-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, B2cOhPwgpuB6iy0tgJQyNm6bOqKNESlPTALyIIon7i+DGr0tkCt8IHR/HNdvhw4t rE863RABwYLAmYRJNLcgNw== 0000946924-99-000008.txt : 19991230 0000946924-99-000008.hdr.sgml : 19991230 ACCESSION NUMBER: 0000946924-99-000008 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991229 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KLAMATH FIRST BANCORP INC CENTRAL INDEX KEY: 0000946924 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 931180440 STATE OF INCORPORATION: OR FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-26556 FILM NUMBER: 99782536 BUSINESS ADDRESS: STREET 1: 540 MAIN ST CITY: KLAMATH FALLS STATE: OR ZIP: 97601 BUSINESS PHONE: 5418823444 MAIL ADDRESS: STREET 2: 540 MAIN STREET CITY: KLAMATH STATE: OR ZIP: 97601 10-K 1 KLAMTH 1ST BANCORP 10K FYE 09/30/99 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended September 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 0-26556 KLAMATH FIRST BANCORP, INC. (Exact name of registrant as specified in its charter) Oregon 93-1180440 (State or other jurisdiction of incorporation (I.R.S. Employer or organization) I.D. Number) 540 Main Street, Klamath Falls, Oregon 97601 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (541) 882-3444 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate by check mark whether disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or other information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. YES X NO As of December 3, 1999, there were issued and outstanding 7,908,377 shares of the Registrant's common stock. The Registrant's voting stock is traded over-the-counter and is listed on the Nasdaq National Market under the symbol "KFBI." The aggregate market value of the voting stock held by nonaffiliates of the Registrant, based on the closing sales price of the Registrant's common stock as quoted on the Nasdaq National Market on December 3, 1999 of $11.75, was $75,645,948. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of Registrant's Annual Report to Shareholders for the Fiscal Year Ended September 30, 1999 ("Annual Report") (Parts I and II). 2. Portions of Registrant's Definitive Proxy Statement for the 1999 Annual Meeting of Shareholders (Part III). PART I Item 1. Business General Klamath First Bancorp, Inc. ("Company"), an Oregon corporation, was organized on June 16, 1995 for the purpose of becoming the holding company for Klamath First Federal Savings and Loan Association ("Association") upon the Association's conversion from a federal mutual to a federal stock savings and loan association ("Conversion"). The Conversion was completed on October 4, 1995. At September 30, 1999, the Company had total assets of $1.0 billion, total deposits of $720.4 million and shareholders' equity of $109.6 million. All references to the Company herein include the Association where applicable. The Association was organized in 1934. The Association is regulated by the Office of Thrift Supervision ("OTS") and its deposits are insured up to applicable limits under the Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC"). The Association also is a member of the Federal Home Loan Bank ("FHLB") System through the FHLB of Seattle. In July 1997, the Association acquired 25 former First Interstate Bank branches from Wells Fargo Bank, N.A. The new branches are located in rural communities throughout Oregon, expanding and complementing the existing network of branches. The acquisition was accounted for as a purchase and resulted in the addition of approximately $241.3 million in deposits on the acquisition date of July 18, 1997. The Association is a traditional, community-oriented savings and loan association that focuses on customer service within its primary market area. Accordingly, the Association is primarily engaged in attracting deposits from the general public through its offices and using those and other available sources of funds to originate permanent residential one- to four-family real estate loans within its market area and to a lesser extent on commercial property and multi-family dwellings. At September 30, 1999, permanent residential one- to four-family real estate loans totaled $647.1 million, or 83.56% of total loans. While the Association has historically emphasized fixed rate mortgage lending, it has been diversifying its loan portfolio by focusing on increasing the number of originations of commercial real estate loans, multi-family residential loans, residential construction loans, small business loans and non-mortgage consumer loans. A significant portion of these newer loan products carry adjustable rates, higher yields, or shorter terms than the traditional fixed rate mortgages. This lending strategy is designed to enhance earnings, reduce interest rate risk, and provide a more complete range of financial services to customers and the local communities served by the Association. At September 30, 1999, the Association's total loan portfolio consisted of 90.59% fixed rate and 9.41% adjustable rate loans, after deducting loans in process and non-performing loans. Announcement of Stock Repurchase On December 1, 1999 the Company announced its intention to repurchase 5% of its outstanding common stock. The repurchase will be accomplished through the open market over a twelve month period. Modified Dutch Auction Tender In September 1998, the Board of Directors authorized the repurchase of approximately 20% of the Company's outstanding common stock. The repurchase was completed through a "Modified Dutch Auction Tender Offer." Under this program, the Company's shareholders were given the opportunity to sell part or all of their shares to the Company at a price of not less than $18.00 per share and not more than $20.00 per share. Results of the offer were finalized on January 15, 1999 when the Company announced the purchase of 1,984,090 shares at $19.50 per share. This represented approximately 85.9% of the shares tendered at $19.50 per share or less, and 64.7% of all shares tendered. The cost of the shares purchased was approximately $39.3 million. The effect of the transaction is reflected in a reduction in cash and investments and a reduction in equity with a corresponding impact on the performance ratios for the year ended September 30, 1999. 1 Market Area As a result of the branch acquisition in 1997, the Association's market area expanded to include 33 locations in 22 of Oregon's 36 counties. Two additional branch locations were added in 1998. The Association's primary market area, which encompasses the State of Oregon and some adjacent areas of California and Washington, can be characterized as a predominantly rural area containing a number of communities that are experiencing moderate to rapid population growth. The favorable population growth in the market area, particularly in Southern Oregon, has been supported in large part by the favorable climate, and by favorable real estate values. The economy of the market area is still based primarily on agriculture and lumber and wood products, but is experiencing diversification into light manufacturing, health care and other services, and other sectors. Tourism is a significant industry in many regions of the market area including Central Oregon and the Southern Oregon coast. Yields Earned and Rates Paid The following table sets forth, for the periods and at the date indicated, the weighted average yields earned on interest-earning assets, the weighted average interest rates paid on interest-bearing liabilities, and the interest rate spread between the weighted average yields earned and rates paid.
Year Ended At September 30, September 30, ------------------------ 1999 1999 1998 1997 ------------- ---- ---- ---- Weighted average yield: Loans receivable ..................... 7.47% 7.80% 8.06% 7.92% Mortgage backed and related securities 5.89 5.50 6.03 6.34 Investment securities ................ 6.23 5.88 6.05 6.10 Federal funds sold ................... 5.22 4.93 5.45 5.31 Interest-earning deposits ............ 5.28 4.75 5.35 5.32 FHLB stock ........................... 7.25 7.50 7.73 7.70 Combined weighted average yield on interest-bearing assets ................ 7.15 7.25 7.34 7.40 ----- ----- ----- ----- Weighted average rate paid on: Tax and insurance reserve ............ 1.73 2.07 2.47 2.97 Passbook and statement savings ....... 1.76 2.15 2.70 3.15 Interest-bearing checking ............ 1.14 1.23 1.48 2.20 Money market ......................... 4.04 3.87 3.86 3.85 Certificates of deposit .............. 5.28 5.38 5.69 5.76 FHLB advances/Short term borrowings .. 5.34 5.26 5.63 5.68 Combined weighted average rate on interest-bearing liabilities ........... 4.64 4.52 4.77 5.12 ----- ----- ----- ----- Net interest spread ..................... 2.51% 2.73% 2.57% 2.28% ===== ===== ===== =====
2 Average Balances, Net Interest Income and Yields Earned and Rates Paid Reference is made to the section entitled "Average Balances, Net Interest Income and Yields Earned and Rates Paid" on page 16 of the 1999 Annual Report to Shareholders ("Annual Report"), which section is incorporated herein by reference. Interest Sensitivity Gap Analysis Reference is made to the section entitled "Interest Sensitivity Gap Analysis" on page 12 of the Annual Report, which section is incorporated herein by reference. Rate/Volume Analysis Reference is made to the section entitled "Rate/Volume Analysis" on page 17 of the Annual Report, which section is incorporated herein by reference. Lending Activities General. As a federally chartered savings and loan association, the Association has authority to originate and purchase loans secured by real estate located throughout the United States. Notwithstanding this nationwide lending authority, over 79% of the mortgage loans in the Association's portfolio are secured by properties located in Klamath, Jackson and Deschutes counties in Southern and Central Oregon. With the expanded market area provided by the branch acquisition in 1997, the Association's mortgage lending has diversified throughout the state of Oregon. It is management's intention, subject to market conditions, that the Association will remain a traditional financial institution originating long-term mortgage loans for the purchase, construction or refinance of one- to four-family residential real estate. However, to enhance interest income and reduce interest rate risk, the Association is placing increased emphasis on the origination or purchase of adjustable rate loans secured by one- to four-family residential, multi-family residential and commercial real estate, the majority of which are located outside Klamath, Jackson, and Deschutes counties. During the year ended September 30, 1999, the Association initiated a program to sell loans to the Federal National Mortgage Association ("Fannie Mae"). Permanent residential one- to four-family mortgage loans amounted to $647.1 million, or 83.56%, of the Association's total loan portfolio before net items, at September 30, 1999. The Association originates other loans secured by multi-family residential and commercial real estate, construction and land loans. Those loans amounted to $110.8 million, or 14.31%, of the total loan portfolio, before net items, at September 30, 1999. Approximately 2.13%, or $16.5 million, of the Association's total loan portfolio, before net items, as of September 30, 1999, consisted of non-real estate loans. Permissible loans-to-one borrower by the Association are generally limited to 15% of unimpaired capital and surplus. The Association's loan-to-one borrower limitation was $15.2 million at September 30, 1999. At September 30, 1999, the Association had 25 borrowing relationships with outstanding balances in excess of $1.0 million, the largest of which amounted to $5.4 million and consisted of 28 loans, 27 of which were secured by commercial real estate construction projects and single family real estate and one which is an unsecured line of credit. The Association has placed a growing emphasis on the origination of adjustable rate loans in order to increase the interest rate sensitivity of its loan portfolio. The Association has been successful in expanding the production of adjustable rate consumer loans and has purchased adjustable rate multi- family residential and non-residential real estate loans. Also, in September 1999, the Association purchased $10.0 million of adjustable rate one- to four-family loans on properties located in the Pacific Northwest from a Northwest bank. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Market Risk and Asset/Liability Management" and "INTEREST SENSITIVITY GAP ANALYSIS" in the Annual Report. At September 30, 1999, $70.3 million, or 9.41% of loans in the Association's total loan portfolio, after loans in process and non-performing loans, consisted of adjustable rate loans. 3 Loan Portfolio Analysis. The following table sets forth the composition of the loan portfolio by type of loan at the dates indicated.
At September 30, ----------------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ----------------- ------------------ ------------------ ------------------ ------------------ Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent -------- ------- -------- ------- -------- ------- -------- ------- -------- ------- (Dollars in thousands) Real estate loans: Permanent residential one- to four-family .... $647,130 83.56% $577,471 81.95% $498,595 86.47% $447,004 91.50% $381,683 91.68% Multi-family residential . 18,412 2.38 19,230 2.73 16,881 2.93 6,555 1.34 7,433 1.79 Construction ............. 53,219 6.87 64,289 9.12 30,487 5.29 14,276 2.92 9,807 2.36 Commercial ............... 37,079 4.79 29,457 4.18 22,639 3.93 15,645 3.20 13,984 3.36 Land ..................... 2,064 0.27 2,185 0.31 1,586 0.27 1,152 0.24 1,072 0.25 ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ Total real estate loans .... 757,904 97.87 692,632 98.29 570,188 98.89 484,632 99.20 413,979 99.44 ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ Non-real estate loans: Savings accounts ......... 1,800 0.23 1,991 0.28 1,711 0.30 1,640 0.34 1,966 0.47 Home improvement and home equity loans ..... 6,726 0.87 5,750 0.82 3,486 0.60 1,977 0.40 -- -- Other .................... 8,011 1.03 4,330 0.61 1,190 0.21 302 0.06 367 0.09 ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ Total non-real estate loans 16,537 2.13 12,071 1.71 6,387 1.11 3,919 0.80 2,333 0.56 ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ Total loans ............... 774,441 100.00% 704,703 100.00% 576,575 100.00% 488,551 100.00% 416,312 100.00% ====== ====== ====== ====== ====== Less: Undisbursed portion of loans 24,176 26,987 17,096 8,622 7,203 Deferred loan fees ......... 7,988 7,620 6,358 5,445 4,757 Allowance for loan losses .. 2,484 1,950 1,296 928 808 -------- -------- -------- -------- -------- Net loans .................. $739,793 $668,146 $551,825 $473,556 $403,544 ======== ======== ======== ======== ========
4 The following table sets forth the amount of fixed-rate and adjustable rate loans, net of loans in process and non-performing loans, included in the total loan portfolio at the dates indicated.
At September 30, ------------------------------------------ 1999 1998 ------------------- -------------------- Amount Percent Amount Percent -------- -------- -------- ------- (Dollars in thousands) Fixed rate .... $676,644 90.59% $607,112 89.67% Adjustable-rate 70,309 9.41 69,958 10.33 -------- ------ -------- ------ Total .... $746,953 100.00% $677,070 100.00% ======== ====== ======== ======
Permanent Residential One- to Four-Family Mortgage Loans. The primary lending activity of the Association is the origination of permanent residential one- to four-family mortgage loans. Management believes that this policy of focusing on single-family residential mortgage loans has been successful in contributing to interest income while keeping delinquencies and losses to a minimum. At September 30, 1999, $647.1 million, or 83.56%, of the Association's total loan portfolio, before net items, consisted of permanent residential one- to four-family mortgage loans. As of such date, the average balance of the Association's permanent residential one- to four-family mortgage loans was $73,558. The Association presently originates both fixed-rate mortgage loans and adjustable rate mortgages ("ARMs") secured by one- to four-family properties with terms of 15 to 30 years. Historically, most of the loans originated by the Association have been fixed rate loans secured by one- to four-family properties. At September 30, 1999, $634.6 million, or 84.96% of the total loans after loans in process and non-performing loans were fixed rate one- to four-family loans and $33.5 million, or 4.48%, were ARM loans. Borrower demand for ARM loans versus fixed-rate mortgage loans is a function of the level of interest rates, the expectations of changes in the level of interest rates and the difference between the initial interest rates and fees charged for each type of loan. The relative amount of fixed-rate mortgage loans and ARM loans that can be originated at any time is largely determined by the demand for each in a competitive environment. The Association qualifies the ARM loan borrower based on the borrower's ability to repay the loan using the fully indexed rate. As a result, the Association believes that the potential for delinquencies and defaults on ARM loans when rates adjust upwards is lessened. The loan fees charged, interest rates and other provisions of the Association's ARM loans are determined by the Association on the basis of its own pricing criteria and competitive market conditions. At September 30, 1999, the Association charged origination fees ranging from 1.00% to 1.75% on its ARM loans. In an attempt to increase adjustable rate mortgages in the loan portfolio, the Association uses below market "teaser" rates which are competitive with other institutions originating mortgages in the Association's primary market area. Initially, ARM loans are priced at the competitive teaser rate and after one year reprice at 2.875% over the One-Year Constant Maturity Treasury Bill Index, with a maximum increase or decrease of 2.00% in any one year and 6.00% over the life of the loan. In October 1999 the Association also introduced variable rate loan products that bear fixed rates for the first three or five years and then reprice annually thereafter. As a supplement to origination of ARM loans, the Association purchases ARMs from other institutions when suitable loans can be found which meet its underwriting criteria. The retention of ARM loans in the Association's loan portfolio helps reduce the Association's exposure to changes in interest rates. There are, however, unquantifiable credit risks resulting from the potential of increased costs due to changed rates to be paid by the customer. It is possible that, during periods of rising interest rates, the risk of default on ARM loans may increase as a result of repricing with increased costs to the borrower. Furthermore, the ARM loans originated by the Association generally provide, as a marketing incentive, for initial rates of interest below the rates which would apply were the 5 adjustment index used for pricing initially (discounting). These loans are subject to increased risks of default or delinquency because of this. Another consideration is that although ARM loans allow the Association to increase the sensitivity of its asset base to changes in the interest rates, the extent of this interest sensitivity is limited by the periodic and lifetime interest rate adjustment limits. Because of these considerations, the Association has no assurance that yields on ARM loans will be sufficient to offset increases in the Association's cost of funds. The loan-to-value ratio, maturity and other provisions of the loans made by the Association generally have reflected the policy of making less than the maximum loan permissible under applicable regulations, in accordance with sound lending practices, market conditions and underwriting standards established by the Association. The Association's lending policies on permanent residential one- to four-family mortgage loans generally limit the maximum loan-to-value ratio to 90% of the lesser of the appraised value or purchase price of the property and generally all permanent residential one- to four-family mortgage loans in excess of an 80% loan-to-value ratio require private mortgage insurance. Programs for 95% and 97% loan-to-value are available for owner occupied purchase transactions. The Association also has a limited amount of non-owner-occupied permanent residential one- to four-family mortgage loans in its portfolio. These loans are underwritten using generally the same criteria as owner-occupied permanent residential one- to four-family mortgage loans, except that the maximum loan-to-value ratio is generally 75% of the lesser of the appraised value or purchase price of the property and such loans are generally provided at an interest rate higher than owner-occupied loans. The Association offers fixed-rate, permanent residential one- to four-family mortgage loans with terms of 15 to 30 years. Substantially all permanent one- to four-family loans have original contractual terms to maturity of 30 years. Such loans are amortized on a monthly basis with principal and interest due each month and customarily include "due-on-sale" clauses. The Association enforces due-on-sale clauses to the extent permitted under applicable laws. Substantially all of the Association's mortgage loan portfolio consists of conventional loans. Historically, the Association has not originated significant amounts of mortgage loans on second residences. However, with the branch offices in Bend and the loan center in Redmond, which is near popular ski areas and other outdoor activities, and the branches along the Southern Oregon coast, which is also an increasingly popular resort and vacation area, the Association believes that there is an opportunity to engage in such lending within the parameters of its current underwriting policies. At September 30, 1999, $4.2 million, or 0.54%, of the Association's loan portfolio consisted of loans on second homes. Commercial and Multi-Family Real Estate Loans. The Association has historically engaged in a limited amount of multi-family and commercial real estate lending. The Association purchases participations in loans secured by multi-family and commercial real estate in order to increase the balance of adjustable rate loans in the portfolio. See "-- Loan Originations, Purchases, and Sales." At September 30, 1999, $18.4 million, or 2.38%, of the Association's total loan portfolio, before net items, consisted of loans secured by existing multi-family residential real estate and $37.1 million, or 4.79%, of the Association's total loan portfolio, before net items, consisted of loans secured by existing commercial real estate. The Association's commercial and multi-family real estate loans include primarily loans secured by office buildings, small shopping centers, churches, mini-storage warehouses and apartment buildings. All of the Association's commercial and multi-family real estate loans are secured by properties located in the Association's primary market area. The average outstanding balance of commercial and multi-family real estate loans was $246,625 at September 30, 1999, the largest of which was a $2.5 million land development loan secured by land and improvements. This loan has performed in accordance with its terms since origination. Originations of commercial real estate and multi-family residential real estate amounted to 5.74%, 3.20%, and 4.87% of the Association's total loan originations in the fiscal years ended September 30, 1999, 1998, and 1997, respectively. The 6 Association also purchased $2.4 million in multi-family residential loan participations and $937,000 in commercial real estate participations during the year ended September 30, 1999. The Association's commercial and multi-family loans generally have terms which range up to 25 years and loan-to-value ratios of up to 75%. The Association currently originates fixed and adjustable rate commercial and multi-family real estate loans. Commercial real estate and multi-family adjustable rate loans are priced to be competitive with other commercial lenders in the Association's market area. A variety of terms are available to meet specific commercial and multi-family residential financing needs. As of September 30, 1999, $28.0 million, or 3.75%, after loans in process and non-performing loans, of other mortgage loans, including commercial and multi-family residential real estate loans, had adjustable rates of interest. Multi-family residential and commercial real estate lending is generally considered to involve a higher degree of risk than permanent residential one- to four-family lending. Such lending typically involves large loan balances concentrated in a single borrower or groups of related borrowers. In addition, the payment experience on loans secured by income-producing properties is typically dependent on the successful operation of the related real estate project and thus may be subject to a greater extent to adverse conditions in the real estate market or in the economy generally. The Association generally attempts to mitigate the risks associated with multi-family residential and commercial real estate lending by, among other things, lending on collateral located in its market area and following strict underwriting standards. Loans considered for purchase are subjected to the same underwriting standards as those originated in- house. Construction Loans. The Association makes construction loans primarily to individuals for the construction of their single-family residences. The Association also makes loans to builders for the construction of single-family residences which are not presold at the time of origination ("speculative loans"). Permanent construction loans generally begin to amortize as permanent residential one- to four-family mortgage loans within one year of origination unless extended. Speculative loans are scheduled to pay off in 12 to 18 months. At September 30, 1999, construction loans amounted to $53.2 million (including $22.5 million of speculative loans), or 6.87%, of the Association's total loan portfolio before net items. Construction loans have rates and terms which generally match the non-construction loans then offered by the Association, except that during the construction phase, the borrower pays only interest on the loan. The Association's construction loan agreements generally provide that loan proceeds are disbursed in increments as construction progresses. The Association periodically reviews the progress of the underlying construction project through physical inspections. Construction loans are underwritten pursuant to the same general guidelines used for originating permanent one- to four-family loans. Construction lending is generally limited to the Association's primary market area. Construction financing is generally considered to involve a higher degree of risk of loss than financing on improved, owner-occupied real estate because of the uncertainties of construction, including the possibility of costs exceeding the initial estimates and, in the case of speculative loans, the need to obtain a purchaser. The Association has sought to minimize the risks associated with permanent construction lending by limiting construction loans to qualified owner-occupied borrowers with construction performed by qualified state licensed builders located primarily in the Association's market area. During 1997, the Association began originating construction loans in the Portland, Oregon metropolitan area through mortgage brokers. These loans are underwritten using the same standards as loans from the branch locations. The Association's underwriting criteria are designed to evaluate and minimize the risks of each construction loan. Interim construction loans are qualified at permanent rates in order to ensure the capability of the borrower to repay the loan. Loan proceeds are disbursed only as construction progresses and inspections warrant. These loans are underwritten to the same standards and to the same terms and requirements as one- to four-family purchase mortgage loans, except the loans provide for disbursement of funds during a construction period of up to one year. During this period, the borrower is required to make monthly payments of accrued interest on the outstanding loan balance. Disbursements during the construction period are limited to no more than the percent of completion. Up to 95% loan-to-value upon completion of construction may be 7 disbursed if private mortgage insurance above 80% loan-to-value is in place. Land Loans. The Association makes loans to individuals for the purpose of acquiring land to build a permanent residence. These loans generally have 20 year amortization periods, with a balloon payment due in five years, and maximum loan-to-value ratios of 80%. As of September 30, 1999, $2.1 million, or 0.27%, of the Association's total loan portfolio consisted of land loans. Non-Real Estate Loans. Non-real estate lending has traditionally been a small part of the Association's business. During 1997, the Association introduced several new business and consumer loan products, including home equity lines of credit, automobile and recreational vehicle loans, and personal and business lines of credit, among others. Non-real estate loans generally have shorter terms to maturity or repricing and higher interest rates than real estate loans. As of September 30, 1999, $16.5 million, or 2.13%, of the Association's total loan portfolio consisted of non-real estate loans. As of that date, $1.8 million, or .23%, of total loans were secured by savings accounts. At September 30, 1999, $1.5 million, or 0.20%, of non-real estate loans consisted of Title I home improvement loans insured by the Federal Housing Administration and most are secured by liens on the real property. Loan Maturity and Repricing. The following table sets forth certain information at September 30, 1999 regarding the dollar amount of total loans, after loans in process and non-performing loans, maturing in the Association's portfolio, based on the contractual terms to maturity or repricing date. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less.
Within After One Year One Year Through 5 Years After 5 Years Total --------- --------------- ------------- ---------- (In thousands) Permanent residential one- to four-family: Adjustable rate .... $ 24,418 $ 9,070 $ -- $ 33,488 Fixed rate ......... 10,004 3,908 620,724 634,636 Other mortgage loans: Adjustable rate .... 14,276 13,732 -- 28,008 Fixed rate ......... 1,264 12,788 20,234 34,286 Non-real estate loans: Adjustable rate ... 8,627 186 -- 8,813 Fixed rate ........ 1,503 4,303 1,916 7,722 --------- --------- --------- --------- Total loans ...... $ 60,092 $ 43,987 $ 642,874 $ 746,953 ========= ========= ========= =========
Scheduled contractual amortization of loans does not reflect the actual term of the Association's loan portfolio. The average life of loans is substantially less than their contractual terms because of prepayments and due-on-sale clauses, which gives the Association the right to declare a conventional loan immediately due and payable in the event, among other things, that the borrower sells the real property subject to the mortgage and the loan is not repaid. The dollar amount of all loans, net of loans in process and non-performing loans, due one year after September 30, 1999, which have fixed interest rates and have adjustable rates, was $663.9 million and $23.0 million, respectively. 8 Loan Commitments. The Association issues commitments for fixed and adjustable rate loans conditioned upon the occurrence of certain events. Such commitments are made on specified terms and conditions and are honored for up to 45 days from commitment. The Association had outstanding loan commitments of approximately $11.8 million at September 30, 1999 consisting of $4.4 million of variable rate loans and $7.4 million of fixed rate loans. See Note 19 of Notes to the Consolidated Financial Statements. Loan Solicitation and Processing. The Association originates real estate and other loans at each of its offices. Loan originations are obtained by a variety of sources, including mortgage brokers, developers, builders, existing customers, newspapers, radio, periodical advertising and walk-in customers, although referrals from local realtors has been the primary source. Loan applications are taken by lending personnel, and the loan processing department obtains credit reports, appraisals and other documentation involved with a loan. All of the Association's lending is subject to its written nondiscriminatory underwriting standards, loan origination procedures and lending policies prescribed by the Association's Board of Directors. Property valuations are required on all real estate loans and are prepared by employees experienced in the field of real estate or by independent appraisers approved by the Association's Board of Directors. Additionally, all appraisals on loans in excess of $250,000 must meet applicable regulatory standards. The Association's loan approval process is intended to assess the borrower's ability to repay the loan, the viability of the loan, the adequacy of the value of the property that will secure the loan, the location of the real estate, and, in the case of commercial and multi-family real estate loans, the cash flow of the project and the quality of management involved with the project. The Association generally requires title insurance on all loans and also that borrowers provide evidence of fire and extended casualty insurance in amounts and through insurers that are acceptable to the Association. A loan application file is first reviewed by a loan officer of the Association and then is submitted to the loan committee for underwriting and approval. The Association can make loan commitments, subject to property valuation and possible other conditions of approval, in three to five days if income and credit data of the borrower are readily available. Loan Originations, Purchases and Sales. The Association has originated substantially all of the loans in its portfolio. During the year ended September 30, 1999, the Association originated $224.2 million in total loans, compared to $232.5 million in the same period of 1998. The continued high level of loan originations was attributable to relatively low interest rates and promotion of lending throughout the branch network and through mortgage brokers. During the year ended September 30, 1999, the Association began a program to sell loans to Fannie Mae. Through this program, $5.6 million in fixed rate loans were sold, all of which were one- to four-family mortgages. Servicing was retained on all loans sold. Between 1989 and 1992, the Association purchased permanent residential one- to four-family jumbo mortgage loans (i.e., loans with principal balances over $203,150) on detached residences from various localities throughout the Western United States, primarily Oregon, Washington, California and Arizona. At one time the aggregate balance of such loans was approximately $64.6 million. At September 30, 1999, the balance had declined to $1.3 million. During 1999, the Association purchased $10.4 million in permanent residential one- to four-family mortgage loans. These loans were underwritten on the same basis as permanent residential one- to four-family real estate loans originated by the Association. The Association also purchases multi-family and commercial real estate mortgage loans secured by properties within the Association's primary market area. At September 30, 1999, the balance of such purchased loans was $17.9 million. These loans were underwritten on the same basis as similar loans originated by the Association. 9 The following table shows total loans originated, purchased and sold, loan reductions and the net increase in the Association's loans during the periods indicated.
Year Ended September 30, ----------------------------------- 1999 1998 1997 --------- --------- --------- (In thousands) Total net loans at beginning of period $ 668,146 $ 551,825 $ 473,556 --------- --------- --------- Loans originated: Real estate loans originated (1) .... 209,723 219,790 116,502 Real estate loans purchased ......... 15,500 7,792 15,648 Non-real estate loans originated .... 14,471 12,684 3,571 --------- --------- --------- Total loans originated ............ 239,694 240,266 135,721 --------- --------- --------- Loan reductions: Principal paydowns .................. (159,161) (122,029) (56,157) Loans sold .......................... (5,584) -- -- Other reductions (2) ................ (3,302) (1,916) (1,295) --------- --------- --------- Total loan reductions ............ (168,047) (123,945) (57,452) --------- --------- --------- Total net loans at end of period ..... $ 739,793 $ 668,146 $ 551,825 ========= ========= ========= (1) Includes decreases/increases from loans-in-process. (2) Includes net reductions due to deferred loans fees, discounts net of amortization, provision for loan loss and transfers to real estate owned.
Loan Origination and Other Fees. In addition to interest earned on loans, the Association receives loan origination fees or "points" for originating loans. Loan points are a percentage of the principal amount of the real estate loan and are charged to the borrower in connection with the origination of the loan. The amount of points charged by the Association varies, though it generally amounts to 1.00% to 1.75% on permanent loans and 2.00% on construction loans. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 91, which deals with the accounting for non-refundable fees and costs associated with originating or acquiring loans, the Association's loan origination fees and certain related direct loan origination costs are offset, and the resulting net amount is deferred and amortized as income over the contractual life of the related loans as an adjustment to the yield of such loans, or until the loan is paid in full. At September 30, 1999, the Association had $8.0 million of net loan fees which had been deferred and are being recognized as income over the contractual maturities of the related loans. 10 Asset Quality Delinquent Loans. The following table sets forth information concerning delinquent loans at September 30, 1999, in dollar amount and as a percentage of the Association's total loan portfolio. The amounts presented represent the total outstanding principal balances of the related loans, rather than the actual payment amounts which are past due.
Permanent residential Multi-family 1-4 family Construction Real Estate Loans Total --------------------- --------------------- ------------------- --------------------- Amount Percentage Amount Percentage Amount Percentage Amount Percentage ------- ---------- ------ ---------- ------ ---------- ------- ---------- (Dollars in thousands) Loans delinquent for 90 days and more....... $915 0.12% $1,474 0.19% $926 0.12% $3,315 0.43%
Delinquency Procedures. When a borrower fails to make a required payment on a loan, the Association attempts to cure the delinquency by contacting the borrower. In the case of loans past due, appropriate late notices are sent on the fifth and fifteenth days after the due date. If the delinquency is not cured, the borrower is contacted by telephone after the fifteenth day after the payment is due. For real estate loans, in the event a loan is past due for 45 days or more, the Association will attempt to arrange an in-person interview with the borrower to determine the nature of the delinquency; based upon the results of the interview and its review of the loan status, the Association may negotiate a repayment program with the borrower. If a loan remains past due at 60 days, the Association performs an in-depth review of the loan status, the condition of the property and the circumstances of the borrower. If appropriate, an alternative payment plan is established. At 90 days past due, a letter prepared by the Association is sent to the borrower describing the steps to be taken to collect the loan, including acceptance of a voluntary deed-in-lieu of foreclosure, and of the initiation of foreclosure proceedings. A decision as to whether and when to initiate foreclosure proceedings is made by senior management, with the assistance of legal counsel, at the direction of the Board of Directors, based on such factors as the amount of the outstanding loan in relation to the value of the property securing the original indebtedness, the extent of the delinquency and the borrower's ability and willingness to cooperate in curing the delinquency. For consumer loans, at 60 days past due a letter demanding payment is sent to the borrower. If the delinquency is not cured prior to becoming 90 days past due, repossession procedures are implemented for collateralized loans. At 90 days past due, consumer loans are generally charged off. Non-Performing Assets. The Association's non-performing assets consist of non-accrual loans, accruing loans greater than 90 days delinquent, real estate owned and other repossessed assets. All loans are reviewed on a regular basis and are placed on a non-accrual status when, in the opinion of management, the collection of additional interest is deemed insufficient to warrant further accrual. Generally, the Association places all loans more than 90 days past due on non-accrual status. Uncollectible interest on loans is charged-off or an allowance for losses is established by a charge to earnings equal to all interest previously accrued and interest is subsequently recognized only to the extent cash payments are received until delinquent interest is paid in full and, in management's judgment, the borrower's ability to make periodic interest and principal payments is back to normal in which case the loan is returned to accrual status. Real estate acquired by foreclosure is classified as real estate owned until such time as it is sold. See Note 1 of Notes to the Consolidated Financial Statements. When such property is acquired, it is recorded at the lower of the balance of the loan on the property at the date of acquisition (not to exceed the net realizable value) or the estimated fair value. Costs, excluding interest, relating to holding the property are expensed as incurred. Valuations are periodically performed by management and an allowance for losses is established by a charge to operations if the carrying value of the property exceeds its estimated net realizable value. From time to time, the Association 11 also acquires personal property, generally mobile homes, which are classified as other repossessed assets and are carried on the books at their estimated fair market value and disposed of as soon as commercially reasonable. As of September 30, 1999, the Association's total non-performing loans amounted to $3.3 million, or 0.43% of total loans, before net items, compared with $524,000, or 0.07% of total loans, before net items, at September 30, 1998. The increase relates primarily to two loans placed on nonaccrual status during 1999, a $1.5 million land development loan and a $925,711 commercial real estate loan secured by an apartment complex. The appraised value of the underlying collateral exceeds the loan balances and foreclosure proceedings have been commenced related to these properties. Real estate owned increased from the prior year primarily as a result of the foreclosure of a commercial real estate property. This property was written down to its estimated fair value of $1.4 million upon foreclosure. The following table sets forth the amounts and categories of the Association's non-performing assets at the dates indicated. The Association had no material troubled debt restructurings as defined by SFAS No. 15 at any of the dates indicated.
At September 30, ----------------------------------------------- 1999 1998 1997 1996 1995 ----- ------ ------- ------- ------ (Dollars in thousands) Non-accruing loans One- to four-family real estate ..... $ 915 $ 513 $ 245 $ 191 $ 734 Commercial real estate .............. 2,400 -- -- -- -- Consumer ............................ -- 11 9 -- -- Accruing loans greater than 90 days delinquent ....................... -- -- -- -- -- ------ ------ ------- ------ ------ Total non-performing loans .......... 3,315 524 254 191 734 ------ ------ ------- ------ ------ Real estate owned ....................... 1,495 -- -- 69 24 Other repossessed assets ................ -- -- -- -- -- ------ ------ ------- ------ ------ Total repossessed assets ............ 1,495 -- -- 69 24 ------ ------- ------- ------ ------ Total non-performing assets ......... $4,810 $ 524 $ 254 $ 260 $ 758 ====== ======= ======= ====== ====== Total non-performing assets as a percentage of total assets ............ 0.46% 0.05% 0.03% 0.04% 0.12% ====== ====== ======= ====== ====== Total non-performing loans as a percentage of total loans, before net items ...................... 0.62% 0.07% 0.04% 0.04% 0.18% ====== ====== ======= ====== ====== Allowance for loan losses as a percentage of total non-performing assets ................................ 51.64% 372.14% 510.38% 356.92% 106.80% ====== ====== ======= ====== ====== Allowance for loan losses as a percentage of total non-performing loans ......... 74.93% 372.14% 510.38% 485.86% 110.08% ====== ====== ======= ====== ======
For the year ended September 30, 1999, the amount of gross income that would have been recorded in the period then ended if non-accrual loans and troubled debt restructurings had been current according to their original terms, 12 and the amount of interest income on such loans that was included in net income for each of such periods, were, in both cases, less than 1% of total interest income. Classified Assets. Federal regulations require that each insured savings association classify its assets on a regular basis. In addition, in connection with examinations of insured institutions, federal examiners have authority to identify problem assets and, if appropriate, classify them. There are four categories used to classify problem assets: "special mention," "substandard," "doubtful," and "loss." Special mention assets are not considered classified assets, but are assets of questionable quality that have potential or past weaknesses that deserve management's close attention and monitoring. Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. Special mention assets and assets classified as substandard or doubtful require the institution to establish general allowances for loan losses. If an asset or portion thereof is classified loss, the insured institution must either establish specific allowances for loan losses in the amount of 100% of the portion of the asset classified loss or charge-off such amount. General loss allowances established to cover possible losses related to special mention assets and assets classified substandard or doubtful may be included in determining an institution's regulatory capital, while specific valuation allowances for loan losses do not qualify as regulatory capital. Federal examiners may disagree with an insured institution's classifications and the amounts reserved. As of September 30, 1999, total classified assets amounted to 0.46% of total assets. At September 30, 1999 and 1998, the aggregate amounts of the Association's classified and special mention assets, exclusive of amounts classified loss and which have been fully reserved, were as follows:
At September 30, ----------------- 1999 1998 ------ ------ (In thousands) Loss ................... $ -- $ -- Doubtful ............... -- -- Substandard assets ..... 4,810 521 Special mention ........ 456 2,452 General loss allowances 2,484 1,947 Specific loss allowances -- 3 Charge offs ............ 398 20
Assets classified substandard at September 30, 1999 include a $1.5 million land development loan, a $925,711 loan on a 40-unit apartment complex, and a $1.4 million commercial real estate property obtained through foreclosure. None of these assets were classified at September 30, 1998. These problem assets are not concentrated in any one market area and the Company does not believe they are indicative of an adverse market trend in the Northwest. The increase in charge offs for the year ended September 30, 1999 relates primarily to the write-down of the commercial real estate property to fair value. The loan on the commercial real estate was originally a participation with another lender. Allowance for Loan Losses. The allowance for loan losses is maintained at a level considered adequate by management to provide for anticipated loan losses based on management's assessment of various factors affecting the loan portfolio, including a review of all loans for which full collectibility may not be reasonably assured, an overall evaluation of the quality of the underlying collateral, economic conditions, historical loan loss experience and other 13 factors that warrant recognition in providing for an adequate loan loss allowance. While management believes it uses the best information available to determine the allowance for loan losses, unforeseen market conditions could result in adjustments to the allowance for loan losses and net earnings could be significantly affected, if circumstances differ substantially from the assumptions used in making the final determination. At September 30, 1999, the Association had an allowance for loan losses of $2.5 million, which was equal to 51.64% of non-performing assets and 0.32% of total loans. Provisions for loan losses are charged to earnings to bring the total allowance for loan losses to a level deemed appropriate by management. Management considers historical loan loss experience, the volume and type of lending conducted by the Association, industry standards, the amount of non-performing assets, general economic conditions (particularly as they relate to the Association's market area), and other factors related to the collectibility of the Association's loan portfolio in their determination of the adequacy of the allowance and the provision. The provisions for loan losses charged against income for the years ended September 30, 1999, 1998 and 1997 were $932,000, $674,000, and $370,000, respectively. Management believes that the amount maintained in the allowance will be adequate to absorb possible losses in the portfolio. The following table sets forth for the periods indicated information regarding changes in the Association's allowance for loan losses. All information is before net items.
Year Ended September 30, ---------------------------------------------------------------- 1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- (Dollars in thousands) Total loans outstanding ................. $ 774,441 $ 704,703 $ 576,575 $ 488,551 $ 416,312 ========= ========= ========= ========= ========= Average loans outstanding ............... $ 721,658 $ 614,457 $ 515,555 $ 440,510 $ 381,689 ========= ========= ========= ========= ========= Allowance at beginning of period ........ $ 1,950 $ 1,296 $ 928 $ 808 $ 755 Charge-offs ............................. (398) (20) (2) -- (67) Recoveries .............................. -- -- -- -- -- Provision for loan losses ............... 932 674 370 120 120 --------- --------- --------- --------- --------- Allowance at end of period .............. $ 2,484 $ 1,950 $ 1,296 $ 928 $ 808 ========= ========= ========= ========= ========= Allowance for loan losses as a percentage of total loans outstanding ............. 0.32% 0.28% 0.22% 0.19% 0.19% ==== ==== ==== ==== ==== Ratio of net charge-offs to average loans outstanding during the period .......... 0.06% --% --% --% 0.02% ==== ==== ==== ==== ====
14 The following table sets forth the breakdown of the allowance for loan losses by loan category and summarizes the percentage of total loans, before net items, in each category to total loans, before net items, at the dates indicated.
At September 30, ------------------------------------------------------------------------------------------------------------- 1999 1998 1997 ------------------------------------ ----------------------------------- ----------------------------------- Percent of Percent of Percent of Amount Allowance in Percent of Amount Allowance in Percent of Amount Allowance in Percent of of Category to Total Loans of Category to Total Loans of Category to Total Loans Allowance Total Loans by Category Allowance Total Loans by Category Allowance Total Loans by Category --------- ------------ ----------- --------- ------------ ----------- --------- ------------ ----------- (Dollars in thousands) Permanent residential 1-4 family ........... $1,103 0.14% 83.56% $1,141 0.16% 81.95% $ 887 0.15% 86.51% Multi-family residential .......... 267 0.03 2.38 124 0.02 2.73 121 0.02 2.93 Construction ........... 221 0.03 6.87 116 0.02 9.12 -- -- 5.31 Commercial ............. 730 0.09 4.79 444 0.07 4.18 250 0.04 3.93 Land ................... 28 -- 0.27 29 -- 0.31 12 -- 0.27 Non-real estate ........ 135 0.02 2.13 96 0.01 1.71 26 0.01 1.05 ------ ------ ------ ------ ----- ------ ------ ---- ------ Total ............... $2,484 0.31% 100.00% $1,950 0.28% 100.00% $1,296 0.22% 100.00% ====== ===== ====== ====== ==== ====== ====== ==== ======
At September 30, ------------------------------------------------------------------------- 1996 1995 ------------------------------------ ----------------------------------- Percent of Percent of Amount Allowance in Percent of Amount Allowance in Percent of of Category to Total Loans of Category to Total Loans Allowance Total Loans by Category Allowance Total Loans by Category --------- ------------ ----------- --------- ------------ ----------- (Dollars in thousands) Permanent residential 1-4 family............ $925 0.19% 91.50% $807 0.19% 91.68% Multi-family residential........... -- -- 1.34 -- -- 1.79 Construction............ -- -- 2.92 -- -- 2.36 Commercial.............. -- -- 3.20 -- -- 3.36 Land.................... -- -- 0.24 -- -- 0.25 Non-real estate......... 3 -- 0.80 1 -- 0.56 ------ ----- ------- ---- ---- ------ Total................ $928 0.19% 100.00% $808 0.19% 100.00% ====== ===== ======= ==== ==== ======
15 Although the Association believes that it has established its allowance for loan losses in accordance with generally accepted accounting principles ("GAAP"), there can be no assurance that regulators, in reviewing the Association's loan portfolio, will not request the Association to significantly increase its allowance for loan losses, thereby reducing the Association's net worth and earnings. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that substantial increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance may adversely affect the Association's financial condition and results of operation. Investment Activities Federally chartered savings institutions have the authority to invest in securities of various federal agencies, certain insured certificates of deposit of banks and savings institutions, certain bankers' acceptances, repurchase agreements and federal funds. Subject to various restrictions, federally chartered savings institutions may also invest their assets in commercial paper, investment grade corporate debt securities and mutual funds whose assets conform to the investments that a federally chartered savings institution is otherwise authorized to make directly. OTS regulations restrict investments in corporate debt securities of any one issuer in excess of 15% of the Association's unimpaired capital and unimpaired surplus, as defined by federal regulations, which totaled $101.0 million at September 30, 1999, plus an additional 10% if the investments are fully secured by readily marketable collateral. See "REGULATION -- Federal Regulation of Savings Associations -- Loans to One Borrower" for a discussion of additional restrictions on the Association's investment activities. The investment securities portfolio is managed in accordance with a written investment policy adopted by the Board of Directors and administered by the Investment Committee, which consists of the President and four Board members. Generally, the investment policy is to invest funds among various categories of investments and maturities based upon the need for liquidity, to achieve the proper balance between its desire to minimize risk and maximize yield, and to fulfill the asset/liability management policy. The President and the Chief Financial Officer may independently invest up to 1.0% of total assets of the Company within the parameters set forth in the Investment Policy, to be subsequently reviewed with the Investment Committee at their next scheduled meeting. Transactions or investments in any one security determined by type, maturity and coupon in excess of $10.0 million or 1.0% of assets are not permitted. Investment securities held to maturity are carried at cost and adjusted for amortization of premiums and accretion of discounts. As of September 30, 1999, the investment securities portfolio held to maturity consisted of $559,512 in tax-exempt securities issued by states and municipalities. Securities to be held for indefinite periods of time and not intended to be held to maturity are classified as available for sale and carried at fair value. Securities available for sale include securities that management intends to use as part of its asset/liability management strategy that may be sold in response to changes in interest rates or significant prepayment risks or both. As of September 30, 1999, the portfolio of securities available for sale consisted of $73.9 million in securities issued by the U.S. Treasury and other federal government agencies, $23.9 million in tax exempt securities issued by states and municipalities, and $102.6 million in investment grade corporate investments. During the years ended September 30, 1999, 1998 and 1997, neither the Company nor the Association held any off-balance sheet derivative financial instruments in their investment portfolios to which the provisions of SFAS No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments," would apply. 16 The following tables set forth certain information relating to the investment securities portfolio held to maturity and securities available for sale at the dates indicated.
At September 30, --------------------------------------------------------------------------- 1999 1998 1997 ----------------------- ----------------------- ----------------------- Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value --------- ----------- --------- ----------- --------- ----------- (In thousands) Held to maturity: State and municipal obligations ...... $ 560 $ 577 $ 889 $ 926 $ 1,042 $ 1,069 Corporate obligations ................ -- -- 2,000 2,002 21,895 21,900 Available for sale: U.S. Government obligations .......... 74,227 73,960 102,620 105,454 185,861 185,601 State and municipal obligations ...... 24,848 23,881 17,406 18,103 8,861 9,087 Corporate obligations ................ 62,037 60,807 79,225 79,667 67,147 67,158 -------- ----------- -------- ----------- -------- ----------- Total .............................. $161,672 $ 159,225 $202,140 $ 206,152 $284,806 $ 284,815 ======== =========== ======== =========== ======== ===========
At September 30, ---------------------------------------------------------------------- 1999 1998 1997 --------------------- ---------------------- --------------------- Amortized Percent of Amortized Percent of Amortized Percent of Cost Portfolio Cost Portfolio Cost Portfolio --------- ----------- ---------- ---------- --------- ---------- (Dollars in thousands) Held to maturity: State and municipal obligations $ 560 0.35% $ 889 0.44% $ 1,042 0.36% Corporate obligations ......... -- -- 2,000 0.99 21,895 7.69 Available for sale: U.S. Government obligations ... 74,227 45.91 102,620 50.77 185,861 65.26 State and municipal obligations 24,848 15.37 17,406 8.61 8,861 3.11 Corporate obligations ......... 62,037 38.37 79,225 39.19 67,147 23.58 -------- ------ -------- ------ -------- ------ Total ....................... $161,672 100.00% $202,140 100.00% $284,806 100.00% ======== ====== ======== ====== ======== ======
17 The following table sets forth the maturities and weighted average yields of the debt securities in the investment portfolio at September 30, 1999.
One Year After One Through After Five Through After Ten or Less Five Years Ten Years Years Totals --------------------- -------------------- --------------------- -------------------- -------- Amount Yield Amount Yield Amount Yield Amount Yield -------- ------ -------- ------ -------- ------ -------- ------ (Dollars in thousands) Held to maturity: State and municipal obligations ...... $ 171 6.82% $ 389 5.60% $ -- -- $ -- -- $ 560 Available for sale: U.S. Government obligations ...... 15,014 5.69% 59,213 6.01% -- -- -- -- 74,227 State and municipal obligations ...... 572 6.49% 802 6.25% 198 6.12% 23,276 7.57% 24,848 Corporate obligations . 21,053 6.14% 21,159 6.12% -- -- 19,825 5.94% 62,037 -------- ------- ------- -------- -------- Total.................. $ 36,810 $81,563 $ 198 $ 43,101 $161,672 ======== ======= ======= ======== ========
At September 30, 1999 the Association did not hold any securities from a single issuer, other than the U.S. Government, whose aggregate book value was in excess of 10% of the Company's stockholders' equity, or $11.0 million. 18 Mortgage-Backed and Related Securities At September 30, 1999, the Company's net mortgage-backed and related securities totaled $75.3 million at fair value ($75.7 million at amortized cost) and had a weighted average yield of 5.88%. At September 30, 1999, 82.37% of the mortgage-backed and related securities were adjustable rate securities. Mortgage-backed and related securities ("MBS") can be divided into two main groups. The first group, called mortgage participation certificates or pass-through certificates, typically represents a participation interest in a pool of single-family or multi-family mortgages. The principal and interest payments on these mortgages are passed from the mortgage originators, through intermediaries (generally U.S. Government agencies and government sponsored enterprises) that pool and resell the participation interests in the form of securities, to investors such as the Company. Such U.S. Government agencies and government sponsored enterprises, which guarantee the payment of principal and interest to investors, primarily include the Federal Home Loan Mortgage Corporation ("FHLMC"), Fannie Mae (formerly the Federal National Mortgage Association), the Government National Mortgage Association ("GNMA") and the U.S. Small Business Administration ("SBA"). The second group, called collateralized mortgage obligations ("CMOs"), consists of securities created from and secured by the securities in the first group described above. CMOs are an example of a security called a derivative, because they are derived from mortgage pass-through securities. Underwriters of CMOs create these securities by dividing up the interest and principal cash flows from the pools of mortgages and selling these different slices of cash flows as a new and different class of individual securities or "tranches." The Company invested in $18.1 million of CMOs during 1999, comprised of two classes, planned amortization class tranches ("PACs") and Floaters. The least volatile CMOs are PACs. With PAC tranches, the yields, average lives, and lockout periods when no payments are received are designed to closely follow the actual performance of the underlying MBS. PACs are available in a variety of short term maturities, usually two, three, five, or seven years. CMO floaters are similar to adjustable rate mortgages; they carry an interest rate that changes in a fixed relationship to an interest rate index, typically the London Interbank Offer Rate ("LIBOR"). Floaters usually have caps that determine the highest interest that can be paid by the securities. Except for caps on floaters, PACs and floaters may help to manage interest rate risk by reducing asset duration. They also may help manage price volatility since they typically have short maturities or coupons that reset monthly or quarterly to reflect changes in the index rate. MBS typically are issued with stated principal amounts, and the securities are backed by pools of mortgages that have loans with interest rates that fall within a specific range and have varying maturities. MBS generally yield less than the loans that underlie such securities because of the cost of payment guarantees and credit enhancements. In addition, MBS are usually more liquid than individual mortgage loans and may be used to collateralize certain liabilities and obligations of the Company. These types of securities also permit the Association to optimize its regulatory capital because they have low risk weighting. Expected maturities of MBS will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Prepayments that are faster than anticipated may shorten the life of the security and may result in a loss of any premiums paid and thereby reduce the net yield on such securities. Although prepayments of underlying mortgages depend on many factors, including the type of mortgages, the coupon rate, the age of mortgages, the geographical location of the underlying real estate collateralizing the mortgages and general levels of market interest rates, the difference between the interest rates on the underlying mortgages and the prevailing mortgage interest rates generally is the most significant determinant of the rate of prepayments. During periods of declining mortgage interest rates, if the coupon rate of the underlying mortgages exceeds the prevailing market interest rates offered for mortgage loans, refinancing generally increases and accelerates the prepayment of the underlying mortgages and the related security. Under such circumstances, the Company may be subject to reinvestment risk because, to the extent that the Company's MBS amortize or prepay faster than anticipated, the Company may not be able to reinvest the proceeds of such repayments and prepayments at a comparable rate. 19 The following tables set forth certain information relating to the mortgage-backed and related securities portfolio held to maturity and available for sale at the dates indicated.
At September 30, --------------------------------------------------------------------------- 1999 1998 1997 ----------------------- ----------------------- ----------------------- Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value --------- ----------- --------- ----------- --------- ----------- (In thousands) Held to maturity: GNMA ................................. $ 2,601 $ 2,596 $ 3,662 $ 3,696 $ 5,447 $ 5,518 Available for sale: Fannie Mae ........................... 24,319 24,410 12,866 12,985 12,775 12,897 FHLMC ................................ 18,375 18,371 14,722 15,158 25,881 26,574 GNMA ................................. 11,783 11,768 3,619 3,662 9,709 9,808 SBA .................................. -- -- 11,535 11,531 15,732 15,590 CMOs ................................. 18,598 18,146 -- -- -- -- -------- ----------- -------- ----------- -------- ----------- Total .............................. $ 75,676 $ 75,291 $ 46,404 $ 47,032 $ 69,544 $ 70,387 ======== =========== ======== =========== ======== ===========
At September 30, ------------------------------------------------------------------------------------ 1999 1998 1997 ---------------------------- -------------------------- -------------------------- Amortized Percent of Amortized Percent of Amortized Percent of Cost Portfolio Cost Portfolio Cost Portfolio ----------- ----------- --------- ----------- --------- ---------- (Dollars in thousands) Held to maturity: GNMA ............ $ 2,601 3.44% $ 3,662 7.89% $ 5,447 7.83% Available for sale: Fannie Mae ...... 24,319 32.13 12,866 27.73 12,775 18.37 FHLMC ........... 18,375 24.28 14,722 31.72 25,881 37.22 GNMA ............ 11,783 15.57 3,619 7.80 9,709 13.96 SBA ............. -- -- 11,535 24.86 15,732 22.62 CMOs ............ 18,598 24.58 -- -- -- -- ---------- ------ -------- ------ ------- ------ Total ......... $ 75,676 100.00% $ 46,404 100.00% $69,544 100.00% ========== ====== ======== ====== ======= ======
Interest-Earning Deposits The Company also had interest-earning deposits in the FHLB of Seattle amounting to $1.3 million and $12.1 million at September 30, 1999 and 1998, respectively. Deposit Activities and Other Sources of Funds General. Deposits are the primary source of the Association's funds for lending and other investment purposes. In addition to deposits, the Association derives funds from loan principal repayments. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows are significantly influenced by general 20 interest rates and money market conditions. Borrowings may be used on a short-term basis to compensate for reductions in the availability of funds from other sources. They may also be used on a longer term basis for general business purposes. Deposits. The Association's deposits are attracted principally from within the Association's primary market area through the offering of a broad selection of deposit instruments, including checking accounts, negotiable order of withdrawal ("NOW") accounts, money market deposit accounts, passbook and statement savings accounts, and certificates of deposit. Included among these deposit products are individual retirement account ("IRA") certificates of approximately $87.4 million at September 30, 1999. Deposit account terms vary, with the principal differences being the minimum balance required, the time period the funds must remain on deposit and the interest rate. In 1996, the Association began accepting deposits from outside its primary market area through both private placements and brokered deposits if the terms of the deposits fit the Association's specific needs and are at a rate lower than the rates on similar maturity borrowings through the FHLB of Seattle. At September 30, 1999, these deposits totaled $35.2 million, or 4.89% of total deposits. Interest rates paid, maturity terms, service fees and withdrawal penalties are established by the Association on a periodic basis. Determination of rates and terms are predicated on funds acquisition and liquidity requirements, rates paid by competitors, growth goals and federal regulations. In July 1997, the Association acquired 25 Wells Fargo Bank branches in Oregon, adding $241.3 million in deposit accounts. In addition to the increase from the acquisition, the Association experienced a net increase in deposits (before interest credited) of $14.1 million for the year ended September 30, 1997 as customers deposited funds and new customers were added. The acquired deposit base included a significant proportion of non-interest bearing checking accounts, thereby reducing the cost of deposits. Concurrent with the acquisition, the Association's deposit product offerings were expanded, allowing customers to choose the accounts best suited to their needs, whether their focus is low cost or additional services. For the year ended September 30, 1999, the Association experienced a net increase in deposits (before interest credited) of $6.3 million as customers deposited funds and new customers were added. The Association has conducted a special checking account campaign in an effort to attract and retain deposits. To augment this deposit growth, the Association has relied on increased borrowings from the FHLB of Seattle. See "-- Borrowings." At September 30, 1999, certificate accounts maturing during the year ending September 30, 2000 totaled $266.0 million. Based on historical experience, the Association expects that a significant amount will be renewed with the Association at maturity. In the event a significant amount of such accounts are not renewed at maturity, the Association would not expect a resultant adverse impact on operations and liquidity because of the Association's borrowing capacity. See "-- Borrowings." In the unlikely event the Association is liquidated, depositors will be entitled to full payment of their deposit accounts prior to any payment being made to the Company, which is the sole shareholder of the Association. Substantially all of the Association's depositors are residents of the State of Oregon. 21 The following table indicates the amount of certificate accounts with balances of $100,000 or greater by time remaining until maturity as of September 30, 1999.
Certificate Maturity Period Accounts ------------------------------------ ----------- (In thousands) Three months or less................ $17,824 Over three through six months....... 18,692 Over six through twelve months...... 22,841 Over twelve months.................. 25,289 ------- Total........................... $84,646 =======
The following table sets forth the deposit balances in the various types of deposit accounts offered by the Association at the dates indicated.
At September 30, ------------------------------------------------------------------------------------------ 1999 1998 1997 ------------------------------- -------------------------------- --------------------- Percent Percent Percent of Increase of Increase of Amount Total (Decrease) Amount Total (Decrease) Amount Total -------- ------- ---------- -------- -------- ---------- -------- -------- (Dollars in thousands) Certificates of deposit .. $392,086 54.43% ($ 3,265) $395,351 57.33% $ 19,748 $375,603 55.73% -------- ----- -------- -------- ----- -------- -------- ----- Transaction accounts: Non-interest checking .... 52,319 7.26 4,772 47,547 6.90 (5,031) 52,578 7.80 Interest-bearing checking 67,303 9.34 (3,258) 70,561 10.23 (4,483) 75,044 11.14 Passbook and statement savings .... 59,790 8.30 (1,624) 61,414 8.91 (1,765) 63,179 9.37 Money market deposits .... 148,903 20.67 34,235 114,668 16.63 7,094 107,574 15.96 -------- ------ -------- ------- ------ -------- -------- ------ Total transaction accounts 328,315 45.57 34,125 294,190 42.67 (4,185) 298,375 44.27 -------- ------ -------- -------- ------ -------- -------- ------ Total deposits ........... $720,401 100.00% $ 30,860 $689,541 100.00% $ 15,563 $673,978 100.00% ======== ====== ======== ======== ====== ======== ======== ======
The following table sets forth the deposit activities of the Association for the periods indicated.
Year Ended September 30, ----------------------------------- 1999 1998 1997 --------- --------- --------- (In thousands) Beginning balance .................... $ 689,541 $ 673,978 $ 399,673 --------- --------- --------- Increase due to acquired deposits .... -- -- 241,272 Net inflow (outflow) of deposits before interest credited ................... 6,251 (8,753) 14,077 Interest credited .................... 24,609 24,316 18,956 --------- --------- --------- Net increase in deposits ............. 30,860 15,563 274,305 --------- --------- --------- Ending balance ....................... $ 720,401 $ 689,541 $ 673,978 ========= ========= =========
Borrowings. Deposit liabilities are the primary source of funds for the Association's lending and investment activities and for its general business purposes. The Association may rely upon advances from the FHLB of Seattle, 22 reverse repurchase agreements and a bank line of credit to supplement its supply of lendable funds and to meet deposit withdrawal requirements. The FHLB of Seattle serves as the Association's primary borrowing source after deposits. The FHLB of Seattle functions as a central reserve bank providing credit for savings and loan associations and certain other member financial institutions. As a member, the Association is required to own capital stock in the FHLB of Seattle and is authorized to apply for advances on the security of certain of its mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the U.S. Government) provided certain creditworthiness standards have been met. Advances are made pursuant to several different credit programs. Each credit program has its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based on the financial condition of the member institution and the adequacy of collateral pledged to secure the credit. As a member of the FHLB, the Association maintains a credit line that is a percentage of its regulatory assets, subject to collateral requirements. At September 30, 1999, the credit line was 30% of total assets of the Association. Advances are collateralized in aggregate, as provided for in the Advances, Security and Deposit Agreements with the FHLB, by certain mortgages or deeds of trust and securities of the U.S. Government and agencies thereof. During the year ended September 30, 1998 the Company sold under agreements to repurchase specific securities of the U.S. Government and its agencies and other approved investments to a broker-dealer. The securities underlying these repurchase agreements were delivered to the broker-dealer who arranged the transaction. Securities delivered to the broker-dealer may be loaned out in the ordinary course of operations. All of the reverse repurchase agreements at September 30, 1998 matured during the quarter ended March 31, 1999 and were not renewed. The following table sets forth certain information regarding borrowings by the Company and Association at the end of and during the periods indicated:
At September 30, ------------------------- 1999 1998 ---------- ----------- Weighted average rate paid on: FHLB advances .................................. 5.34% 5.26% Reverse repurchase agreements .................. -- 5.65
Year Ended September 30, ------------------------- 1999 1998 ---------- ----------- (Dollars in thousands) Maximum amount outstanding at any month end: FHLB advances .................................. $ 197,000 $ 167,000 Reverse repurchase agreements .................. 8,095 17,078 Approximate average balance: FHLB advances .................................. 173,740 141,016 Reverse repurchase agreements .................. 3,105 14,669 Approximate weighted average rate paid on: FHLB advances .................................. 5.25% 5.62% Reverse repurchase agreements .................. 5.72 5.80
The Association also has an uncommitted line of credit of $15.0 million with a commercial bank. At September 30, 1999, the Association had no borrowings outstanding under this credit facility. 23 REGULATION OF THE ASSOCIATION The Association is subject to extensive regulation, examination and supervision by the OTS as its chartering agency, and the FDIC, as the insurer of its deposits. The activities of federal savings institutions are governed by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain respects, the Federal Deposit Insurance Act ("FDIA") and the regulations issued by the OTS and the FDIC to implement these statutes. These laws and regulations delineate the nature and extent of the activities in which federal savings associations may engage. Lending activities and other investments must comply with various statutory and regulatory capital requirements. In addition, the Association's relationship with its depositors and borrowers is also regulated to a great extent, especially in such matters as the ownership of deposit accounts and the form and content of the Association's mortgage documents. The Association must file reports with the OTS and the FDIC concerning its activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other financial institutions. There are periodic examinations by the OTS and the FDIC to review the Association's compliance with various regulatory requirements. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such policies, whether by the OTS, the FDIC or Congress, could have a material adverse impact on the Company, the Association and their operations. The Company, as a savings and loan holding company, is also required to file certain reports with, and otherwise comply with the rules and regulations of, the OTS. Federal Regulation of Savings Associations Office of Thrift Supervision. The OTS is an office in the Department of the Treasury subject to the general oversight of the Secretary of the Treasury. The OTS generally possesses the supervisory and regulatory duties and responsibilities formerly vested in the Federal Home Loan Bank Board. Among other functions, the OTS issues and enforces regulations affecting federally insured savings associations and regularly examines these institutions. Federal Home Loan Bank System. The FHLB System, consisting of 12 FHLBs, is under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The designated duties of the FHFB are to supervise the FHLBs, to ensure that the FHLBs carry out their housing finance mission, to ensure that the FHLBs remain adequately capitalized and able to raise funds in the capital markets, and to ensure that the FHLBs operate in a safe and sound manner. The Association, as a member of the FHLB of Seattle, is required to acquire and hold shares of capital stock in the FHLB of Seattle in an amount equal to the greater of (i) 1.0% of the aggregate outstanding principal amount of residential mortgage loans, home purchase contracts and similar obligations at the beginning of each year, or (ii) 1/20 of its advances (borrowings) from the FHLB of Seattle. The Association is in compliance with this requirement with an investment in FHLB of Seattle stock of $11.0 million at September 30, 1999. Among other benefits, the FHLB provides a central credit facility primarily for member institutions. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes advances to members in accordance with policies and procedures established by the FHFB and the Board of Directors of the FHLB of Seattle. Federal Deposit Insurance Corporation. The FDIC is an independent federal agency that insures the deposits, up to prescribed statutory limits, of depository institutions. The FDIC currently maintains two separate insurance funds: the Bank Insurance Fund ("BIF") and the SAIF. As insurer of the Association's deposits, the FDIC has examination, supervisory and enforcement authority over the Association. The majority of the Association's accounts are insured by the SAIF, however, the $241.3 million of deposits acquired in July 1997 from Wells Fargo Bank, N.A., a BIF-insured institution, will continue to be BIF-insured deposits 24 and will be assessed premiums based on BIF rates, which have been lower than the SAIF rates since 1995. These deposits are known as Oakar deposits, indicating that they are deposits held by a SAIF-insured institution, but insured by the BIF. The FDIC insures deposits at the Association to the maximum extent permitted by law. The Association currently pays deposit insurance premiums to the FDIC based on a risk-based assessment system established by the FDIC for all SAIF-member institutions. Under applicable regulations, institutions are assigned to one of three capital groups that are based solely on the level of an institution's capital -- "well capitalized," "adequately capitalized," and "undercapitalized" -- which are defined in the same manner as the regulations establishing the prompt corrective action system, as discussed below. These three groups are then divided into three subgroups which reflect varying levels of supervisory concern, from those which are considered to be healthy to those which are considered to be of substantial supervisory concern. The matrix so created results in nine assessment risk classifications, with rates currently ranging from .23% for well capitalized, financially sound institutions with only a few minor weaknesses to .31% for undercapitalized institutions that pose a substantial risk of loss to the SAIF unless effective corrective action is taken. The FDIC is authorized to raise assessment rates under certain circumstances. The Association's assessments expensed for the year ended September 30, 1999 totaled $295,950. Until the second half of 1995, the same matrix applied to BIF-member institutions. As a result of the BIF having reached its designated reserve ratio, effective January 1, 1996, the FDIC substantially reduced deposit insurance premiums for well-capitalized, well-managed financial institutions that are members of the BIF. Under the new assessment schedule, rates were reduced to a range of 0 to 27 basis points, with approximately 92% of BIF members paying the statutory minimum annual assessment rate of $2,000. Pursuant to the Deposit Insurance Fund Act ("DIF Act"), which was enacted on September 30, 1996, the FDIC imposed a special one-time assessment on each depository institution with SAIF-assessable deposits so that the SAIF may achieve its designated reserve ratio. The Association's assessment amounted to $2.5 million and was assessed during the quarter ended September 30, 1996. Beginning January 1, 1997, the assessment schedule for SAIF members became the same as that for BIF members. In addition, beginning January 1, 1997, SAIF members were charged an assessment of 0.064% of SAIF-assessable deposits for the purpose of paying interest on the obligations issued by the Financing Corporation ("FICO") in the 1980s to help fund the thrift industry cleanup. After December 31, 1999, the insurance assessment will be the same for all insured deposits. This should result in a significant reduction in future deposit insurance premiums for the Association. The FDIC may terminate the deposit insurance of any insured depository institution if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC. Management is aware of no existing circumstances that could result in termination of the deposit insurance of the Association. Liquidity Requirements. Under OTS regulations, each savings institution is required to maintain an average daily balance of liquid assets (cash, certain time deposits and savings accounts, bankers' acceptances, and specified U.S. Government, state or federal agency obligations and certain other investments) equal to a quarterly average of not less than a specified percentage (currently 4.0%) of its net withdrawable accounts plus short-term borrowings. The Association's liquidity ratio was 22.38% at September 30, 1999. Prompt Corrective Action. Under the FDIA, each federal banking agency is required to implement a system of prompt corrective action for institutions that it regulates. The federal banking agencies have promulgated substantially similar regulations to implement this system of prompt corrective action. Under the regulations, an institution shall be deemed to be (i) "well capitalized" if it has a total risk-based capital ratio of 10.0% or more, has a Tier I risk-based capital ratio of 6.0% or more, has a leverage ratio of 5.0% or more and is not subject to specified requirements to meet and maintain a specific capital level for any capital measure; (ii) "adequately capitalized" if it has a total risk-based capital ratio of 8.0% or more, a Tier I risk-based capital ratio of 4.0% or more and a leverage ratio of 4.0% or more (3.0% under certain 25 circumstances) and does not meet the definition of "well capitalized;" (iii) "undercapitalized" if it has a total risk-based capital ratio that is less than 8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a leverage ratio that is less than 4.0% (3.0% under certain circumstances); (iv) "significantly undercapitalized" if it has a total risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a leverage ratio that is less than 3.0%; and (v) "critically undercapitalized" if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%. A federal banking agency may, after notice and an opportunity for a hearing, reclassify a well capitalized institution as adequately capitalized and may require an adequately capitalized institution or an undercapitalized institution to comply with supervisory actions as if it were in the next lower category if the institution is in an unsafe or unsound condition or has received in its most recent examination, and has not corrected, a less than satisfactory rating for asset quality, management, earnings or liquidity. (The OTS may not, however, reclassify a significantly undercapitalized institution as critically undercapitalized.) An institution generally must file a written capital restoration plan that meets specified requirements, as well as a performance guaranty by each company that controls the institution, with the appropriate federal banking agency within 45 days of the date that the institution receives notice or is deemed to have notice that it is undercapitalized, significantly undercapitalized or critically undercapitalized. Immediately upon becoming undercapitalized, an institution shall become subject to various mandatory and discretionary restrictions on its operations. At September 30, 1999, the Association was categorized as "well capitalized" under the prompt corrective action regulations of the OTS. Standards for Safety and Soundness. The federal banking regulatory agencies have prescribed, by regulation, standards for all insured depository institutions relating to: (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii) earnings; and (viii) compensation, fees and benefits ("Guidelines"). The Guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the OTS determines that the Association fails to meet any standard prescribed by the Guidelines, the OTS may require the Association to submit an acceptable plan to achieve compliance with the standard, as required by the FDIA. OTS regulations establish deadlines for the submission and review of such safety and soundness compliance plans. Qualified Thrift Lender Test. All savings associations are required to meet a qualified thrift lender ("QTL") test to avoid certain restrictions on their operations. A savings institution that fails to become or remain a QTL shall either become a national bank or be subject to the following restrictions on its operations: (i) the association may not make any new investment or engage in activities that would not be permissible for national banks; (ii) the association may not establish any new branch office where a national bank located in the savings institution's home state would not be able to establish a branch office; (iii) the association shall be ineligible to obtain new advances from any FHLB; and (iv) the payment of dividends by the association shall be subject to the rules regarding the statutory and regulatory dividend restrictions applicable to national banks. Also, beginning three years after the date on which the savings institution ceases to be a QTL, the savings institution would be prohibited from retaining any investment or engaging in any activity not permissible for a national bank and would be required to repay any outstanding advances to any FHLB. In addition, within one year of the date on which a savings association controlled by a company ceases to be a QTL, the company must register as a bank holding company and become subject to the rules applicable to such companies. A savings institution may requalify as a QTL if it thereafter complies with the QTL test. Currently, the QTL test requires that 65% of an institution's "portfolio assets" (as defined) consist of certain housing and consumer-related assets on a monthly average basis in nine out of every 12 months. Assets that qualify without limit for inclusion as part of the 65% requirement are loans made to purchase, refinance, construct, improve or repair domestic residential housing and manufactured housing; home equity loans; mortgage-backed securities 26 (where the mortgages are secured by domestic residential housing or manufactured housing); FHLB stock; and direct or indirect obligations of the FDIC. In addition, the following assets, among others, may be included in meeting the test subject to an overall limit of 20% of the savings institution's portfolio assets: 50% of residential mortgage loans originated and sold within 90 days of origination; 100% of consumer and educational loans (limited to 10% of total portfolio assets); and stock issued by the FHLMC or Fannie Mae. Portfolio assets consist of total assets minus the sum of (i) goodwill and other intangible assets, (ii) property used by the savings institution to conduct its business, and (iii) liquid assets up to 20% of the institution's total assets. At September 30, 1998, the qualified thrift investments of the Association were approximately 88.90% of its portfolio assets. Capital Requirements. Under OTS regulations a savings association must satisfy three minimum capital requirements: core capital, tangible capital and risk-based capital. Savings associations must meet all of the standards in order to comply with the capital requirements. OTS capital regulations establish a 3% core capital or leverage ratio (defined as the ratio of core capital to adjusted total assets). Core capital is defined to include common shareholders' equity, noncumulative perpetual preferred stock and any related surplus, and minority interests in equity accounts of consolidated subsidiaries, less (i) any intangible assets, except for certain qualifying intangible assets; (ii) certain mortgage servicing rights; and (iii) equity and debt investments in subsidiaries that are not "includable subsidiaries," which are defined as subsidiaries engaged solely in activities not impermissible for a national bank, engaged in activities impermissible for a national bank but only as an agent for its customers, or engaged solely in mortgage-banking activities. In calculating adjusted total assets, adjustments are made to total assets to give effect to the exclusion of certain assets from capital and to account appropriately for the investments in and assets of both includable and nonincludable subsidiaries. Institutions that fail to meet the core capital requirement would be required to file with the OTS a capital plan that details the steps they will take to reach compliance. In addition, the OTS's prompt corrective action regulation provides that a savings institution that has a leverage ratio of less than 4% (3% for institutions receiving the highest CAMELS examination rating) will be deemed to be "undercapitalized" and may be subject to certain restrictions. See "-- Federal Regulation of Savings Associations -- Prompt Corrective Action." Savings associations also must maintain "tangible capital" not less than 1.5% of the Association's adjusted total assets. "Tangible capital" is defined, generally, as core capital minus any "intangible assets" other than purchased mortgage servicing rights. Each savings institution must maintain total risk-based capital equal to at least 8% of risk-weighted assets. Total risk-based capital consists of the sum of core and supplementary capital, provided that supplementary capital cannot exceed core capital, as previously defined. Supplementary capital includes (i) permanent capital instruments such as cumulative perpetual preferred stock, perpetual subordinated debt and mandatory convertible subordinated debt, (ii) maturing capital instruments such as subordinated debt, intermediate-term preferred stock and mandatory convertible subordinated debt, subject to an amortization schedule, and (iii) general valuation loan and lease loss allowances up to 1.25% of risk-weighted assets. The risk-based capital regulation assigns each balance sheet asset held by a savings institution to one of four risk categories based on the amount of credit risk associated with that particular class of assets. Assets not included for purposes of calculating capital are not included in calculating risk-weighted assets. The categories range from 0% for cash and securities that are backed by the full faith and credit of the U.S. Government to 100% for repossessed assets or assets more than 90 days past due. Qualifying residential mortgage loans (including multi-family mortgage loans) are assigned a 50% risk weight. Consumer, commercial, home equity and residential construction loans are assigned a 100% risk weight, as are nonqualifying residential mortgage loans and that portion of land loans and nonresidential construction loans that do not exceed 80% loan-to-value ratio. The book value of assets in each category is multiplied by the weighting factor (from 0% to 100%) assigned to that category. These products are then totaled to arrive at total risk-weighted assets. Off-balance sheet items are included in risk-weighted assets by converting them to an approximate balance sheet "credit equivalent amount" based on a conversion 27 schedule. These credit equivalent amounts are then assigned to risk categories in the same manner as balance sheet assets and included in risk-weighted assets. The following table presents the Association's capital levels at September 30, 1999.
To Be Categorized as "Well Capitalized" Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provision -------------------------- ----------------------- --------------------- Amount Ratio Amount Ratio Amount Ratio ---------- ------ ------- ------ ------- ------ (In thousands) Total Capital ............ $ 95,495 17.4% $42,889 8.0% $53,611 10.0% (To Risk Weighted Assets) Tier I Capital ........... 93,012 17.0 -- -- 32,166 6.0 (To Risk Weighted Assets) Tier I Capital ........... 93,012 8.9 30,833 3.0 51,388 5.0 (To Total Assets) Tangible Capital ......... 93,012 8.9 15,416 1.5 -- -- (To Tangible Assets)
Limitations on Capital Distributions. OTS regulations impose uniform limitations on the ability of all savings associations to engage in various distributions of capital such as dividends, stock repurchases and cash-out mergers. In addition, OTS regulations require the Association to give the OTS 30 days' advance notice of any proposed capital distributions, and the OTS has the authority under its supervisory powers to prohibit the capital distributions. The regulation utilizes a three-tiered approach which permits various levels of distributions based primarily upon a savings association's capital level. A Tier 1 savings association has capital in excess of its fully phased-in capital requirement (both before and after the proposed capital distribution). Tier 1 savings associations may make (without application but upon prior notice to, and no objection made by, the OTS) capital distributions during a calendar year up to 100% of its net income to date during the calendar year plus one-half its surplus capital ratio (i.e., the amount of capital in excess of its fully phased-in requirement) at the beginning of the calendar year or the amount authorized for a Tier 2 association. Capital distributions in excess of such amount require advance notice to the OTS. A Tier 2 savings association has capital equal to or in excess of its minimum capital requirement but below its fully phased-in capital requirement (both before and after the proposed capital distribution). Such an association may make (without application) capital distributions up to an amount equal to 75% of its net income during the previous four quarters depending on how close the association is to meeting its fully phased-in capital requirement. Capital distributions exceeding this amount require prior OTS approval. Tier 3 associations are savings associations with capital below the minimum capital requirement (either before or after the proposed capital distribution). Tier 3 associations may not make any capital distributions without prior approval from the OTS. The Association is currently meeting the criteria to be designated a Tier 1 association and, consequently, could at its option (after prior notice to, and no objection made by, the OTS) distribute up to 100% of its net income during the calendar year plus 50% of its surplus capital ratio at the beginning of the calendar year less any distributions previously paid during the year. Loans to One Borrower. Under the HOLA, savings institutions are generally subject to the national bank limit on loans to one borrower. Generally, this limit is 15% of the Association's unimpaired capital and surplus, plus an additional 10% of unimpaired capital and surplus, if such loan is secured by readily-marketable collateral, which is defined to include certain financial instruments and bullion. The OTS by regulation has amended the loans to one borrower rule to permit savings associations meeting certain requirements, including capital requirements, to extend loans to one borrower in additional amounts under circumstances limited essentially to loans to develop or complete residential housing units. At September 30, 1999, the Association's limit on 28 loans to one borrower was $15.2 million. At September 30, 1999, the Association's largest aggregate amount of loans to one borrower was $5.4 million. Activities of Associations and Their Subsidiaries. When a savings association establishes or acquires a subsidiary or elects to conduct any new activity through a subsidiary that the association controls, the savings association must notify the FDIC and the OTS 30 days in advance and provide the information each agency may, by regulation, require. Savings associations also must conduct the activities of subsidiaries in accordance with existing regulations and orders. The OTS may determine that the continuation by a savings association of its ownership control of, or its relationship to, the subsidiary constitutes a serious risk to the safety, soundness or stability of the association or is inconsistent with sound banking practices or with the purposes of the FDIA. Based upon that determination, the FDIC or the OTS has the authority to order the savings association to divest itself of control of the subsidiary. The FDIC also may determine by regulation or order that any specific activity poses a serious threat to the SAIF. If so, it may require that no SAIF member engage in that activity directly. Transactions with Affiliates. Savings associations must comply with Sections 23A and 23B of the Federal Reserve Act ("Sections 23A and 23B") relative to transactions with affiliates in the same manner and to the same extent as if the savings association were a Federal Reserve member bank. A savings and loan holding company, its subsidiaries and any other company under common control are considered affiliates of the subsidiary savings association under the HOLA. Generally, Sections 23A and 23B: (i) limit the extent to which the insured association or its subsidiaries may engage in certain covered transactions with an affiliate to an amount equal to 10% of such institution's capital and surplus and place an aggregate limit on all such transactions with affiliates to an amount equal to 20% of such capital and surplus, and (ii) require that all such transactions be on terms substantially the same, or at least as favorable to the institution or subsidiary, as those provided to a non-affiliate. The term "covered transaction" includes the making of loans, the purchase of assets, the issuance of a guarantee and similar types of transactions. Three additional rules apply to savings associations: (i) a savings association may not make any loan or other extension of credit to an affiliate unless that affiliate is engaged only in activities permissible for bank holding companies; (ii) a savings association may not purchase or invest in securities issued by an affiliate (other than securities of a subsidiary); and (iii) the OTS may, for reasons of safety and soundness, impose more stringent restrictions on savings associations but may not exempt transactions from or otherwise abridge Section 23A or 23B. Exemptions from Section 23A or 23B may be granted only by the Federal Reserve Board, as is currently the case with respect to all FDIC-insured banks. The Association has not been significantly affected by the rules regarding transactions with affiliates. The Association's authority to extend credit to executive officers, directors and 10% shareholders, as well as entities controlled by such persons, is currently governed by Sections 22(g) and 22(h) of the Federal Reserve Act, and Regulation O thereunder. Among other things, these regulations require that such loans be made on terms and conditions substantially the same as those offered to unaffiliated individuals (unless the loan or extension of credit is made under a benefit program generally available to all other employees and does not give preference to any insider over any other employee) and not involve more than the normal risk of repayment. Regulation O also places individual and aggregate limits on the amount of loans the Association may make to such persons based, in part, on the Association's capital position, and requires certain board approval procedures to be followed. The OTS regulations, with certain minor variances, apply Regulation O to savings institutions. 29 REGULATION OF THE COMPANY General The Company is a unitary savings and loan holding company within the meaning of the HOLA. As such, it is registered with the OTS and is subject to OTS regulations, examinations, supervision and reporting requirements. The Company is also subject to the information, proxy solicitation, insider trading restrictions, and other requirements of the Securities Exchange Act of 1934, as amended. Company Acquisitions The HOLA and OTS regulations issued thereunder generally prohibit a savings and loan holding company, without prior OTS approval, from acquiring more than 5% of the voting stock of any other savings association or savings and loan holding company or controlling the assets thereof. They also prohibit, among other things, any director or officer of a savings and loan holding company, or any individual who owns or controls more than 25% of the voting shares of such holding company, from acquiring control of any savings association not a subsidiary of such savings and loan holding company, unless the acquisition is approved by the OTS. Holding Company Activities As a unitary savings and loan holding company, the Company generally is not subject to activity restrictions. If the Company acquires control of another savings association as a separate subsidiary, it would become a multiple savings and loan holding company. There generally are more restrictions on the activities of a multiple savings and loan holding company than a unitary savings and loan holding company. Specifically, if either federally insured subsidiary savings association fails to meet the QTL test, the activities of the Company and any of its subsidiaries (other than the Company or other federally insured subsidiary savings associations) would thereafter be subject to further restrictions. The HOLA provides that, among other things, no multiple savings and loan holding company or subsidiary thereof which is not an insured association shall commence or continue for more than two years after becoming a multiple savings and loan association holding company or subsidiary thereof, any business activity other than: (i) furnishing or performing management services for a subsidiary insured institution, (ii) conducting an insurance agency or escrow business, (iii) holding, managing, or liquidating assets owned by or acquired from a subsidiary insured institution, (iv) holding or managing properties used or occupied by a subsidiary insured institution, (v) acting as trustee under deeds of trust, (vi) those activities previously directly authorized by regulation as of March 5, 1987 to be engaged in by multiple holding companies or (vii) those activities authorized by the Federal Reserve Board as permissible for bank holding companies, unless the OTS by regulation, prohibits or limits such activities for savings and loan holding companies. Those activities described in (vii) above also must be approved by the OTS prior to being engaged in by a multiple holding company. Potential Impact of Current Legislation on Future Results of Operations On November 12, 1999, the Gramm-Leach-Bliley Act (the "GLB Act") was enacted into law. The GLB Act makes sweeping changes in the financial services in which various types of financial institutions may engage. The Glass-Steagull Act, which generally prevented banks from affiliating with securities and insurance firms, was repealed. A new "financial holding company," which owns only well capitalized and well managed depository institutions, will be permitted to engage in a variety of financial activities, including insurance and securities underwriting and agency activities. The GLB Act permits unitary savings and loan holding companies in existence on May 4, 1999, including the Company, to continue to engage in all activities that they were permitted to engage in prior to the enactment of the Act. Such activities are essentially unlimited, provided that the thrift subsidiary remains a qualified thrift lender. Any thrift holding company formed after may 4, 1999, will be subject to the same restrictions as a multiple thrift holding company. In addition, a unitary thrift holding company in existence on May 4, 1999, may be sold only to a financial holding company engaged in activities permissible for multiple savings and loan holding companies. 30 The GLB Act is not expected to have a material effect on the activities in which the Company and the Association currently engage, except to the extent that competition with other types of financial institutions may increase as they engage in activities not permitted prior to enactment of the GLB Act. Affiliate Restrictions The affiliate restrictions contained in Sections 23A and 23B of the Federal Reserve Act apply to all federally insured savings associations and any such "affiliate." A savings and loan holding company, its subsidiaries and any other company under common control are considered affiliates of the subsidiary savings association under the HOLA. Generally, Sections 23A and 23B: (i) limit the extent to which the insured association or its subsidiaries may engage in certain covered transactions with an affiliate to an amount equal to 10% of such institution's capital and surplus, and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital and surplus, and (ii) require that all such transactions be on terms substantially the same, or at least as favorable to the institution or subsidiary, as those provided to a non-affiliate. The term "covered transaction" includes the making of loans, purchase of assets, issuance of a guarantee and other similar types of transactions. Also, a savings association may not make any loan to an affiliate unless the affiliate is engaged only in activities permissible for bank holding companies. Only the Federal Reserve may grant exemptions from the restrictions of Sections 23A and 23B. The OTS, however, may impose more stringent restrictions on savings associations for reasons of safety and soundness. Qualified Thrift Lender Test The HOLA requires any savings and loan holding company that controls a savings association that fails the QTL test, as explained under "-- Qualified Thrift Lender Test," must, within one year after the date on which the association ceases to be a QTL, register as and be deemed a bank holding company subject to all applicable laws and regulations. TAXATION Federal Taxation General. The Company and the Association report their income on a fiscal year basis using the accrual method of accounting and are subject to federal income taxation in the same manner as other corporations, with some exceptions. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Company and the Association. Bad Debt Reserve. Historically, savings institutions such as the Association which met certain definitional tests primarily related to their assets and the nature of their business ("qualifying thrift") were permitted to establish a reserve for bad debts and to make annual additions thereto, which may have been deducted in arriving at their taxable income. The Association's deductions with respect to "qualifying real property loans," which are generally loans secured by certain interest in real property, were computed using an amount based on the Association's actual taxable income, computed with certain modifications and reduced by the amount of any permitted additions to the non- qualifying reserve. Each year the Association selected the most favorable way to calculate the deduction attributable to an addition to the tax bad debt reserve. The provisions repealing the current thrift bad debt rules were passed by Congress as part of "The Small Business Job Protection Act of 1996." The new rules eliminated the 8% of taxable income method for deducting additions to the tax bad debt reserves for all thrifts for tax years beginning after December 31, 1995. These rules also require that all institutions recapture all or a portion of their bad debt reserves added since the base year (last taxable year beginning before January 1, 1988). The Association has previously recorded a deferred tax liability equal to the bad debt recapture and as such the new rules will have no effect on net income or federal income tax expense. For taxable 31 years beginning after December 31, 1995, the Association's bad debt deduction will be determined on the basis of net charge-offs during the taxable year. The new rules allow an institution to suspend bad debt reserve recapture for the 1996 and 1997 tax years if the institution's lending activity for those years is equal to or greater than the institution's average mortgage lending activity for the six taxable years preceding 1996 adjusted for inflation. For this purpose, only home purchase or home improvement loans are included and the institution can elect to have the tax years with the highest and lowest lending activity removed from the average calculation. If an institution is permitted to postpone the reserve recapture, it must begin its six year recapture no later than the 1998 tax year (fiscal year ending September 30, 1999 for the Company). The unrecaptured base year reserves will not be subject to recapture as long as the institution continues to carry on the business of banking. In addition, the balance of the pre-1988 bad debt reserves continue to be subject to provisions of present law referred to below that require recapture in the case of certain excess distributions to shareholders. Distributions. To the extent that the Association makes "nondividend distributions" to the Company, such distributions will be considered to result in distributions from the balance of its bad debt reserves as of December 31, 1987 (or a lesser amount if the Association's loan portfolio decreased since December 31, 1987) and then from the supplemental reserve for losses on loans ("Excess Distributions"), and an amount based on the Excess Distributions will be included in the Association's taxable income. Nondividend distributions include distributions in excess of the Association's current and accumulated earnings and profits, distributions in redemption of stock and distributions in partial or complete liquidation. However, dividends paid out of the Association's current or accumulated earnings and profits, as calculated for federal income tax purposes, will not be considered to result in a distribution from the Association's bad debt reserve. The amount of additional taxable income created from an Excess Distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. The Association does not intend to pay dividends that would result in a recapture of any portion of its tax bad debt reserve. Corporate Alternative Minimum Tax. The Internal Revenue Code of 1986, as amended ("Code") imposes a tax on alternative minimum taxable income ("AMTI") at a rate of 20%. The excess of the tax bad debt reserve deduction using the percentage of taxable income method over the deduction that would have been allowable under the experience method is treated as a preference item for purposes of computing the AMTI. In addition, only 90% of AMTI can be offset by net operating loss carryovers. AMTI is increased by an amount equal to 75% of the amount by which the Association's adjusted current earnings exceeds its AMTI (determined without regard to this preference and prior to reduction for net operating losses). For taxable years beginning after December 31, 1986, and before January 1, 1996, an environmental tax of 0.12% of the excess of AMTI (with certain modification) over $2.0 million is imposed on corporations, including the Association, whether or not an Alternative Minimum Tax ("AMT") is paid. Dividends-Received Deduction. The Company may exclude from its income 100% of dividends received from the Association as a member of the same affiliated group of corporations. The corporate dividends-received deduction is generally 70% in the case of dividends received from unaffiliated corporations with which the Company and the Association will not file a consolidated tax return, except that if the Company or the Association owns more than 20% of the stock of a corporation distributing a dividend, then 80% of any dividends received may be deducted. Other Federal Tax Matters. There have not been any Internal Revenue Service audits of the Company's or the Association's federal income tax returns during the past five years. Oregon Taxation The Company and the Association are subject to an Oregon corporate excise tax at a statutory rate of 6.6% (4.0% for the fiscal year ended September 30, 1998) of income. Neither the Company's nor the Association's state income tax returns have been audited during the past five years. 32 Competition The Association originates most of its loans to and accepts most of its deposits from residents of its market area. The Association is the oldest financial institution headquartered in Klamath Falls. The Association believes that it is a major competitor in the markets in which it operates. Nonetheless, the Association faces competition in attracting deposits and making real estate loans from various financial institutions, including banks, savings associations and mortgage brokers. In addition, the Association has faced additional significant competition for investors' funds from short-term money market securities and other corporate and government securities. The financial institution industry in the Association's market area is characterized by a mix of local independent financial institutions and offices of larger out-of-state financial institutions, including several multi-national bank holding companies. The ability of the Association to attract and retain savings deposits depends on its ability to generally provide a rate of return and liquidity risk comparable to that offered by competing investment opportunities. The Association competes for loans principally through the interest rates and loan fees it charges and the efficiency and quality of services it provides borrowers. Competition may increase as restrictions on the interstate operations of financial institutions continue to be reduced. Personnel As of September 30, 1999, the Association had 249 full-time and 70 part-time employees. The employees are not represented by a collective bargaining unit. The Association believes its relationship with its employees is good. Executive Officers. The following table sets forth certain information regarding the executive officers of the Company.
Name Age(1) Position Gerald V. Brown 63 President and Chief Executive Officer Robert A. Tucker 51 Senior Vice President and Chief Lending Officer/Secretary Frank X. Hernandez 44 Senior Vice President and Chief Operating Officer Marshall J. Alexander 49 Senior Vice President and Chief Financial Officer ______________ (1) At September 30, 1999.
Gerald V. Brown has been employed by the Association since 1957. He was appointed a director and the President of the Association in June 1994 to succeed the retiring President, James Bocchi. From 1982 until his appointment as President, Mr. Brown served as Senior Vice President and Secretary, supervising all loan activities of the Association. Robert A. Tucker has been employed by the Association since 1973. He has served as Senior Vice President since November 1989. He served as Chief Operating Officer from March 1997 to June 1998 and has served as Chief Lending Officer and Secretary since July 1998. Frank X. Hernandez has been employed by the Association since 1991. He served as Human Resources Officer until July 1998 when he was appointed Senior Vice President and Chief Operating Officer. Marshall J. Alexander has been employed by the Association since 1986. He has served as Vice President and Chief Financial Officer since August 1994 and was named a Senior Vice President in November 1998. 33 Item 2. Properties The following table sets forth the location of the Association's offices and other facilities used in operations as well as certain additional information relating to these offices and facilities as of September 30, 1999.
Year Square Description/Address Opened Leased/Owned Footage Main Office 540 Main Street ................... 1939 Owned 25,660 Klamath Falls, Oregon Branch Offices 2943 South Sixth Street ........... 1972 Owned 3,820 Klamath Falls, Oregon 2323 Dahlia Street ................ 1979 Owned 1,876 Klamath Falls, Oregon 512 Walker Avenue ................. 1977 Owned 4,216 Ashland, Oregon 1420 East McAndrews Road .......... 1990 Owned 4,006 Medford, Oregon 61515 S. Highway 97 ............... 1993 Owned 5,415 Bend, Oregon 2300 Madison Street ............... 1995 Owned 5,000 Klamath Falls, Oregon 721 Chetco Avenue ................. 1997 Owned 5,409 Brookings, Oregon 293 North Broadway ................ 1997 Owned 5,087 Burns, Oregon 111 West Main Street .............. 1997 Owned 1,958 Carlton, Oregon 103 South Main Street ............. 1997 Owned 2,235 Condon, Oregon 259 North Adams ................... 1997 Owned 5,803 Coquille, Oregon 106 Southwest 1st Street .......... 1997 Owned 4,700 Enterprise, Oregon 34 Year Square Description/Address Opened Leased/Owned Footage 555 1st Street .................... 1997 Owned 1,844 Fossil, Oregon 708 Garibaldi Avenue .............. 1997 Owned 1,400 Garibaldi, Oregon 29804 Ellensburg Avenue ........... 1997 Owned 3,136 Gold Beach, Oregon 111 North Main Street ............. 1997 Owned 4,586 Heppner, Oregon 810 South Highway 395 ............. 1997 Leased 6,000 Hermiston, Oregon 200 West Main Street .............. 1997 Owned 4,552 John Day, Oregon 1 South E Street .................. 1997 Owned 5,714 Lakeview, Oregon 206 East Front Street ............. 1997 Owned 2,920 Merrill, Oregon 165 North 5th Street .............. 1997 Owned 2,370 Monroe, Oregon 217 Main Street ................... 1997 Owned 6,067 Nyssa, Oregon 48257 East 1st Street ............. 1997 Owned 3,290 Oakridge, Oregon 227 West Main Street .............. 1997 Owned 2,182 Pilot Rock, Oregon 716 Northeast Highway 101 ......... 1997 Owned 2,337 Port Orford, Oregon 178 Northwest Front Street ........ 1997 Owned 2,353 Prairie City, Oregon 315 North Main Street ............. 1997 Owned 3,638 Riddle, Oregon 38770 North Main Street ........... 1997 Owned 2,997 Scio, Oregon 35 Year Square Description/Address Opened Leased/Owned Footage 508 Main Street ................... 1997 Owned 2,282 Moro, Oregon 144 South Main Street ............. 1997 Owned 2,146 Union, Oregon 165 North Maple Street ............ 1997 Owned 2,192 Yamhill, Oregon 475 NE Windy Knolls Drive ......... 1998 Owned 3,120 Bend, Oregon 185 East California ............... 1998 Owned 2,116 Jacksonville, Oregon Loan Center 585 SW 6th, Suite #2 .............. 1996 Leased 900 Redmond, Oregon Loan Processing Center 600 Main Street ................... 1998 Leased 2,800 Klamath Falls, Oregon
The net book value of the Association's investment in office, properties and equipment totaled $11.6 million at September 30, 1999. See Note 5 of Notes to the Consolidated Financial Statements in the Annual Report. Item 3. Legal Proceedings Periodically, there have been various claims and lawsuits involving the Association, mainly as a defendant, such as claims to enforce liens, condemnation proceedings on properties in which the Association holds security interests, claims involving the making and servicing of real property loans and other issues incident to the Association's business. The Association is not a party to any pending legal proceedings that it believes would have a material adverse effect on the financial condition or operations of the Association. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended September 30, 1999. 36 PART II Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters The information contained under the section captioned "Common Stock Information" on page 20 of the Annual Report is incorporated herein by reference. Item 6. Selected Financial Data The information contained under the section captioned "Selected Consolidated Financial Data" on pages 2 and 3 of the Annual Report is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information contained in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" beginning on page 9 of the Annual Report is incorporated herein by reference. Disclosures regarding Year 2000 Readiness are included in the above-referenced section of the Annual Report. Item 7a. Quantitative and Qualitative Disclosures About Market Risk The information contained in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Market Risk and Asset/Liability Management" beginning on page 9 of the Annual Report is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data (a) Financial Statements Independent Auditors' Report* Consolidated Balance Sheets as of September 30, 1999 and 1998* Consolidated Statements of Earnings for the Years Ended September 30, 1999, 1998 and 1997* Consolidated Statements of Shareholders' Equity for the Years Ended September 30, 1999, 1998 and 1997* Consolidated Statements of Cash Flows for the Years Ended September 30, 1999, 1998 and 1997* Notes to the Consolidated Financial Statements* * Included in the Annual Report attached as Exhibit 13 hereto and incorporated herein by reference. All schedules have been omitted as the required information is either inapplicable or included in the Consolidated Financial Statements or related Notes contained in the Annual Report. (b) Supplementary Data The information entitled "Consolidated Supplemental Data - Selected Quarterly Financial Data" on page 39 of the Annual Report is incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There have been no changes in or disagreements with Accountants on accounting and financial disclosure during the year ended September 30, 1999. 37 PART III Item 10. Directors and Executive Officers of the Registrant The information contained under the section captioned "Proposal I - Election of Directors" contained in the Company's Proxy Statement, and "Part I - -- Business -- Personnel -- Executive Officers" of this report, is incorporated herein by reference. Reference is made to the cover page of this report for information regarding compliance with Section 16(a) of the Exchange Act. Item 11. Executive Compensation The information contained under the sections captioned "Executive Compensation", "Directors' Compensation" and "Benefits" under "Proposal I - Election of Directors" in the Proxy Statement is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management (a) Security Ownership of Certain Beneficial Owners Information required by this item is incorporated herein by reference to the section captioned "Security Ownership of Certain Beneficial Owners and Management" of the Proxy Statement. (b) Security Ownership of Management The information required by this item is incorporated herein by reference to the sections captioned "Proposal I - Election of Directors" and "Security Ownership of Certain Beneficial owners and Management" of the Proxy Statement. (c) Changes in Control The Company is not aware of any arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the Company. The information required by this item is incorporated herein by reference to the sections captioned "Proposal I - Election of Directors" and "Security Ownership of Certain Beneficial Owners and Management" of the Proxy Statement. Item 13. Certain Relationships and Related Transactions The information set forth under the section captioned "Proposal I - Election of Directors - Certain Transactions with the Association" in the Proxy Statement is incorporated herein by reference. 38 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) Exhibits 3(a) Articles of Incorporation of the Registrant* 3(b) Bylaws of the Registrant* 10(a) Employment Agreement with Gerald V. Brown*** 10(b) Employment Agreement with Marshall J. Alexander*** 10(c) Employment Agreement with Robert A. Tucker*** 10(d) Employment Agreement with Frank X. Hernandez**** 10(e) 1996 Stock Option Plan** 10(f) 1996 Management Recognition and Development Plan** 13 Annual Report to Shareholders 22 Subsidiaries of the Registrant 23 Consent of Deloitte & Touche LLP with respect to financial statements of the Registrant 27 Financial Data Schedule ___________________ * Incorporated by reference to the Registrant's Registration Statement on Form S-1, filed on June 19, 1995. ** Incorporated by reference to the Registrant's Definitive Proxy Statement for the 1996 Annual Meeting of Shareholders. *** Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended September 30, 1995. **** Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended September 30, 1998. (b) Reports on Form 8-K None. 39 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KLAMATH FIRST BANCORP, INC. Date: December 29, 1999 By: /s/ Gerald V. Brown Gerald V. Brown President and Chief Executive Officer Pursuant to the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURES TITLE DATE /s/ Gerald V. Brown President, Chief December 29, 1999 Gerald V. Brown Executive Officer and Director (Principal Executive Officer) /s/ Marshall J. Alexander Senior Vice President and December 29, 1999 Marshall J. Alexander Chief Financial Officer (Principal Financial and Accounting Officer) /s/ Rodney N. Murray Chairman of the Board December 29, 1999 Rodney N. Murray of Directors /s/ Bernard Z. Agrons Director December 29, 1999 Bernard Z. Agrons /s/ Timothy A. Bailey Director December 29, 1999 Timothy A. Bailey /s/ James D. Bocchi Director December 29, 1999 James D. Bocchi /s/ William C. Dalton Director December 29, 1999 William C. Dalton /s/ J. Gillis Hannigan Director December 29, 1999 J. Gillis Hannigan /s/ Dianne E. Spires Director December 29, 1999 Dianne E. Spires EX-13 2 1999 ANNUAL REPORT TO SHAREHOLDERS EXHIBIT 13 1999 Annual Report to Shareholders CORPORATE PROFILE Klamath First Bancorp, Inc. (Nasdaq: KFBI) is a unitary savings and loan holding company, headquartered in Klamath Falls, Oregon. The Company's subsidiary, Klamath First Federal Savings and Loan Association, has a 65 year history, dating back to 1934. The Company provides a diversified line of loan and deposit services to individuals, families and small business owners. The Company recognizes there is great value in serving both large and small communities of Oregon, and will continue to serve these communities through its traditional "hands on" personal banking style using conventional delivery channels. The Company will also give customers a choice whether to use alternative delivery channels such as ATMs, telephone banking, and Internet banking. At year-end, Klamath First Bancorp, Inc. was operating from 35 offices in 22 counties throughout Oregon. 1999 HIGHLIGHTS Total assets, loans, deposits and earnings per share reach new Company highs. Total assets reached high of $1,041.6 million. Total net loans increased by 10.72% or $71.6 million. Total deposits grew to $720.4 million. Earnings per share reached new high of $1.21, a 15.24% increase over prior year. Completed 20% Modified Dutch Auction Tender Offer (stock buy back) in January 1999. Paid quarterly dividends totaling $.46 per share, 38.98% pay out ratio. Added 2 new ATM locations. Klamath First Financial Services began operations in July 1999, offering investment services and retirement planning for customers throughout Oregon. Went online with our informational web site, www.klamathfirstfederal.com in September 1999. We are planning a fully transactional and bill paying site in 2000. TABLE OF CONTENTS Selected Consolidated Financial Data................................2-3 Directors and Officers................................................4 Letter to our Shareholders............................................5 Executive Officers....................................................8 Financials.........................................................9-40 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.
At September 30, ---------- ---------- ---------- ---------- ---------- 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- FINANCIAL CONDITION DATA (In thousands) Assets ...................................... $1,041,641 $1,031,302 $ 980,078 $ 671,969 $ 647,840 Cash and cash equivalents ................... 24,523 66,985 32,043 16,180 175,994 Loans receivable, net ....................... 739,793 668,146 551,825 473,556 403,544 Investment securities held to maturity ...... 560 2,889 22,937 9,827 42,209 Investment securities available for sale .... 158,648 203,224 261,846 75,987 12,606 Mortgage-backed & related securities held to maturity ............................ 2,601 3,662 5,447 6,783 -- Mortgage-backed & related securities available for sale .......................... 72,695 43,336 64,869 74,109 -- Stock in FHLB of Seattle, at cost ........... 10,957 10,173 7,150 4,774 4,426 Advances from FHLB of Seattle ............... 197,000 167,000 129,000 90,000 20,000 Deposit liabilities ......................... 720,401 689,541 673,978 399,673 384,380 Shareholders' equity ........................ 109,585 145,081 144,462 153,411 164,685
Year Ended September 30, ---------- ---------- ---------- ---------- ---------- 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- SELECTED OPERATING DATA (In thousands) Total interest income ....................... $ 71,691 $ 69,733 $ 54,167 $ 45,649 $ 35,107 Total interest expense ...................... 38,382 37,848 29,856 23,286 20,441 ---------- ---------- ---------- ---------- ---------- Net interest income ......................... 33,309 31,885 24,311 22,363 14,666 Provision for loan losses ................... 932 674 370 120 120 ---------- ---------- ---------- ---------- ---------- Net interest income after provision for loan losses ................... 32,377 31,211 23,941 22,243 14,546 Non-interest income ......................... 3,629 3,202 810 522 381 BIF/SAIF Assessment ......................... -- -- -- 2,473 -- Non-interest expense ........................ 21,186 19,523 11,764 9,769 6,004 ---------- ---------- ---------- ---------- ---------- Earnings before income taxes 14,820 14,890 12,987 10,523 8,923 Provision for income taxes 5,665 5,339 4,429 4,413 3,349 ---------- ---------- ---------- ---------- ---------- Net Earnings ................................ $ 9,155 $ 9,551 $ 8,558 $ 6,110 $ 5,574 ========== ========== ========== ========== ========== Basic earnings per share .................... $ 1.21 $ 1.05 $ 0.91 $ 0.56 N/A ========== ========== ========== ========== ==========
At or for the Year Ended September 30, ------------------------------------------------------------- 1999 1998 1997 1996 1995 --------- -------- ---------- -------- -------- KEY OPERATING RATIOS Performance Ratios Return on average assets (net earnings divided by average assets) .... 0.88% 0.96% 1.14% 0.99% 1.19% Return on average equity (net earnings divided by average equity) .... 7.55% 6.52% 5.85% 3.69% 10.44% Interest rate spread (difference between average yield on interest-earning assets and average cost of interest-bearing liabilities 2.73% 2.57% 2.28% 2.22% 2.73% Net interest margin (net interest income as a percentage of average interest-earning assets) 3.37% 3.36% 3.32% 3.65% 3.24% Average interest-earning assets to average interest-bearing liabilities ................ 116.47% 119.84% 125.58% 137.78% 111.29% Net interest income after provision for loan losses to total non-interest expenses .............. 152.82% 159.87% 203.51% 181.69% 242.27% Non-interest expense to average total assets 2.05% 1.96% 1.57% 1.99% 1.29% Efficiency ratio (non-interest expense divided by net interest income plus non-interest income) 57.36% 55.64% 46.83% 53.49% 39.90% Dividend payout ratio (dividends declared per share divided by net earnings per share) .......... 38.98% 34.50% 34.09% 44.64% -- Book value per share ........................ $ 15.52 $ 16.30 $ 15.64 $ 14.98 N/A Asset Quality Ratios Allowance for loan losses to total loans .... 0.32% 0.28% 0.22% 0.19% 0.19% Non-performing assets to total assets ....... 0.46% 0.05% 0.03% 0.04% 0.12% Non-performing loans to total loans, before net items ................................... 0.43% 0.07% 0.04% 0.04% 0.18% Capital Ratios Equity to assets ratio ...................... 10.52% 14.07% 14.74% 22.83% 25.42% Tangible capital ratio ...................... 8.91% 8.26% 11.06% 19.22% 18.57% Core capital ratio .......................... 8.91% 8.26% 11.06% 19.22% 18.57% Risk-based capital ratio .................... 17.41% 16.13% 23.12% 42.41% 36.87% Other Data Number of Real estate loans outstanding ............... 9,297 9,155 8,393 7,704 7,110 Deposit accounts ............................ 85,112 82,585 82,032 38,651 38,260 Full service offices ........................ 34 34 32 7 7
KLAMATH FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION AND KLAMATH FIRST BANCORP, INC. BOARD OF DIRECTORS Bernard Z. Agrons Retired; Weyerhaeuser Company Vice President for the Eastern Oregon Region until 1981; Former State Representative in the Oregon State Legislature from 1983 to 1991 Timothy A. Bailey Senior Vice President - Klamath Operations for Regence Blue Cross/Blue Shield, a health insurance company James D. Bocchi Retired; President of Klamath First Federal Savings and Loan Association from 1984 until June 1994 Gerald V. Brown President and Chief Executive Officer of Klamath First Federal Savings and Loan Association since June 1994 William C. Dalton Retired; former owner of W. C. Dalton and Company, farming J. Gillis Hannigan Retired; Executive Vice President of Modoc Lumber in Klamath Falls, Oregon, until January 1995 Rodney N. Murray Director and Chairman of the Board, owner and operator of Rodney Murray Ranch, former owner and manager and President of Klamath Falls Creamery, Inc., located in Klamath Falls, Oregon Dianne E. Spires, CPA Partner since 1986 with Rusth, Spires & Menefee, LLP, a public accounting firm located in Klamath Falls and Lakeview, Oregon OFFICERS OF KLAMATH FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION Gerald V. Brown* President and Chief Executive Officer Robert A. Tucker* Senior Vice President - Chief Lending Officer Marshall J. Alexander* Senior Vice President - Chief Financial Officer Frank X. Hernandez* Senior Vice President - Chief Operating Officer Robert L. Salley Vice President Gerald A. Page Vice President Carol Starkweather Assistant Vice President Craig M. Moore Auditor/Corporate Counsel Nora L. Boman Treasurer and all branch managers * Indicates an officer of Klamath First Bancorp, Inc. Dear Shareholder, When we started this fiscal year 1999, we initiated a major shareholder enhancement called a "Modified Dutch Auction Tender Offer". We planned to buy back 20% of our outstanding shares to improve earnings per share ("EPS") and return on equity ("ROE"). This was just as successful as we had planned. We ended the year with EPS of $1.21 as compared to $1.05 for fiscal 1998, a 15.24% increase. Our ROE was 7.55% as compared to 6.52% the year before, a 15.80% increase. It is interesting to note, however, that these enhancements were not only because of the tender offer. We had an excellent earnings year. Our net earnings were very good even though we took $39 million out of our earnings stream to purchase the 1,984,090 shares. The $39 million, if invested at lower yielding overnight funds rates averaging 5.06% for the last quarter, would have represented $1.5 million greater interest income for the year. Our net earnings for the year were $9.2 million as compared to $9.6 million the previous year. We will continue to consider all shareholder and earnings enhancements that are accretive to both EPS and ROE. This year the Company formed Klamath First Financial Services, Inc. The new subsidiary is offering general securities trading as well as financial and retirement planning to customers of the Company and the public at large. The primary area served at present is Klamath County, but we have plans in place to expand with representatives in Jackson and Deschutes Counties. We are striving to achieve an 8% to 10% asset growth this year. We plan to accomplish this through new branches in growth areas such as Jackson and Deschutes counties. We will also continue to look for acquisition opportunities that fit into our corporate structure. We'll continue our primary business as a thrift, with emphasis on one to four family lending, however, we plan to expand our lending in multi-family residential lending and commercial real estate. We also plan to emphasize our consumer and commercial lending by hiring commercial loan officers for our high growth areas. We currently offer a telephone banking voice response system which receives over 20,000 calls per month. We opened our web site (www.klamathfirstfederal.com) which at present is an informational site. We plan on expanding this during the coming fiscal year to a full transactional site to include bill paying. Although new technologies are, and will be, available to our customers who choose to use them, we will continue to provide our traditional "hands on" service at the teller windows. Our deposits increased 4.5% last year when the thrift industry overall showed a 2.4% loss from June of 1998 to June of 1999 according to the Office of Thrift Supervision. We believe this gain is because of our friendly, courteous personnel and their dedication to excellent customer service. We will continue to offer the products and services our customers want. KFBI's mission statement is clear: "The mission of KFBI is to be the preferred provider of financial products and services. This will be accomplished within an atmosphere of commitment to our shareholders, employees, customers and the communities we serve." With our large loan volume, $224.2 million in new loans, we entered the secondary market and started selling loans to the Federal National Mortgage Association ("Fannie Mae"). We sold our first loan to them in May of 1999, the eighth month of our fiscal year. We started this program primarily to improve fee income through the retained servicing rights and servicing fees. We plan to retain servicing on all loans sold for fee income and to retain customer service and relationships. From May through September this new activity generated $72,000 in non-interest income. Total fees and service charges grew from $2.41 million in 1998 to $2.94 million in 1999, a 21.79% increase. We plan to continue this program while retaining non-conforming and higher yielding loans in our portfolio. The big issue for all financial institutions this year has been the Year 2000 issue (Y2K) with the computer turn-over to that date. We have tested all our critical systems with the computer date advanced to 2000. Every type of transaction has been run and they all went through the system well. We also developed a contingency plan in the event any of our branches have problems and transactions must be run off-line. Each of our 34 branches were tested and they all performed successfully. This is an issue that all financial institutions have taken very seriously. We are looking forward to another good year and we thank you, our shareholders, employees and customers, for your support and assistance with our goals. /s/ Gerald V. Brown /s/ Rodney N. Murray Gerald V. Brown Rodney N. Murray President and Chief Executive Officer Chairman of the Board OUR BUSINESS LENDING Klamath First Federal continues to strive to be a market leader in the real estate lending market throughout Oregon. Our tradition of excellence started more than 65 years ago when we were originally formed to meet the housing needs of our customers. We continue that tradition today and have financed single and multi-family homes throughout the state. Real estate loans remain the core earning asset of the Company. This includes owner and non-owner occupied residences, second home loans, construction loans, and our all-in-one construction loan (both the construction and term financing in one package). Multi-family homes have also been in our product line for many years. Today we have expanded these products throughout the state. Our real estate lending includes apartment buildings, manufactured home parks, commercial real estate projects, such as motels, medical buildings, warehouses, resorts and office complexes. When it comes to real estate lending, we do it all. When we purchased the 25 branches of Wells Fargo a few years back, both the customers and the Company went through some changes. In several of the communities, we were the only financial institution in town and many of the offices had not offered real estate loans, but they were familiar with offering consumer and small business loans. Klamath First Federal has a profound commitment to serving the financial needs of our communities. As a result, training for both customers and staff about real estate lending was necessary in addition to increasing staffing levels to originate consumer, commercial and small business loans. Our product line in consumer loans now includes all of the expected products from automobiles to recreational vehicles, secured and unsecured. Our track record has been very good in both originations and credit quality throughout our branch network. Additionally, our branch network provides the opportunity to attract more small business and commercial loans. Our plans for the next year and the future are to further capitalize on our consumer and small business lending with the addition of seasoned lending officers in several key branch locations in our more populated market areas. Our "hands-on" approach to customer service continues to attract customers who still want their bankers to be a part of their communities. Real estate lending will continue to be the Company's primary focus because we are very successful and efficient in this product line. However, we will also continue to expand and emphasize our diversified lending products in consumer, commercial and small business lending. DEPOSITS Klamath First Federal offers our deposit customers an array of competitive terms and rates to help meet their savings needs. These include the traditional savings certificates ("CDs"), IRAs including SEPP, Keogh, Roth and Education, statement savings and money market accounts with tiered rates based on account balances. Throughout the year we have offered specials on CDs that have rates superior to the competition and often have odd maturities that help offset automatic rollovers of our current customers and tend to attract a higher degree of new money. The last few years we have been very successful in marketing our various checking account products to both our personal and business customers. We have a variety of checking account products from free checking to interest checking. We intend to continue emphasizing checking accounts in our marketing efforts as a source of lower cost funds as well as an anchor account from which to cross sell other banking products and loans. This year we will introduce a club account that offers customers various travel discounts, shopping discounts and other add-on options that provide customers a variety of consumer friendly products as well as a source for additional fee income for Klamath First Federal. We are very encouraged by the potential of this account as a value-added service for our growing customer base. Our customers continue to benefit from technological advances which provide economical and convenient choices for them to conduct their banking. We offer a combined ATM, Check Guarantee and Debit Card to qualified customers. This allows them access to their checking or savings balances 24 hours a day either through ATMs or merchants with point-of-sale terminals. We offer combined statements that itemize on one convenient monthly statement multiple account information including checking, savings, time deposits, and mortgage, consumer or commercial loans if the customer desires. Our automated 24-hour telephone banking system allows customers to get instant up-to-date account information and perform routine transfer and payment transactions real-time over the telephone. Our various business accounts continue to grow and have new added options for customer convenience. This past year we added an option allowing our business customers to dial up their accounts and see their account activity directly by use of a modem and personal computer. Customers with a high volume of account activity find this service to be a great advantage over alternative choices. Last, Klamath First Federal has moved into the Internet with our informational web site www.klamathfirstfederal.com. The site will be updated with new features as they are developed, including a bill paying feature as well as a fully transactional site allowing such transactions as account inquiries, balance transfers and making loan payments. The site currently has hot links to Nasdaq, Klamath First Financial Services( see below) and Klamath First Bancorp, Inc. The Bancorp's link will feature Company highlights, and recent news and earnings releases. Our entry into the Internet will allow our customers to have one more choice in how they do their banking with us and access their accounts. INVESTMENT ALTERNATIVES Consolidation of the financial marketplace continues to rapidly blur the line between banks, stockbrokers, and insurance companies. The trend is clear, and customers now expect to be able to have one-stop shopping for their financial needs and retirement planning. With this is mind, Klamath First Federal formed a new subsidiary, Klamath First Financial Services ("KFFS"), whose activities include securities brokerage, insurance and related services to retail bank customers. The subsidiary, through a third party-broker dealer, Fintegra Financial Solutions ("Fintegra"), will offer common and preferred stocks, corporate and municipal bonds, mutual funds, unit investment trusts, variable and fixed annuities, and long term care insurance. Customers are able to access their account histories on the Internet, use optional on-line trading, and have access to market research using the technological advances that Fintegra provides. Wes Handley, Vice President and Program Manager of KFFS operates out of the main office in Klamath Falls. He has been covering all of our branches throughout the state on an appointment basis. This next year we plan to add additional licensed investment professionals to cover our state-wide branch network. Additionally, new accounts personnel are obtaining insurance licenses to offer annuity products to appropriate customers. This subsidiary has the potential to help increase our non-interest income, but more importantly, adds another relationship and valued service for our growing customer base. THE FUTURE The Company looks forward to the rapidly changing future with great anticipation. Our asset size, market capitalization, and current and future branch locations allow us to capitalize on market synergies, economies of scale and product diversification. We plan to add an experienced marketing and training professional to our management staff this coming year. This new position will develop marketing campaigns to inform present and potential customers of our quality service and varied financial product lines, as well as train and motivate branch staff to better market our products. We will continue to look for opportunities to expand the franchise and our market reach through acquisitions, strategic alliances, branching, and technology. Klamath First Bancorp, Inc. and the financial industry have many challenges ahead of it. Management will continue to meet these challenges and provide quality service and financial products through a variety of delivery channels. This should translate into a stronger financial institution creating good returns for our shareholders. CORPORATE EXECUTIVE OFFICERS Corporate Executive Officer Profiles Gerald V. Brown has been with Klamath First Federal since 1957. He began as a teller, and, in his 42 years with Klamath First Federal, has progressed up through the ranks to his current position as President and Chief Executive Officer. Mr. Brown has served on the Board of Directors for Klamath First Federal Savings & Loan Association since 1994. Robert A. Tucker has been with Klamath First Federal Savings & Loan Association since 1973. He is currently Senior Vice President and Chief Lending Officer responsible for all lending functions of the Association. In his 26 years with the Association, Mr. Tucker has served in various positions including Loan Officer, Branch Manager, and Chief Operating Officer responsible for the operations of the Association. Frank X. Hernandez joined Klamath First Federal in 1991 as Human Resource Manager after an 11 year career with Oregon's largest commercial bank where he was a District Operations Officer and Branch Manager. He currently serves as Senior Vice President and Chief Operating Officer responsible for all of the Association's non-loan operations including deposit acquisition, information systems and investor relations. Marshall J. Alexander has been with Klamath First Federal Savings & Loan since 1986. He began as the Association's Controller, was promoted to Chief Financial Officer in August 1994 and was named Senior Vice President and Chief Financial Officer in November 1998. Mr. Alexander brought over ten years of financial management experience in both regional banks and small community banks prior to joining the Association. He is responsible for evaluating strategic shareholder value enhancements, supervising the accounting department, and managing the investments of the Company. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Special Note Regarding Forward-Looking Statements Management's Discussion and Analysis of Financial Condition and Results of Operations and other portions of this Annual Report contain certain "forward-looking statements" concerning the future operations of Klamath First Bancorp, Inc. Management desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 and is including this statement for the express purpose of availing the Company of the protections of such safe harbor with respect to all "forward-looking statements" used in our Annual Report. We have used "forward-looking statements" to describe future plans and strategies, including our expectations of the Company's future financial results. Management's ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors which could affect actual results include interest rate trends, the general economic climate in the Company's market area and the country as a whole which could affect the collectibility of loan balances, the ability to increase non- interest income through expansion of new lines of business, the ability of the Company to control costs and expenses, the ability of the Company to successfully address year 2000 ("Y2K") issues, competitive products and pricing, loan delinquency rates, and changes in federal and state regulation. These factors should be considered in evaluating the "forward-looking statements," and undue reliance should not be placed on such statements. General Klamath First Bancorp, Inc. (the "Company"), an Oregon corporation, is the unitary savings and loan holding company for Klamath First Federal Savings and Loan Association (the "Association"). The Association is a traditional, community-oriented, savings and loan association that focuses on hands-on customer service within its primary market area. Accordingly, the Association is primarily engaged in attracting deposits from the general public through its offices and using those and other available sources of funds to originate permanent residential one- to four-family real estate loans within its market area and, to a lesser but growing extent, commercial real estate and multi-family residential loans and loans to consumers and small businesses. The Company's profitability depends primarily on its net interest income, which is the difference between interest and dividend income on interest-earning assets, principally loans and investment securities, and interest expense on interest-bearing deposits and borrowings. Because the Company is primarily dependent on net interest income for its earnings, the focus of the Company's planning is to devise and employ strategies that provide stable, positive spreads between the yield on interest- earning assets and the cost of interest-bearing liabilities in order to maximize the dollar amount of net interest income. The Company's net earnings are dependent, to a lesser extent, on the level of its non- interest income, such as service charges and other fees, and the controlling of its non-interest expense, such as employee compensation and benefits, occupancy and equipment expense, deposit insurance premiums and miscellaneous other expenses, as well as federal and state income taxes. The Association is regulated by the Office of Thrift Supervision ("OTS") and its deposits are insured up to applicable limits under the Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC"). The Association is a member of the Federal Home Loan Bank system. The Association conducts its business through 34 office facilities and one loan production office, with the main office located in Klamath Falls, Oregon. The Association considers its primary market area to be the state of Oregon, particularly the 22 counties in which the offices are located. Federal Legislation In Federal legislation enacted in 1996, the reserve method of accounting for thrift bad debt reserves (including the percentage of taxable income method) was repealed for tax years beginning after December 31, 1995. The resulting change in accounting method triggers bad debt reserve recapture for post-1987 reserves over a six-year period, thereby generating an additional tax liability. At September 30, 1999, the Association's post-1987 reserves amounted to $3.8 million. Pre-1988 reserves would only be subject to recapture if the institution fails to qualify as a thrift. A special provision suspends recapture of post-1987 reserves for up to two years if, during those years, the institution satisfies a "residential loan requirement." Notwithstanding this special provision, however, recapture was required to begin during the tax year ended September 30, 1999. Market Risk and Asset/Liability Management The Company's financial performance is affected by the success of the fee generating products it offers to its customers, the credit quality of its loans and securities, and the extent to which its earnings are affected by changes in interest rates. Credit risk is the risk that borrowers will become unable to repay their debts. The Company utilizes no derivatives to mitigate its credit risk, relying instead on strict underwriting standards, loan review, and an adequate allowance for loan losses. Interest rate risk is the risk of loss in principal value and risk of earning less net interest income due to changes in interest rates. Put simplistically, savings institutions solicit deposits and lend the funds they receive to borrowers. The difference between the rate paid on deposits and the rate received on loans is the interest rate spread. If the rates paid on deposits change, or reprice, with the same timing and magnitude as the rates change on the loans, there is perfect matching of interest rate changes and thus, no change in interest rate spread and no interest rate risk. In actuality, interest rates on deposits and other liabilities do not reprice at the same time and/or with the same magnitude as those on loans, investments and other interest-earning assets. For example, the Association primarily originates fixed-rate residential loans for its portfolio. Because fixed-rate loans, by definition, do not reprice until payoff and because the majority of residential loans have terms of 15 to 30 years (with actual expected lives of seven to ten years), the interest rate characteristics of the loan portfolio do not exactly match the Company's liabilities, which consist of deposits with maturities ranging up to ten years and borrowings which mature or reprice in five years or less. When interest rates change, this mismatch creates changes in interest rate spread that influence net interest income and result in interest rate risk. Changes in interest rates also impact the fair value of the assets and liabilities on the Company's balance sheet, expressed as changes in the net portfolio value ("NPV"). NPV represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities plus or minus the estimated market value of off-balance-sheet instruments. For example, the market value of investment securities and loans is impacted by changes in interest rates. Fixed-rate loans and investments held in the Company's portfolio increase in market value if interest rates decline. Conversely, the market value of fixed-rate portfolio assets decrease in an increasing interest rate environment. It is generally assumed that assets with adjustable rates are less subject to market value changes due to interest rate fluctuations based on the premise that their rates will adjust with the market. In December 1998, the OTS issued Thrift Bulletin 13a ("TB 13a") containing guidance on the management of interest rate risk and providing a description of how the "Sensitivity to Market Risk" rating would be determined. Sensitivity to Market Risk represents the "S" component of the CAMELS rating which is used by regulators in their evaluation of financial institutions. The OTS has established detailed minimum guidelines for two areas of interest rate risk management. These guidelines establish minimum expectations for (1) the establishment and maintenance of board-approved risk limits and (2) an institution's ability to measure their interest rate risk exposure. Each thrift's board of directors is responsible for establishing risk limits for the institution. The interest rate risk limits are expected to include limits on the change in NPV as well as limits on earnings sensitivity. NPV limits include minimums for the NPV ratio which is calculated by dividing the NPV by the present value of the institution's assets for a given rate scenario. The board should specify the minimum NPV ratio it is willing to allow under interest rate shifts of 100, 200, and 300 basis points up and down. Both the NPV limits and the actual NPV forecast calculations play a role in determining a thrift's Sensitivity to Market Risk. The prudence of the limits and the compliance with board-prescribed limits are factors in the determination of whether or not the institution's risk management is sufficient. In addition, the NPV ratio permitted by the institution's policies under an adverse 200 basis point rate shift scenario is combined with the institution's current interest rate sensitivity to determine the institution's "Level of Interest Rate Risk." The level of interest rate risk is then utilized in conjunction with an assessment of the "Quality of Risk Management Practices" to determine the "S" component of the CAMELS rating. The Company's exposure to interest rate risk is reviewed on at least a quarterly basis by the Board of Directors and the Asset Liability Management Committee ("ALCO"), which includes senior management representatives. The ALCO monitors and considers methods of managing interest rate risk by monitoring changes in NPV, the NPV ratio, and net interest income under various interest rate scenarios. The ALCO attempts to manage the various components of the Company's balance sheet to minimize the impact of sudden and sustained changes in interest rates on NPV and the NPV ratio. If potential changes to NPV and the NPV ratio resulting from hypothetical interest rate swings are not within the limits established by the Board, the Board may direct management to adjust its asset and liability mix to bring interest rate risk within Board-approved limits. NPV is calculated based on the net present value of estimated cash flows utilizing market prepayment assumptions and market rates of interest provided by independent broker quotations and other public sources. Computation of forecasted effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments, and deposit decay, and should not be relied upon as indicative of actual future results. Further, the computations do not contemplate any actions the ALCO could undertake in response to changes in interest rates. The Association continues to originate primarily fixed-rate residential loans. Some of these loans are sold to Fannie Mae with servicing retained while others are held in its portfolio. In order to reduce the exposure to interest rate fluctuations, the Company has developed strategies to manage its liquidity, shorten the effective maturities and increase the repricing of certain interest-earning assets, and increase the effective maturities of certain interest-bearing liabilities. During the year ended September 30, 1999, the Company took several actions to reduce interest rate risk. First, the Company purchased a $10 million block of adjustable-rate single family mortgages, which generally reprice in one year. The Company also purchased participations in adjustable-rate multi-family and commercial real estate loans. Second, the Company has focused its non-residential lending on adjustable or floating rate and/or short-term loans. Third, the Company has focused its investment activities on short- and medium-term securities, including adjustable-rate mortgage-backed securities and collateralized mortgage obligations ("CMOs"). Fourth, the Company has attempted to maintain and increase its regular savings and transaction deposit accounts, which are considered to be relatively resistant to changes in interest rates. New deposit product offerings and promotion of checking accounts provided significant progress in attaining this goal. Fifth, the Company has utilized long-term borrowings and deposit marketing programs to lengthen the term to repricing of its liabilities. During 1999 adjustable-rate borrowings from FHLB of Seattle were converted to longer term fixed-rate borrowings. The Company will continue to explore opportunities in these areas. The Company's Board of Directors had established risk limits under the previous OTS guidance. These limits have been revised and approved to bring them into compliance with TB 13a. NPV values for the Association are regularly calculated internally and by the OTS based on regulatory guidelines. The following table presents the Association's projected change in NPV and the NPV ratio for the various rate shock levels as of September 30, 1999 using the internally generated calculations. The assets and liabilities at the parent company level are not considered in the analysis. The exclusion of holding company assets and liabilities does not have a significant effect on the analysis of NPV sensitivity. All market rate sensitive instruments presented in these tables are classified as either held to maturity or available for sale. The Association has no trading securities.
PROJECTED CHANGES IN NET PORTFOLIO VALUE as of September 30, 1999 Change in NPV Sensitivity Interest Rates Ratio Measure (Basis points) 200 basis point increase ........................ 6.53% (327) 100 basis point increase ........................ 8.21% (159) Base Rate Scenario .............................. 9.80% -- 100 basis point decline ......................... 11.14% 134 200 basis point decline ......................... 11.18% 138
The preceding table indicates that at September 30, 1999, in the event of a sudden and sustained increase in prevailing market interest rates, the Association's NPV and NPV ratio would be expected to decrease. At September 30, 1999, the Association's estimated changes in these measures were within the targets established by the Board of Directors. Certain shortcomings are inherent in the method of analysis presented in the computation of NPV. Actual values may differ from those projections presented should market conditions vary from assumptions used in the calculation of NPV. Certain assets, such as adjustable-rate loans, have features which restrict changes in interest rates on a short-term basis and over the life of the assets. In addition, the proportion of adjustable-rate loans in the Association's portfolio could decrease in future periods if market interest rates remain at or decrease below current levels due to refinance activity. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in the NPV. Finally, the ability of many borrowers to repay their adjustable-rate mortgage loans may decrease in the event of interest rate increases. A conventional measure of interest rate sensitivity for savings institutions is the calculation of interest rate "gap." This measure of interest rate sensitivity is a measure of the difference between amounts of interest-earning assets and interest-bearing liabilities which either reprice or mature within a given period of time. The difference, or the interest rate repricing "gap," provides an indication of the extent to which an institution's interest rate spread will be affected by changes in interest rates. A gap is considered positive when the amount of interest-rate sensitive assets exceed the amount of interest- rate sensitive liabilities, and is considered negative when the amount of interest-rate sensitive liabilities exceeds the amount of interest-rate sensitive assets. Generally, during a period of rising interest rates, a negative gap within shorter maturities would result in a decrease in net interest income. Conversely, during a period of falling interest rates, a negative gap within shorter maturities would result in an increase in net interest income. At September 30, 1999, the Association's one-year cumulative gap was a negative 31.49% of total assets compared to a negative 32.19% of total assets at September 30, 1998. 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.
At September 30, ----------------------------------------- 1999 1998 1997 --------- -------- ---------- (In thousands) Earning assets maturing or repricing within one year .... $ 188,286 $ 220,952 $ 199,320 Interest-bearing liabilities maturing or repricing within one year ................. 516,161 552,929 524,942 Deficiency of earning assets over interest-bearing liabilities as a percent of total assets .... (31.49%) (32.19%) (33.22%) Percent of assets to liabilities maturing or repricing within one year ................. 36.48% 39.96% 37.97%
INTEREST SENSITIVITY GAP ANALYSIS The following table presents the difference between the Company's interest-earning assets and interest-bearing liabilities within specified maturities at September 30, 1999. This table does not necessarily indicate the impact of general interest rate movements on the Company's net interest income because the repricing of certain assets and liabilities is subject to competitive and other limitations. As a result, certain assets and liabilities indicated as maturing or otherwise repricing within a stated period may in fact mature or reprice at different times and at different volumes.
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 Adjustable-rate ....... $ 11,519 $ 3,638 $ 9,261 $ 3,962 $ 5,108 $-- $-- $-- $ 33,488 Fixed-rate ............ 2,927 2,705 4,372 1,355 2,553 25,381 96,983 498,360 634,636 Other Mortgage Loans Adjustable-rate ....... 2,494 3,176 8,606 6,321 7,411 -- -- -- 28,008 Fixed-rate ............ 195 224 845 5,657 7,131 9,522 6,514 4,198 34,286 Mortgage Backed and Related Securities 48,780 946 10,696 1,879 4,969 2,469 4,018 1,919 75,676 Non-Real Estate Loans Adjustable-rate ....... 6,896 469 1,262 186 -- -- -- -- 8,813 Fixed-rate ............ 653 303 547 1,106 3,197 838 1,078 -- 7,722 Investment Securities ... 39,186 -- 28,586 74,025 10,471 2,235 20,289 1,237 176,029 -------- -------- -------- -------- ------- ------- -------- -------- -------- Total Rate Sensitive Assets $112,650 $ 11,461 $ 64,175 $ 94,491 $40,840 $40,445 $128,882 $505,714 $998,658 ======== ======== ======== ======== ======= ======= ======== ======== ======== LIABILITIES Deposits-Fixed Maturity $ 97,557 $ 80,259 $ 88,208 $ 67,166 $ 37,459 $20,703 $ 594 $ 140 $392,086 Deposits-Interest Bearing 5,741 5,250 9,200 24,034 11,771 9,409 1,844 54 67,303 Deposits-Money Market 47,440 31,865 35,945 29,870 2,442 1,132 208 -- 148,902 Deposits-Passbook and Statement Savings 5,100 4,664 8,173 21,351 10,457 8,359 1,638 48 59,790 Other Interest-Bearing Liabilities 71,759 25,000 -- 100,000 10,000 -- -- -- 206,759 -------- -------- -------- -------- -------- ------- -------- -------- -------- Total Rate Sensitive Liabilities $227,597 $147,038 $141,526 $242,421 $ 72,129 $39,603 $ 4,284 $ 242 $874,840 ======== ======== ======== ======== ======== ======= ======== ======== ======== Interest Rate Sensitivity Gap ($114,947) ($135,577) ($77,351) ($147,930) ($31,289) $ 842 $124,598 $505,472 $123,818 Cumulative Interest Rate Sensitivity Gap ($114,947) ($250,524) ($327,875) ($475,805) ($507,094) ($506,252) ($381,654) $123,818 Sensitivity Gap to Total Assets -11.04% -13.02% -7.43% -14.20% -3.00% 0.08% 11.96% 48.53% Cumulative Interest Rate Sensitivity Gap to Total Assets -11.04% -24.06% -31.49% -45.69% -48.69% -48.61% -36.65% 11.88%
Liquidity and Capital Resources The Company generates cash through operating activities, primarily as a result of net income. The adjustments to reconcile net income to net cash provided by operations during the periods presented consisted primarily of the provision for loan losses, depreciation and amortization, stock-based compensation expense, amortization of deferred loan origination fees, increases or decreases in various escrow accounts and increases or decreases in other assets and liabilities. During the fiscal year ended September 30, 1997, there was a major one-time adjustment to cash resulting from the Wells Fargo branch acquisition which contributed approximately $220.9 million in cash. The primary investing activity of the Association is lending, which is funded with cash provided from operations and financing activities, as well as proceeds from amortization and prepayments on existing loans and mortgage backed and related securities. For additional information about cash flows from operating, financing, and investing activities, see the Consolidated Statements of Cash Flows included in the Consolidated Financial Statements. The Association is required under applicable federal regulations to maintain specified levels of "liquid" investments in qualifying types of U.S. government, federal agency and other investments having maturities of five years or less. Current OTS regulations require that a savings association maintain liquid assets of not less than 4.00% of its average daily balance of net withdrawable deposit accounts and borrowings payable in one year or less. At September 30, 1999, the Association's regulatory liquidity, as measured for regulatory purposes, was 22.38%. The Company has borrowing agreements with banks that can be used if funds are needed. (See Notes 9 and 10 to the Consolidated Financial Statements.) OTS capital regulations require the Association to have: (i) tangible capital equal to 1.5% of adjusted total assets, (ii) core capital equal to 3.0% of adjusted total assets, and (iii) total risk-based capital equal to 8.0% of risk-weighted assets. At September 30, 1999, the Association was in compliance with all regulatory capital requirements effective as of such date, with tangible, core and risk-based capital of 8.9%, 8.9% and 17.4%, respectively. (See Note 18 to Consolidated Financial Statements.) Year 2000 Readiness The Company has taken all possible steps to ensure computer systems and infrastructure are ready for the Year 2000. The following information explains the process that the Company used to achieve Year 2000 readiness. Background. As with other organizations, some of the data processing programs used by the Company were originally designed to recognize calendar years by their last two digits. Calculations performed using these truncated fields may not work properly with dates beyond 1999. Correct processing of date oriented information is critical to the operation of all financial institutions because computer systems track deposit account and loan balances, record transaction activity in accounts, and calculate interest amounts, among other activities. Failure of these processes could severely hinder the ability to continue operations and provide customer service. Because of the critical nature of the issue, the Company established a committee early in 1997 to address "Year 2000" issues. The committee, consisting of executive management, technical staff, and a full-time project manager, chose to use the OTS Year 2000 checklist as a guide for Year 2000 preparation. The committee also used a Year 2000 Testing Guide and Contingency Guide provided by Alex Information Systems, Inc. to complement the OTS checklist. Process. The Federal Financial Institutions Examination Council ("FFIEC") issued guidelines for Year 2000 project management by financial institutions, which were followed by the Company. These guidelines identified the following five steps for Year 2000 conversion programs: Awareness Phase - Define the Year 2000 problem and establish a Year 2000 program team and overall strategy. This step was completed by the Company as of September 30, 1997. Assessment Phase - Assess the size and complexity of the problem and detail the magnitude of effort necessary to address Year 2000 issues, including hardware, software, networks, automated teller machines, etc. This step was approximately 100% complete by June 30, 1999 and assessment will be ongoing until the Year 2000. Renovation Phase - This phase includes hardware and software upgrades and system replacements. This step was 100% complete for in-house systems at December 31, 1998. This phase also encompasses ongoing discussions with and monitoring of outside servicers and third-party software providers. Validation/Testing Phase - This process includes testing of hardware and software components. Testing is completed by performing extensive tests with the computer dates changed to January 1, 2, and 3, 2000. Such testing continued through September 30, 1999, with the most critical functions tested first. This allows time to correct any discovered deficiencies before the end of 1999. In-house systems and third party service bureaus are 100% tested as of September 30, 1999. The Company is either testing or reviewing test documents of additional third party vendors that are deemed critical to the operations of the Company. Overall, the validation phase is considered 100% complete as of September 30, 1999. Implementation Phase - Systems successfully tested will be designated as Year 2000 compliant. For any system failing validation testing, the business impact must be assessed and a contingency plan implemented. This phase was completed as of June 30, 1999. All personal computers ("PCs") and related software throughout the Company have been inventoried and tested for Year 2000 capability. The Company used two testing methods, BIOS and off line, for PC certification of Year 2000 compatibility. PCs were required to pass both tests to be considered ready for Year 2000. As of September 30, 1998, all of the Company's PCs were Year 2000 compatible. The Company's Wide Area Network and various Local Area Networks were also upgraded, tested, and determined to be Year 2000 prepared. Data processing for the Company is provided by Fiserv, the nation's largest third party service bureau serving financial institutions. Fiserv has stated that all their processing was Year 2000 ready of as June 30, 1998. The Company successfully performed test procedures for critical service bureau processes in December 1998 and in April 1999. Software purchased from a Fiserv affiliate is used for applications such as accounts payable, fixed assets and investment portfolio accounting. The investment portfolio accounting software was Year 2000 compatible as of September 30, 1998. During the quarter ended March 31, 1999, the Company converted the accounts payable and fixed asset applications to the Year 2000 ready software provided by the Fiserv affiliate. Other third party vendors identified by the Company were monitored for Year 2000 readiness. Validation with critical vendors was 100% complete as of June 30, 1999. Critical data processing applications, in addition to those provided by the service bureau, have been identified. These include applications such as electronic processing through the Federal Reserve Bank and ATM processing. Testing with the Federal Reserve Bank has been successfully completed. All ATM machines have been upgraded and are now ready for Year 2000. Contingency plans were developed by the committee. The contingency plans address actions to be taken to continue operations in the event of system failure due to areas that cannot be tested in advance, such as power and telephone service, which are vital to business continuation. Contingency planning was 100% complete as of June 30, 1999. The Company continues to make last minute plans and to prepare its staff for the rollover period of December 20, 1999 to January 7, 2000. For many financial institutions, the Year 2000 readiness of borrowers to whom the institution has commercial operating loans is a concern. Lack of Year 2000 preparedness could cause disruptions of borrowers' businesses significant enough to compromise their ability to repay indebtedness. The Company's loans of this type represent less than one half of one percent of the total loan portfolio, and are not considered to represent a significant risk of loss. To assist in understanding Year 2000 issues and to inform them of the Company's preparation activities, brochures regarding Year 2000 preparedness have been distributed to all customers. Another mailing was made during the quarter ending September 30, 1999. In addition, the Company has published advertisements in local newspapers and has placed "Year 2000" bulletin boards in all branches, which contain current information on Year 2000 readiness for the Company and the financial services industry. Conclusion. The Company believes that the Year 2000 issue will not pose significant operational problems and is not anticipated to be material to its financial position or results of operations in any given year. As of September 30, 1999, the Company estimated that total Year 2000 implementation costs will be approximately $200,000 and are expected to be expensed over a period of 18 months, affecting fiscal years 1998, 1999, and 2000. This estimate is based on information available at September 30, 1999, and may be revised as additional information and actual costs become available. During the years ended September 30, 1999 and 1998, $82,000 and $89,000 of Year 2000 expenses were incurred and expensed, respectively. Changes in Financial Condition At September 30, 1999, the consolidated assets of the Company totaled $1.04 billion, an increase of $10.3 million, or 1.0%, from $1.03 billion at September 30, 1998. The increase in total assets was primarily a result of $71.6 million growth in loans which offset the Company's repurchase of 20% of the outstanding common stock in January 1999, which reduced cash and investments by $39.0 million. Total cash and cash equivalents decreased $42.5 million, or 63.4%, from $67.0 million at September 30, 1998 to $24.5 million at September 30, 1999. The decrease is primarily the result of using cash to fund the stock repurchase in January 1999. Net loans receivable increased by $71.6 million, or 10.7%, to $739.8 million at September 30, 1999, compared to $668.1 million at September 30, 1998. The increase was primarily the result of continued new loan demand exceeding loan repayments, augmented by the Company's purchase of $5.1 million in higher yielding loans on multi-family residential and commercial properties in Oregon and $10.0 million in adjustable-rate one- to four- family mortgages during the year ended September 30, 1999. Investment securities decreased $46.9 million, or 22.8%, from $206.1 million at September 30, 1998 to $159.2 million at September 30, 1999. This decrease was the result of scheduled maturities, primarily maturities of short term commercial paper. The proceeds from these maturities were used to fund the stock repurchase. During the year ended September 30, 1999, $16.4 million of principal payments were received on mortgage backed and related securities ("MBS") and $9.5 million of MBS were sold, thus reducing the balance of MBS. This reduction was more than offset by the purchase of $18.8 million in CMOs and $36.7 million in other mortgage-backed securities, resulting in a net increase in total MBS from $47.0 million at September 30, 1998 to $75.3 million at September 30, 1999. Real estate owned increased from zero at September 30, 1998 to $1.5 million at September 30, 1999. This balance primarily relates to the foreclosure of a motel with an estimated fair value of $1.4 million that was a participation loan originated by another lender. Deposit liabilities increased $30.9 million, or 4.5%, from $689.5 million at September 30, 1998 to $720.4 million at September 30,1999. Management attributes the increase to the maintaining of competitive rates in its market areas as well as the use of an automated on-line personal computer-based system to market deposits nationally. The increase in deposits has been experienced throughout the network of 34 full service branches. Advances from the FHLB of Seattle increased from $167.0 million at September 30, 1998 to $197.0 million at September 30, 1999. The increase was used to fund loan growth. During the quarter ended June 30, 1999, the Company converted adjustable-rate FHLB borrowings to fixed-rate three- to five-year maturity borrowings as a strategic move to manage interest rate risk. Short term borrowings at September 30, 1998 consisted of $12.1 million in reverse repurchase agreements. These agreements matured during the quarter ended March 31, 1999, and they were not renewed. Total shareholders' equity decreased $35.5 million, or 24.5%, from $145.1 million at September 30, 1998 to $109.6 million at September 30, 1999. The decrease is primarily attributable to $39.0 million paid out for the 20% stock repurchase completed in January 1999. Equity was also decreased by a $4.6 million decrease in unrealized gains on securities available for sale during the year ended September 30, 1999. These decreases were partially offset by $9.2 million in earnings for the year. Asset Quality Non-Performing Assets At September 30, 1999, the ratio of non-performing assets (including nonaccrual loans, accruing loans greater than 90 days delinquent, real estate owned, and other repossessed assets) to total assets was .46% as compared to .05% at September 30, 1999. The Association intends to maintain asset quality by continuing its focus on one-to-four family lending. With the introduction of other lending options such as commercial and multi-family real estate loans, equity lines of credit, other consumer loan products, and commercial loans, the Association has evaluated the trade off associated with planned loan growth and 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.
The following table sets forth at the dates indicated the amounts of classified assets: At September 30, --------------------------------- 1999 1998 1997 --------- --------- --------- (In thousands) Loss .......... $ -- $ 3 $ -- Doubtful ...... -- -- -- Substandard ... 4,810 521 304 Special Mention 456 2,452 843 _________ _________ _________ $ 5,266 $ 2,976 $ 1,147 ========= ========= =========
Allowance for Loan Losses The Association has established a systematic methodology for determination of provisions for loan losses. The methodology is set forth in a formal policy and takes into consideration the need for a general valuation allowance as well as specific allowances that are tied to individual loans. Provision for loan losses is recorded based on the Association's evaluation of specific loans in its portfolio, historical loan loss experience, the volume and type of lending, geographic distribution of lending, general economic conditions, and the existing level of the Association's allowance for loan losses.
The following table sets forth at the dates indicated the loan loss allowance and charge-offs: At September 30, ----------------------------------------- 1999 1998 1997 ------- -------- ------ (In thousands) General loan loss allowance $2,484 $1,947 $1,296 Specific loss allowance -- 3 -- Charge-offs 398 20 2
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998 General In September 1998, the Company's Board of Directors authorized the repurchase of 20% of the Company's outstanding common stock via a "Modified Dutch Auction Tender Offer" (the "Offer"). The transaction was completed in January 1999. The Offer contributed to the 15.24% increase in earnings per share from $1.05 for the year ended September 30, 1998 to $1.21 for the year ended September 30, 1999. Similarly, the Company's return on average equity improved by 15.80% from 6.52% for the year ended September 30, 1998 to 7.55% for the year ended September 30, 1999. Interest Income The $39.1 million increase in average interest earning assets contributed to an increase in interest income of $2.0 million or 2.8% from $69.7 million for the year ended September 30, 1998 to $71.7 million for the year ended September 30, 1999. An increase in average loans receivable provided a net increase in interest income that more than offset the decrease in interest income resulting from completion of the Offer in January 1999 which reduced earning assets by $39.0 million. The general interest rate environment during the year was one of low but gradually increasing rates. During the year ended September 30, 1998, interest rates were stable throughout most of the year, declining only in the last quarter, from July through September. As a result, interest rates were lower overall during fiscal 1999 than in 1998. This is reflected in the average yield on interest-earning assets which decreased slightly from 7.34% for the year ended September 30, 1998 to 7.25% for the year ended September 30, 1999. An increase in loans receivable contributed to a $6.8 million increase in interest income on loans. The increase in loans receivable was primarily a result of the purchase of participation loans and loan originations exceeding loan refinancing, which resulted in net loan growth of $71.6 million for 1999. The increase in interest income on loans was partially offset by decreases in interest income on investment securities, mortgage backed and related securities and interest-earning deposits. Cash and investment securities were liquidated to provide funds for completion of the Offer in January 1999. For example the average balance of investments decreased by $49.3 million, or 21.1%, for the year ended September 30, 1999 compared with the same period in 1998. Interest Expense Interest expense increased $533,255 due to increases in interest expense on FHLB borrowings. Interest expense on deposits remained stable at $29.0 million for the year ended September 30, 1999 compared to $28.9 million for the year ended September 30, 1998. Average deposits increased by $35.9 million for the year ended September 30, 1999 compared to the year ended September 30, 1998, but the average interest paid on interest-bearing deposits decreased 24 basis points from 4.58% for the year ended September 30, 1998 to 4.34% for the year ended September 30, 1999. This decrease was a result of the lower interest rate scenario during the year. Interest expense on FHLB borrowings increased $1.2 million due to increased average borrowings of $32.7 million. As noted previously, the general interest rate environment during the year was one of low rates which gradually increased during the year. In this 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.
AVERAGE BALANCES, NET INTEREST INCOME and YIELDS EARNED and RATES PAID The following table presents, for the periods indicated, information regarding average balances of assets and liabilities, as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate spread, net interest margin and the ratio of average interest-earning assets to average interest-bearing liabilities. Dividends received are included as interest income. The table does not reflect any effect of income taxes. All average balances are based on month-end balances. Nonaccrual loans are reflected as carrying a zero yield. Year Ended September 30, ------------------------------------------------------------------------------------------------------ 1999 1998 1997 ------------------------------- -------------------------------- ----------------------------------- Average Yield/ Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate Balance Interest Rate --------- ---------- ------ --------- ---------- ------ -------- -------- ------- INTEREST-EARNING ASSETS (In thousands) Loans receivable ........ $ 721,658 $ 56,290 7.80% $614,457 $ 49,508 8.06% $515,555 $ 40,851 7.92% Mortgage backed and related securities 38,284 2,104 5.50% 61,000 3,680 6.03% 74,349 4,716 6.34% Investment securities ... 184,428 10,847 5.88% 233,715 14,149 6.05% 112,319 6,847 6.10% Federal funds sold ...... 18,555 914 4.93% 16,820 917 5.45% 17,533 931 5.31% Interest earning deposits 15,801 751 4.75% 16,108 862 5.35% 6,132 327 5.32% FHLB stock .............. 10,471 785 7.50% 7,983 617 7.73% 6,431 495 7.70% ---------- ---------- -------- ---------- --------- -------- Total interest-earning assets 989,197 71,691 7.25% 950,083 69,733 7.34% 732,319 54,167 7.40% Non-interest-earning assets 45,314 ---------- 48,202 ---------- 16,527 -------- ---------- ---------- -------- Total Assets ............ $1,034,511 $ 998,285 $748,846 ========== ========== ======== INTEREST-BEARING LIABILITIES Tax and insurance reserve $ 5,326 $ 110 2.07%$ 5,895 $ 145 2.47%$ 4,614 $ 137 2.97% Passbook and statement savings 61,674 1,326 2.15% 62,333 1,683 2.70% 40,281 1,271 3.15% Interest-bearing checking 71,107 873 1.23% 73,806 1,089 1.48% 35,892 791 2.20% Money market ............ 131,534 5,096 3.87% 110,650 4,275 3.86% 62,171 2,391 3.85% Certificates of deposit . 402,809 21,679 5.38% 384,400 21,885 5.69% 312,511 18,012 5.76% FHLB advances/Short term borrowings 176,851 9,298 5.26% 155,712 8,771 5.63% 127,659 7,254 5.68% ---------- ---------- --------- --------- -------- -------- Total interest-bearing liabilities 849,301 38,382 4.52% 792,796 37,848 4.77% 583,128 29,856 5.12% Non-interest-bearing liabilities 63,975 59,037 19,417 ---------- ---------- ---------- ----------- --------- ------- Total liabilities ....... 913,276 851,833 602,545 Shareholders' equity .... 121,235 146,452 146,301 ---------- ---------- -------- Total Liabilities and Shareholders' Equity $1,034,511 $ 998,285 $748,846 ========== ========== ======== Net interest income ..... $ 33,309 $ 31,885 $24,311 ========== ========== ======= Interest rate spread .... 2.73% 2.57% 2.28% ======= ===== ===== Net interest margin ..... 3.37% 3.36% 3.32% ======= ===== ====== Average interest-earning assets to average interest-bearing liabilities 116.47% 125.58% 137.78% ======= ======= =======
RATE VOLUME ANALYSIS The following table sets forth the effects of changing rates and volumes on net interest income of the Company. Information is provided with respect to (i) effects on interest income attributable to changes in volume (changes in average volume multiplied by prior rate); (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior average volume); and (iii) changes in rate/volume (change in rate multiplied by change in average volume.
For the Year Ended September 30, ------------------------------------------------------------------------------------------- 1998 VS 1999 Increase (Decrease) Due to 1997 VS 1998 Increase (Decrease) Due to --------------------------------------------- ---------------------------------------- Net Increase Net Increase Rate Volume Rate/Vol (Decrease) Rate Volume Rate/Vol (Decrease) -------- -------- -------- ------------ ------- -------- -------- ------------ INTEREST EARNING ASSETS (In thousands) Loans ............................... ($ 1,580) $ 8,637 ($ 275) $ 6,782 $ 688 $ 7,837 $ 132 $ 8,657 Mortgage backed and related securities ..................... (328) (1,370) 122 (1,576) (231) (848) 43 (1,036) Investment securities ............... (403) (2,984) 85 (3,302) (47) 7,400 (51) 7,302 Federal funds sold .................. (88) 95 (10) (3) 25 (37) (2) (14) Interest bearing deposits ........... (96) (16) 1 (111) 1 533 1 535 FHLB stock .......................... (19) 192 (5) 168 2 120 -- 122 -------- -------- -------- -------- -------- -------- ------ -------- Total Interest-Earning Assets ($ 2,514) $ 4,554 ($ 82) $ 1,958 $ 438 $ 15,005 $ 123 $ 15,566 ======== ======== ======== ======== ======== ======== ====== ======== INTEREST-BEARING LIABILITIES Tax and insurance reserves .......... ($ 23) ($ 14) $ 2 ($ 35) ($ 24) $ 38 ($ 6) $ 8 Passbook and statement savings ...... (343) (18) 4 (357) (183) 696 (101) 412 Interest-bearing checking ........... (183) (40) 7 (216) (261) 836 (277) 298 Money market ........................ 12 807 2 821 11 1,864 9 1,884 Certificates of deposit ............. (1,197) 1,048 (57) (206) (220) 4,143 (50) 3,873 FHLB advances/Short term borrowings.. (584) 1,191 (80) 527 (63) 1,593 (13) 1,517 -------- -------- -------- -------- -------- -------- ------- -------- Total Interest-Bearing Liabilities ($ 2,318) $ 2,974 ($ 122) $ 534 ($ 740) $ 9,170 ($ 438) $ 7,992 ======== ======== ======== ======== ======== ======== ======= ======== Increase in Net Interest Income...... $1,424 $ 7,574 ======== ========
Provision for Loan Losses The provision for loan losses was $932,000, recoveries were zero, and charge offs were $398,052 during the year ended September 30, 1999 compared to a provision of $674,000, with no recoveries, and charge offs of $20,774 during the year ended September 30, 1998. Charge offs for the year ended September 30, 1999 primarily relate to the write-down of a $1.6 million commercial real estate loan. The underlying property was acquired through foreclosure in September 1999. As the Company has grown over the last twelve months, the composition of the loan portfolio has changed, with relatively high levels of construction loans and increases in commercial and consumer loans, which are considered to have more associated risk than the Company's traditional portfolio of one- to four-family residential mortgages. Because of the Company's history of relatively low loan loss experience, it has historically maintained an allowance for loan losses at a lower percentage of total loans as compared with other institutions with higher risk loan portfolios and higher loss experience. The increased provision for loan losses reflects such changes in the composition of the loan portfolio, although the Company's recent experience has not indicated a deterioration in loan quality. The balance of non-performing loans has increased during the current fiscal year, primarily as a result of the addition of a $1.5 million land development loan. The Company is not anticipating any material loss on this loan at this time. At September 30, 1998, the allowance for loan losses was equal to 372.1% of non-performing assets compared to 51.64% at September 30, 1999. The decrease in the coverage ratio at year end 1999 was the result of an increase in non-performing assets as a result of the aforementioned nonperforming land development loan and foreclosure of a $1.6 million commercial real estate property. The foreclosed real estate has been recorded at estimated fair value of $1.4 million. The Company views these as isolated problem assets, not a market or underwriting trend. Non-Interest Income Non-interest income increased $427,264, or 13.3%, to $3.6 million for the year ended September 30, 1999 from $3.2 million for the year ended September 30, 1998. The increase was primarily attributable to increases in fee income related to the increase in deposit accounts subject to service charges. Non-Interest Expense Non-interest expense increased $1.7 million, or 8.5%, from a total of $19.5 million for the prior year to $21.2 million for the year ended September 30, 1999. Compensation, employee benefits, and related expense increased $479,677, or 5.0%, from $9.6 million for the year ended September 30, 1998 to $10.1 million for the same period of 1999. Occupancy expense increased from $2.1 million for the year ended September 30, 1998 to $2.2 million for the year ended September 30, 1999. These modest increases are due to the addition of two branches and expenditures on equipment related to preparing for the Year 2000. Sale of mortgage backed and related securities and real estate owned resulted in a loss of $137,140 during the year ended September 30, 1999 compared to zero in the previous year. Other expense increased $1.0 million, from $4.9 million for the year ended September 30, 1998 to $5.9 million for the current year. The increase primarily resulted from recognition of $515,000 of losses in the third quarter of this year related to the Wells Fargo branch integration. Management believes this loss is an isolated item and does not anticipate additional charges. The ratio of non-interest expense to average total assets was 2.05% and 1.96% for the years ended September 30, 1999 and 1998, respectively. Income Taxes The provision for income taxes was $5.7 million for the year ended September 30, 1999, representing an effective tax rate of 38.2% compared with $5.3 million for the year ended September 30, 1998 representing an effective tax rate of 35.9%. The lower effective rate for 1998 reflects the impact of a one year reduction in the state tax rate for Oregon. (See Note 11 to the Consolidated Financial Statements.) COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997 General The acquisition of 25 branches from Wells Fargo Bank, N.A. late in the fiscal year ended September 30, 1997 (the "Acquisition") had significant positive impact on the operations of the Company. The overnight expansion from eight branches to 33 and the resultant increase in deposits and number of employees is reflected in increases in non-interest income and expenses. Additionally, two branches were opened during fiscal year 1998, including a branch that the Company constructed in Bend and a branch the Company purchased from Key Bank in Jacksonville. The Company ended fiscal year 1998 with 34 full service branches in operation and one loan production office. With the Acquisition during the year ended September 30, 1997 and other activities throughout 1998, net earnings increased $1.0 million, or 11.6%, from $8.6 million for the year ended September 30, 1997, to $9.6 million for the year ended September 30, 1998. Net interest income increased $7.6 million or 31.2% from $24.3 million for the year ended September 30, 1997 to $31.9 million for the year ended September 30, 1998. This increase was primarily attributable to an increase in total average interest-earning assets from $732.3 million at September 30, 1997 to $950.1 million at September 30, 1998. The increase in net interest income was augmented by a significant increase in non-interest income from $810,608 for the year ended September 30, 1997 to $3.2 million for the year ended September 30, 1998. This increase was primarily attributable to an increase in service fee income due to the addition of the 25 acquired branches which contributed 42,000 additional deposit accounts. Interest Income The $217.8 million increase in average interest earning assets contributed to an increase in interest income of $15.6 million, or 28.7%, from $54.1 million for the year ended September 30, 1997 to $69.7 million for the year ended September 30, 1998. A significant portion of the increase in average interest-earning assets was the result of converting the cash obtained in the Acquisition into investment securities. This in turn increased the proportion of investment securities to total earning assets and decreased the proportion of loans. In most cases, loans will generate higher average yields than investments. As a result, although total interest income increased for the year, the average yield on interest earning assets decreased slightly from 7.40% for the year ended September 30, 1997 to 7.34% for the year ended September 30, 1998. Of the $15.6 million increase in interest income, $8.7 million is attributable to additional loan income due to an increase in loans receivable. The increase in loans receivable was primarily a result of the purchase of participation loans and loan originations exceeding loan refinancing, which resulted in greater net loan growth for 1998. The remaining increase in interest income of $6.9 million was a result of investing the proceeds of the Acquisition in fixed-rate U.S. Government and agency securities with maturities of less than five years, fixed and adjustable-rate corporate securities and overnight funds. The average balance of investments and mortgage-backed and related securities increased by $108.0 million, or 57.9%, for the year ended September 30, 1998 compared with the comparable period in 1997. Interest Expense Interest expense increased $8.0 million due to increases in interest expense on deposits and borrowings. Interest expense on deposits increased $6.5 million, or 28.8%, from $22.4 million for the year ended September 30, 1997 to $28.9 million for the year ended September 30, 1998. Average deposits increased by $180.3 million for the year ended September 30, 1998 compared to the year ended September 30, 1997, but the average interest paid on interest-bearing deposits decreased 40 basis points from 4.98% for the year ended September 30, 1997 to 4.58% for the year ended September 30, 1998. This decrease was a result of the lower cost of deposits obtained in the Acquisition and overall lower rates in 1998 over 1997. These lower cost deposits were outstanding for the entire year ended September 30, 1998 but only two and a half months during the prior year, thus having a greater impact on fiscal year 1998. Interest expense on FHLB borrowings increased $1.7 million due to increased average borrowings of $30.3 million. The general interest rate environment during the year was one of low rates and a flat yield curve. Analysts reported that the largest 50 public banking companies experienced a 20-basis-point compression in net interest margin for the year ended September 30, 1998. In spite of this environment, the Company improved its net interest margin from 3.32% for the fiscal year ended September 30, 1997 to 3.36% for the year ended September 30, 1998. This improvement was related to the Company's success in converting proceeds from investment securities into loans which yield a higher return than investment securities as well as improving the mix of loans originated to include more higher yielding loans than in the past. Interest rate spread also improved, from 2.28% for the year ended September 30, 1997 to 2.57% for the current year. This improvement was primarily the result of the lower cost transaction accounts obtained with the Acquisition. The addition of non- interest-bearing checking deposits through the Acquisition had the further positive impact of reducing overall cost of funds. Provision for Loan Losses The provision for loan losses was $674,000, recoveries were zero, and charge offs were $20,774 during the year ended September 30, 1998 compared to a provision of $370,000 with no recoveries and charge offs of $1,369 during the year ended September 30, 1997. The increase in the provision is a reflection of the Company's approach of increasing the provision as loan volumes increase. At September 30, 1998, the allowance for loan losses was equal to 372.1% of non-performing assets compared to 510.2% at September 30, 1997. The decrease in the coverage ratio at year end 1998 was the result of an increase in non-performing assets as a result of foreclosure proceedings initiated against five one- to four-family properties. The loan balances related to these properties totaled $289,737 at September 30, 1998 compared to fair values of $565,830. Non-Interest Income Non-interest income increased $2.4 million, or 295.1%, to $3.2 million for the year ended September 30, 1998 from $811,000 for the year ended September 30, 1997. The increase was attributable to increases in fees and service charges and other income, principally as a result of the increase in the number of deposit accounts subject to service charges obtained in the Acquisition. Non-Interest Expense Non-interest expense increased $7.7 million, or 65.9%, for the year ended September 30, 1998, from a total of $11.8 million for the prior year to $19.5 million for the year ended September 30, 1998. The increase in branches with the Acquisition as well as the addition of two new branches impacted several categories of non-interest expense. An increase in number of employees from 100 to 244 produced the $2.5 million increase in compensation and employee benefits. Occupancy expense increased $1.2 million, or 127.4%, as expected with the increase from seven branches to 34. Other items correlated to increased volume and number of locations also increased as expected. For example, postage increased by $400,759, or 221.3%; telephone increased by $171,570, or 147.7%; check processing increased by $506,181, or 281.0%; and ATM expense increased $218,004, or 145.1%. The recording of core deposit intangible related to the Acquisition resulted in $1.7 million in amortization expense for the year ended September 30, 1998 compared to $302,991 for the prior year. The ratio of non-interest expense to average total assets was 1.96% and 1.57% for the years ended September 30, 1998 and 1997, respectively. Income Taxes The provision for income taxes was $5.3 million for the year ended September 30, 1998, representing an effective tax rate of 35.9% compared with $4.4 million for the year ended September 30, 1997 representing an effective tax rate of 34.1%. The effective rate for 1998 reflects the impact of a one year reduction in the state tax rate for Oregon. The effective tax rate for 1997 was lower than 1998 because the Company was able to recognize the tax benefit related to the capital loss on sale of the U.S. Federal securities mutual bond fund, thereby reducing tax expense for the year. At September 30, 1996, when the capital loss was recognized for book purposes, a valuation allowance was created to offset the deferred tax asset because the Company was not assured of being able to realize a capital gain and the related tax benefit. During the year ended September 30, 1997, the Company, through the sale of certain investments, realized a capital gain for tax purposes that assures realization of the tax benefit and thus reduced the valuation allowance to zero. (See Note 11 to the Consolidated Financial Statements.) COMMON STOCK INFORMATION Since October 4, 1995, Klamath First Bancorp's common stock has traded on the National Association of Security Dealers Automated Quotation ("Nasdaq") National Market under the symbol "KFBI". As of September 30, 1999, there were approximately 1,511 shareholders of record. This total does not reflect the number of persons or entities who hold stock in nominee or "street" name through various brokerage firms. The high and low common stock prices by quarter were as follows:
Year Ended September 30, ________________________________________________ 1999 1998 __________________ __________________ High Low High Low ______ ______ ______ ______ First quarter $19.38 $16.00 $24.25 $20.50 Second quarter 19.00 15.00 23.06 19.50 Third quarter 17.00 14.63 23.00 18.63 Fourth quarter 15.06 12.63 20.00 14.00
The cash dividends declared by quarter were as follows:
Year Ended September 30, ________________________ 1999 1998 _________ _________ First quarter $0.095 $0.080 Second quarter 0.120 0.085 Third quarter 0.120 0.090 Fourth quarter 0.125 0.090
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. Independent Auditors' Report Board of Directors Klamath First Bancorp, Inc. Klamath Falls, Oregon We have audited the accompanying consolidated balance sheets of Klamath First Bancorp, Inc. and Subsidiary (the "Company") as of September 30, 1999 and 1998, and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the three years in the period ended September 30, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Klamath First Bancorp, Inc. and Subsidiary as of September 30, 1999 and 1998 and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1999, in conformity with generally accepted accounting principles. \s\ Deloitte & Touche LLP Portland, Oregon October 29, 1999
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS September 30, ----------------------------------- 1999 1998 ASSETS ---------------- --------------- Cash and due from banks ................................................. $ 21,123,217 $ 25,644,460 Interest bearing deposits with banks .................................... 1,231,516 11,496,026 Federal funds sold and securities purchased under agreements to resell .. 2,167,856 29,844,783 --------------- --------------- Total cash and cash equivalents ...................................... 24,522,589 66,985,269 Investment securities available for sale, at fair value (amortized cost: $161,112,272 and $199,251,123) ....................... 158,648,057 203,224,184 Investment securities held to maturity, at amortized cost (fair value: $577,455 and $2,928,324) ....................................... 559,512 2,888,759 Mortgage backed and related securities available for sale, at fair value (amortized cost: $73,075,553 and $42,741,863) ................... 72,695,555 43,335,857 Mortgage backed and related securities held to maturity, at amortized cost (fair value: $2,596,408 and $3,696,444) .......................... 2,600,920 3,661,683 Loans receivable, net ................................................... 739,793,403 668,146,380 Real estate owned and repossessed assets ................................ 1,494,890 -- Premises and equipment, net ............................................. 11,581,923 12,347,467 Stock in Federal Home Loan Bank of Seattle, at cost ..................... 10,957,300 10,172,900 Accrued interest receivable ............................................. 7,153,818 7,471,717 Core deposit intangible ................................................. 9,778,341 11,431,018 Other assets ............................................................ 1,855,032 1,637,164 --------------- --------------- Total assets ......................................................... $ 1,041,641,340 $ 1,031,302,398 =============== =============== LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Deposit liabilities ................................................... $ 720,401,112 $ 689,541,345 Accrued interest on deposit liabilities ............................... 1,184,471 1,291,784 Advances from borrowers for taxes and insurance ....................... 9,758,627 9,420,791 Advances from Federal Home Loan Bank of Seattle ....................... 197,000,000 167,000,000 Short term borrowings ................................................. -- 12,112,500 Accrued interest on borrowings ........................................ 34,484 213,957 Pension liabilities ................................................... 833,644 779,392 Deferred federal and state income taxes ............................... 579,727 3,655,944 Other liabilities ..................................................... 2,263,812 2,205,730 --------------- --------------- Total liabilities ................................................... 932,055,877 886,221,443 --------------- --------------- Commitments and contingencies SHAREHOLDERS' EQUITY Preferred stock, $.01 par value, 500,000 shares authorized; none issued -- -- Common stock, $.01 par value, 35,000,000 shares authorized, September 30, 1999 - 7,908,377 issued, 7,062,092 outstanding September 30, 1998 - 9,916,766 issued, 8,898,972 outstanding ......... 79,084 99,168 Additional paid-in capital ............................................ 43,794,535 82,486,183 Retained earnings-substantially restricted ............................ 76,866,452 71,051,445 Unearned shares issued to ESOP ........................................ (5,871,900) (6,850,550) Unearned shares issued to MRDP ........................................ (3,519,296) (4,536,865) Net unrealized gain (loss) on securities available for sale, net of tax (1,763,412) 2,831,574 --------------- --------------- Total shareholders' equity .......................................... 109,585,463 145,080,955 --------------- --------------- Total liabilities and shareholders' equity .......................... $ 1,041,641,340 $ 1,031,302,398 =============== ===============
See notes to consolidated financial statements. KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended September 30, --------------------------------------- 1999 1998 1997 ----------- ----------- ------------ INTEREST INCOME Loans receivable ........................................ $56,289,718 $49,508,126 $40,850,478 Mortgage backed and related securities .................. 2,103,881 3,679,740 4,716,184 Investment securities ................................... 11,631,439 14,766,471 7,342,604 Federal funds sold and securities purchased under agreements to resell ................................. 914,584 916,847 930,980 Interest bearing deposits ............................... 751,218 862,086 326,521 ----------- ----------- ----------- Total interest income ................................. 71,690,840 69,733,270 54,166,767 ----------- ----------- ----------- INTEREST EXPENSE Deposit liabilities ..................................... 28,974,568 28,931,749 22,464,345 Advances from FHLB of Seattle ........................... 9,121,190 7,921,570 6,270,615 Other ................................................... 285,848 995,032 1,120,858 ----------- ----------- ----------- Total interest expense ................................ 38,381,606 37,848,351 29,855,818 ----------- ----------- ----------- Net interest income ................................... 33,309,234 31,884,919 24,310,949 Provision for loan losses ................................. 932,000 674,000 370,000 ----------- ----------- ----------- Net interest income after provision for loan losses ......................................... 32,377,234 31,210,919 23,940,949 ----------- ----------- ----------- NON-INTEREST INCOME Fees and service charges ................................ 2,935,700 2,410,239 668,779 Gain on sale of investments ............................. 329,435 440,750 2,144 Gain on sale of real estate owned ....................... 29,266 -- 27,946 Other income ............................................ 335,217 351,365 111,739 ----------- ----------- ----------- Total non-interest income ............................. 3,629,618 3,202,354 810,608 ----------- ----------- ----------- NON-INTEREST EXPENSE Compensation, employee benefits and related expense ..... 10,096,000 9,616,323 7,143,516 Occupancy expense ....................................... 2,221,900 2,091,830 919,880 Data processing expense ................................. 915,434 963,475 480,889 Insurance premium expense ............................... 295,950 289,592 376,029 Loss on sale of investments ............................. 112,255 -- 14,531 Loss on sale of real estate owned ....................... 24,885 -- -- Amortization of core deposit intangible ................. 1,652,677 1,652,677 302,991 Other expense ........................................... 5,867,155 4,908,907 2,526,519 ----------- ----------- ----------- Total non-interest expense ............................ 21,186,256 19,522,804 11,764,355 ----------- ----------- ----------- Earnings before income taxes .............................. 14,820,596 14,890,469 12,987,202 Provision for income taxes ................................ 5,665,403 5,339,432 4,429,452 ----------- ----------- ----------- Net earnings .............................................. $ 9,155,193 $ 9,551,037 $ 8,557,750 =========== =========== =========== Earnings per common share - basic ......................... $ 1.21 $ 1.05 $ 0.90 Earnings per common share - fully diluted ................. $ 1.18 $ 1.00 $ 0.88 Weighted average common shares outstanding - basic ........ 7,564,415 9,115,404 9,487,848 Weighted average common shares outstanding - with dilution 7,748,527 9,521,249 9,762,459
See notes to consolidated financial statements. KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
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 October 1, 1996 10,242,360 $116,124 $110,762,678 $59,082,479 ($8,807,850) ($6,694,470) ($1,047,987) $153,410,974 Cash dividends ..... -- -- -- (2,895,234) -- -- -- (2,895,234) Stock repurchased and retired.... (1,182,936) (11,829) (18,866,299) -- -- -- -- (18,878,128) ESOP contribution .. 97,865 -- 705,260 -- 978,650 -- -- 1,683,910 MRDP contribution .. 78,293 -- -- -- -- 1,071,130 -- 1,071,130 ---------- ------- ---------- ----------- ---------- --------- ---------- ------------ 9,235,582 104,295 92,601,639 56,187,245 (7,829,200) (5,623,340) (1,047,987) 134,392,652 Comprehensive income Net earnings ...... 8,557,750 8,557,750 Other comprehensive income: Unrealized gain on securities, net of tax and reclassifi- cation adjustment (1) 1,512,041 1,512,041 ------------ Total comprehensive income 10,069,791 ---------- ------- ---------- ----------- ---------- ---------- ---------- ------------ Balance at September 30, 1997 9,235,582 104,295 92,601,639 64,744,995 (7,829,200) (5,623,340) 464,054 144,462,443 Cash dividends ..... -- -- -- (3,244,587) -- -- -- (3,244,587) Stock repurchased and retired....... (544,085) (5,440) (11,556,044) -- -- -- -- (11,561,484) ESOP contribution .. 97,865 -- 1,029,866 -- 978,650 -- -- 2,008,516 MRDP contribution .. 78,293 -- -- -- -- 1,086,475 -- 1,086,475 Exercise of stock options 31,317 313 410,722 -- -- -- -- 411,035 ---------- ------- ---------- ----------- ---------- ---------- ---------- ----------- 8,898,972 99,168 82,486,183 61,500,408 (6,850,550) (4,536,865) 464,054 133,162,398 Comprehensive income Net earnings ...... 9,551,037 9,551,037 Other comprehensive income: Unrealized gain on securities, net of tax and reclassifi- cation adjustment (2) 2,367,520 2,367,520 ------------ Total comprehensive income 11,918,557 ---------- ------- ---------- ----------- ---------- ---------- ---------- ------------ Balance at September 30, 1998 8,898,972 99,168 82,486,183 71,051,445 (6,850,550) (4,536,865) 2,831,574 145,080,955
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Continued)
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 ----------- --------- ------------ ----------- ------------ ------------ ------------ ------------- Cash dividends ..... -- -- -- (3,340,186) -- -- -- (3,340,186) Stock repurchased and retired ...... (2,008,389) (20,084) (39,314,056) -- -- -- -- (39,334,140) ESOP contribution .. 97,865 -- 602,287 -- 978,650 -- -- 1,580,937 MRDP contribution .. 73,644 -- 20,121 -- -- 1,017,569 -- 1,037,690 ---------- ------- ---------- ----------- ---------- ---------- ---------- ----------- 7,062,092 79,084 43,794,535 67,711,259 (5,871,900) (3,519,296) 2,831,574 105,025,256 Comprehensive income Net earnings ...... 9,155,193 9,155,193 Other comprehensive income: Unrealized loss on securities, net of tax and reclassifi- cation adjustment (3) (4,594,986) (4,594,986) ------------ Total comprehensive income 4,560,207 ---------- ------- ---------- ----------- ---------- ---------- ---------- ------------ Balance at September 30, 1999 7,062,092 $79,084 $43,794,535 $76,866,452 ($5,871,900) ($3,519,296) ($1,763,412) $109,585,463 ========== ======= ========== =========== ========== ========== ========== ============ (1) Net unrealized holding gain on securities of $1,476,538 (net of $461,062 tax expense) less reclassification adjustment for losses included in net earnings of $35,503 (net of $21,760 tax benefit). (2) Net unrealized holding gain on securities of $2,429,643 (net of $1,451,061 tax expense) less reclassification adjustment for gains included in net earnings of $62,123 (net of $38,075 tax expense). (3) Net unrealized holding loss on securities of $4,332,997 (net of $2,816,282 tax benefit) less reclassification adjustment for gains included in net earnings of $261,989 (net of $160,574 tax expense).
See notes to consolidated financial statements. KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended September 30, --------------------------------------- 1999 1998 1997 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net earnings .......................................... $ 9,155,193 $ 9,551,037 $ 8,557,750 ADJUSTMENTS TO RECONCILE NET EARNINGS TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES Depreciation and amortization ......................... 2,896,271 2,815,615 772,204 Provision for deferred taxes .......................... (259,935) 293,310 714,915 Provision for loan losses ............................. 932,000 674,000 370,000 Compensation expense related to ESOP benefit .......... 1,580,937 2,008,516 1,683,910 Compensation expense related to MRDP Trust ............ 1,037,690 1,086,475 1,071,130 Net amortization of premiums (discounts) paid on investment and mortgage backed and related securities 134,979 21,994 102,626 Increase in deferred loan fees, net of amortization ... 405,237 1,258,655 912,445 Accretion of discounts on purchased loans ............. (37,456) 3,763 (325) Net (gain) loss on sale of real estate owned and premises and equipment .............................. (4,381) 3,196 (3,514) Net (gain) loss on sale of investment and mortgage backed and related securities ....................... (217,179) (440,750) 12,387 FHLB stock dividend ................................... (784,400) (617,000) (495,000) Increase in core deposit intangible ................... -- -- (13,386,686) CHANGES IN ASSETS AND LIABILITIES Accrued interest receivable ........................... 317,899 154,447 (2,583,032) Other assets .......................................... (377,868) (218,359) (1,625,538) Accrued interest on deposit liabilities ............... (107,313) 76,039 503,337 Accrued interest on borrowings ........................ (179,473) (298,759) 189,553 Pension liabilities ................................... 54,252 52,252 59,052 Other liabilities ..................................... 264,936 131,341 (1,134,717) ----------- ----------- ----------- Net cash provided by (used in) operating activities ....... 14,811,389 16,555,772 (4,279,503) ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturity of investment securities held to maturity .................................... 82,455,000 20,150,000 48,680,000 Proceeds from maturity of investment securities available for sale .................................. 48,572,000 104,180,000 19,009,324 Principal repayments received on mortgage backed and related securities held to maturity ..... 1,044,871 1,755,918 1,313,309 Principal repayments received on mortgage backed and related securities available for sale ... 15,311,695 24,664,174 18,923,262 Principal repayments received on loans ................ 159,160,842 122,009,359 56,879,728 Loan originations ..................................... (224,193,434) (232,474,655) (120,072,487) Loans purchased ....................................... (15,500,495) (7,792,061) (15,648,275) Loans sold ............................................ 5,584,065 -- -- Purchase of investment securities held to maturity ......................................... (79,711,523) -- (61,722,409) Purchase of investment securities available for sale ............................................ (22,147,855) (60,366,913) (219,697,100) Purchase of mortgage backed and related securities available for sale ....................... (55,536,014) (13,202,490) (14,850,705) Purchase of FHLB stock ................................ -- (2,405,500) (4,307,500) Proceeds from sale of FHLB stock ...................... -- -- 2,425,900 Proceeds from sale of investment securities available for sale .................................. 11,834,420 19,388,451 16,066,044 Proceeds from sale of mortgage backed and related securities available for sale ....................... 9,454,776 9,656,938 5,743,267 Proceeds from sale of real estate owned and premises and equipment .............................. 514,710 -- 86,159 Purchases of premises and equipment ................... (321,050) (1,682,477) (7,176,075) ----------- ----------- ----------- Net cash used in investing activities ..................... (63,477,992) (16,119,256) (274,347,558) ----------- ----------- -----------
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Year Ended September 30, ---------------------------------------- 1999 1998 1997 ----------- ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES Increase in deposit liabilities, net of withdrawals ................................... $30,859,767 $15,563,444 $274,304,721 Proceeds from FHLB advances ........................... 160,000,000 179,000,000 184,000,000 Repayments of FHLB advances ........................... (130,000,000) (141,000,000) (145,000,000) Proceeds from short term borrowings ................... 8,595,000 88,343,199 84,750,150 Repayments of short term borrowings ................... (20,707,500) (93,308,199) (82,577,050) Stock repurchase and retirement ...................... (39,334,140) (11,561,483) (18,878,128) Proceeds from exercise of stock options ............... -- 411,035 -- Advances from borrowers for taxes and insurance ....... 337,836 505,305 1,084,359 Dividends paid ........................................ (3,547,040) (3,447,744) (3,193,428) ----------- ----------- ----------- Net cash provided by financing activities ................. 6,203,923 34,505,557 294,490,624 ----------- ----------- ----------- Net (decrease) increase in cash and cash equivalents ............................................. (42,462,680) 34,942,073 15,863,563 Cash and cash equivalents at beginning of year ................................................. 66,985,269 32,043,196 16,179,633 ----------- ----------- ----------- Cash and cash equivalents at end of year .................. $24,522,589 $66,985,269 $32,043,196 =========== =========== =========== SUPPLEMENTAL SCHEDULE OF INTEREST AND INCOME TAXES PAID Interest paid ......................................... $38,668,392 $38,071,070 $29,162,927 Income taxes paid ..................................... 5,866,000 5,808,299 3,373,457 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES Net unrealized gain (loss) on securities available for sale .................................. ($4,594,986) $ 2,367,520 $ 1,512,041 Dividends declared and accrued in other liabilities ......................................... 988,547 892,509 834,363
See notes to consolidated financial statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of Klamath First Bancorp, Inc. (the "Company") and its wholly-owned subsidiary Klamath First Federal Savings and Loan Association (the "Association"), including the Association's subsidiary, Klamath First Financial Services. All intercompany accounts and transactions have been eliminated in consolidation. Nature of Operations The Company provides banking and limited non-banking services to its customers who are located throughout the state of Oregon, principally in rural communities. These services primarily include attracting deposits from the general public and using such funds, together with other borrowings, to invest in various real estate loans, consumer and commercial loans, investment securities and mortgage backed and related securities. Use of Estimates in the Presentation of the Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make assumptions. These assumptions result in estimates that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of related revenue and expense during the reporting period. Actual results could differ from those estimates. Cash Equivalents The Company considers cash and due from banks, interest bearing deposits held at domestic banks, federal funds sold, and security resale agreements to be cash and cash equivalents for purposes of the Consolidated Statements of Cash Flows. Investment Securities In accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity Securities, investment securities held to maturity are stated at amortized cost only if the Company has the positive intent and the ability to hold the securities to maturity. Securities available for sale, including mutual funds, and trading securities are stated at fair value. Unrealized gains and losses from available for sale securities are excluded from earnings and reported (net of tax) as a net amount in a separate component of shareholders' equity until realized. Realized gains and losses on the sale of securities, recognized on a specific identification basis, and valuation adjustments of trading account securities are included in non-interest income or expense. Net unrealized gains or losses on securities resulting from an other than temporary decline in the fair value are recognized in earnings when incurred. Stock Investments The Company holds stock in the Federal Home Loan Bank of Seattle ("FHLB of Seattle"). This investment is carried at the lower of cost or fair value. Loans Loans held for investment are stated at the principal amount outstanding, net of deferred loan fees and unearned income. Loan origination fees, commitment fees and certain direct loan origination costs are capitalized and recognized as a yield adjustment over the lives of the loans using the level-yield method. Unearned discounts are accreted to income over the average lives of the related loans using the level yield method, adjusted for estimated prepayments. Interest income is recorded as earned. Management ceases to accrue interest income on any loan that becomes 90 days or more delinquent and reverses all interest accrued up to that time. Thereafter, interest income is accrued only if and when, in management's opinion, projected cash proceeds are deemed sufficient to repay both principal and interest. All loans for which interest is not being accrued are referred to as loans on nonaccrual status. Allowance for Loan Losses The allowance for loan losses is established to absorb known and inherent losses in the loan portfolio. Allowances for losses on specific problem real estate loans and real estate owned are charged to earnings when it is determined that the value of these loans and properties, in the judgment of management, is impaired. In addition to specific reserves, the Company also maintains general provisions for loan losses based on evaluating known and inherent risks in the loan portfolio, including management's continuing analysis of the factors underlying the quality of the loan portfolio. These factors include changes in the size and composition of the loan portfolio, actual loan loss experience, current and anticipated economic conditions, detailed analysis of individual loans for which full collectibility may not be assured, and determination of the existence and realizable value of the collateral and guarantees securing the loans. The reserve is an estimate based upon factors and trends identified by management at the time financial statements are prepared. The ultimate recovery of loans is susceptible to future market factors beyond the Company's control, which may result in losses or recoveries differing significantly from those provided in the consolidated financial statements. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's valuation allowances on loans and real estate owned. Delinquent interest on loans past due 90 days or more is charged off or an allowance established by a charge to income equal to all interest previously accrued. Interest is subsequently recognized only to the extent cash payments are received until delinquent interest is paid in full and, in management's judgment, the borrower's ability to make periodic interest and principal payments is back to normal, in which case the loan is returned to accrual status. Real Estate Owned Property acquired through foreclosure or deed in lieu of foreclosure is carried at the lower of estimated fair value, less estimated costs to sell, or the balance of the loan on the property at date of acquisition, not to exceed net realizable value. Costs excluding interest, relating to the improvement of property are capitalized, whereas those relating to holding the property are charged to expense. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation. Depreciation is generally computed on the straight-line basis over the estimated useful lives of the various classes of assets from their respective dates of acquisition. Estimated useful lives range up to 30 years for buildings, up to the lease term for leasehold improvements, three years for automobiles, and three to 15 years for furniture and equipment. Mortgage Servicing Fees earned for servicing loans are reported as income when the related mortgage loan payments are collected. Loan servicing costs are charged to expense as incurred. Effective January 1, 1997, the Company adopted SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. SFAS No. 125 requires the Company to allocate the total cost of all mortgage loans sold, whether originated or purchased, to the mortgage servicing rights and the loans (without mortgage servicing rights) based on their relative fair values if it is practicable to estimate those fair values. Core Deposit Intangible On July 18, 1997 the Company assumed $241.3 million of deposits from Wells Fargo Bank, N.A. for a core deposit premium of $16.4 million. In conjunction with the assumption of these deposits the Company also acquired 25 branch facilities (24 owned and one leased) located throughout Oregon. In accordance with generally accepted accounting principles for purchase transactions, the assets acquired and liabilities assumed were recorded at fair value and the core deposit premium was allocated to premises and equipment in the amount of $3.0 million and to core deposit intangible in the amount of $13.4 million. The recorded core deposit intangible is being amortized to non-interest expense on a straight-line basis over 8.1 years. Income Taxes The Company accounts for income taxes in accordance with the provisions of SFAS No. 109, Accounting for Income Taxes, which requires the use of the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Pension Cost It is the Company's policy to fund retirement costs as they are accrued. All such costs are computed on the basis of accepted actuarial methods. Employee Stock Ownership Plan The Company sponsors an Employee Stock Ownership Plan ("ESOP"). The ESOP is accounted for in accordance with the American Institute of Certified Public Accountants ("AICPA") Statement of Position 93-6, Employer's Accounting for Employee Stock Ownership Plans. Accordingly, the shares held by the ESOP are reported as unearned shares issued to the employee stock ownership plan in the balance sheets. The plan authorizes release of the shares over a ten-year period, of which six years are remaining. As shares are released from collateral, compensation expense is recorded equal to the then current market price of the shares, and the shares become outstanding for earnings per share calculations. Management Recognition and Development Plan The Company sponsors a Management Recognition and Development Plan ("MRDP"). The MRDP is accounted for in accordance with SFAS No. 123, Accounting for Stock-Based Compensation. The plan authorizes the grant of common stock shares to certain officers and directors, which vest over a five-year period in equal installments. The Company recognizes compensation expense in the amount of the fair value of the common stock in accordance with the vesting schedule during the years in which the shares are payable. When the MRDP awards are allocated, the common stock shares become common stock equivalents for earnings per share calculations. Stock Based Compensation The Company accounts for stock option grants using the intrinsic value method as prescribed in Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Under the intrinsic value based method, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the stock at grant date over the amount an employee must pay to acquire the stock. Stock options granted by the Company have no intrinsic value at the grant date and, under APB No. 25, there is no compensation expense to be recorded. SFAS No. 123, Accounting for Stock-Based Compensation, encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The fair value approach measures compensation costs based on factors such as the term of the option, the market price at grant date, and the option exercise price, with expense recognized over the vesting period. See Note 15 for the pro forma effect on net earnings and earnings per share as if the fair value method had been used. Recently Issued Accounting Pronouncements In June 1998, SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was issued. SFAS No. 133 establishes the accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. The effective date of this Statement was deferred by the issuance of SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133. This Statement is now effective for fiscal years beginning after June 15, 2000. The Company has determined that it currently has no instruments or contracts that meet the scope of SFAS No. 133. Accordingly, the adoption of this Statement in 2001 is not expected to have a material impact on the financial statements of the Company. (2) Cash and Due from Banks The Company is required to maintain an average reserve balance with the Federal Reserve Bank, or maintain such reserve balance in the form of cash. The amount of this required reserve balance was approximately $3.0 million at September 30, 1999 and 1998, and was met by holding cash and maintaining an average balance with the Federal Reserve Bank in excess of this amount. (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:
September 30, 1999 -------------------------------------------------------- Amortized Gross Unrealized Fair cost Gains Losses value ----------- ------------ ------------ ------------ Investment securities available for sale U.S. Government obligations 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 ============ ============ ============ ============ September 30, 1998 -------------------------------------------------------- Amortized Gross Unrealized Fair cost Gains Losses value ----------- ------------ ------------ ------------ Investment securities available for sale U.S. Government obligations Maturing within one year ........... $ 11,555,117 $ 95,853 $-- $ 11,650,970 Maturing after one year through five years ........................ 91,064,477 2,738,617 -- 93,803,094 State and municipal obligations Maturing after one year through five years ........................ 890,782 21,258 -- 912,040 Maturing after ten years ........... 16,515,526 675,702 567 17,190,661 Corporate obligations Maturing within one year ........... 14,518,739 34,576 -- 14,553,315 Maturing after one year through five years ........................ 44,883,935 772,455 12,836 45,643,554 Maturing after ten years ........... 19,822,547 -- 351,997 19,470,550 ------------ ------------ ------------ ------------ $199,251,123 $ 4,338,461 $ 365,400 $203,224,184 ============ ============ ============ ============ September 30, 1999 -------------------------------------------------------- Amortized Gross Unrealized Fair cost Gains Losses value ----------- ------------ ------------ ------------ Investment securities held to maturity State and municipal obligations 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 ============ ============ ============ ============
September 30, 1998 -------------------------------------------------------- Amortized Gross Unrealized Fair cost Gains Losses value ---------- ---------- ---------- ------------- Investment securities held to maturity State and municipal obligations Maturing within one year ........... $ 210,837 $ 1,397 $-- $ 212,234 Maturing after one year through five years ........................ 677,922 36,168 -- 714,090 Corporate obligations Maturing within one year ........... 2,000,000 2,000 -- 2,002,000 ------------ ------------ ------------ ------------ $ 2,888,759 $ 39,565 $-- $ 2,928,324 ============ ============ ============ ============
MORTGAGE BACKED AND RELATED SECURITIES
September 30, 1999 -------------------------------------------------------- Amortized Gross Unrealized Fair cost Gains Losses value ----------- ------------ ------------ ------------ Mortgage backed and related securities available for sale FNMA maturing after five years through ten years ................. $ 2,469,286 $-- $ 25,043 $ 2,444,243 CMO's maturing after one year through five years ................. 4,969,296 -- 55,346 4,913,950 FNMA maturing after ten years ........ 21,849,523 116,867 228 21,966,162 FHLMC maturing after ten years ....... 18,375,619 26,201 31,314 18,370,506 GNMA maturing after ten years ........ 11,783,245 3,738 18,918 11,768,065 CMO's maturing after ten years ...... 13,628,584 -- 395,955 13,232,629 ------------ ------------ ------------ ------------ $ 73,075,553 $ 146,806 $ 526,804 $ 72,695,555 ============ ============ ============ ============ September 30, 1998 -------------------------------------------------------- Amortized Gross Unrealized Fair cost Gains Losses value ----------- ------------ ------------ ------------ Mortgage backed and related securities available for sale FNMA maturing after five years through ten years ................. $ 4,045,247 $ 40,251 $-- $ 4,085,498 FNMA maturing after ten years ........ 8,820,853 89,676 11,334 8,899,195 FHLMC maturing after ten years ....... 14,722,039 438,394 1,941 15,158,492 GNMA maturing after ten years ........ 3,619,071 43,083 -- 3,662,154 SBA maturing after ten years ......... 11,534,653 1,780 5,915 11,530,518 ------------ ------------ ------------ ------------ $ 42,741,863 $ 613,184 $ 19,190 $ 43,335,857 ============ ============ ============ ============
September 30, 1999 -------------------------------------------------------- Amortized Gross Unrealized Fair cost Gains Losses value ----------- ------------ ------------ ------------ Mortgage backed and related securities held to maturity GNMA maturing after ten years ........ $ 2,600,920 $ 3,289 $ 7,801 $ 2,596,408 ============ ============ ============ ============ September 30, 1998 -------------------------------------------------------- Amortized Gross Unrealized Fair cost Gains Losses value ----------- ------------ ------------ ------------ Mortgage backed and related securities held to maturity GNMA maturing after ten years ........ $ 3,661,683 $ 34,761 $-- $ 3,696,444 ============ ============ ============ ============
Expected maturities of mortgage backed and related securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. At September 30, 1999 and 1998, the Company pledged securities totaling $35.6 million and $31.2 million, respectively, to secure certain public deposits and for other purposes as required or permitted by law. The Company has also pledged securities of zero and $12.0 million to secure short term borrowings of reverse repurchase agreements at September 30, 1999 and 1998, respectively. (See Note 10.) (4) Loans Receivable
September 30, --------------------------- 1999 1998 ------------ ------------ Real estate loans Permanent residential 1-4 family ..... $647,130,329 $577,321,223 Multi-family residential ............. 18,411,762 19,229,984 Construction ......................... 53,219,452 64,288,949 Commercial ........................... 37,078,809 29,457,284 Land ................................. 2,064,037 2,184,595 ------------ ------------ Total real estate loans ........... 757,904,389 692,482,035 ------------ ------------ Non-real estate loans Savings account ...................... 1,800,234 1,990,776 Home improvement and home equity ..... 6,725,721 5,749,969 Other ................................ 8,010,808 4,480,064 ------------ ------------ Total non-real estate loans ....... 16,536,763 12,220,809 ------------ ------------ Total loans ....................... 774,441,152 704,702,844 Less Undisbursed portion of loans ......... 24,176,425 26,986,869 Deferred loan fees ................... 7,987,699 7,619,918 Allowance for loan losses ............ 2,483,625 1,949,677 ------------ ------------ $739,793,403 $668,146,380 ============ ============
The weighted average interest rate on loans at September 30, 1999 and 1998 was 7.47% and 7.71%, respectively. Included in loans receivable are $379,662 of loans held for sale. All these loans are one- to four-family mortgage loans. In the aggregate there was no lower of cost or market adjustment required; fair value approximates cost. Loans to employees, officers, and directors totaled $10.9 million and $8.8 million at September 30, 1999 and 1998, respectively. Activity in the allowance for loan losses is summarized as follows:
Year Ended September 30, ------------------------------------------ 1999 1998 1997 ----------- ------------ ------------ Balance, beginning of year ... $ 1,949,677 $ 1,296,451 $ 927,820 Charge offs .................. (398,052) (20,774) (1,369) Additions .................... 932,000 674,000 370,000 ----------- ----------- ----------- Balance, end of year ......... $ 2,483,625 $ 1,949,677 $ 1,296,451 =========== =========== ===========
(5) Premises and Equipment Premises and equipment consist of the following:
September 30, ---------------------------- 1999 1998 ------------ ------------ Land ............................................. $ 2,476,807 $ 2,479,807 Office buildings and construction in progress..... 10,470,855 10,403,971 Furniture, fixtures and equipment ................ 4,464,622 4,211,886 Automobiles ...................................... 38,856 38,856 Less accumulated depreciation .................... (5,869,217) (4,787,053) ------------ ------------ $ 11,581,923 $ 12,347,467 ============ ============
Depreciation expense was $1.1 million, $1.0 million, and $469,208 for the years ended September 30, 1999, 1998, and 1997, respectively. (6) Accrued Interest Receivable The following is a summary of accrued interest receivable:
September 30, --------------------------- 1999 1998 ------------ ------------ Loans receivable ....................... $ 4,335,013 $ 4,114,533 Mortgage backed and related securities . 478,635 424,458 Investment securities .................. 2,340,170 2,932,726 ------------ ------------ $ 7,153,818 $ 7,471,717 ============ ============
(7) Mortgage Servicing Rights Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balance of mortgage loans serviced for others was $6.1 million and $724,559 at September 30, 1999 and 1998, respectively. During the year ended September 30, 1999 the Company initiated a program to sell loans to the Federal National Mortgage Association ("Fannie Mae") which resulted in the significant increase in loans serviced for others. Capitalized mortgage servicing rights were $52,432 and zero at September 30, 1999 and 1998, respectively. The changes in the balance of mortgage servicing rights were as follows:
Year Ended September 30, ---------------------------- 1999 1998 ------------ ------------ Balance, beginning of year ...................... $-- $-- Additions ....................................... 53,789 -- Amortization of mortgage servicing rights ....... (1,357) -- ------------ ------------ Balance, end of year ............................ $ 52,432 $-- ============ ============
(8) Deposit Liabilities The following is a summary of deposit liabilities:
September 30, ----------------------------------------------- 1999 1998 ----------------------- ----------------------- Amount Percent Amount Percent ------------ --------- ------------ -------- Checking accounts, non-interest bearing ...................... $ 52,318,958 7.3% $ 47,547,651 6.9% ------------ ------- ------------ ------- Interest-bearing checking ..... 67,303,245 9.3 70,561,435 10.2 ------------ ------- ------------ ------- Passbook and statement savings 59,790,124 8.3 61,413,910 8.9 ------------ ------- ------------ ------- Money market deposits ......... 148,902,589 20.7 114,667,649 16.6 ------------ ------- ------------ ------- Certificates of deposit Less than 4% ................. 4,893,194 0.7 1,371,156 0.2 4.00% to 5.99% ............... 340,945,349 47.3 329,246,772 47.8 6.00% to 7.99% ............... 36,072,270 5.0 43,853,274 6.4 8.00% to 9.99% ............... 10,175,383 1.4 20,879,498 3.0 ------------ ------- ------------ ------- 392,086,196 54.4 395,350,700 57.4 ------------ ------- ------------ ------- $720,401,112 100.0% $689,541,345 100.0% ============ ======= ============ =======
Following is a summary of interest expense on deposits:
Year Ended September 30, --------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Interest-bearing checking ................................. $ 873,211 $ 1,088,777 $ 791,032 Passbook and statement savings ............................ 1,326,259 1,683,101 1,270,468 Money market .............................................. 5,096,134 4,275,419 2,391,245 Certificates of deposit ................................... 21,767,895 21,990,525 18,075,128 ----------- ----------- ----------- 29,063,499 29,037,822 22,527,873 Less early withdrawal penalties ................................................ 88,931 106,073 63,528 ----------- ----------- ----------- Net interest on deposits ................................ $28,974,568 $28,931,749 $22,464,345 =========== =========== ===========
At September 30, 1999, deposit maturities are as follows:
Within 1 year $594,338,934 1 year to 3 years 67,166,011 3 years to 5 years 37,459,409 Thereafter 21,436,758 ------------ $720,401,112 ============
Weighted average interest rates at September 30 are as follows: 1999 1998 ---------- ---------- Interest-bearing checking .............. 1.14% 1.33% Passbook and statement savings ......... 1.76% 2.44% Money market ........................... 4.04% 3.92% Certificates of deposit ................ 5.28% 5.81% Weighted average rate for all deposits . 4.27% 4.66%
Deposits in excess of $100,000 totaled $149.9 million and $151.0 million at September 30, 1999 and 1998, respectively. Deposits in excess of $100,000 may not be insured by the Federal Deposit Insurance Corporation ("FDIC"). (9) Advances from FHLB As a member of the FHLB of Seattle, the Association maintains a credit line that is a percentage of its total regulatory assets, subject to collateralization requirements. At September 30, 1999, the credit line was 30% of total assets of the Association. Advances are collateralized in the aggregate, as provided for in the Advances, Security and Deposit Agreements with the FHLB of Seattle, by certain mortgages or deeds of trust, and securities of the U.S. Government and agencies thereof. At September 30, 1999 the minimum book value of eligible collateral for these borrowings was $216.2 million. Scheduled maturities of advances from the FHLB were as follows:
September 30, 1999 September 30, 1998 ------------------------------------------ ---------------------------------------------- Range of Weighted Range of Weighted interest average interest average Amount rates interest rate Amount rates interest rate ------------ ----------- -------------- ------------ ----------- ------------- Due within one year . $ -- -- -- $ 30,000,000 5.54%-5.56% 5.55% After one but within five years .......... 40,000,000 5.39%-5.70% 5.43% 55,000,000 5.39%-5.74% 5.56% After five but within ten years ........... 157,000,000 4.77%-5.87% 5.32% 82,000,000 4.77%-5.24% 4.96% ------------ ------------- $197,000,000 $ 167,000,000 ============ =============
Financial data pertaining to the weighted average cost, the level of FHLB advances and the related interest expense are as follows:
Year ended September 30, ----------------------------------------- 1999 1998 1997 ------------- ------------ ------------ Weighted average interest rate at end of year ............. 5.34% 5.26% 5.62% Weighted daily average interest rate during the year ........................................... 5.25% 5.62% 5.66% Daily average FHLB advances ............................... $173,739,726 $141,016,438 $110,736,986 Maximum FHLB advances at any month end .................... 197,000,000 167,000,000 151,000,000 Interest expense during the year .......................... 9,121,190 7,921,570 6,270,615
(10) Short Term Borrowings Securities sold under agreements to repurchase at September 30, 1998 consisted of reverse repurchase agreements of $12.1 million. All these agreements matured during the quarter ended March 31, 1999 and were not renewed. The Company sold, under agreements to repurchase, specific securities of the U.S. government and its agencies and other approved investments to a broker-dealer. The securities underlying the agreement with the broker- dealer were delivered to the dealer who arranged the transaction. Securities delivered to broker-dealers may be loaned out in the ordinary course of operations. Financial data pertaining to the weighted average cost, the level of securities sold under agreements to repurchase, and the related interest expense are as follows:
Year Ended September 30, ---------------------------------------- 1999 1998 1997 ------------ ------------ ------------ Weighted average interest rate at end of year ............. -- 5.65% 5.75% Weighted daily average interest rate during the year ........................................... 5.72% 5.80% 5.82% Daily average of securities sold under agreements to repurchase ............................ $ 3,105,336 $14,669,203 $16,804,520 Maximum securities sold under agreements to repurchase at any month end ................................................. 8,095,000 17,077,500 19,117,500 Interest expense during the year .......................... 177,568 850,122 978,023
The Company had an unused line of credit totaling $15.0 million with U.S. National Bank of Oregon at September 30, 1999 and 1998. (11) Taxes on Income The following is a summary of income tax expense:
Year Ended September 30, --------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Current Taxes Federal ................................................... $ 4,842,232 $ 4,771,653 $ 3,076,977 State ..................................................... 1,065,157 468,978 639,503 ----------- ----------- ----------- Current tax provision ..................................... 5,907,389 5,240,631 3,716,480 ----------- ----------- ----------- Deferred Taxes Federal ................................................... (201,337) 82,204 648,092 State ..................................................... (40,649) 16,597 64,880 ----------- ----------- ----------- Deferred tax provision (benefit) .......................... (241,986) 98,801 712,972 ----------- ----------- ----------- Provision for income taxes ................................ $ 5,665,403 $ 5,339,432 $ 4,429,452 =========== =========== ===========
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:
Year Ended September 30, ---------------------------------- 1999 1998 1997 ------ ----- ----- Federal income taxes computed at statutory rate ............................................ 35.0% 35.0% 35.0% Tax effect of: State income taxes, net of Federal income tax benefit ........................................ 4.5 2.1 4.4 Nondeductible ESOP compensation expense ................................................... 1.4 2.4 5.4 Deductible MRDP compensation expense ................................................... (0.1) (1.5) (2.2) Interest income on municipal securities ................... (2.2) -- -- Elimination of valuation allowance ........................ -- (1.5) (12.6) Other ..................................................... (0.4) (0.6) 4.1 ------- ------ ------ Income tax expense included in the consolidated statement of earnings ........................ 38.2% 35.9% 34.1% ====== ===== ====
Deferred income taxes at September 30, 1999 and 1998 reflect the impact of "temporary differences" between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. The tax effects of temporary differences which give rise to a significant portion of deferred tax assets and deferred tax liabilities are as follows:
September 30, --------------------------- 1999 1998 ------------ ------------ DEFERRED TAX ASSETS Allowance for losses on loans .................... $ 975,816 $ 761,440 Pension liability ................................ 327,539 306,462 Unearned ESOP shares ............................. 371,290 422,071 Unrealized loss on securities available for sale . 1,080,801 -- Core deposit premium ............................. 657,904 359,209 ------------ ------------ Total gross deferred tax assets .................. 3,413,350 1,849,182 ------------ ------------ DEFERRED TAX LIABILITIES FHLB stock dividends ............................. 894,222 585,949 Deferred loan fees ............................... 1,262,694 919,314 Tax bad debt reserve in excess of base- year reserve ..................................... 1,224,537 1,469,444 Unrealized gain on securities held for sale ...... -- 1,735,484 Other ............................................ 611,624 794,935 ------------ ------------ Total gross deferred tax liabilities ............. 3,993,077 5,505,126 ------------ ------------ Net deferred tax liability ....................... $ 579,727 $ 3,655,944 ============ ============
At September 30, 1996 the Company created a valuation allowance of $648,837 to offset the deferred tax asset associated with the realized capital loss on the U.S. Federal securities mutual bond fund because management was not assured of being able to realize a capital gain and the related tax benefit. During the year ended September 30, 1997, the Company, through sale of certain investments, realized a capital gain for tax purposes that assured realization of the tax benefit and thus reduced the valuation allowance to zero. There continues to be no valuation allowance at September 30, 1999. The Company has qualified under provisions of the Internal Revenue Code to compute federal income taxes after deductions of additions to the bad debt reserves. At September 30, 1999, the Company had a taxable temporary difference of approximately $10.5 million that arose before 1988 (base-year amount). In accordance with SFAS No. 109, a deferred tax liability has not been recognized for the temporary difference. Management does not expect this temporary difference to reverse in the foreseeable future. (12) Commitments and Contingencies In the ordinary course of business, the Company has various outstanding commitments and contingencies that are not reflected in the accompanying consolidated financial statements. In addition, the Company is a defendant in certain claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the consolidated financial condition of the Company. (13) Shareholders' Equity In September 1998, the Board of Directors authorized the repurchase of approximately 20% of the Company's outstanding common stock. The repurchase was completed through a "Modified Dutch Auction Tender." Under this procedure, the Company's shareholders were given the opportunity to sell part or all of their shares to the Company at a price of not less than $18.00 per share and not more than $20.00 per share. Results of the offer were finalized on January 15, 1999 when the Company announced purchase of 1,984,090 shares at $19.50 per share. This represents approximately 85.9% of the shares tendered at $19.50 per share or below, and 64.7% of all shares tendered. The cost of the shares purchased was approximately $39.3 million. The effect of the transaction is reflected in a reduction in cash and investments and a reduction in equity. The table below summarizes repurchases of the Company's common stock which were approved by the Board of Directors and completed by management.
Number Average Month Completed of Shares Price - ---------------------------------------- --------- -------- 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
In 1999, 1998 and 1997, the vested portion of awarded MRDP shares were released. Many of the recipients of this award had the Company withhold and retire some of their shares to pay the associated taxes. This further reduced the number of shares outstanding by 24,299, 22,608 and 21,689 shares, respectively, and reduced equity by $353,407, $498,054 and $377,000, respectively. At the time of conversion, the Association established a liquidation account in an amount equal to its retained earnings as of June 30, 1995, the date of the latest statement of financial condition used in the final conversion prospectus. The liquidation account will be maintained for the benefit of eligible withdrawable account holders who have maintained their deposit accounts in the Association after conversion. In the event of a complete liquidation of the Association (and only in such an event), eligible depositors who have continued to maintain accounts will be entitled to receive a distribution from the liquidation account before any liquidation may be made with respect to common stock. The Association may not declare or pay cash dividends if the effect thereof would reduce its regulatory capital below the amount required for the liquidation account. The Company's Articles of Incorporation authorize the issuance of 500,000 shares of preferred stock, having a par value of $.01 per share, in series and to fix and state the powers, designations, preferences and relative rights of the shares of such series, and the qualifications, limitations and restrictions thereof. (14) Earnings Per Share Earnings per share ("EPS") is computed in accordance with SFAS No. 128, Earnings per Share, which was adopted by the Company as of December 31, 1997. EPS for all prior periods have been restated to reflect the adoption. Shares held by the Company's ESOP that are committed for release are considered contingently issuable shares and are included in the computation of basic EPS. Diluted EPS is computed using the treasury stock method, giving effect to potential additional common shares that were outstanding during the period. Potential dilutive common shares include shares awarded but not released under the Company's MRDP, and stock options granted under the Stock Option Plan. Following is a summary of the effect of dilutive securities on weighted average number of shares (denominator) for the basic and diluted EPS calculations. There are no resulting adjustments to net earnings.
Year Ended September 30, --------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Weighted average common shares outstanding - basic ................................ 7,564,415 9,115,404 9,487,848 ----------- ----------- ----------- Effect of Dilutive Securities on Number of Shares: MRDP shares ............................................... 23,923 64,188 45,824 Stock options ............................................. 160,189 341,657 228,787 ----------- ----------- ----------- Total Dilutive Securities ................................. 184,112 405,845 274,611 ----------- ----------- ----------- Weighted average common shares outstanding - with dilution .............................. 7,748,527 9,521,249 9,762,459 =========== =========== ===========
(15) Employee Benefit Plans Employee Retirement Plan The Company is a member of a multiple-employer trusteed pension plan ("Plan") covering all employees with at least one year of service and pays direct pensions to certain retired employees. Benefits are based on years of service with the Company and salary excluding bonuses, fees, commissions, etc. Participants are vested in their accrued benefits after five years of service. Pension expense of $40,828, $180,000, and $170,613 was incurred during the years ended September 30, 1999, 1998, and 1997, respectively. Separate actuarial valuations, including computed value of vested benefits, are not made with respect to each contributing employer, nor are the plan assets so segregated by the trustee. The Plan had an over-funded accumulated benefit of approximately $564.7 million at June 30, 1999. Director Deferred Compensation Plan The Company also has an unfunded supplemental benefits plan to provide members of the Board of Directors with supplemental retirement benefits. Supplemental benefits are based on monthly fees approved by the Compensation Committee of the Board. Pension costs recognized for the years ended September 30, 1999, 1998, and 1997 were $71,052, $71,052, and $71,052, respectively. At September 30, 1999 and 1998, the projected benefit obligation was $833,644 and $779,392, respectively. Management Recognition and Development Plan In February 1996, the Board of Directors approved a MRDP for the benefit of officers and non- employee directors which authorizes the grant of 489,325 common stock shares. The MRDP was approved by the Company's shareholders on April 9, 1996. Those eligible to receive benefits under the MRDP are determined by members of a committee appointed by the Board of Directors of the Company. MRDP awards vest over a five-year period in equal installments beginning on April 9, 1997 (the first anniversary of the effective date of the MRDP) or upon the participant's death or disability. On April 9, 1996, 391,459 shares were awarded to officers and directors. On November 19, 1997 a new award of 6,116 shares was made to a director. On January 4, 1999 a new award of 4,893 was made to an officer. During 1998, 17,616 shares awarded under the plan were forfeited upon resignation of an officer. The Company recognizes compensation expense in accordance with the vesting schedule during the years in which the shares are payable based on the fair value of the common stock on the grant date. Compensation expense for the years ended September 30, 1999, 1998 and 1997 was $1.0 million, $1.1 million and $1.1 million, respectively. Stock Option Plan In February 1996, the Board of Directors adopted a Stock Option Plan ("Stock Plan") for the benefit of certain employees and directors. The Stock Plan was approved by the Company's shareholders on April 9, 1996. The maximum number of common shares which may be issued under the Stock Plan is 1,223,313 shares with a maximum term of ten years for each option from the date of grant. The initial awards were granted on April 9, 1996 at the fair value of the common stock on that date ($13.125). All initial awards vest in equal installments over a five year period from the grant date and expire during April 2006. Unvested options become immediately exercisable in the event of death or disability. Option activity under the Stock Plan is as follows:
Weighted Number of Average Shares Exercise Price ------------ -------------- Outstanding, October 1, 1996 ........... 971,308 $13.125 Granted ................................ -- -- Exercised .............................. -- -- Canceled ............................... -- -- ---------- Outstanding, September 30, 1997 ........ 971,308 $13.125 Granted ................................ 23,243 $20.577 Exercised .............................. (31,317) $13.125 Canceled ............................... (46,976) $13.125 ---------- Outstanding, September 30, 1998 ........ 916,258 $13.314 Granted ................................ -- -- Exercised .............................. -- -- Canceled ............................... -- -- ---------- Outstanding, September 30, 1999 ........ 916,258 $13.314 ========== =======
At September 30, 1999, 275,738 shares were available for future grants under the Stock Plan. Additional information regarding options outstanding as of September 30, 1999 is as follows:
Weighted Avg. Options Options Remaining Exercise Price Outstanding Exercisable Contractual Life - -------------- ----------- ----------- ---------------- $13.125 893,015 535,809 6.5 $20.577 23,243 4,649 8.1 ----------- ----------- 916,258 540,458 =========== ===========
Additional Stock Plan Information As discussed in Note 1, the Company continues to account for its stock-based awards using the intrinsic value method in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees and its related interpretations. Accordingly, no compensation expense has been recognized in the financial statements for employee stock arrangements. SFAS No. 123, Accounting for Stock-Based Compensation, requires the disclosure of pro forma net income and earnings per share had the Company adopted the fair value method as of the beginning of fiscal 1996. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company's calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions:
November 1997 April 1996 Grant Grant ------------- ----------- 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%
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:
Year ended September 30, ----------------------------------------- 1999 1998 1997 ---------- ---------- ---------- Net earnings: As reported $9,155,193 $9,551,037 $8,557,750 Pro forma 8,642,299 9,040,753 8,063,929 Earnings per common share - basic As reported $1.21 $1.05 $0.90 Pro forma $1.14 $0.99 $0.85 Earnings per common share - fully diluted As reported $1.18 $1.00 $0.88 Pro forma $1.12 $0.95 $0.83
(16) Employee Stock Ownership Plan As part of the stock conversion consummated on October 4, 1995, the Company established an ESOP for all employees that are age 21 or older and have completed two years of service with the Company. The ESOP borrowed $9,786,500 from the Company and used the funds to purchase 978,650 shares of the common stock of the Company issued in the conversion which would be distributed over a ten year period. The loan will be repaid principally from the Company's discretionary contributions to the ESOP over a period of ten years. The loan had an outstanding balance of $5.9 million and $6.9 million at September 30, 1999 and 1998, respectively, and an interest rate of 8.75%. The loan obligation of the ESOP is considered unearned compensation and, as such, recorded as a reduction of the Company's shareholders' equity. Both the loan obligation and the unearned compensation are reduced by the amount of loan repayments made by the ESOP. Shares purchased with the loan proceeds are held in a suspense account for allocation among participants as the loan is repaid. Contributions to the ESOP and shares released from the suspense account are allocated among participants on the basis of compensation in the year of allocation. Benefits are fully vested at all times under the ESOP. Forfeitures are reallocated to remaining plan participants and may reduce the Company's contributions. Benefits may be payable on retirement, death, disability, or separation from service. Since the Company's annual contributions are discretionary, benefits payable under the ESOP cannot be estimated. Compensation expense is recognized to the extent of the fair value of shares committed to be released. The Company recorded compensation expense under the ESOP of $1.6 million, $2.0 million, and $1.7 million for the years ended September 30, 1999, 1998 and 1997, respectively, and 97,865 shares were allocated among the participants in each of those years. (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.
September 30, 1999 September 30, 1998 --------------------------- --------------------------- Carrying Fair Carrying Fair amount value amount value Financial Assets ------------ ------------ ------------ ------------ Cash and due from banks ............ $ 21,123,217 $ 21,123,217 $ 25,644,460 $ 25,644,460 Interest earning deposits with banks 1,231,516 1,231,516 11,496,026 11,496,026 Federal funds sold and securities purchased under agreements to resell ............... 2,167,856 2,167,856 29,844,783 29,844,783 Investment securities available for sale ................. 158,648,057 158,648,057 203,224,184 203,224,184 Investment securities held to maturity ........................ 559,512 577,455 2,888,759 2,928,324 Mortgage backed and related securities available for sale ...... 72,695,555 72,695,555 43,335,857 43,335,857 Mortgage backed and related securities held to maturity ........ 2,600,920 2,596,408 3,661,683 3,696,444 Loans receivable, net .............. 739,793,403 714,285,234 668,146,380 721,213,589 FHLB stock ......................... 10,957,300 10,957,300 10,172,900 10,172,900 Financial Liabilities Deposit liabilities ................ 720,401,112 722,373,174 689,541,345 693,936,011 FHLB advances ...................... 197,000,000 192,637,192 167,000,000 166,432,152 Short term borrowings .............. -- -- 12,112,500 12,112,500
(18) Regulatory Capital Requirements The Company is not subject to any regulatory capital requirements. The Association, however, is subject to various regulatory capital requirements administered by the Office of Thrift Supervision ("OTS"). Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary action by regulators that, if undertaken, could have a direct material effect on the Association's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Association must meet specific capital guidelines that involve quantitative measures of the Association's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Association's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Association to maintain minimum amounts and ratios of total and Tier I capital to risk-weighted assets, of Tier I capital to total assets, and tangible capital to tangible assets (set forth in the table below). Management believes that the Association meets all capital adequacy requirements to which it is subject as of September 30, 1999. As of September 30, 1999, the most recent notification from the OTS categorized the Association as "well capitalized" under the regulatory framework for prompt corrective action. To be categorized as "well-capitalized," the Association must maintain minimum total risk-based, Tier I risk-based, and tangible capital ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. At periodic intervals, the OTS and FDIC routinely examine the Association as part of their legally prescribed oversight of the thrift industry. Based on these examinations, the regulators can direct that the Association's financial statements be adjusted in accordance with their findings. A future examination by the OTS or the FDIC could include a review of certain transactions or other amounts reported in the Association's 1999 financial statements. In view of the uncertain regulatory environment in which the Association now operates, the extent, if any, to which a forthcoming regulatory examination may ultimately result in adjustments to the 1999 financial statements cannot be presently determined.
Categorized as "Well Capitalized" Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provision --------------------- -------------------- --------------------- Amount Ratio Amount Ratio Amount Ratio ----------- ----- ----------- ----- ----------- ----- As of September 30, 1999 Total Capital: ........... $95,495,327 17.4% $42,888,616 8.0% $53,610,770 10.0% (To Risk Weighted Assets) Tier I Capital: .......... 93,011,702 17.0% N/A N/A 32,166,462 6.0% (To Risk Weighted Assets) Tier I Capital: .......... 93,011,702 8.9% 30,832,614 3.0% 51,387,690 5.0% (To Total Assets) Tangible Capital: ........ 93,011,702 8.9% 15,416,307 1.5% N/A N/A (To Tangible Assets) As of September 30, 1998 Total Capital: ........... $83,179,044 16.1% $41,257,520 8.0% $51,571,900 10.0% (To Risk Weighted Assets) Tier I Capital: .......... 81,232,367 15.8% N/A N/A 30,943,140 6.0% (To Risk Weighted Assets) Tier I Capital: .......... 81,232,367 8.3% 29,487,686 3.0% 49,146,143 5.0% (To Total Assets) Tangible Capital: ........ 81,232,367 8.3% 14,743,843 1.5% N/A N/A (To Tangible Assets)
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:
September 30, 1999 September 30, 1998 ------------------ ------------------ Association's equity $101,042,299 $95,448,624 Unrealized securities (gains) losses 1,747,744 (2,785,239) Core deposit intangible (9,778,341) (11,431,018) ----------- ----------- Tangible capital 93,011,702 81,232,367 General valuation allowances 2,483,625 1,946,677 ----------- ----------- Total capital $ 95,495,327 $83,179,044 ========== ==========
(19) Financial Instruments with Off-Balance Sheet Risk and Concentrations of Credit Risk The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments generally include commitments to originate mortgage and consumer loans. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The Company's maximum exposure to credit loss in the event of nonperformance by the borrower is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments. Commitments to extend credit are conditional 45 day agreements to lend to a customer subject to the Company's usual terms and conditions. At September 30, 1999, loan commitments amounted to approximately $11.8 million comprised of $4.4 million in variable rate loans ranging from 5.50% to 10.50% and $7.4 million in fixed rate loans ranging from 6.75% to 10.50%. At September 30, 1998 commitments amounted to approximately $31.2 million comprised of $305,000 in variable rate loans ranging from 8.99% to 14.50% and $30.9 million in fixed rate loans ranging from 6.13% to 10.75%. At September 30, 1999, the Company also had $2.0 million in commitments to sell loans to FNMA. The Company originates residential real estate loans and, to a lesser extent, commercial and multi-family real estate, commercial business and consumer loans. Over 79% of the mortgage loans in the Association's portfolio are secured by properties located in Klamath, Jackson, and Deschutes counties in Southern and Central Oregon. An economic downturn in these areas would likely have a negative impact on the Company's results of operations depending on the severity of the downturn. (20) Parent Company Financial Information Condensed financial information as of September 30, 1999 and 1998, and for the years then ended, for Klamath First Bancorp, Inc. is presented and should be read in conjunction with the consolidated financial statements and the notes thereto:
BALANCE SHEETS September 30, ------------------------------ 1999 1998 ------------- ------------- Cash and cash equivalents ........................ $ 5,844,155 $ 41,737,415 Investment and mortgage-backed securities ........ 2,762,506 20,003,078 Investment in wholly-owned subsidiary ............ 101,042,299 95,448,624 Other assets ..................................... 1,034,776 1,099,598 ------------- ------------- Total assets ..................................... $ 110,683,736 $ 158,288,715 ============= ============= Liabilities Short-term borrowings ............................ $ -- $ 12,112,500 Other liabilities ................................ 1,098,273 1,095,260 ------------- ------------- Total liabilities ................................ 1,098,273 13,207,760 ------------- ------------- Shareholders' equity Common stock ..................................... 79,084 99,168 Additional paid-in capital ....................... 43,794,535 82,486,183 Retained earnings ................................ 75,103,040 73,883,019 Unearned ESOP shares at cost ..................... (5,871,900) (6,850,550) Unearned MRDP shares at cost ..................... (3,519,296) (4,536,865) ------------- ------------- Total shareholders' equity ....................... 109,585,463 145,080,955 ------------- ------------- Total liabilities and shareholders' equity ....... $ 110,683,736 $ 158,288,715 ============= =============
STATEMENTS OF EARNINGS Year Ended September 30, ------------------------------ 1999 1998 ------------- ------------- Equity in undistributed income of subsidiary ..... $ 9,221,480 $ 9,259,035 Total interest income ............................ 1,675,756 2,995,169 Total interest expense ........................... 177,568 850,122 Non-interest income .............................. 77 -- Non-interest expense ............................. 1,631,674 1,674,321 ------------- ------------- Earnings before income taxes ..................... 9,088,071 9,729,761 Provision (benefit) for income taxes ............. (67,122) 178,724 ------------- ------------- Net earnings ..................................... $ 9,155,193 $ 9,551,037 ============= =============
STATEMENTS OF CASH FLOWS Year Ended September 30, ------------------------------ 1999 1998 ------------- ------------- Net cash flows from operating activities ......... $ 963,814 $ 34,654,657 ------------- ------------- Cash flows from investing activities Investment in subsidiary ......................... (302,892) (261,300) Maturity of investment and mortgage- backed securities ................................ 76,275,337 20,227,224 (Purchase) sale of investment and mortgage- backed securities ................................ (58,814,489) (5,035,162) ------------- ------------- Net cash flows provided by investing activities .. 17,157,956 14,930,762 ------------- ------------- Cash flows from financing activities Cost of ESOP shares released ..................... 978,650 978,650 Proceeds from short-term borrowings .............. 8,095,000 72,503,199 Repayments of short-term borrowings .............. (20,207,500) (77,468,199) Stock repurchase and retirement .................. (39,334,140) (11,561,483) Proceeds from exercise of stock options .......... -- 411,035 Dividends paid ................................... (3,547,040) (3,447,740) ------------- ------------- Net cash flows used in financing activities ...... (54,015,030) (18,584,538) ------------- ------------- Net increase/(decrease) in cash and cash equivalents ...................................... (35,893,260) 31,000,881 Cash and cash equivalents beginning of year ...... 41,737,415 10,736,534 ------------- ------------- Cash and cash equivalents end of year ............ $ 5,844,155 $ 41,737,415 ============= =============
Consolidated Supplemental Data Selected Quarterly Financial Data (unaudited)
Year Ended September 30, 1999 --------------------------------------------- December March June September --------- --------- --------- --------- (In thousands except per share data) 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 ========= ========= ========= ========= Year Ended September 30, 1998 --------------------------------------------- December March June September --------- --------- --------- --------- (In thousands except per share data) Total interest income ............................ $ 16,945 $ 17,180 $ 17,710 $ 17,898 Total interest expense ........................... 9,186 9,123 9,710 9,829 --------- --------- --------- --------- Net interest income .............................. 7,759 8,057 8,000 8,069 Provision for loan losses ........................ 75 91 198 310 --------- --------- --------- --------- Net interest income after provision .............. 7,684 7,966 7,802 7,759 Non-interest income .............................. 697 577 823 1,106 Non-interest expense ............................. 4,829 4,888 4,832 4,974 --------- --------- --------- --------- Earnings before income taxes ..................... 3,552 3,655 3,793 3,891 Provision for income taxes ....................... 1,406 1,447 1,302 1,184 --------- --------- --------- --------- Net earnings ..................................... $ 2,146 $ 2,208 $ 2,491 $ 2,707 ========= ========= ========= ========= Net earnings per share - basic ................... $ 0.23 $ 0.24 $ 0.28 $ 0.31 ========= ========= ========= ========= Net earnings per share - fully diluted ........... $ 0.22 $ 0.23 $ 0.26 $ 0.30 ========= ========= ========= =========
Klamath First Bancorp, Inc. Corporate Information Corporate Special Counsel Headquarters Breyer & Associates PC 540 Main Street 1100 New York Ave. N.W. Klamath Falls, OR 97601 Suite 700 East 541-882-3444 Washington, DC 20005 www.klamathfirstfederal.com (202)737-7900 Independent Transfer Agent Auditors Registrar & Transfer Co. Deloitte & Touche LLP 10 Commerce Drive 3900 U.S. Bancorp Tower Cranford, NJ 07016-3572 111 SW Fifth Avenue (800) 866-1340 Portland, OR 97204-3698 503-222-1341 Corporate Counsel Craig M. Moore 540 Main Street Klamath Falls, OR 97601 541-882-3444 Common Stock Traded over-the-counter/Nasdaq National Market Nasdaq Symbol: KFBI Form 10-K Information A copy of the Form 10-K, as filed with the Securities and Exchange Commission, will be furnished without charge to shareholders as of the record date for voting at the annual meeting of shareholders upon written request to: Marshall Alexander, Senior Vice President - Chief Financial Officer Klamath First Bancorp, Inc. 540 Main Street Klamath Falls, OR 97601 Annual Meeting The annual meeting of shareholders will be held Wednesday, January 26, 2000 beginning at 2:00 p.m., Pacific Time at: The Shilo Inn 2500 Almond Street Klamath Falls, OR 97601. Shareholders of record as of the close of business on November 29, 1999 shall be those entitled to notice of and to vote at the meeting. EX-21 3 SUBSIDIARY OF REGISTRANT EXHIBIT 21 Subsidiary of the Registrant Exhibit 21 Subsidiary of Registrant Percentage Jurisdiction or Subsidiary (1) Owned State of Incorporation Klamath First Federal Savings and Loan Association 100% United States (1) The operations of the Company's subsidiary are included in the Company's consolidated financial statements. EX-23 4 INDEPENDENT AUDITORS' CONSENT EXHIBIT 23 Independent Auditors' Consent Exhibit 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the Registration Statement of Klamath First Bancorp, Inc. on Form S-8 (File No. 333-4002) of our report dated October 29, 1999, on the financial statements appearing in the Annual Report to stockholders of Klamath First Bancorp, Inc. for the year ended September 30, 1999. /s/ DELOITTE & TOUCHE LLP Portland, Oregon December 28, 1999 EX-27 5 ART. 9 FDS FOR FISCAL YEAR END 99 10-K WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. EXHIBIT 27 Financial Data Schedule
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FOURTH QUARTER/FISCAL YEAR END 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-K YEAR SEP-30-1999 SEP-30-1999 21,123,217 1,231,516 2,167,856 0 231,043,612 3,160,432 3,173,863 739,793,403 2,483,625 1,041,641,340 720,401,112 0 14,754,178 197,000,000 0 0 79,084 109,506,379 1,041,641,340 56,289,718 13,735,320 1,665,802 71,690,840 28,974,568 38,381,606 33,309,234 932,000 217,180 21,074,001 14,820,596 14,820,596 0 0 9,155,193 1.21 1.18 2.73 3,314,641 0 0 0 1,949,677 398,052 0 2,483,625 0 0 2,483,625
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