------------------------------------
2000 1999
------------------ ------------------
High Low High Low
------ ------ ------ ------
<S> <C> <C> <C> <C>
First quarter $13.13 $11.38 $19.38 $16.00
Second quarter 11.81 10.31 19.00 15.00
Third quarter 12.00 9.75 17.00 14.63
Fourth quarter 13.44 11.00 15.06 12.63
</TABLE>
The cash dividends declared by quarter were as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------
2000 1999
------- ------
<S> <C> <C>
First quarter $0.125 $0.095
Second quarter 0.130 0.120
Third quarter 0.130 0.120
Fourth quarter 0.130 0.125
</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.
21
<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, 2000 and
1999, and the related consolidated statements of earnings, shareholders' equity,
and cash flows for each of the three years in the period ended September 30,
2000. 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 auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Klamath First Bancorp, Inc. and
Subsidiary as of September 30, 2000 and 1999 and the results of their operations
and their cash flows for each of the three years in the period ended September
30, 2000, in conformity with accounting principles generally accepted in the
United States of America.
\s\ Deloitte & Touche LLP
Portland, Oregon
October 27, 2000
22
<PAGE>
<TABLE>
<CAPTION>
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, 2000 September 30, 1999
ASSETS ------------------ ------------------
<S> <C> <C>
Cash and due from banks ................................................. $ 19,998,788 $ 21,123,217
Interest bearing deposits with banks .................................... 2,077,359 1,231,516
Federal funds sold and securities
purchased under agreements to resell .................................. 7,870,453 2,167,856
--------------- ---------------
Total cash and cash equivalents ...................................... 29,946,600 24,522,589
Investment securities available for sale, at fair value
(amortized cost: $118,689,247 and $161,112,272) ....................... 116,627,756 158,648,057
Investment securities held to maturity, at amortized cost (fair
value: $726,889 and $577,455) ......................................... 723,838 559,512
Mortgage backed and related securities available for sale, at fair
value (amortized cost: $75,483,569 and $73,075,553) ................... 75,331,311 72,695,555
Mortgage backed and related securities held to maturity, at amortized
cost (fair value: $2,145,918 and $2,596,408) .......................... 2,159,868 2,600,920
Loans receivable, net ................................................... 729,036,847 739,793,403
Real estate owned and repossessed assets ................................ 788,400 1,494,890
Premises and equipment, net ............................................. 12,727,570 11,581,923
Stock in Federal Home Loan Bank of Seattle, at cost ..................... 11,876,500 10,957,300
Accrued interest receivable ............................................. 6,432,073 7,153,818
Deferred federal and state income taxes ................................. 230,893 --
Core deposit intangible ................................................. 8,125,664 9,778,341
Other assets ............................................................ 1,567,318 1,855,032
--------------- ---------------
Total assets ......................................................... $ 995,574,638 $ 1,041,641,340
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposit liabilities ................................................... $ 695,380,871 $ 720,401,112
Accrued interest on deposit liabilities ............................... 1,185,076 1,184,471
Advances from borrowers for taxes and insurance ....................... 9,653,376 9,758,627
Advances from Federal Home Loan Bank of Seattle ....................... 173,000,000 197,000,000
Short term borrowings ................................................. 3,000,000 --
Accrued interest on borrowings ........................................ 857,163 34,484
Pension liabilities ................................................... 887,896 833,644
Deferred federal and state income taxes ............................... -- 579,727
Other liabilities ..................................................... 2,885,695 2,263,812
--------------- ---------------
Total liabilities ................................................... 886,850,077 932,055,877
--------------- ---------------
Commitments and contingent liabilities
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, 2000 - 7,366,226 issued, 6,692,428 outstanding
September 30, 1999 - 7,908,377 issued, 7,062,092 outstanding ......... 73,662 79,084
Additional paid-in capital ............................................ 37,701,796 43,794,535
Retained earnings-substantially restricted ............................ 79,713,255 76,866,452
Unearned shares issued to ESOP ........................................ (4,893,250) (5,871,900)
Unearned shares issued to MRDP ........................................ (2,498,378) (3,519,296)
Accumulated other comprehensive loss .................................. (1,372,524) (1,763,412)
--------------- ---------------
Total shareholders' equity .......................................... 108,724,561 109,585,463
--------------- ---------------
Total liabilities and shareholders' equity .......................... $ 995,574,638 $ 1,041,641,340
=============== ===============
</TABLE>
See notes to consolidated financial statements.
23
<PAGE>
<TABLE>
<CAPTION>
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
2000 1999 1998
-------------- -------------- --------------
INTEREST INCOME
<S> <C> <C> <C>
Loans receivable $57,133,422 $56,289,718 $49,508,126
Mortgage backed and related securities 5,035,957 2,103,881 3,679,740
Investment securities 9,495,804 11,631,439 14,766,471
Federal funds sold and securities purchased under
agreements to resell 180,253 914,584 916,847
Interest bearing deposits 312,293 751,218 862,086
-------------- -------------- --------------
Total interest income 72,157,729 71,690,840 69,733,270
-------------- -------------- --------------
INTEREST EXPENSE
Deposit liabilities 28,363,916 28,974,568 28,931,749
Advances from FHLB of Seattle 12,184,341 9,121,190 7,921,570
Other 207,963 285,848 995,032
-------------- -------------- --------------
Total interest expense 40,756,220 38,381,606 37,848,351
-------------- -------------- --------------
Net interest income 31,401,509 33,309,234 31,884,919
Provision for loan losses 1,764,000 932,000 674,000
-------------- -------------- --------------
Net interest income after provision for
loan losses 29,637,509 32,377,234 31,210,919
-------------- -------------- --------------
NON-INTEREST INCOME
Fees and service charges 3,212,434 2,935,700 2,410,239
Gain on sale of investments 6,836 329,435 440,750
Gain on sale of real estate owned 154,661 29,266 --
Other income 720,743 335,217 351,365
-------------- -------------- --------------
Total non-interest income 4,094,674 3,629,618 3,202,354
-------------- -------------- --------------
NON-INTEREST EXPENSE
Compensation, employee benefits and related expense 11,898,041 10,096,000 9,616,323
Occupancy expense 2,413,316 2,221,900 2,091,830
Data processing expense 913,531 915,434 963,475
Insurance premium expense 186,557 295,950 289,592
Loss on sale of investments -- 112,255 --
Loss on sale of real estate owned 7,863 24,885 --
Amortization of core deposit intangible 1,652,677 1,652,677 1,652,677
Other expense 6,700,888 5,867,155 4,908,907
-------------- -------------- --------------
Total non-interest expense 23,772,873 21,186,256 19,522,804
-------------- -------------- --------------
Earnings before income taxes 9,959,310 14,820,596 14,890,469
Provision for income taxes 3,533,158 5,665,403 5,339,432
-------------- -------------- --------------
Net earnings $6,426,152 $9,155,193 $9,551,037
============== ============== ==============
Earnings per common share - basic $0.94 $1.21 $1.05
Earnings per common share - fully diluted $0.94 $1.18 $1.00
Weighted average common shares outstanding - basic 6,822,025 7,564,415 9,115,404
Weighted average common shares outstanding - with dilution 6,822,025 7,748,527 9,521,249
</TABLE>
See notes to consolidated financial statements.
24
<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, 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 reclassif-
ication adjustment (1) 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
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 reclassif-
ication adjustment (2) (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
</TABLE>
25
<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 ......... -- -- -- (3,579,349) -- -- -- (3,579,349)
Stock repurchased
and retired ....... (542,151) (5,422) (6,249,273) -- -- -- -- (6,254,695)
ESOP contribution ...... 97,865 -- 142,826 -- 978,650 -- -- 1,121,476
MRDP contribution ...... 74,622 -- 13,708 -- -- 1,020,918 -- 1,034,626
----------- --------- ------------ ----------- ---------- ------------ ------------- -------------
6,692,428 73,662 37,701,796 73,287,103 (4,893,250) (2,498,378) (1,763,412) 101,907,521
Comprehensive income
Net earnings 6,426,152 6,426,152
Other comprehensive
income:
Unrealized gain on
securities, net of
tax and reclassif-
ication adjustment (3) 390,888 390,888
-------------
Total comprehensive
income 6,817,040
----------- --------- ------------ ----------- ---------- ------------ ------------- -------------
Balance at
September 30, 2000 ..... 6,692,428 $73,662 $37,701,796 $79,713,255 ($4,893,250) ($2,498,378) ($1,372,524) $108,724,561
=========== ========= ============ =========== ========== ============ ============= =============
<FN>
(1) Net unrealized holding gain on securities of $2,429,643 (net of $1,451,061 tax expense) less reclassification adjustment for net
gains included in net earnings of $62,123 (net of $38,075 tax expense)
(2) Net unrealized holding loss on securities of $4,332,997 (net of $2,816,282 tax benefit) less reclassification adjustment
for net gains included in net earnings of $261,989 (net of $160,574 tax expense)
(3) Net unrealized holding gain on securities of $440,870 (net of $270,211 tax expense) less reclassification adjustment
for net gains included in net earnings of $49,982 (net of $30,634 tax expense)
</FN>
</TABLE>
See notes to consolidated financial statements.
26
<PAGE>
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
2000 1999 1998
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net earnings ................................................ $ 6,426,152 $ 9,155,193 $ 9,551,037
ADJUSTMENTS TO RECONCILE NET EARNINGS TO
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Depreciation and amortization ............................... 2,927,853 2,896,271 2,815,615
Provision for deferred taxes ................................ (1,050,197) (259,935) 293,310
Provision for loan losses ................................... 1,764,000 932,000 674,000
Provision for losses on real estate owned ................... 120,000 -- --
Compensation expense related to ESOP benefit ................ 1,121,476 1,580,937 2,008,516
Compensation expense related to MRDP Trust .................. 1,034,626 1,037,690 1,086,475
Net amortization of premiums paid on
investment and mortgage backed and related securities ..... 266,018 134,979 21,994
Increase(decrease) in deferred loan fees, net of amortization (547,429) 367,781 1,262,418
Net (gain) loss on sale of real estate owned and
premises and equipment .................................... (177,493) (4,381) 3,196
Net gain on sale of investment and mortgage
backed and related securities ............................. (6,836) (217,179) (440,750)
FHLB stock dividend ......................................... (758,300) (784,400) (617,000)
CHANGES IN ASSETS AND LIABILITIES
Accrued interest receivable ................................. 721,745 317,899 154,447
Other assets ................................................ 127,714 (377,868) (218,359)
Accrued interest on deposit liabilities ..................... 605 (107,313) 76,039
Accrued interest on borrowings .............................. 822,679 (179,473) (298,759)
Pension liabilities ......................................... 54,252 54,252 52,252
Other liabilities ........................................... 984,855 264,936 131,341
------------- ------------- -------------
Net cash provided by operating activities ....................... 13,831,720 14,811,389 16,555,772
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of investment securities
held to maturity .......................................... 290,000 82,455,000 20,150,000
Proceeds from maturity of investment securities
available for sale ........................................ 33,360,000 48,572,000 104,180,000
Principal repayments received on mortgage
backed and related securities held to maturity ........... 434,252 1,044,871 1,755,918
Principal repayments received on mortgage
backed and related securities available for sale ......... 26,859,810 15,311,695 24,664,174
Principal repayments received on loans ...................... 99,031,327 159,160,842 122,009,359
Loan originations ........................................... (97,246,615) (224,193,434) (232,474,655)
Loans purchased ............................................. (507,600) (15,500,495) (7,792,061)
Loans sold .................................................. 6,315,261 5,584,065 --
Purchase of investment securities held
to maturity ............................................... (457,000) (79,711,523) --
Purchase of investment securities available
for sale .................................................. (1,110,000) (22,147,855) (60,366,913)
Purchase of mortgage backed and related
securities available for sale ............................. (29,396,069) (55,536,014) (13,202,490)
Purchase of FHLB stock ...................................... (160,900) -- (2,405,500)
Proceeds from sale of investment securities
available for sale ........................................ 10,051,563 11,834,420 19,388,451
Proceeds from sale of mortgage backed and related
securities available for sale ............................. -- 9,454,776 9,656,938
Proceeds from sale of real estate owned and
premises and equipment .................................... 2,722,397 514,710 --
Purchases of premises and equipment ......................... (2,271,628) (321,050) (1,682,477)
------------- ------------- -------------
Net cash provided by (used in) investing activities ............. 47,914,798 (63,477,992) (16,119,256)
------------- ------------- -------------
</TABLE>
27
<PAGE>
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
2000 1999 1998
--------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
<S> <C> <C> <C>
Net increase(decrease) in deposit liabilities ............... ($ 25,020,241) $ 30,859,767 $ 15,563,444
Proceeds from FHLB advances ................................. 614,650,000 160,000,000 179,000,000
Repayments of FHLB advances ................................. (638,650,000) (130,000,000) (141,000,000)
Proceeds from short term borrowings ......................... 3,700,000 8,595,000 88,343,199
Repayments of short term borrowings ......................... (700,000) (20,707,500) (93,308,199)
Stock repurchase and retirement ............................ (6,254,695) (39,334,140) (11,561,483)
Proceeds from exercise of stock options ..................... -- -- 411,035
Advances from borrowers for taxes and insurance ............. (105,251) 337,836 505,305
Dividends paid .............................................. (3,942,320) (3,547,040) (3,447,744)
------------- ------------- -------------
Net cash provided by (used in) financing activities ............ (56,322,507) 6,203,923 34,505,557
------------- ------------- -------------
Net (decrease) increase in cash and cash
equivalents ................................................... 5,424,011 (42,462,680) 34,942,073
Cash and cash equivalents at beginning
of year ....................................................... 24,522,589 66,985,269 32,043,196
------------- ------------- -------------
Cash and cash equivalents at end of year ........................ $ 29,946,600 $ 24,522,589 $ 66,985,269
============= ============= =============
SUPPLEMENTAL SCHEDULE OF INTEREST AND
INCOME
TAXES PAID
Interest paid ............................................... $ 39,932,938 $ 38,668,392 $ 38,071,070
Income taxes paid ........................................... 4,745,000 5,866,000 5,808,299
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES
Net unrealized gain (loss) on securities
available for sale, net of tax ............................ $ 390,888 ($ 4,594,986) $ 2,367,520
Dividends declared and accrued in other
liabilities ............................................... 957,609 988,547 892,509
Loans transferred to real estate owned ....................... 2,291,059 2,002,219 --
Write down of real estate owned .............................. 343,450 -- --
</TABLE>
See notes to consolidated financial statements.
28
<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 subsidiaries, Klamath First Financial Services and Pacific
Cascades Financial, Inc. 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 accounting principles
generally accepted in the United States of America requires management to make
assumptions. These assumptions result in estimates that affect the reported
amounts of 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.
29
<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 acquiring and 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.
30
<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.
The Company accounts for mortgage servicing rights in accordance with 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 using 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.
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 five 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 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
31
<PAGE>
value based method, compensation cost for stock options is measured as the
excess, if any, of the quoted market price of stock at grant date over the
amount an employee must pay to acquire the stock. Stock options granted by the
Company have no intrinsic value at the grant date and, under APB No. 25, there
is no compensation expense to be recorded.
SFAS No. 123, 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 accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. 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. SFAS No.
133 was also amended by SFAS No 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities. 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 $801,000 and $3.0 million at
September 30, 2000 and 1999, respectively, and was met by holding cash and
maintaining an average balance with the Federal Reserve Bank in excess of this
amount.
32
<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, 2000
-------------------------------------------------------
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 ...... $ 24,003,818 $-- $ 67,408 $ 23,936,410
Maturing after one year through
five years ................... 25,185,824 -- 336,629 24,849,195
State and municipal obligations
Maturing within one year ...... 425,353 1,407 -- 426,760
Maturing after one year through
five years ................... 585,742 -- 14,888 570,854
Maturing after five years through
ten years .................... 397,752 -- 15,988 381,764
Maturing after ten years ...... 24,191,641 79,483 707,211 23,563,913
Corporate obligations
Maturing within one year ...... 14,045,495 -- 58,538 13,986,957
Maturing after one year through
five years ................... 10,026,335 -- 216,032 9,810,303
Maturing after ten years ...... 19,827,287 -- 725,687 19,101,600
------------ ------------ ------------ ------------
$118,689,247 $ 80,890 $ 2,142,381 $116,627,756
============ ============ ============ ============
</TABLE>
<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
============ ============ ============ ============
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
September 30, 2000
---------------------------------------------------------
Amortized Gross Unrealized Fair
cost Gains Losses value
------------ ------------ ---------- ------------
INVESTMENT SECURITIES HELD-TO-MATURITY
State and municipal obligations
Maturing after one year through
<S> <C> <C> <C> <C>
five years ................... $ 266,838 $ 3,051 $-- $ 269,889
Other obligations
Maturing after ten years ..... 457,000 -- -- 457,000
------------ ------------ ------------ ------------
$ 723,838 $ 3,051 $-- $ 726,889
============ ============ ============ ============
</TABLE>
<TABLE>
<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>
34
<PAGE>
<TABLE>
<CAPTION>
MORTGAGE-BACKED AND RELATED SECURITIES
September 30, 2000
---------------------------------------------------------
Amortized Gross Unrealized Fair
cost Gains Losses value
------------ ---------- ---------- ------------
MORTGAGE-BACKED AND RELATED SECURITIES AVAILABLE-FOR-SALE
FNMA maturing after one year
<S> <C> <C> <C> <C>
through five years ........... $ 2,004,350 $-- $ 26,164 $ 1,978,186
CMO's maturing after one year
through five years ............ 4,977,970 -- 57,870 4,920,100
FNMA maturing after ten years ... 11,494,099 125,826 423 11,619,502
FHLMC maturing after ten years .. 32,902,232 390,912 10,707 33,282,437
GNMA maturing after ten years ... 10,727,693 -- 46,770 10,680,923
CMO's maturing after ten years . 13,377,225 -- 527,062 12,850,163
------------ ------------ ------------ ------------
$ 75,483,569 $ 516,738 $ 668,996 $ 75,331,311
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
September 30, 1999
---------------------------------------------------------
Amortized Gross Unrealized Fair
cost Gains Losses value
------------ ------------ ------------ ------------
MORTGAGE-BACKED AND RELATED SECURITIES AVAILABLE-FOR-SALE
FNMA maturing after one year
<S> <C> <C> <C> <C>
through five 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
============ ============ ============ ============
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
September 30, 2000
---------------------------------------------------------
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 ... $ 2,159,868 $ 31 $ 13,981 $ 2,145,918
============ ============ ============ ============
</TABLE>
<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
============ ============ ============ ============
</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.
36
<PAGE>
At September 30, 2000 and 1999, the Company pledged securities totaling $50.4
million and $35.6 million, respectively, to secure certain public deposits and
for other purposes as required or permitted by law.
The Company has also pledged securities of $2.1 million and zero to secure short
term borrowings at September 30, 2000 and 1999, respectively. (See Note 10.)
(4) Loans receivable
<TABLE>
<CAPTION>
September 30,
------------------------------
2000 1999
------------- -------------
Real estate loans
<S> <C> <C>
Permanent residential 1-4 family ....... $ 639,165,006 $ 647,130,329
Multi-family residential ............... 19,015,537 18,411,762
Construction ........................... 25,288,607 53,219,452
Commercial ............................. 42,276,796 37,078,809
Land ................................... 3,394,070 2,064,037
------------- -------------
Total real estate loans ............. 729,140,016 757,904,389
------------- -------------
Non-real estate loans
Savings account ........................ 1,956,817 1,800,234
Home improvement and home equity ....... 8,338,029 6,725,721
Other .................................. 11,474,207 8,010,808
------------- -------------
Total non-real estate loans ......... 21,769,053 16,536,763
------------- -------------
Total loans ......................... 750,909,069 774,441,152
Less
Undisbursed portion of loans ........... 10,349,686 24,176,425
Deferred loan fees ..................... 7,440,271 7,987,699
Allowance for loan losses .............. 4,082,265 2,483,625
------------- -------------
$ 729,036,847 $ 739,793,403
============= =============
</TABLE>
The weighted average interest rate on loans at September 30, 2000 and 1999 was
7.56% and 7.47%, respectively.
Included in loans receivable are $199,935 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 $8.8 million and $10.9
million at September 30, 2000 and 1999, respectively.
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------
2000 1999 1998
------------- ------------- -------------
<S> <C> <C> <C>
Balance, beginning of year ............ $ 2,483,625 $ 1,949,677 $ 1,296,451
Charge offs ........................... (606,999) (398,052) (20,774)
Recoveries ............................ 441,639 -- --
Additions ............................. 1,764,000 932,000 674,000
------------- ------------- -------------
Balance, end of year .................. $ 4,082,265 $ 2,483,625 $ 1,949,677
============= ============= =============
</TABLE>
Impaired loans at September 30, 2000 totaled $171,254. Specifically allocated
loan loss reserves related to these loans totaled $19,500. The average
investment in impaired loans for the year ended September 30, 2000 was $582,811.
There were no impaired loans at September 30, 1999 or during the year then
ended.
37
<PAGE>
(5) Premises and Equipment
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
September 30,
------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Land ..................................... $ 2,828,648 $ 2,476,807
Office buildings and construction in progress 11,033,130 10,470,855
Furniture, fixtures and equipment ........ 5,137,130 4,464,622
Automobiles .............................. 38,856 38,856
Less accumulated depreciation ............ (6,310,194) (5,869,217)
------------- -------------
$ 12,727,570 $ 11,581,923
============= =============
</TABLE>
Depreciation expense was $1.1 million, $1.1 million, and $1.0 million for the
years ended September 30, 2000, 1999, and 1998, respectively.
(6) Accrued Interest Receivable
The following is a summary of accrued interest receivable:
<TABLE>
<CAPTION>
September 30,
------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Loans receivable ......................... $ 3,996,223 $ 4,335,013
Mortgage backed and related securities ... 623,884 478,635
Investment securities .................... 1,811,966 2,340,170
------------- -------------
$ 6,432,073 $ 7,153,818
============= =============
</TABLE>
(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 $11.6 million and $6.1 million at September 30, 2000 and
1999, respectively. During the year ended September 30, 1999, the Company
initiated a program to sell loans to FNMA which resulted in the significant
increase in loans serviced for others. The mortgage servicing rights are
included in other assets in the consolidated balance sheets.
The changes in the balance of capitalized mortgage servicing rights were as
follows:
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------
2000 1999 1998
------------- ------------- -------------
<S> <C> <C> <C>
Balance, beginning of year ............................... $ 52,432 $-- $--
Additions ................................................ 59,868 53,789 --
Amortization of mortgage servicing rights ................ (16,880) (1,357) --
------------- ------------- -------------
Balance, end of year ..................................... $ 95,420 $ 52,432 $--
============= ============= =============
</TABLE>
38
<PAGE>
(8) Deposit Liabilities
The following is a summary of deposit liabilities:
<TABLE>
<CAPTION>
September 30,
------------------------------------------------
2000 1999
----------------------- -----------------------
Amount Percent Amount Percent
------------ -------- ------------ -------
Checking accounts, non-interest
<S> <C> <C> <C> <C>
bearing ..................... $ 54,339,904 7.8% $ 52,318,958 7.3%
------------ ------- ------------ -------
Interest-bearing checking .... 72,185,571 10.4 67,303,245 9.3
------------ ------- ------------ -------
Passbook and statement savings 47,946,711 6.9 59,790,124 8.3
------------ ------- ------------ -------
Money market deposits ........ 148,160,284 21.3 148,902,589 20.7
------------ ------- ------------ -------
Certificates of deposit
Less than 4% ................ 747,623 0.1 4,893,194 0.7
4.00% to 5.99% .............. 244,183,723 35.1 340,945,349 47.3
6.00% to 7.99% .............. 123,987,117 17.8 36,072,270 5.0
8.00% to 9.99% .............. 3,829,938 0.6 10,175,383 1.4
------------ ------- ------------ -------
372,748,401 53.6 392,086,196 54.4
------------ ------- ------------ -------
$695,380,871 100.0% $720,401,112 100.0%
============ ======= ============ =======
</TABLE>
The following is a summary of interest expense on deposits:
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------
2000 1999 1998
------------- ------------- -------------
<S> <C> <C> <C>
Interest-bearing checking .............. $ 779,335 $ 873,211 $ 1,088,777
Passbook and statement savings ......... 958,558 1,326,259 1,683,101
Money market ........................... 6,217,783 5,096,134 4,275,419
Certificates of deposit ................ 20,575,944 21,767,895 21,990,525
------------- ------------- -------------
28,531,620 29,063,499 29,037,822
Less early withdrawal
penalties ............................. 167,704 88,931 106,073
------------- ------------- -------------
Net interest on deposits ............. $ 28,363,916 $ 28,974,568 $ 28,931,749
============= ============= =============
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
At September 30, 2000, deposit maturities are as
follows:
<S> <C>
Within 1 year $551,890,110
1 year to 3 years 82,170,477
3 years to 5 years 39,685,703
Thereafter 21,634,581
------------
$695,380,871
============
</TABLE>
<TABLE>
<CAPTION>
Weighted average interest rates at September 30 are as follows:
2000 1999
---------- ----------
<S> <C> <C>
Interest-bearing checking ................ 1.14% 1.14%
Passbook and statement savings ........... 2.31% 1.76%
Money market ............................. 4.30% 4.04%
Certificates of deposit .................. 5.98% 5.28%
Weighted average rate for all deposits ... 4.77% 4.27%
</TABLE>
Deposits in excess of $100,000 totaled $146.3 million and $149.9 million at
September 30, 2000 and 1999, respectively. Deposits in excess of $100,000 are
not insured by the Federal Deposit Insurance Corporation ("FDIC").
40
<PAGE>
(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, 2000, the credit line was 30 percent 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 the U.S.
Government and agencies thereof. At September 30, 2000 the minimum book value of
eligible collateral for these borrowings was $203.3 million.
Scheduled maturities of advances from the FHLB were as follows:
<TABLE>
<CAPTION>
September 30, 2000 September 30, 1999
------------------------------------------------------ ------------------------------------------------
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 . $ 5,000,000 5.70% 5.70% $ -- -- --
After one but within
five years .......... 10,000,000 6.65% 6.65% 40,000,000 5.39% - 5.70% 5.43%
After five but within
ten years ........... 158,000,000 4.77% - 7.05% 5.86% 157,000,000 4.77% - 5.87% 5.32%
------------- ------------
$173,000,000 $197,000,000
============= ============
</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,
------------------------------------------------
2000 1999 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Weighted average interest rate at end of year ................... 5.90% 5.34% 5.26%
Weighted daily average interest rate during the year ............ 5.88% 5.25% 5.62%
Daily average FHLB advances ..................................... $ 207,218,306 $ 173,739,726 $ 141,016,438
Maximum FHLB advances at any month end .......................... 230,000,000 197,000,000 167,000,000
Interest expense during the year ................................ 12,184,341 9,121,190 7,921,570
</TABLE>
41
<PAGE>
(10) Short Term Borrowings
The Company had short term borrowings of $3.0 million and zero at September 30,
2000 and 1999, respectively. The borrowings consisted of two lines of credit
with Key Bank in the amounts of $1.7 million and $5.0 million. The line of
credit for $1.7 million was fully disbursed and $1.3 million was disbursed on
the $5.0 million line of credit at September 30, 2000. The Company also had an
unused line of credit totaling $15.0 million with U.S. National Bank of Oregon
at September 30, 2000 and 1999. The Company is in compliance with all debt
covenants imposed by the lenders.
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 the
agreement with the broker-dealer were delivered to the dealer who arranged the
transaction. Securities delivered to broker-dealers may be loaned out in the
ordinary course of operations. All these agreements matured during the quarter
ended March 31, 1999 and were not renewed.
Financial data pertaining to the weighted average cost, the level of short term
borrowings and securities sold under agreements to repurchase, and the related
interest expense are as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------
2000 1999 1998
--------------- -------------- --------- ----
<S> <C> <C> <C>
Weighted average interest rate at end of year ................... 9.01% -- 5.65%
Weighted daily average interest rate
during the year .............................................. 9.34% 5.72% 5.80%
Daily average of short term borrowings .......................... $ 1,289,617 $ -- $ --
Daily average of securities sold
under agreements to repurchase ............................... -- 3,105,336 14,669,203
Maximum short term borrowings at
any month end ................................................ 3,000,000 -- --
Maximum securities sold under
agreements to repurchase at any
month end .................................................... -- 8,095,000 17,077,500
Interest expense during the year ................................ 120,413 177,568 850,122
</TABLE>
42
<PAGE>
(11) Taxes on Income
The following is a summary of income tax expense:
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------
2000 1999 1998
------------- ------------- -------------
Current Taxes
<S> <C> <C> <C>
Federal ......................................................... $ 3,735,797 $ 4,842,232 $ 4,771,653
State ........................................................... 847,558 1,065,157 468,978
------------- ------------- -------------
Current tax provision ........................................... 4,583,355 5,907,389 5,240,631
------------- ------------- -------------
Deferred Taxes
Federal ......................................................... (873,784) (201,337) 82,204
State ........................................................... (176,413) (40,649) 16,597
------------- ------------- -------------
Deferred tax provision (benefit) ................................ (1,050,197) (241,986) 98,801
------------- ------------- -------------
Provision for income taxes ...................................... $ 3,533,158 $ 5,665,403 $ 5,339,432
============= ============= =============
</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,
-----------------------------
2000 1999 1998
------- ------- -------
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 ................. 4.4 4.5 2.1
Nondeductible ESOP compensation
expense ............................ 0.5 1.4 2.4
Deductible MRDP compensation
expense ............................. 1.6 (0.1) (1.5)
Interest income on municipal securities (4.1) (2.2) --
Elimination of valuation allowance .... -- -- (1.5)
Other ................................. (1.9) (0.4) (0.6)
------ ------ ------
Income tax expense included in the
statement of earnings ................. 35.5% 38.2% 35.9%
====== ====== ======
</TABLE>
43
<PAGE>
Deferred income taxes at September 30, 2000 and 1999 reflect the impact of
"temporary differences" between amounts of assets and liabilities for financial
reporting purposes and such amounts as measured by tax laws.
The tax effects of temporary differences which give rise to a significant
portion of deferred tax assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
September 30,
------------------------------
2000 1999
------------- -------------
DEFERRED TAX ASSETS
<S> <C> <C>
Allowance for losses on loans .................... $ 1,603,922 $ 975,816
Pension liability ................................ 348,854 327,539
Unearned ESOP shares ............................. 397,360 371,290
Unrealized loss on securities available for sale.. 841,224 1,080,801
Core deposit premium ............................. 956,599 657,904
------------- ------------
Total gross deferred tax assets .................. 4,147,959 3,413,350
------------- ------------
DEFERRED TAX LIABILITIES
FHLB stock dividends ............................. 1,192,076 894,222
Deferred loan fees ............................... 1,303,241 1,262,694
Tax bad debt reserve in excess of base-
year reserve .................................. 972,280 1,224,537
Other ............................................ 449,469 611,624
------------- -------------
Total gross deferred tax liabilities ............. 3,917,066 3,993,077
------------- -------------
Net deferred tax asset (liability) ............... $ 230,893 ($ 579,727)
============= =============
</TABLE>
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, 2000, 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, Accounting for Income Taxes, 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.
44
<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 percent 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 percent of the shares
tendered at $19.50 per share or below, and 64.7 percent 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>
Month Completed Number of Shares Average 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
December 1999 395,419 11.68
</TABLE>
In May 2000, the Company announced its intent to repurchase five percent of the
outstanding common stock, or approximately 375,648 shares. As of September 30,
2000, the Company had repurchased 33.28% of the shares to be repurchased, or
125,000 shares, at a weighted average price per share of $11.20.
In 2000, 1999, and 1998, vested portions 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 21,732, 24,299 and 22,608 shares, respectively, and
reduced equity by $236,336, $353,407 and $498,054, 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.
45
<PAGE>
(14) Earnings Per Share
Earnings per share ("EPS") is computed in accordance with SFAS No. 128, Earnings
per Share. 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>
For the Year Ended September 30,
--------------------------------------------
2000 1999 1998
---------- ------------- -------------
Weighted average common
<S> <C> <C> <C>
shares outstanding - basic ...................................... 6,822,025 7,564,415 9,115,404
---------- ------------- -------------
Effect of Dilutive Securities on Number of Shares:
MRDP shares ..................................................... -- 23,923 64,188
Stock options ................................................... -- 160,189 341,657
---------- ------------- -------------
Total Dilutive Securities ....................................... -- 184,112 405,845
---------- ------------- -------------
Weighted average common shares
outstanding - with dilution .................................... 6,822,025 7,748,527 9,521,249
========== ============= =============
</TABLE>
Options to purchase 916,258 shares of common stock were outstanding at September
30, 2000 but were not included in the computation of diluted EPS because the
options' exercise prices were greater than the average market price of the
common shares. Additionally, 80,006 shares awarded under the MRDP but not yet
released to the individuals were not included in the computation of diluted EPS
because their effect would not have been dilutive.
46
<PAGE>
(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 $367,916, $40,828, and $180,000 was incurred during the years
ended September 30, 2000, 1999, and 1998, 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
$439.9 million at June 30, 2000.
Postretirement Benefit Plan
The Company has a postretirement benefit plan for certain retirees and all
currently active employees who retire with at least ten years of service. The
plan provides for payment of all or a portion of the Medicare Supplement premium
for qualified retirees and their spouses.
Information related to the year ended September 30, 2000 is presented below.
Information for fiscal years 1999 and 1998 is not available.
<TABLE>
<CAPTION>
Year Ended September 30,
2000
-----------------------
Change in benefit obligation
<S> <C>
Benefit obligation at beginning of year $193,861
Service cost 24,276
Interest cost 23,937
Actuarial changes 92,453
Benefits paid (10,248)
--------
Benefit obligation at end of year $324,279
========
Components of net periodic benefit cost
Service cost $ 24,276
Interest cost 23,937
Recognition of changes in actuarial
assumptions, prior service cost, benefit
changes, and actuarial gains and losses 9,475
-------
Net periodic benefit cost $57,688
=======
</TABLE>
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, 2000, 1999,
and 1998 were $71,052, $71,052, and $71,052, respectively. At September 30, 2000
and 1999, the projected benefit obligation was $887,896 and $833,644,
respectively.
47
<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, 2000, 1999 and 1998 was
$1.3 million, $1.0 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, 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
Granted -- --
Exercised -- --
Canceled -- --
------- -------
Outstanding, September 30, 2000 916,258 $13.314
======= =======
</TABLE>
48
<PAGE>
At September 30, 2000, 275,738 shares were available for future grants under the
Stock Plan.
Additional information regarding options outstanding as of September 30, 2000 is
as follows:
<TABLE>
<CAPTION>
Weighted Avg.
Range of Options Options Remaining
Exercise Prices Outstanding Exercisable Contractual Life
--------------- ----------- ----------- ----------------
<S> <C> <C> <C> <C>
$13.125 893,015 714,412 5.5
$20.577 23,243 9,297 7.1
-------- --------
916,258 723,709
======= =======
</TABLE>
Additional Stock Plan Information
As discussed in Note 1, the Company continues to account for its stock-based
awards using the intrinsic value method in accordance with 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 weighted average grant-date fair value of options granted during fiscal
years 1998 and 1996 were $6.65 and $4.12, respectively. The Company's
calculations are based on a multiple option valuation approach and forfeitures
are recognized as they occur. Had compensation cost for these awards been
determined 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,
--------------------------------------------
2000 1999 1998
---------- ---------- ----------
Net earnings:
<S> <C> <C> <C>
As reported $6,426,152 $9,155,193 $9,551,037
Pro forma 5,885,826 8,642,299 9,040,753
Earnings per common share - basic
As reported $0.94 $1.21 $1.05
Pro forma $0.86 $1.14 $0.99
Earnings per common share - fully
diluted:
As reported $0.94 $1.18 $1.00
Pro forma $0.86 $1.12 $0.95
</TABLE>
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>
49
<PAGE>
(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 $4.9 million and $5.9 million at September 30, 2000
and 1999, 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 $1.1 million, $1.6 million, and
$2.0 million for the years ended September 30, 2000, 1999 and 1998,
respectively, and 97,865 shares were allocated among the participants in each of
those years.
50
<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, 2000 September 30, 1999
----------------------------- -----------------------------
Carrying Fair Carrying Fair
amount value amount value
------------- ------------- ------------- -------------
Financial Assets
<S> <C> <C> <C> <C>
Cash and due from banks .............. $ 19,998,788 $ 19,998,788 $ 21,123,217 $ 21,123,217
Interest earning deposits with banks . 2,077,359 2,077,359 1,231,516 1,231,516
Federal funds sold and
securities purchased under
agreements to resell ................. 7,870,453 7,870,453 2,167,856 2,167,856
Investment securities
available for sale ................... 116,627,756 116,627,756 158,648,057 158,648,057
Investment securities held
to maturity .......................... 723,838 726,889 559,512 577,455
Mortgage backed and related
securities available for sale ........ 75,331,311 75,331,311 72,695,555 72,695,555
Mortgage backed and related
securities held to maturity .......... 2,159,868 2,145,918 2,600,920 2,596,408
Loans receivable, net ................ 729,036,847 702,505,736 739,793,403 714,285,234
FHLB stock ........................... 11,876,500 11,876,500 10,957,300 10,957,300
Financial Liabilities
Deposit liabilities .................. 695,380,871 694,624,273 720,401,112 722,373,174
FHLB advances ........................ 173,000,000 158,850,040 197,000,000 192,637,192
Short term borrowings ................ 3,000,000 3,000,000 -- --
</TABLE>
(18) 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 need of its customers. These
financial instruments generally include commitments to originate mortgage,
commercial 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, 2000, loan commitments amounted to approximately $16.4 million
comprised of $3.8 million in variable rate loans ranging from 7.13% to 13.00%
and $12.6 million in fixed rate loans ranging from 6.75% to 11.00%. At September
30, 2000, the Company had no commitments to sell loans to FNMA.
The Company originates residential real estate loans and, to a lesser extent,
commercial and multi-family real estate and consumer loans. Over 82% 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.
51
<PAGE>
(19) 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
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, 2000.
As of September 30, 2000, the most recent notification from the OTS categorized
the Association as "well capitalized" under the regulatory framework for prompt
corrective action. To be categorized as "well-capitalized," the Association must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.
At periodic intervals, the OTS and FDIC routinely examine the Association as
part of their legally prescribed oversight of the thrift industry. Based on
these examinations, the regulators can direct that the Association's financial
statements be adjusted in accordance with their findings. A future examination
by the OTS or the FDIC could include a review of certain transactions or other
amounts reported in the Association's 2000 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 2000 financial statements cannot be presently
determined.
52
<PAGE>
The Association's actual and required minimum capital ratios are presented in
the following table:
<TABLE>
<CAPTION>
To Be
Categorized as "Well
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
--------------------- --------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ------ ------------ ------ ------------ -------
As of September 30, 2000
<S> <C> <C> <C> <C> <C> <C>
Total Capital: ........... $106,096,316 20.3% $ 41,816,560 8.0% $ 52,270,700 10.0%
(To Risk Weighted Assets)
Tier I Capital: .......... 102,151,810 19.5% N/A N/A 31,362,420 6.0%
(To Risk Weighted Assets)
Tier I Capital: .......... 102,151,810 10.4% 39,472,851 4.0% 49,341,064 5.0%
(To Total Assets)
Tangible Capital: ........ 102,151,810 10.4% 14,802,319 1.5% N/A N/A
(To Tangible Assets)
As of September 30, 1999
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)
</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, 2000 September 30, 1999
------------------ ------------------
<S> <C> <C>
Association's equity $ 108,921,434 $101,042,299
Unrealized securities losses 1,356,040 1,747,744
Core deposit intangible (8,125,664) (9,778,341)
----------- -----------
Tangible capital 102,151,810 93,011,702
General valuation allowances 3,944,506 2,483,625
----------- -----------
Total capital $106,096,316 $95,495,327
=========== ===========
</TABLE>
53
<PAGE>
(20) Parent Company Financial Information
Condensed financial information as of and for the years ended September 30, 2000
and 1999, 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,
------------------------------
2000 1999
------------- -------------
Assets
<S> <C> <C>
Cash and cash equivalents ................ $ 731,987 $ 5,844,155
Investment and mortgage backed securities 2,138,224 2,762,506
Investment in wholly-owned subsidiary .... 108,921,434 101,042,299
Other assets ............................. 1,266,667 1,034,776
------------- -------------
Total assets ............................. $ 113,058,312 $ 110,683,736
============= =============
Liabilities
Short-term borrowings .................... $ 3,000,000 $ --
Other liabilities ........................ 1,333,751 1,098,273
------------- -------------
Total liabilities ........................ 4,333,751 1,098,273
------------- -------------
Shareholders' equity
Common stock ............................. 73,662 79,084
Additional paid-in capital ............... 37,701,796 43,794,535
Retained earnings ........................ 78,340,731 75,103,040
Unearned ESOP shares at cost ............. (4,893,250) (5,871,900)
Unearned MRDP shares at cost ............. (2,498,378) (3,519,296)
------------- -------------
Total shareholders' equity ............... 108,724,561 109,585,463
------------- -------------
Total liabilities and shareholders' equity $ 113,058,312 $ 110,683,736
============= =============
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF EARNINGS
Year Ended September 30,
------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Equity in undistributed income of subsidiary $ 7,065,690 $ 9,221,480
Total interest income .................... 789,684 1,675,756
Total interest expense ................... 120,412 177,568
Non-interest income ...................... 203 77
Non-interest expense ..................... 1,746,138 1,631,674
------------- -------------
Earnings before income taxes ............. 5,989,027 9,088,071
Provision for income taxes ............... (437,125) (67,122)
------------- -------------
Net earnings ............................. $ 6,426,152 $ 9,155,193
============= =============
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
Year Ended September 30,
------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Net cash flows from operating activities . $ 721,914 $ 963,814
------------- -------------
Cash flows from investing activities
Investment in subsidiary ................. (278,916) (302,892)
Maturity of investment and
mortgage- backed securities ...... 610,081 76,275,337
Purchase of investment and
mortgage-backed securities ....... -- (58,814,489)
------------- -------------
Net cash flows from investing activities . 331,165 17,157,956
------------- -------------
Cash flows from financing activities
Cost of ESOP shares released ............. 978,650 978,650
Proceeds from short-term borrowings ...... 3,700,000 8,095,000
Repayments of short-term borrowings ...... (700,000) (20,207,500)
Stock repurchase and retirement .......... (6,254,695) (39,334,140)
Dividends paid ........................... (3,889,202) (3,547,040)
------------- -------------
Net cash flows used in financing activities (6,165,247) (54,015,030)
------------- -------------
Net decrease in cash and cash equivalents (5,112,168) (35,893,260)
Cash and cash equivalents beginning of year 5,844,155 41,737,415
------------- -------------
Cash and cash equivalents end of year .... $ 731,987 $ 5,844,155
============= =============
</TABLE>
55
<PAGE>
Consolidated Supplemental Data
Selected Quarterly Financial Data
(unaudited)
<TABLE>
<CAPTION>
Year Ended September 30, 2000
-------------------------------------------------
December March June September
---------- ---------- ---------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Total interest income ................ $ 18,050 $ 18,141 $ 18,235 $ 17,731
Total interest expense ............... 9,813 10,238 10,414 10,291
---------- ---------- ---------- ----------
Net interest income .................. 8,237 7,903 7,821 7,440
Provision for loan losses ............ 108 200 228 1,228
---------- ---------- ---------- ----------
Net interest income after provision .. 8,129 7,703 7,593 6,212
Non-interest income .................. 1,032 926 1,036 1,100
Non-interest expense ................. 5,866 5,571 5,659 6,677
---------- ---------- ---------- ----------
Earnings before income taxes ......... 3,295 3,058 2,970 635
Provision for income taxes ........... 1,266 1,184 1,044 38
---------- ---------- ---------- ----------
Net earnings ......................... $ 2,029 $ 1,874 $ 1,926 $ 597
========== ========== ========== ==========
Net earnings per share - basic ....... $ 0.29 $ 0.28 $ 0.28 $ 0.09
========== ========== ========== ==========
Net earnings per share - fully diluted $ 0.29 $ 0.28 $ 0.28 $ 0.09
========== ========== ========== ==========
<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
========== ========== ========== ==========
</TABLE>
56
<PAGE>
Klamath First Bancorp, Inc.
Corporate Information
Corporate Common Stock
Headquarters Traded over-the-counter/
540 Main Street Nasdaq National Market
Klamath Falls, OR 97601 Nasdaq Symbol: KFBI
541-882-3444
Form 10-K
Independent Information
Auditors Available without charge
Deloitte & Touche LLP to shareholders of record
Suite 3900 upon written request to:
111 SW Fifth Avenue Marshall Alexander
Portland, OR 97204-3698 Senior Vice President -
503-222-1341 Chief Financial Officer
Klamath First Bancorp, Inc.
Corporate Counsel 540 Main Street
Craig M. Moore Klamath Falls, Or 97601
540 Main Street
Klamath Falls, OR 97601 Annual Meeting
541-882-3444 The annual meeting of
shareholders will be held
Special Counsel Wednesday,
Breyer & Associates PC January 24, 2001
1100 New York Avenue N.W. beginning at 2:00 p.m.,
Suite 700 East Pacific Time at:
Washington, DC 20005 The Shilo Inn
202-737-7900 2500 Almond Street
Klamath Falls, OR 97601.
Shareholders of record as
Transfer Agent of the close of business on
Registrar & Transfer Co. November 22, 2000 shall
10 Commerce Drive be those entitled to notice
Cranford, NJ 07016-3572 of and to vote at the
800-866-1340 meeting.
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