-----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, WY6BkxuVQvTRs9DYwyTX7sjQ1+mf1QgtEK3PX+U1yKEhM2tFUBXu9mQgMP+lPAe/ RBPTojdDr9QL4/uogXQmKA== 0000946924-96-000013.txt : 19961225 0000946924-96-000013.hdr.sgml : 19961225 ACCESSION NUMBER: 0000946924-96-000013 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961224 SROS: NASD 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: 1934 Act SEC FILE NUMBER: 000-26556 FILM NUMBER: 96685834 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 FORM 10-K, FOR THE YEAR ENDED SEPTEMBER 30, 1996 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended September 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 0-26556 KLAMATH FIRST BANCORP, INC. (Exact name of registrant as specified in its charter) Oregon 93-1180440 - ---------------------------------------------- --------------- (State or other jurisdiction of incorporation I.R.S. Employer or organization) I.D. Number) 540 Main Street, Klamath Falls, Oregon 97601 - ---------------------------------------------- --------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (541) 882-3444 ---------------- Securities registered pursuant to Section 12(b) of the Act: None ---------------- Securities registered pursuant to Section 12(g) of the Act: Common Stock,par value $.01 per share ------------------------------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate by check mark whether disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or other information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. YES X NO --- --- As of December 10, 1996, there were issued and outstanding 11,612,470 shares of the Registrant's Common Stock. The Registrant's voting stock is traded over-the-counter and is listed on the Nasdaq National Market under the symbol "KFBI." The aggregate market value of the voting stock held by nonaffiliates of the Registrant, based on the closing sales price of the Registrant's common stock as quoted on the Nasdaq National Market on December 10, 1996 of $15.00, was $167,255,070. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of Registrant's Annual Report to Shareholders for the Fiscal Year Ended September 30, 1996 ("Annual Report") (Parts I and II). 2. Portions of Registrant's Definitive Proxy Statement for the 1997 Annual Meeting of Shareholders (Part III). 3. Registrant's Current Report on Form 8-K dated May 21, 1996, as amended on May 31, 1996 (Part II, Item 9). PART I Item 1. Business General Klamath First Bancorp, Inc. ("Company"), an Oregon corporation, was organized on June 16, 1995 for the purpose of becoming the holding company for Klamath First Federal Savings and Loan Association ("Association") upon the Association's conversion from a federal mutual to a federal stock savings and loan association ("Conversion"). The Conversion was completed on October 4, 1995. At September 30, 1996, the Company had total assets of $672.0 million, total deposits of $399.7 million and shareholders' equity of $153.4 million. All references to the Company herein include the Association where applicable. The Association was organized in 1934. The Association is regulated by the Office of Thrift Supervision ("OTS") and its deposits are insured up to applicable limits under the Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC"). The Association also is a member of the Federal Home Loan Bank ("FHLB") System. The Association is a traditional, community-oriented savings and loan association that focuses on customer service within its primary market area. Accordingly, the Association is primarily engaged in attracting deposits from the general public through its offices and using those and other available sources of funds to originate permanent residential one- to four-family real estate loans within its market area and to a lesser extent on commercial property and multi-family dwellings. At September 30, 1996, permanent residential one- to four-family real estate loans totalled $447.0 million, or 91.50% of the total loans. The Association has historically emphasized fixed-rate lending but has determined to place greater emphasis on the origination of adjustable rate loans on permanent one- to four-family residences. In an attempt to increase this type of business, in November 1994 the Association began to use below market "teaser" rates which are competitive with other institutions originating mortgages in the Association's primary market area. At September 30, 1996, 89.32% and 10.68% of the Association's total loan portfolio consisted of long-term, fixed-rate and adjustable rate loans, after loans in process and non-performing loans, respectively. Market Area The Association's market area covers the counties of Klamath, Deschutes and Jackson in Southern and Central Oregon. This area has a diverse economic base, with each of the three counties influenced by distinct economic factors. The economy of Klamath County, where the Association's main office is located, has been historically reliant on the timber and wood products industry and agriculture. However, Klamath County's economy has been increasingly influenced in recent years by employment growth in light industry, the federal government (including the Kingsley Field Air National Guard Installation) and health services. Major employers in Klamath County include Merle West Medical Center and JELD-WEN (wood products). The economy of Deschutes County, which is located in the center of the state, has been affected by rapid expansion in tourism, recreation and retirement activities, especially in and around the Three Sisters Alpine Wilderness Area and the Mt. Bachelor ski area. Much of this activity, and related service sector and retail/wholesale trade employment, is centered in Bend which lies 140 miles north of the Association's main office. Redmond, Oregon, 20 miles to the north of Bend and the location of the new loan center, has grown rapidly because of affordable housing for many people employed in the Bend area. Deschutes County's major employers include Bend Mill Works (wood products), St. Charles Medical Center and Bend-Lapine Schools. The economy of Jackson County has been influenced by a steady influx of new residents, primarily retirees, many of whom have migrated from nearby California. Related to this increase, employment in services, including 1 lodging, recreation and health care, has expanded. The cities of Medford, which is 75 miles northwest of the Association's main office, and Ashland which is 62 miles southwest of the main office, are located in Jackson County. Major employers in Jackson County include Bear Creek Corporation (fruit production and sales), Rogue Valley Medical Center and Jackson County School District. 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, ----------------- 1996 1996 1995 1994 ------------ ---- ---- ---- Weighted average yield: Loans receivable........................... 7.73% 8.00% 7.89% 8.12% Mortgage backed and related securities..... 6.34 5.75 -- -- Investment securities...................... 6.31 6.27 7.43 7.09 Federal funds sold......................... 5.38 5.47 5.55 3.42 Time deposits.............................. 5.24 5.37 5.30 5.39 FHLB stock................................. 8.00 7.64 6.86 8.89 Combined weighted average yield on interest-bearing assets...................... 7.34 7.45 7.75 7.86 ---- ---- ---- ---- Weighted average rate paid on: Tax and insurance reserves................. 3.30 3.30 3.97 4.10 Passbook accounts.......................... 3.29 2.87 2.78 2.67 Negotiable order of withdrawal ("NOW") accounts 2.54 2.47 2.44 2.58 Money market deposit accounts.............. 3.96 3.88 3.95 3.33 Certificate accounts....................... 5.95 5.94 5.79 5.30 FHLB advances.............................. 5.62 5.60 6.21 -- Combined weighted average rate on interest-bearing liabilities................. 5.30 5.23 5.02 4.46 ---- ---- ---- ---- Net interest spread........................... 2.04% 2.22% 2.73% 3.40% ==== ==== ==== ====
Average Balances, Net Interest Income and Yields Earned and Rates Paid Reference is made to the section entitled "Average Balances, Net Interest Income and Yields Earned and Rates Paid" on page 12 of the Annual Report, which section is incorporated herein by reference. Interest Sensitivity Gap Analysis Reference is made to the section entitled "Interest Sensitivity Gap Analysis" on page 10 of the Annual Report, which section is incorporated herein by reference. 2 Rate/Volume Analysis Reference is made to the section entitled "Rate/Volume Analysis" on page 13 of the Annual Report, which section is incorporated herein by reference. Lending Activities General. As a federally chartered savings and loan association, the Association has authority to originate and purchase loans secured by real estate located throughout the United States. Notwithstanding this nationwide lending authority, over 95% of the mortgage loans in the Association's portfolio are secured by properties located in Klamath, Jackson and Deschutes counties in Southern and Central Oregon. It is management's intention, subject to market conditions, that the Association will remain a traditional financial institution originating long-term mortgage loans for the purchase, construction or refinance of one- to four-family residential real estate. Permanent residential one- to four-family mortgage loans amounted to $447.0 million, or 91.50%, of the Association's total loan portfolio before net items, at September 30, 1996. The Association originates other loans secured by multi-family residential and commercial real estate, construction and land loans. Those loans amounted to $37.6 million, or 7.70%, of the total loan portfolio, before net items, at September 30, 1996. Approximately 0.80%, or $3.9 million, of the Association's total loan portfolio, before net items, as of September 30, 1996 consisted of non-real estate loans. Permissible loans-to-one borrower by the Association are generally limited to 15% of unimpaired capital and surplus. The Association's loan-to-one borrower limitation was $18.0 million at September 30, 1996. At September 30, 1996, the Association had seven borrowing relationships with outstanding balances in excess of $1.0 million, the largest of which amounted to $1.4 million and consisted of three loans, all of which were secured by multi-family residential or commercial real estate. All of those loans have performed in accordance with their terms since origination. The Association has placed a growing emphasis on the origination of adjustable rate mortgage ("ARM") loans in order to increase the interest rate sensitivity of its loan portfolio. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Asset Liability Management and Interest Rate Risk" and "INTEREST SENSITIVITY GAP ANALYSIS" in the Annual Report. At September 30, 1996, $51.3 million, or 10.68% of loans in the Association's total loan portfolio, after loans in process and non-performing loans, consisted of ARM loans. 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, ---------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---------------- ---------------- ---------------- ---------------- ---------------- Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent -------- ------ ------- ------- ------- ------- ------- ------- ------- ------- (Dollars in Thousands) Real estate loans: Permanent residential 1-4 family ............. $447,004 91.50% $381,683 91.68% $337,212 90.06% $291,317 90.54% $272,421 91.61% Multi-family residential . 6,555 1.34 7,433 1.79 8,209 2.19 7,797 2.42 6,009 2.02 Construction ............. 14,276 2.92 9,807 2.36 12,625 3.37 8,298 2.58 5,055 1.70 Commercial ............... 15,645 3.20 13,984 3.36 13,425 3.58 11,227 3.49 10,420 3.50 Land ..................... 1,152 0.24 1,072 0.25 1,180 0.32 1,270 0.39 1,376 0.46 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Total real estate loans .... 484,632 99.20 413,979 99.44 372,651 99.52 319,909 99.42 295,281 99.29 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Non-real estate loans: Savings accounts ......... 1,640 0.34 1,966 0.47 1,316 0.35 1,250 0.39 1,414 0.48 Home improvement loans ... 1,977 0.40 -- -- -- -- -- -- -- -- Education ................ -- -- -- -- -- -- -- -- 99 0.03 Other .................... 302 0.06 367 0.09 472 0.13 615 0.19 594 0.20 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Total non-real estate loans 3,919 0.80 2,333 0.56 1,788 0.48 1,865 0.58 2,107 0.71 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Total loans ............... 488,551 100.00% 416,312 100.00% 374,439 100.00% 321,774 100.00% 297,388 100.00% ====== ====== ====== ====== ====== Less: Undisbursed portion of loans 8,622 7,203 9,310 7,148 5,240 Deferred loan fees ......... 5,445 4,757 4,252 3,330 2,354 Allowance for loan losses .. 928 808 755 628 572 --------- -------- -------- -------- -------- Net loans .................. $473,556 $403,544 $360,122 $310,668 $289,222 ========= ======== ======== ======== ========
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, ------------------------------------- 1996 1995 ----------------- ----------------- Amount Percent Amount Percent -------- ------- ------- -------- (Dollars in thousands) Fixed rate.. $428,528 89.32% 353,457 86.55% Adjustable-rate 51,250 10.68 54,918 13.45 -------- ------ --------- ------ Total.. $479,778 100.00% $408,375 100.00% ======== ====== ======== ======
Permanent Residential One- to Four-Family Mortgage Loans. The primary lending activity of the Association is the origination of permanent residential one- to four-family mortgage loans. Management believes that this policy of focusing on single-family residential mortgage loans has been successful in contributing to interest income while keeping delinquencies and losses to a minimum. At September 30, 1996, $447.0 million, or 91.50%, of the Association's total loan portfolio, before net items, consisted of permanent residential one- to four-family mortgage loans. As of such date, the average balance of the Association's permanent residential one- to four-family mortgage loans was $60,447. The Association presently originates both fixed-rate mortgage loans and ARM loans secured by one- to four-family properties with terms of 15 to 30 years. Historically, most of the loans originated by the Association have been fixed rate loans secured by one- to four-family properties. At September 30, 1996, $410.1 million, or 86.61% of the total loans after loans in process and non-performing loans were fixed rate one- to four-family loans and $42.3 million, or 8.92%, were ARM loans. Borrower demand for ARM loans versus fixed-rate mortgage loans is a function of the level of interest rates, the expectations of changes in the level of interest rates and the difference between the initial interest rates and fees charged for each type of loan. The relative amount of fixed-rate mortgage loans and ARM loans that can be originated at any time is largely determined by the demand for each in a competitive environment. The Association qualifies the ARM loan borrower based on the borrower's ability to repay the loan using the fully indexed rate. As a result, the Association believes that the potential for delinquencies and defaults on ARM loans when rates adjust upwards is lessened. The loan fees charged, interest rates and other provisions of the Association's ARM loans are determined by the Association on the basis of its own pricing criteria and competitive market conditions. At September 30, 1996, the Association charged 1.75% origination fees on its ARM loans. The Association has placed greater emphasis on the origination of ARM loans for permanent one- to four-family residences. In an attempt to increase this type of business, the Association uses below market "teaser" rates which are competitive with other institutions originating mortgages in the Association's primary market area. Initially, ARM loans are priced at the competitive teaser rate and after one year reprice at 2.875% over the One-Year Constant Maturity Treasury Bill Index, with a maximum increase or decrease of 2.00% in any one year and 6.00% over the life of the loan. The retention of ARM loans in the Association's loan portfolio helps reduce the Association's exposure to changes in interest rates. There are, however, unquantifiable credit risks resulting from the potential of increased costs due to changed rates to be paid by the customer. It is possible that, during periods of rising interest rates, the risk of default on ARM loans may increase as a result of repricing with increased costs to the borrower. Furthermore, the ARM loans originated by the Association generally provide, as a marketing incentive, 5 for initial rates of interest below the rates which would apply were the adjustment index used for pricing initially (discounting). These loans are subject to increased risks of default or delinquency because of this. Another consideration is that although ARM loans allow the Association to increase the sensitivity of its asset base to changes in the interest rates, the extent of this interest sensitivity is limited by the periodic and lifetime interest rate adjustment limits. Because of these considerations, the Association has no assurance that yields on ARM loans will be sufficient to offset increases in the Association's cost of funds. The loan-to-value ratio, maturity and other provisions of the loans made by the Association generally have reflected the policy of making less than the maximum loan permissible under applicable regulations, in accordance with sound lending practices, market conditions and underwriting standards established by the Association. The Association's lending policies on permanent residential one- to four-family mortgage loans generally limit the maximum loan-to-value ratio to 90% of the lesser of the appraised value or purchase price of the property and generally all permanent residential one- to four-family mortgage loans in excess of an 80% loan-to-value ratio require private mortgage insurance. A 95% loan-to- value program is available for owner occupied purchase transactions. The Association also has a limited amount of non-owner-occupied permanent residential one- to four-family mortgage loans in its portfolio. These loans are underwritten using generally the same criteria as owner-occupied permanent residential one- to four-family mortgage loans, except that the maximum loan-to-value ratio is generally 75% of the lesser of the appraised value or purchase price of the property and such loans are generally provided at an interest rate generally higher than owner-occupied loans. The Association offers fixed-rate, permanent residential one- to four-family mortgage loans with terms of 15 to 30 years. Substantially all permanent one- to four-family loans have original contractual terms to maturity of 30 years. Such loans are amortized on a monthly basis with principal and interest due each month and customarily include "due-on-sale" clauses. The Association enforces due-on-sale clauses to the extent permitted under applicable laws. Substantially all of the Association's mortgage loan portfolio consists of conventional loans. Historically, the Association has not originated significant amounts of mortgage loans on second residences. However, with the opening of a branch office in Bend and the loan center in Redmond, near popular ski areas and other outdoor activities, the Association believes that there is an opportunity to engage in such lending within the parameters of its current underwriting policies. Commercial and Multi-Family Real Estate Loans. The Association has historically engaged in a limited amount of multi-family and commercial real estate lending. At September 30, 1996, $6.6 million, or 1.34%, of the Association's total loan portfolio, before net items, consisted of loans secured by existing multi-family residential real estate and $15.6 million, or 3.20%, of the Association's total loan portfolio, before net items, consisted of loans secured by existing commercial real estate. The Association's commercial and multi-family real estate loans include primarily loans secured by office buildings, small shopping centers, churches, mini-storage warehouses and apartment buildings. All of the Association's commercial and multi-family real estate loans are secured by properties located in the Association's primary market area. The average outstanding balance of commercial and multi-family real estate loans was $155,247 at September 30, 1996, the largest of which was a $1.2 million loan secured by a commercial office property. The loan has performed in accordance with its terms since origination. Originations of commercial real estate and multi-family residential real estate amounted to 2.58%, 1.35% and 4.51% of the Association's total loan originations in the fiscal year ended September 30, 1996, 1995 and 1994, respectively. The Association's commercial and multi-family loans have terms which range up to 25 years and loan-to-value ratios of up to 75%. The Association currently originates fixed- and adjustable-rate commercial and multi-family real estate loans. Commercial real estate and multi-family adjustable rate loans are priced to be competitive with other commercial lenders in the Association's market area. A variety of terms are available to meet specific commercial and multi-family residential financing needs. As of September 30, 1996, $9.0 million, or 1.87%, after loans in process and non-performing loans, of commercial and multi-family residential real estate loans had adjustable rates of interest. 6 Multi-family residential and commercial real estate lending is generally considered to involve a higher degree of risk than permanent residential one- to four-family lending. Such lending typically involves large loan balances concentrated in a single borrower or groups of related borrowers. In addition, the payment experience on loans secured by income-producing properties is typically dependent on the successful operation of the related real estate project and thus may be subject to a greater extent to adverse conditions in the real estate market or in the economy generally. The Association generally attempts to mitigate the risks associated with multi-family commercial and residential real estate lending by, among other things, lending on collateral located in its market area and generally to individuals who reside in its market. Construction Loans. The Association makes construction loans primarily to individuals for the construction of their single-family residences. The Association also makes loans to builders for the construction of single-family residences which are not presold at the time of origination ("speculative loans"). The Association generally limits loans to builders to not more than two residences under construction at a given time. With the exception of a limited number of 18-month speculative loans, construction loans generally begin to amortize as permanent residential one-to four-family mortgage loans within one year of origination unless extended. At September 30, 1996, construction loans amounted to $14.3 million (including $1.0 million of speculative loans), or 2.92%, of the Association's total loan portfolio before net items. Construction loans have rates and terms which generally match the non-construction loans then offered by the Association, except that during the construction phase, the borrower pays only interest on the loan. The Association's construction loan agreements generally provide that loan proceeds are disbursed in increments as construction progresses. The Association periodically reviews the progress of the underlying construction project. Construction loans are underwritten pursuant to the same general guidelines used for originating permanent one- to four-family loans. Construction lending is generally limited to the Association's market area. Construction financing is generally considered to involve a higher degree of risk of loss than financing on improved, owner-occupied real estate because of the uncertainties of construction, including the possibility of costs exceeding the initial estimates and, in the case of speculative loans, the need to obtain a purchaser. The Association has sought to minimize the risks associated with permanent construction lending by limiting construction loans to qualified owner-occupied borrowers with construction performed by qualified state licensed builders located primarily in the Association's market area. The Association's underwriting criteria are designed to evaluate and minimize the risks of each construction loan. Interim construction loans are qualified at permanent rates in order to ensure the capability of the borrower to repay the loan. Loan proceeds are disbursed only as construction progresses and inspections warrant. These loans are underwritten to the same standards and to the same terms and requirements as one- to four-family purchased mortgage loans, except the loans provide for disbursement of funds during a construction period of up to one year. During this period, the borrower is required to make monthly payments of accrued interest on the outstanding loan balance. Disbursements during the construction period are limited to no more than the percent of completion. Up to 95% loan-to-value upon completion of construction, may be disbursed if private mortgage insurance above 80% loan-to-value is in place. Land Loans. The Association makes loans to individuals for the purpose of acquiring land to build a permanent residence. These loans generally have terms not exceeding 15 years and maximum loan-to-value ratios of 75%. As of September 30, 1996, $1.2 million, or 0.24%, of the Association's total loan portfolio consisted of land loans. Non-Real Estate Loans. Non-real estate lending has traditionally been a small part of the Association's business. Non-real estate loans generally have shorter terms to maturity or repricing and higher interest rates than real estate loans. As of September 30, 1996, $3.9 million, or .80%, of the Association's total loan portfolio consisted of non-real estate loans. As of that date, $1.6 million, or .34%, of such loans were secured by savings accounts. 7 At September 30, 1996, $2.0 million, or 0.40%, million of non-real estate loans consisted of Title I home improvement loans insured by the Federal Housing Administration and most are secured by liens on the real property. Loan Maturity and Repricing. The following table sets forth certain information at September 30, 1996 regarding the dollar amount of total loans, after loans in process and non-performing loans, maturing in the Association's portfolio, based on the contractual terms to maturity. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less.
After One Year Within One Year Through 5 Years After 5 Years Total --------------- --------------- ------------- ----- (In thousands) Permanent residential 1-4 family: Adjustable rate..... $41,149 $1,109 $ -- $ 42,258 Fixed rate.......... 884 1,098 408,150 410,132 Other mortgage loans: Adjustable rate..... 8,843 249 -- 8,992 Fixed rate.......... 96 2,088 12,293 14,477 Non-real estate loans. 1,159 836 1,924 3,919 ------- ------ --------- --------- Total loans....... $52,031 $5,380 $422,367 $479,778 ======= ====== ======== ========
Scheduled contractual amortization of loans does not reflect the actual term of the Association's loan portfolio. The average life of loans is substantially less than their contractual terms because of prepayments and due-on-sale clauses, which gives the Association the right to declare a conventional loan immediately due and payable in the event, among other things, that the borrower sells the real property subject to the mortgage and the loan is not repaid. The dollar amount of all loans, net of loans in process and non-performing loans, due one year after September 30, 1996, which have fixed interest rates and have floating or adjustable rates, was $426.4 million and $1.4 million, respectively. Loan Commitments. The Association issues commitments for fixed- and adjustable-rate one- to four-family residential mortgage loans conditioned upon the occurrence of certain events. Such commitments are made on specified terms and conditions and are honored for up to 60 days from commitment. The Association had outstanding loan commitments of approximately $10.8 million at September 30, 1996 consisting of $146,000 of variable rate loans and $10.7 million of fixed rate loans. See Note 16 of Notes to the Consolidated Financial Statements. Loan Solicitation and Processing. The Association originates real estate and other loans at each of its offices. Loan originations are obtained by a variety of sources, including developers, builders, existing customers, newspapers, radio, periodical advertising and walk-in customers, although referrals from local realtors has been the primary source. Loan applications are taken by lending personnel, and the loan processing department obtains credit reports, appraisals and other documentation involved with a loan. All of the Association's lending is subject to its written nondiscriminatory underwriting standards, loan origination procedures and lending policies prescribed by the Association's Board of Directors. Property valuations are required on all real estate loans and are prepared by employees experienced in the field of real estate or by independent appraisers approved by the Association's Board of Directors. Additionally, all appraisals on loans in excess of $250,000 must meet applicable regulatory standards. 8 The Association's loan approval process is intended to assess the borrower's ability to repay the loan, the viability of the loan, the adequacy of the value of the property that will secure the loan, the location of the real estate, and, in the case of commercial and multi-family real estate loans, the cash flow of the project and the quality of management involved with the project. The Association generally requires title insurance on all loans and also that borrowers provide evidence of fire and extended casualty insurance in amounts and through insurers that are acceptable to the Association. A loan application file is first reviewed by a loan officer of the Association and then is submitted to the loan committee for underwriting and approval. The Association generally originates loans for its own portfolio which has enabled it to develop an expedited loan application and approval process which management believes provides it with a competitive advantage in its primary market area. The Association can make loan commitments, subject to property valuation and possible other conditions of approval, in three to five days if income and credit data of the borrower are readily available. Loan Originations, Purchases and Sales. The Association has originated substantially all of the loans in its portfolio and generally holds them until maturity. During the year ended September 30, 1996, the Association originated $135.6 million in total loans, compared to $84.7 million in the same period of 1995. The increase in loan originations was attributable to strong new purchase loan originations. The Association generally does not engage in the sale or purchase of loans. Between 1989 and 1992, however, the Association purchased permanent residential one- to four-family jumbo mortgage loans (i.e., loans with principal balances over $203,150) on detached residences from various localities throughout the Western United States, primarily Oregon, Washington, California and Arizona. At one time the aggregate balance of such loans was approximately $64.6 million. At September 30, 1996, the balance was $5.8 million. These loans were underwritten on the same basis as permanent residential one- to four-family real estate loans originated by the Association. 9 The following table shows total loans originated, loan reductions and the net increase in the Association's loans during the periods indicated.
Year Ended September 30, ------------------------- 1996 1995 1994 ---- ---- ---- (In thousands) Total net loans at beginning of period.... $403,544 $360,122 $310,668 Loans originated: Real estate loans originated (1)......... 133,814 83,344 128,814 Non-real estate loans originated......... 1,753 1,370 1,211 -------- -------- -------- Total loans originated................. 135,567 84,714 130,025 -------- -------- -------- Loan reductions: Principal paydowns....................... (64,530) (40,408) (79,226) Other reductions (2)..................... (1,025) (884) (1,345) -------- -------- -------- Total loan reductions................. (65,555) (41,292) (80,571) -------- --------- -------- Total net loans at end of period.......... $473,556 $403,544 $360,122 ======== ======== ======== (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 1.75% on permanent loans and 2.00% on construction loans. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 91, which deals with the accounting for non-refundable fees and costs associated with originating or acquiring loans, the Association's loan origination fees and certain related direct loan origination costs are offset, and the resulting net amount is deferred and amortized as income over the contractual life of the related loans as an adjustment to the yield of such loans, or until the loan is paid in full. At September 30, 1996, the Association had $5.4 million of net loan fees which had been deferred and are being recognized as income over the contractual maturities of the related loans. Asset Quality Delinquent Loans. The following table sets forth information concerning delinquent loans at September 30, 1996, in dollar amount and as a percentage of the Association's total loan portfolio. The amounts presented represent the total outstanding principal balances of the related loans, rather than the actual payment amounts which are past due.
Permanent residential Non-real 1-4 family Estate Loans Total ------------------- ------------------- ------------------- Amount Percentage Amount Percentage Amount Percentage ------ ---------- ------ ---------- ------ ---------- (Dollars in Thousands) Loans delinquent for 90 days and more..... $189 0.04% $2 --% $191 0.04%
10 Delinquency Procedures. When a borrower fails to make a required payment on a real estate loan, the Association attempts to cure the delinquency by contacting the borrower. In the case of loans past due, appropriate late notices are sent on the fifth and fifteenth days after the due date. If the delinquency is not cured, the borrower is contacted by telephone on the fifteenth day after the payment is due. In the event a loan is past due for 45 days or more, the Association will attempt to arrange an in-person interview with the borrower to determine the nature of the delinquency; based upon the results of the interview and its review of the loan status, the Association may negotiate a repayment program with the borrower. If a loan remains past due at 60 days, the Association performs an in-depth review of the loan status, the condition of the property and the circumstances of the borrower. If appropriate, an alternative payment plan is established. At 90 days past due, a letter prepared by the Association's legal counsel is sent to the borrower describing the steps to be taken to collect the loan, including acceptance of a voluntary deed-in-lieu of foreclosure, and of the initiation of foreclosure proceedings. A decision as to whether and when to initiate foreclosure proceedings is made by senior management, with the assistance of legal counsel, at the direction of the Board of Directors, based on such factors as the amount of the outstanding loan in relation to the value of the property securing the original indebtedness, the extent of the delinquency and the borrower's ability and willingness to cooperate in curing the delinquency. Non-Performing Assets. The Association's non-performing assets consist of non-accrual loans, accruing loans greater than 90 days delinquent, real estate owned and other repossessed assets. All loans are reviewed on a regular basis and are placed on a non-accrual status when, in the opinion of management, the collection of additional interest is deemed insufficient to warrant further accrual. Generally, the Association places all loans more than 90 days past due on non-accrual status. Uncollectible interest on loans is charged-off or an allowance for losses is established by a charge to earnings equal to all interest previously accrued and interest is subsequently recognized only to the extent cash payments are received until delinquent interest is paid in full and, in management's judgment, the borrower's ability to make periodic interest and principal payments is back to normal in which case the loan is returned to accrual status. Real estate acquired by foreclosure or accounted for as "in substance" foreclosure is classified as real estate owned until such time as it is sold. See Note 1 of Notes to the Consolidated Financial Statements. When such property is acquired, it is recorded at the lower of the balance of the loan on the property at the date of acquisition (not to exceed the net realizable value) or the estimated fair value. Costs, excluding interest, relating to holding the property are expensed. Valuations are periodically performed by management and an allowance for losses is established by a charge to operations if the carrying value of property exceeds its estimated net realizable value. From time to time, the Association also acquires personal property, generally mobile homes, which are classified as other repossessed assets and are carried on the books at their estimated fair market value and disposed of as soon as commercially reasonable. As of September 30, 1996, the Association's total non-performing loans amounted to $191,000, or 0.04% of total loans, before net items, compared to $734,000, or 0.18% of total loans, before net items, at September 30, 1995. The decrease in non-accruing loans at September 30, 1996 was the result of properties foreclosed and sold during the year. 11 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, ---------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (Dollars in thousands) Non-accruing loans (1)....... $191 $734 $183 $198 $1,350 Accruing loans greater than 90 days delinquent............ -- -- -- -- -- ------ ------ ------ ------ ------ Total non-performing loans 191 734 183 198 1,350 Real estate owned............ 69 24 59 84 354 Other repossessed assets..... -- -- -- 16 -- ------ ------ ------ ------ ------ Total repossessed assets. 69 24 59 100 354 ------ ------ ------ ------ ------ Total non-performing assets $260 $758 $242 $298 $1,704 ====== ====== ====== ====== ====== Total non-performing assets as a percentage of total assets. 0.04% 0.12% 0.05% 0.07% 0.46% ==== ==== ==== ==== ==== Total non-performing loans as a percentage of total loans, before net items........... 0.04% 0.18% 0.05% 0.06% 0.45% ==== ==== ==== ==== ==== Allowance for loan losses as a percentage of total non-performing assets..................... 356.92% 106.80% 311.98% 210.74% 33.57% ====== ====== ====== ====== ===== Allowance for loan losses as a percentage of total non-performing loans 485.86% 110.08% 412.57% 317.19% 42.37% ====== ====== ====== ====== ===== (1) Consists of permanent residential one- to four-family mortgage loans.
For the year ended September 30, 1996, the amount of gross income that would have been recorded in the period then ended if non-accrual loans and troubled debt restructurings had been current according to their original terms, and the amount of interest income on such loans that was included in net income for each of such periods, were, in both cases, less than 1% of total interest income. Classified Assets. Federal regulations require that each insured savings association classify its assets on a regular basis. In addition, in connection with examinations of insured institutions, federal examiners have authority to identify problem assets and, if appropriate, classify them. There are four categories used to classify problem assets: "special mention", "substandard", "doubtful", and "loss." Special mention assets are not considered classified assets, but assets of questionable quality that have potential or past weaknesses that deserve management's close attention and monitoring. Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. Special mention assets and assets 12 classified as substandard or doubtful require the institution to establish general allowances for loan losses. If an asset or portion thereof is classified loss, the insured institution must either establish specific allowances for loan losses in the amount of 100% of the portion of the asset classified loss, or charge-off such amount. General loss allowances established to cover possible losses related to special mention assets and assets classified substandard or doubtful may be included in determining an institution's regulatory capital, while specific valuation allowances for loan losses do not qualify as regulatory capital. Federal examiners may disagree with an insured institution's classifications and the amounts reserved. Exclusive of assets classified loss and which have been fully reserved, the Association's classified assets at September 30, 1996 consisted of $281,000 of loans classified as substandard and $645,000 designated as special mention. As of September 30, 1996, total classified assets amounted to 0.14% of total assets. At September 30, 1996 and 1995, the aggregate amounts of the Association's classified assets were as follows:
At September 30, ---------------- 1996 1995 ---- ---- (In thousands) Loss.......................... $ -- $ -- Doubtful...................... -- -- Substandard assets............ 281 1,095 Special mention............... 645 -- General loss allowances....... 928 808 Specific loss allowances...... -- -- Charge offs................... -- 67
Allowance for Loan Losses. The allowance for loan losses is maintained at a level considered adequate by management to provide for anticipated loan losses based on management's assessment of various factors affecting the loan portfolio, including a review of all loans for which full collectibility may not be reasonably assured, an overall evaluation of the quality of the underlying collateral, economic conditions, historical loan loss experience and other factors that warrant recognition in providing for an adequate loan loss allowance. While management believes it uses the best information available to determine the allowance for loan losses, unforeseen market conditions could result in adjustments to the allowance for loan losses and net earnings could be significantly affected, if circumstances differ substantially from the assumptions used in making the final determination. At September 30, 1996, the Association had an allowance for loan losses of $928,000, which was equal to 356.9% of non-performing assets and 0.19% of total loans. Provisions for loan losses are charged to earnings to bring the total allowance for loan losses to a level deemed appropriate by management based on historical loan loss experience, the volume and type of lending conducted by the Association, industry standards, the amount of non-performing assets, general economic conditions (particularly as they relate to the Association's market area), and other factors, which exist at the time the determination of the adequacy of the provision is made, related to the collectibility of the Association's loan portfolio. The provisions for loan losses charged against income for the years ended September 30, 1996, 1995 and 1994 were $120,000, $120,000 and $150,000, respectively. Management believes that the amount maintained in the allowances will be adequate to absorb possible losses in the portfolio. 13 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, ----------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (Dollars in thousands) Total loans outstanding......... $488,551 $416,312 $374,439 $321,774 $297,388 ======= ======= ======= ======= ======= Average loans outstanding....... $440,510 $381,689 $338,679 $298,481 $291,775 ======= ======= ======= ======= ======= Allowance at beginning of period $ 808 $ 755 $ 628 $ 572 $ 532 Charge-offs..................... -- (67) (23) (64) (80) Provision for loan losses....... 120 120 150 120 120 -------- -------- -------- -------- -------- Allowance at end of period...... $ 928 $ 808 $ 755 $ 628 $ 572 ======= ======= ======= ======= ======= Allowance for loan losses as a percentage of total loans outstanding..... 0.19% 0.19% 0.20% 0.20% 0.19% ==== ==== ==== ==== ==== Ratio of net charge-offs to average loans outstanding during the period.. --% 0.02% 0.01% 0.02% 0.03% === ==== ==== ==== ====
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, ------------------------------------------------------------------------------------------------------------ 1996 1995 1994 ----------------------------------- ---------------------------------- ----------------------------------- Percent of Percent of Percent of Amount Allowance in Percent of Amount Allowance in Percent of Amount Allowance in Percent of of Category to Total Loans of Category to Total Loans of Category to Total Loans Allowance Total Loans by Category Allowance Total Loans by Category Allowance Total Loans by Category --------- ----------- ----------- --------- ----------- ----------- --------- ----------- ---------- (Dollars in thousands) Permanent residential 1-4 family ........... $925 0.19% 91.50% $807 0.19% 91.68% $713 0.19% 90.06% Multi-family residential -- -- 1.34 -- -- 1.79 -- -- 2.19 Construction ........... -- -- 2.92 -- -- 2.36 -- -- 3.37 Commercial ............. -- -- 3.20 -- -- 3.36 41 0.01 3.58 Land ................... -- -- 0.24 -- -- 0.25 -- -- 0.32 Non-real estate ........ 3 -- 0.80 1 -- 0.56 1 -- 0.48 ----- ----- ----- ----- ----- ------ ----- ----- ------ Total ............... $928 0.19% 100.00% $808 0.19% 100.00% $755 0.20% 100.00% ===== ===== ====== ===== ===== ====== ===== ===== ====== At September 30, ----------------------------------------------------------------------- 1993 1992 ----------------------------------- ---------------------------------- Percent of Percent of Amount Allowance in Percent of Amount Allowance in Percent of of Category to Total Loans of Category to Total Loans Allowance Total Loans by Category Allowance Total Loans by Category --------- ----------- ----------- --------- ----------- ----------- (Dollars in thousands) Permanent residential 1-4 family ............ $599 0.19% 90.54% $565 0.19% 91.61% Multi-family residential -- -- 2.42 -- -- 2.02 Construction ............ -- -- 2.58 -- -- 1.70 Commercial .............. 28 0.01 3.49 -- -- 3.50 Land .................... -- -- 0.39 -- -- 0.46 Non-real estate ......... 1 -- 0.58 7 -- 0.71 ----- ----- ----- ----- ----- ------ Total ................ $628 0.20% 100.00% $572 0.19% 100.00% ===== ===== ====== ===== ===== ======
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 totalled $120.3 million at September 30, 1996, plus an additional 10% if the investments are fully secured by readily marketable collateral. See "REGULATION -- Investment Rules" for a discussion of additional restrictions on the Association's investment activities. The investment securities portfolio is managed in accordance with a written investment policy adopted by the Board of Directors and administered by the Investment Committee, which consists of the President and four Board members. Generally, the investment policy is to invest funds among various categories of investments and maturities based upon the need for liquidity, to achieve the proper balance between its desire to minimize risk and maximize yield, and to fulfill the asset/liability management policy. The President and the Chief Financial Officer may independently invest up to 1% of total assets of the Association within the parameters set forth in the Investment Policy, to be subsequently reviewed with the Investment Committee at their next scheduled meeting. Transactions or investments in any one security determined by type, maturity and coupon in excess of 1.0% of assets are not permitted. Investment securities held to maturity are carried at cost and adjusted for amortization of premiums and accretion of discounts. As of September 30, 1996, the investment securities portfolio held to maturity had $1.2 million in tax-exempt securities issued by states and municipalities and $8.6 million in investment grade corporate obligations. Securities to be held for indefinite periods of time and not intended to be held to maturity are classified as available for sale and carried at fair value. Securities available for sale include securities that management intends to use as part of its asset/liability management strategy that may be sold in response to changes in interest rates or significant prepayments risks or both. As of September 30, 1996, the portfolio of securities available for sale consisted of $12.1 million in a U.S. Federal securities mutual bond fund, which was sold subsequent to year end and was recorded as a realized loss of $1.6 million, $59.7 million in securities issued by the U.S. Treasury and other federal government agencies, $250,000 in tax exempt securities issued by states and municipalities, and $5.0 million in investment grade corporate investments. On November 15, 1995, the Financial Accounting Standards Board published implementation guidance on SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities", that allows a corporation to reassess the appropriateness of the classification of its debt securities under a special transition provision. Debt securities classified as "held to maturity" are reported in financial statements at amortized cost while those classified as "available for sale" are reported at fair value and unrealized gains and losses on such securities are reported as a net amount in a separate component of shareholders' equity. The net unrealized gain or loss on securities classified as available for sale fluctuates based on several factors, including market interest rates, prepayment rates and the portfolio amount. Subsequent to 16 September 30, 1995, the Association reclassified and transferred $27.2 million of its debt securities from the held-to-maturity portfolio to the available-for-sale portfolio. During the years ended September 30, 1996, 1995 and 1994, neither the Company nor the Association held any off-balance sheet derivative financial instruments in their investment portfolios to which the provisions of SFAS No. 119 would apply. 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, -------------------------------------------------------------------------------------------- 1996 1995 1994 -------------------------- --------------------------- -------------------------- Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost(1) Value ---- ----- ---- ----- ---- ----- (In thousands) Held to maturity: U.S. Government obligations...... $ -- $ -- $28,961 $28,873 $29,091 $27,681 State and municipal obligations.. 1,227 1,249 512 552 513 536 Corporate obligations............ 8,600 8,611 12,736 12,753 14,960 14,833 Available for sale: U.S. Federal securities mutual bond fund................ 12,080 12,080 12,606 12,606 12,224 12,224 U.S. Government obligations...... 59,717 58,624 -- -- -- -- State and municipal obligations . 250 251 -- -- -- -- Corporate obligations............ 5,024 5,032 -- -- -- -- -------- -------- -------- -------- -------- -------- Total.......................... $86,898 $85,847 $54,815 $54,784 $56,788 $55,274 ======== ======== ======= ======== ======== ======= (1) SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities", was adopted on October 1, 1993. See the Notes to the Consolidated Financial Statements.
17
At September 30, -------------------------------------------------------------------------------------- 1996 1995 1994 ------------------------- ------------------------- ------------------------- Amortized Percent of Amortized Percent of Amortized Percent of Cost Portfolio Cost Portfolio Cost(1)(2) Portfolio ---- --------- ---- --------- ---------- --------- (Dollars in Thousands) Held to maturity: U.S. Government obligations...... $ -- 0.00% $28,961 52.84% $29,091 51.23% State and municipal obligations.. 1,227 1.41 512 .93 513 0.90 Corporate obligations............ 8,600 9.90 12,736 23.23 14,960 26.34 Available for sale: U.S. Federal securities mutual bond fund................ 12,080 13.90 12,606 23.00 12,224 21.53 U.S. Government obligations...... 59,717 68.72 -- -- -- -- State and municipal obligations.. 250 0.29 -- -- -- -- Corporate obligations............ 5,024 5.78 -- -- -- -- -------- -------- -------- -------- -------- -------- Total........................... $86,898 100.00% $54,815 100.00% $56,788 100.00% ======== ======== ======== ======== ======== ======== (1) The fair value of the investment portfolio amounted to $85.8 million, $54.8 million and $55.3 million at September 30, 1996, 1995 and 1994, respectively. (2) SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities", was adopted on October 1, 1993. See Note 1 of Notes to the Consolidated Financial Statements.
The following table sets forth the maturities and weighted average yields of the debt securities in the investment portfolio at September 30, 1996.
Less Than One to Five to Over Ten One Year Five Years Ten Years Years ------------- ------------- ------------- ------------- Amount Yield Amount Yield Amount Yield Amount Yield Totals ------ ----- ------ ----- ------ ----- ------ ----- ------ (Dollars in thousands) Held to maturity: State and municipal obligations....... $ 181 5.90% $ 536 6.55% $ 510 6.57% -- -- $ 1,227 Corporate obligations 6,600 6.37% 2,000 5.86% -- -- -- -- 8,600 Available for sale: U.S. Federal securities mutual bond fund.... 12,080 6.10% -- -- -- -- -- -- 12,080 U.S. Government obligations......... -- -- 43,720 6.14% 15,997 6.94% -- -- 59,717 State and municipal obligations......... -- -- 250 7.12% -- -- -- -- 250 Corporate obligations -- -- 5,024 6.27% -- -- -- -- 5,024 ------- ------- ------- ------- ------ Total ................. $18,861 $51,530 $16,507 $0 $86,898 ======= ======= ======= ======= =======
18 Mortgage Backed and Related Securities At September 30, 1996, the Company's and Association's net mortgage backed and related securities totaled $80.8 million at fair value ($81.0 million at amortized cost) and had a weighted average yield of 6.34%. At September 30, 1996, all of the mortgage backed securities were adjustable-rate securities. The Company and Association purchased its mortgage backed and related securities during 1996 with proceeds from the Company's initial stock offering and borrowings from the FHLB of Seattle. Mortgage backed and related securities (which also are known as mortgage participation certificates or pass-through certificates) typically represent a participation interest in a pool of single-family or multi-family mortgages. The principal and interest payments on these mortgages are passed from the mortgage originators, through intermediaries (generally U.S. Government agencies and government sponsored enterprises) that pool and resell the participation interests in the form of securities, to investors such as the Association. Such U.S. Government agencies and government sponsored enterprises, which guarantee the payment of principal and interest to investors, primarily include the Federal Home Loan Mortgage Corporation ("FHLMC"), Fannie Mae ("FNMA") (formerly the Federal National Mortgage Association), the Government National Mortgage Association ("GNMA") and the U.S. Small Business Administration ("SBA"). Mortgage backed and related securities typically are issued with stated principal amounts, and the securities are backed by pools of mortgages that have loans with interest rates that fall within a specific range and have varying maturities. Mortgage backed and related securities generally yield less than the loans that underlie such securities because of the cost of payment guarantees and credit enhancements. In addition, mortgage-backed and related securities are usually more liquid than individual mortgage loans and may be used to collateralize certain liabilities and obligations of the Association. These types of securities also permit the Association to optimize its regulatory capital because they have low risk weighting. Expected maturities of mortgage backed and related securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Prepayments that are faster than anticipated may shorten the life of the security and may result in a loss of any premiums paid and thereby reduce the net yield on such securities. Although prepayments of underlying mortgages depend on many factors, including the type of mortgages, the coupon rate, the age of mortgages, the geographical location of the underlying real estate collateralizing the mortgages and general levels of market interest rates, the difference between the interest rates on the underlying mortgages and the prevailing mortgage interest rates generally is the most significant determinant of the rate of prepayments. During periods of declining mortgage interest rates, if the coupon rate of the underlying mortgages exceeds the prevailing market interest rates offered for mortgage loans, refinancing generally increases and accelerates the prepayment of the underlying mortgages and the related security. Under such circumstances, the Association may be subject to reinvestment risk because, to the extent that the Association's mortgage backed securities amortize or prepay faster than anticipated, the Association may not be able to reinvest the proceeds of such repayments and prepayments at a comparable rate. Subsequent to September 30, 1995, the Association reclassified $1.7 million of mortgage backed and related securities from held to maturity to available for sale at fair values, with an unrealized loss of $100,421, consistent with the implementation guidance discussed under above "-- Investment Activities. 19 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, ------------------------------------------------------ 1996 1995 1994 --------------- --------------- --------------- Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value ---- ----- ---- ----- ---- ----- (In thousands) Held to maturity: GNMA......................... $ 6,783 $ 6,736 $-- $-- $-- $-- Available for sale: FNMA......................... 15,905 15,959 -- -- -- -- FHLMC........................ 39,205 39,179 -- -- -- -- SBA.......................... 19,139 18,971 -- -- -- -- ------ -------- ----- ----- ----- ----- Total...................... $81,032 $80,845 $-- $-- $-- $-- ======= ======= === === === === At September 30, ------------------------------------------------------------------------- 1996 1995 1994 ---------------------- ---------------------- ---------------------- Amortized Percent of Amortized Percent of Carrying Percent of Cost Portfolio Cost Portfolio Value(1) Portfolio ------ ---------- ------ ---------- ----------- ---------- (Dollars in Thousands) Held to maturity: GNMA......................... $ 6,783 8.37% $-- 0.00% $-- 0.00% Available for sale: FNMA......................... 15,905 19.63 -- -- -- -- FHLMC........................ 39,205 48.38 -- -- -- -- SBA.......................... 19,139 23.62 -- -- -- -- ------ ------ ------ ------ ------ ------ Total...................... $81,032 100.00% $-- 0.00% $-- 0.00% ====== ====== ====== ====== ====== ====== (1) The fair value of the mortgage-backed and related securities portfolio amounted to $80.8 million at September 30, 1996.
Interest-Earning Deposits The Company also had interest-earning deposits in the FHLB of Seattle amounting to $3.1 million and $134.0 million at September 30, 1996 and 1995, respectively. Deposit Activities and Other Sources of Funds General. Deposits are the primary source of the Association's funds for lending and other investment purposes. In addition to deposits, the Association derives funds from loan principal repayments. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows are significantly influenced by general interest rates and money market conditions. Borrowings may be used on a short-term basis to compensate for 20 reductions in the availability of funds from other sources. They may also be used on a longer term basis for general business purposes. Deposits. The Association's deposits are attracted principally from within the Association's primary market area through the offering of a broad selection of deposit instruments, including NOW accounts, money market deposit accounts, passbook accounts, and term certificate accounts. Included among these deposit products are individual retirement account ("IRA") certificates of approximately $73.0 million at September 30, 1996. Deposit account terms vary, with the principal differences being the minimum balance required, the time periods the funds must remain on deposit and the interest rate. Beginning in 1996, the Association began accepting deposits from outside its primary market area through both private placements and brokered deposits if the terms of the deposits fit the Association's specific needs and are at a rate lower than the rates on similar maturity borrowings through the FHLB of Seattle. At September 30, 1996, these deposits totalled $9.3 million, or 2.33% of total deposits. Interest rates paid, maturity terms, service fees and withdrawal penalties are established by the Association on a periodic basis. Determination of rates and terms are predicated on funds acquisition and liquidity requirements, rates paid by competitors, growth goals and federal regulations. For the year ended September 30, 1996, the Association experienced a net decrease in deposits (before interest credited) of $2.4 million as depositors withdrew funds to seek higher yielding alternative investments. To offset this deposit outflow, the Association has relied on increased borrowings from the FHLB of Seattle. See "--Borrowings." The Association has also offered special certificate accounts with odd-month terms (i.e., 13, 17, 23 and 25 month terms) in an effort to attract and retain deposits. The increased use of FHLB advances and the certificate account specials have contributed to the Association's interest rate spread decreasing from 2.73% for the year ended September 30, 1995 to 2.22% for the year ended September 30, 1996. In addition, the Association introduced a Basic Checking Account and a Small Business Checking Account to compete for student checking and small business accounts. Both accounts have check truncation and do not pay interest which results in low costs for the customer. At September 30, 1996, certificate accounts maturing during the year ending September 30, 1997 totalled $102.4 million. Based on historical experience, the Association expects that a significant amount will be renewed with the Association at maturity. In the event a significant amount of such accounts are not renewed at maturity, the Association would not expect a resultant adverse impact on operations and liquidity because of the Association's borrowing capacity. See "-- Borrowings." In the unlikely event the Association is liquidated, depositors will be entitled to full payment of their deposit accounts prior to any payment being made to the Company, which is the sole shareholder of the Association. Substantially all of the Association's depositors are residents of the State of Oregon. The following table indicates the amount of certificate accounts with balances of $100,000 or greater by time remaining until maturity as of September 30, 1996.
Certificate Maturity Period Accounts --------------- ---------- (In thousands) Three months or less $ 6,278 Over three through six months 7,538 Over six through twelve months 19,318 Over twelve months 20,058 ------ Total $53,192 ======
21 The following table sets forth the deposit balances in the various types of savings accounts offered by the Association at the dates indicated.
At September 30, ------------------------------------------------------------------------------- 1996 1995 1994 ----------------------------- ------------------------------ ------------- Percent Percent Percent of Increase of Increase of Amount Total (Decrease) Amount Total (Decrease) Amount Total ------ ----- -------- ------ ----- -------- ------ ----- (Dollars in thousands) Certificate accounts... $289,188 72.36% $12,093 $277,095 2.09% $21,109 $255,986 65.68% -------- ----- ------- -------- ---- ------- -------- ----- Transaction accounts: Non-interest checking.. 161 0.04 161 -- -- -- -- -- NOW accounts........... 24,282 6.08 2,245 22,037 5.73 (814) 22,851 5.86 Passbook accounts...... 33,711 8.43 (3,526) 37,237 9.69 (7,277) 44,514 11.42 Money market deposit accounts.............. 52,331 13.09 4,320 48,011 12.49 (18,389) 66,400 17.04 -------- ------ ------- -------- ------ ------ -------- ------ Total transaction accounts 110,485 27.64 3,200 107,285 27.91 (26,480) 133,765 34.32 -------- ------ ------- -------- ------ ------ -------- ------ Total deposits......... $399,673 100.00% $15,293 $384,380 100.00% ($5,371) $389,751 100.00% ======== ====== ======= ======== ====== ====== ======== ======
The following table sets forth the savings activities of the Association for the periods indicated.
Year Ended September 30, ---------------------------- 1996 1995 1994 ---- ---- ---- (In thousands) Beginning balance........... $384,380 $389,751 $349,952 -------- ------- ------- Net increase (decrease) before interest credited.......... (2,364) (21,109) 25,248 Interest credited........... 17,657 15,738 14,551 -------- ------- ------- Net increase (decrease) in deposits 15,293 (5,371) 39,799 -------- ------- ------- Ending balance.............. $399,673 $384,380 $389,751 ======= ======= =======
Borrowings. Savings deposits are the primary source of funds for the Association's lending and investment activities and for its general business purposes. The Association may rely upon advances from the FHLB of Seattle, reverse repurchase agreements and a bank line of credit to supplement its supply of lendable funds and to meet deposit withdrawal requirements. The FHLB of Seattle serves as the Association's primary borrowing source after deposits. The FHLB of Seattle functions as a central reserve bank providing credit for savings and loan associations and certain other member financial institutions. As a member, the Association is required to own capital stock in the FHLB of Seattle and is authorized to apply for advances on the security of certain of its mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the U.S. Government) provided certain creditworthiness standards have been met. Advances are made pursuant to several different credit programs. Each credit program has its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based on the financial condition of the member 22 institution and the adequacy of collateral pledged to secure the credit. As a member of the FHLB, the Association maintains a credit line that is a percentage of its regulatory assets, subject to collateral requirements. At September 30, 1996, the credit line was 30% of total assets of the Association. Advances are collateralized in aggregate, as provided for in the Advances, Security and Deposit Agreements with the FHLB, by certain mortgages or deeds of trust and securities of the U.S. Government and agencies thereof. During the year ended September 30, 1996 the Company sold under agreements to repurchase specific securities of the U.S. Government and its agencies and other approved investments to a broker-dealer. The securities underlying these repurchase agreements were delivered to the broker-dealer who arranged the transaction. Securities delivered to the broker-dealer may be loaned out in the ordinary course of operations. All of the reverse repurchase agreements at September 30, 1996 were due within 30 days and were subsequently renewed with additional principal outstanding of approximately $53,000 and at an interest rate of 5.65%. The following table sets forth certain information regarding short-term borrowings by the Company and Association at the end of and during the periods indicated:
At September 30, ------------------ 1996 1995 ---- ---- Weighted average rate paid on: FHLB advances................. 5.50% 5.94% Reverse repurchase agreements. 5.65 -- Year Ended September 30, ------------------ 1996 1995 ---- ---- (Dollars in thousands) Maximum amount outstanding at any month end: FHLB advances.................. $90,000 $22,000 Reverse repurchase agreements.. 14,904 -- Approximate average balance: FHLB advances.................. 47,986 15,305 Reverse repurchase agreements.. 3,531 -- Approximate weighted average rate paid on: FHLB advances................. 5.60% 6.21% Reverse repurchase agreements. 5.55 --
The Association also has an uncommitted line of credit of $15.0 million with a commercial bank. At September 30, 1996, the Association had no borrowings outstanding under this credit facility. REGULATION OF THE ASSOCIATION The Association is subject to extensive regulation, examination and supervision by the OTS as its chartering agency, and the FDIC, as the insurer of its deposits. The activities of federal savings institutions are governed by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain respects, the Federal Deposit Insurance Act ("FDIA") and the regulations issued by the OTS and the FDIC to implement these statutes. These laws and regulations delineate the nature and extent of the activities in which federal savings associations may engage. Lending activities and other investments must comply with various 23 statutory and regulatory capital requirements. In addition, the Association's relationship with its depositors and borrowers is also regulated to a great extent, especially in such matters as the ownership of deposit accounts and the form and content of the Association's mortgage documents. The Association must file reports with the OTS and the FDIC concerning its activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other financial institutions. There are periodic examinations by the OTS and the FDIC to review the Association's compliance with various regulatory requirements. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such policies, whether by the OTS, the FDIC or Congress, could have a material adverse impact on the Holding Company, the Association and their operations. The Holding Company, as a savings and loan holding company, will also be required to file certain reports with, and otherwise comply with the rules and regulations of, the OTS. Federal Regulation of Savings Associations Office of Thrift Supervision. The OTS is an office in the Department of the Treasury subject to the general oversight of the Secretary of the Treasury. The OTS generally possesses the supervisory and regulatory duties and responsibilities formerly vested in the Federal Home Loan Bank Board. Among other functions, the OTS issues and enforces regulations affecting federally insured savings associations and regularly examines these institutions. Federal Home Loan Bank System. The FHLB System, consisting of 12 FHLBs, is under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The designated duties of the FHFB are to supervise the FHLBs, to ensure that the FHLBs carry out their housing finance mission, to ensure that the FHLBs remain adequately capitalized and able to raise funds in the capital markets, and to ensure that the FHLBs operate in a safe and sound manner. The Association, as a member of the FHLB of Seattle, is required to acquire and hold shares of capital stock in the FHLB of Seattle in an amount equal to the greater of (i) 1.0% of the aggregate outstanding principal amount of residential mortgage loans, home purchase contracts and similar obligations at the beginning of each year, or (ii) 1/20 of its advances (borrowings) from the FHLB of Seattle. The Association is in compliance with this requirement with an investment in FHLB of Seattle stock of $4.8 million at September 30, 1996. Among other benefits, the FHLB provides a central credit facility primarily for member institutions. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes advances to members in accordance with policies and procedures established by the FHFB and the Board of Directors of the FHLB of Seattle. Federal Deposit Insurance Corporation. The FDIC is an independent federal agency established originally to insure the deposits, up to prescribed statutory limits, of federally insured banks and to preserve the safety and soundness of the banking industry. In 1989 the FDIC also became the insurer, up to the prescribed limits, of the deposit accounts held at federally insured savings associations and established two separate insurance funds: the Bank Insurance Fund ("BIF") and the SAIF. As insurer of deposits, the FDIC has examination, supervisory and enforcement authority over all savings associations. The Association's accounts are insured by the SAIF. The FDIC insures deposits at the Association to the maximum extent permitted by law. The Association currently pays deposit insurance premiums to the FDIC based on a risk-based assessment system established by the FDIC for all SAIF-member institutions. Under applicable regulations, institutions are assigned to one of three capital groups that are based solely on the level of an institution's capital -- "well capitalized", "adequately capitalized", and "undercapitalized" - -- which are defined in the same manner as the regulations establishing the 24 prompt corrective action system, as discussed below. These three groups are then divided into three subgroups which reflect varying levels of supervisory concern, from those which are considered to be healthy to those which are considered to be of substantial supervisory concern. The matrix so created results in nine assessment risk classifications, with rates currently ranging from .23% for well capitalized, financially sound institutions with only a few minor weaknesses to .31% for undercapitalized institutions that pose a substantial risk of loss to the SAIF unless effective corrective action is taken. The FDIC is authorized to raise assessment rates in certain circumstances. The Association's assessments expensed for the year ended September 30, 1996, totalled $907,825. Until the second half of 1995, the same matrix applied to BIF-member institutions. As a result of the BIF having reached its designated reserve ratio, effective January 1, 1996, the FDIC substantially reduced deposit insurance premiums for well-capitalized, well-managed financial institutions that are members of the BIF. Under the new assessment schedule, rates were reduced to a range of 0 to 27 basis points, with approximately 92% of BIF members paying the statutory minimum annual assessment rate of $2,000. Pursuant to the Deposit Insurance Fund ("DIF"), which was enacted on September 30, 1996, the FDIC imposed a special one-time assessment on each depository institution with SAIF-assessable deposits so that the SAIF may achieve its designated reserve ratio. The Association's assessment amounted to $2.5 million and was assessed during the quarter ended September 30, 1996. Beginning January 1, 1997, the assessment schedule for SAIF members will be the same as that for BIF members. In addition, beginning January 1, 1997, SAIF members will be charged an assessment of 0.064% of SAIF-assessable deposits for the purpose of paying interest on the obligations issued by the Financing Corporation ("FICO") in the 1980s to help fund the thrift industry cleanup. BIF-assessable deposits will be charged an assessment to help pay interest on the FICO bonds at a rate of approximately 0.013% until the earlier of December 31, 1999 or the date upon which the last savings association ceases to exist, after which time the assessment will be the same for all insured deposits. The DIF Act provides for the merger of the BIF and the SAIF into the Deposit Insurance Fund on January 1, 1999, but only if no insured depository institution is a savings association on that date. The DIF contemplates the development of a common charter for all federally chartered depository institutions and the abolition of separate charters for national banks and federal savings associations. It is not known what form the common charter may take and what effect, if any, the adoption of a new charter would have on the operation of the Association. The FDIC may terminate the deposit insurance of any insured depository institution if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC. Management is aware of no existing circumstances that could result in termination of the deposit insurance of the Association. Liquidity Requirements. Under OTS regulations, each savings institution is required to maintain an average daily balance of liquid assets (cash, certain time deposits and savings accounts, bankers' acceptances, and specified U.S. Government, state or federal agency obligations and certain other investments) equal to a monthly average of not less than a specified percentage (currently 5.0%) of its net withdrawable accounts plus short-term borrowings. OTS regulations also require each savings institution to maintain an average daily balance of short-term liquid assets at a specified percentage (currently 1.0%) of the total of its net withdrawable savings accounts and borrowings payable in one year or less. Monetary penalties may be imposed for failure to meet liquidity requirements. The Association's short- and long-term monthly liquidity ratios were 2.70% and 10.47%, respectively, at September 30, 1996. 25 Prompt Corrective Action. Under the FDIA, each federal banking agency is required to implement a system of prompt corrective action for institutions that it regulates. The federal banking agencies have promulgated substantially similar regulations to implement this system of prompt corrective action. Under the regulations, an institution shall be deemed to be (i) "well capitalized" if it has a total risk-based capital ratio of 10.0% or more, has a Tier I risk-based capital ratio of 6.0% or more, has a leverage ratio of 5.0% or more and is not subject to specified requirements to meet and maintain a specific capital level for any capital measure; (ii) "adequately capitalized" if it has a total risk-based capital ratio of 8.0% or more, a Tier I risk-based capital ratio of 4.0% or more and a leverage ratio of 4.0% or more (3.0% under certain circumstances) and does not meet the definition of "well capitalized;" (iii) "undercapitalized" if it has a total risk-based capital ratio that is less than 8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a leverage ratio that is less than 4.0% (3.0% under certain circumstances); (iv) "significantly undercapitalized" if it has a total risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a leverage ratio that is less than 3.0%; and (v) "critically undercapitalized" if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%. A federal banking agency may, after notice and an opportunity for a hearing, reclassify a well capitalized institution as adequately capitalized and may require an adequately capitalized institution or an undercapitalized institution to comply with supervisory actions as if it were in the next lower category if the institution is in an unsafe or unsound condition or has received in its most recent examination, and has not corrected, a less than satisfactory rating for asset quality, management, earnings or liquidity. (The OTS may not, however, reclassify a significantly undercapitalized institution as critically undercapitalized.) An institution generally must file a written capital restoration plan that meets specified requirements, as well as a performance guaranty by each company that controls the institution, with the appropriate federal banking agency within 45 days of the date that the institution receives notice or is deemed to have notice that it is undercapitalized, significantly undercapitalized or critically undercapitalized. Immediately upon becoming undercapitalized, an institution shall become subject to various mandatory and discretionary restrictions on its operations. At September 30, 1996, the Association was categorized as "well capitalized" under the prompt corrective action regulations of the OTS. Standards for Safety and Soundness. The FDIA requires the federal banking regulatory agencies to prescribe, by regulation, standards for all insured depository institutions relating to: (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v) asset growth; and (vi) compensation, fees and benefits. The federal banking agencies adopted regulations and Interagency Guidelines Prescribing Standards for Safety and Soundness ("Guidelines") to implement safety and soundness standards required by the FDIA. The Guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The agencies also proposed asset quality and earnings standards which, if adopted, would be added to the Guidelines. If the OTS determines that the Association fails to meet any standard prescribed by the Guidelines, the agency may require the Association to submit to the agency an acceptable plan to achieve compliance with the standard, as required by the FDIA. OTS regulations establish deadlines for the submission and review of such safety and soundness compliance plans. Qualified Thrift Lender Test. All savings associations are required to meet a qualified thrift lender ("QTL") test to avoid certain restrictions on their operations. A savings institution that fails to become or remain a QTL shall either become a national bank or be subject to the following restrictions on its operations: (i) the association may not make any new investment or engage in activities that would not be permissible for national banks; (ii) the association may not establish any new branch office where a national bank located in the savings institution's home state would not be able to establish a branch office; (iii) the association shall be ineligible to obtain new advances from any FHLB; and (iv) the payment of dividends by the association shall be subject to the 26 rules regarding the statutory and regulatory dividend restrictions applicable to national banks. Also, beginning three years after the date on which the savings institution ceases to be a QTL, the savings institution would be prohibited from retaining any investment or engaging in any activity not permissible for a national bank and would be required to repay any outstanding advances to any FHLB. In addition, within one year of the date on which a savings association controlled by a company ceases to be a QTL, the company must register as a bank holding company and become subject to the rules applicable to such companies. A savings institution may requalify as a QTL if it thereafter complies with the QTL test. Currently, the QTL test requires that 65% of an institution's "portfolio assets" (as defined) consist of certain housing and consumer-related assets on a monthly average basis in nine out of every 12 months. Assets that qualify without limit for inclusion as part of the 65% requirement are loans made to purchase, refinance, construct, improve or repair domestic residential housing and manufactured housing; home equity loans; mortgage backed securities (where the mortgages are secured by domestic residential housing or manufactured housing); FHLB stock; and direct or indirect obligations of the FDIC. In addition, the following assets, among others, may be included in meeting the test subject to an overall limit of 20% of the savings institution's portfolio assets: 50% of residential mortgage loans originated and sold within 90 days of origination; 100% of consumer and educational loans (limited to 10% of total portfolio assets); and stock issued by the FHLMC or Fannie Mae. Portfolio assets consist of total assets minus the sum of (i) goodwill and other intangible assets, (ii) property used by the savings institution to conduct its business, and (iii) liquid assets up to 20% of the institution's total assets. At September 30, 1996, the qualified thrift investments of the Association were approximately 92.20% of its portfolio assets. Capital Requirements. Under OTS regulations a savings association must satisfy three minimum capital requirements: core capital, tangible capital and risk-based capital. Savings associations must meet all of the standards in order to comply with the capital requirements. OTS capital regulations establish a 3% core capital or leverage ratio (defined as the ratio of core capital to adjusted total assets). Core capital is defined to include common shareholders' equity, noncumulative perpetual preferred stock and any related surplus, and minority interests in equity accounts of consolidated subsidiaries, less (i) any intangible assets, except for certain qualifying intangible assets; (ii) certain mortgage servicing rights; and (iii) equity and debt investments in subsidiaries that are not "includable subsidiaries", which is defined as subsidiaries engaged solely in activities not impermissible for a national bank, engaged in activities impermissible for a national bank but only as an agent for its customers, or engaged solely in mortgage-banking activities. In calculating adjusted total assets, adjustments are made to total assets to give effect to the exclusion of certain assets from capital and to account appropriately for the investments in and assets of both includable and nonincludable subsidiaries. Institutions that fail to meet the core capital requirement would be required to file with the OTS a capital plan that details the steps they will take to reach compliance. In addition, the OTS's prompt corrective action regulation provides that a savings institution that has a leverage ratio of less than 4% (3% for institutions receiving the highest CAMEL examination rating) will be deemed to be "undercapitalized" and may be subject to certain restrictions. See "-- Federal Regulation of Savings Associations -- Prompt Corrective Action." As required by federal law, the OTS has proposed a rule revising its minimum core capital requirement to be no less stringent than that imposed on national banks. The OTS has proposed that only those savings associations rated a composite one (the highest rating) under the CAMEL rating system for savings associations will be permitted to operate at or near the regulatory minimum leverage ratio of 3%. All other savings associations will be required to maintain a minimum leverage ratio of 4% to 5%. The OTS will assess each individual savings association through the supervisory process on a case-by-case basis to determine the applicable requirement. No assurance can be given as to the final form of any such regulation, the date of its effectiveness or the requirement applicable to the Association. 27 Savings associations also must maintain "tangible capital" not less than 1.5% of the Association's adjusted total assets. "Tangible capital" is defined, generally, as core capital minus any "intangible assets" other than purchased mortgage servicing rights. Each savings institution must maintain total risk-based capital equal to at least 8% of risk-weighted assets. Total risk-based capital consists of the sum of core and supplementary capital, provided that supplementary capital cannot exceed core capital, as previously defined. Supplementary capital includes (i) permanent capital instruments such as cumulative perpetual preferred stock, perpetual subordinated debt and mandatory convertible subordinated debt, (ii) maturing capital instruments such as subordinated debt, intermediate-term preferred stock and mandatory convertible subordinated debt, subject to an amortization schedule, and (iii) general valuation loan and lease loss allowances up to 1.25% of risk-weighted assets. The risk-based capital regulation assigns each balance sheet asset held by a savings institution to one of four risk categories based on the amount of credit risk associated with that particular class of assets. Assets not included for purposes of calculating capital are not included in calculating risk-weighted assets. The categories range from 0% for cash and securities that are backed by the full faith and credit of the U.S. Government to 100% for repossessed assets or assets more than 90 days past due. Qualifying residential mortgage loans (including multi-family mortgage loans) are assigned a 50% risk weight. Consumer, commercial, home equity, land and residential construction loans are assigned a 100% risk weight, as are nonqualifying residential and multi-family mortgage loans and nonresidential construction loans. The book value of assets in each category is multiplied by the weighing factor (from 0% to 100%) assigned to that category. These products are then totalled to arrive at total risk-weighted assets. Off-balance sheet items are included in risk-weighted assets by converting them to an approximate balance sheet "credit equivalent amount" based on a conversion schedule. These credit equivalent amounts are then assigned to risk categories in the same manner as balance sheet assets and included in risk-weighted assets. The OTS has incorporated an interest rate risk component into its regulatory capital rule. Under the rule, savings associations with "above normal" interest rate risk exposure would be subject to a deduction from total capital for purposes of calculating their risk-based capital requirements. A savings association's interest rate risk is measured by the decline in the net portfolio value of its assets (i.e., the difference between incoming and outgoing discounted cash flows from assets, liabilities and off-balance sheet contracts) that would result from a hypothetical 200 basis point increase or decrease in market interest rates divided by the estimated economic value of the association's assets, as calculated in accordance with guidelines set forth by the OTS. A savings association whose measured interest rate risk exposure exceeds 2% must deduct an interest rate risk component in calculating its total capital under the risk-based capital rule. The interest rate risk component is an amount equal to one-half of the difference between the institution's measured interest rate risk and 2%, multiplied by the estimated economic value of the association's assets. That dollar amount is deducted from an association's total capital in calculating compliance with its risk-based capital requirement. Under the rule, there is a two quarter lag between the reporting date of an institution's financial data and the effective date for the new capital requirement based on that data. A savings association with assets of less than $300 million and risk-based capital ratios in excess of 12% is not subject to the interest rate risk component, unless the OTS determines otherwise. The rule also provides that the Director of the OTS may waive or defer an association's interest rate risk component on a case-by-case basis. Under certain circumstances, a savings association may request an adjustment to its interest rate risk component if it believes that the OTS-calculated interest rate risk component overstates its interest rate risk exposure. In addition, certain "well-capitalized" institutions may obtain authorization to use their own interest rate risk model to calculate their interest rate risk component in lieu of the OTS-calculated amount. The OTS has postponed the date that the component will first be deducted from an institution's total capital until savings associations become familiar with the process for requesting an adjustment to its interest rate risk component. 28 The following table presents the Association's capital levels at September 30, 1996.
To Be Categorized as "Well Capitalized" Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provision ------------------- ------------------ ------------------- Amount Ratio Amount Ratio Amount Ratio ------------ ----- ----------- ----- ----------- ----- Total Capital $121,036,745 42.4% $22,832,496 8.0% $28,540,620 10.0% (To Risk Weighted Assets) Tier I Capital 120,108,925 42.1 -- -- 17,124,372 6.0 (To Risk Weighted Assets) Tier I Capital 120,108,925 19.2 18,746,701 3.0 31,244,502 5.0 (To Total Assets) Tangible Capital 120,108,925 19.2 9,373,351 1.5 -- -- (To Tangible Capital)
Limitations on Capital Distributions. OTS regulations impose uniform limitations on the ability of all savings associations to engage in various distributions of capital such as dividends, stock repurchases and cash-out mergers. In addition, OTS regulations require the Association to give the OTS 30 days' advance notice of any proposed capital distributions, and the OTS has the authority under its supervisory powers to prohibit the capital distributions. The regulation utilizes a three-tiered approach which permits various levels of distributions based primarily upon a savings association's capital level. A Tier 1 savings association has capital in excess of its fully phased-in capital requirement (both before and after the proposed capital distribution). Tier 1 savings associations may make (without application but upon prior notice to, and no objection made by, the OTS) capital distributions during a calendar year up to 100% of its net income to date during the calendar year plus one-half its surplus capital ratio (i.e., the amount of capital in excess of its fully phased-in requirement) at the beginning of the calendar year or the amount authorized for a Tier 2 association. Capital distributions in excess of such amount require advance notice to the OTS. A Tier 2 savings association has capital equal to or in excess of its minimum capital requirement but below its fully phased-in capital requirement (both before and after the proposed capital distribution). Such an association may make (without application) capital distributions up to an amount equal to 75% of its net income during the previous four quarters depending on how close the association is to meeting its fully phased-in capital requirement. Capital distributions exceeding this amount require prior OTS approval. Tier 3 associations are savings associations with capital below the minimum capital requirement (either before or after the proposed capital distribution). Tier 3 associations may not make any capital distributions without prior approval from the OTS. The Association is currently meeting the criteria to be designated a Tier 1 association and, consequently, could at its option (after prior notice to, and no objection made by, the OTS) distribute up to 100% of its net income during the calendar year plus 50% of its surplus capital ratio at the beginning of the calendar year less any distributions previously paid during the year. Loans to One Borrower. Under the HOLA, savings institutions are generally subject to the national bank limit on loans to one borrower. Generally, this limit is 15% of the Association's unimpaired capital and surplus, plus an additional 10% of unimpaired capital and surplus, if such loan is secured by readily-marketable collateral, which is defined to include certain financial instruments and bullion. The OTS by regulation has amended the loans to one borrower rule to permit savings associations meeting certain requirements, including capital requirements, to extend loans to one borrower in additional amounts under circumstances limited essentially to loans to develop or complete residential housing units. At September 30, 1996, the Association's limit on loans to one borrower was $18.0 million. At September 30, 1996, the Association's largest aggregate amount of loans to one borrower was $1.4 million. 29 Activities of Associations and Their Subsidiaries. When a savings association establishes or acquires a subsidiary or elects to conduct any new activity through a subsidiary that the association controls, the savings association must notify the FDIC and the OTS 30 days in advance and provide the information each agency may, by regulation, require. Savings associations also must conduct the activities of subsidiaries in accordance with existing regulations and orders. The OTS may determine that the continuation by a savings association of its ownership control of, or its relationship to, the subsidiary constitutes a serious risk to the safety, soundness or stability of the association or is inconsistent with sound banking practices or with the purposes of the FDIA. Based upon that determination, the FDIC or the OTS has the authority to order the savings association to divest itself of control of the subsidiary. The FDIC also may determine by regulation or order that any specific activity poses a serious threat to the SAIF. If so, it may require that no SAIF member engage in that activity directly. Transactions with Affiliates. Savings associations must comply with Sections 23A and 23B of the Federal Reserve Act ("Sections 23A and 23B") relative to transactions with affiliates in the same manner and to the same extent as if the savings association were a Federal Reserve member bank. A savings and loan holding company, its subsidiaries and any other company under common control are considered affiliates of the subsidiary savings association under the HOLA. Generally, Sections 23A and 23B: (i) limit the extent to which the insured association or its subsidiaries may engage in certain covered transactions with an affiliate to an amount equal to 10% of such institution's capital and surplus and place an aggregate limit on all such transactions with affiliates to an amount equal to 20% of such capital and surplus, and (ii) require that all such transactions be on terms substantially the same, or at least as favorable to the institution or subsidiary, as those provided to a non-affiliate. The term "covered transaction" includes the making of loans, the purchase of assets, the issuance of a guarantee and similar types of transactions. Three additional rules apply to savings associations: (i) a savings association may not make any loan or other extension of credit to an affiliate unless that affiliate is engaged only in activities permissible for bank holding companies; (ii) a savings association may not purchase or invest in securities issued by an affiliate (other than securities of a subsidiary); and (iii) the OTS may, for reasons of safety and soundness, impose more stringent restrictions on savings associations but may not exempt transactions from or otherwise abridge Section 23A or 23B. Exemptions from Section 23A or 23B may be granted only by the Federal Reserve Board, as is currently the case with respect to all FDIC-insured banks. The Association has not been significantly affected by the rules regarding transactions with affiliates. The Association's authority to extend credit to executive officers, directors and 10% shareholders, as well as entities controlled by such persons, is currently governed by Sections 22(g) and 22(h) of the Federal Reserve Act, and Regulation O thereunder. Among other things, these regulations require that such loans be made on terms and conditions substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment. Regulation O also places individual and aggregate limits on the amount of loans the Association may make to such persons based, in part, on the Association's capital position, and requires certain board approval procedures to be followed. The OTS regulations, with certain minor variances, apply Regulation O to savings institutions. REGULATION OF THE COMPANY General The Company is a savings and loan holding company within the meaning of the HOLA. As such, it is registered with the OTS and is subject to OTS regulations, examinations, supervision and reporting requirements. The Company is also subject to the information, proxy solicitation, insider trading restrictions, and other requirements of the Securities Exchange Act of 1934, as amended. 30 Company Acquisitions The HOLA and OTS regulations issued thereunder generally prohibit a savings and loan holding company, without prior OTS approval, from acquiring more than 5% of the voting stock of any other savings association or savings and loan holding company or controlling the assets thereof. They also prohibit, among other things, any director or officer of a savings and loan holding company, or any individual who owns or controls more than 25% of the voting shares of such holding company, from acquiring control of any savings association not a subsidiary of such savings and loan holding company, unless the acquisition is approved by the OTS. Holding Company Activities As a unitary savings and loan holding company, the Company generally is not subject to activity restrictions. If the Company acquires control of another savings association as a separate subsidiary, it would become a multiple savings and loan holding company. There generally are more restrictions on the activities of a multiple savings and loan holding company than a unitary savings and loan holding company. Specifically, if either federally insured subsidiary savings association fails to meet the QTL test, the activities of the Company and any of its subsidiaries (other than the Company or other federally insured subsidiary savings associations) would thereafter be subject to further restrictions. The HOLA provides that, among other things, no multiple savings and loan holding company or subsidiary thereof which is not an insured association shall commence or continue for more than two years after becoming a multiple savings and loan association holding company or subsidiary thereof, any business activity other than: (i) furnishing or performing management services for a subsidiary insured institution, (ii) conducting an insurance agency or escrow business, (iii) holding, managing, or liquidating assets owned by or acquired from a subsidiary insured institution, (iv) holding or managing properties used or occupied by a subsidiary insured institution, (v) acting as trustee under deeds of trust, (vi) those activities previously directly authorized by regulation as of March 5, 1987 to be engaged in by multiple holding companies or (vii) those activities authorized by the Federal Reserve Board as permissible for bank holding companies, unless the OTS by regulation, prohibits or limits such activities for savings and loan holding companies. Those activities described in (vii) above also must be approved by the OTS prior to being engaged in by a multiple holding company. Affiliate Restrictions The affiliate restrictions contained in Sections 23A and 23B of the Federal Reserve Act apply to all federally insured savings associations and any such "affiliate." A savings and loan holding company, its subsidiaries and any other company under common control are considered affiliates of the subsidiary savings association under the HOLA. Generally, Sections 23A and 23B: (i) limit the extent to which the insured association or its subsidiaries may engage in certain covered transactions with an affiliate to an amount equal to 10% of such institution's capital and surplus, and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital and surplus, and (ii) require that all such transactions be on terms substantially the same, or at least as favorable to the institution or subsidiary, as those provided to a non-affiliate. The term "covered transaction" includes the making of loans, purchase of assets, issuance of a guarantee and other similar types of transactions. Also, a savings association may not make any loan to an affiliate unless the affiliate is engaged only in activities permissible for bank holding companies. Only the Federal Reserve may grant exemptions from the restrictions of Sections 23A and 23B. The OTS, however, may impose more stringent restrictions on savings associations for reasons of safety and soundness. Qualified Thrift Lender Test The HOLA requires any savings and loan holding company that controls a savings association that fails the QTL test, as explained under "-- Qualified 31 Thrift Lender Test", must, within one year after the date on which the association ceases to be a QTL, register as and be deemed a bank holding company subject to all applicable laws and regulations. TAXATION Federal Taxation General. The Company and the Association report their income on a fiscal year basis using the accrual method of accounting and are subject to federal income taxation in the same manner as other corporations, with some exceptions. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Company and the Association. Tax Bad Debt Reserves. For taxable years beginning prior to January 1, 1996, savings institutions such as the Association which met certain definitional tests primarily relating to their assets and the nature of their business ("qualifying thrifts") were permitted to establish a reserve for bad debts and to make annual additions thereto, which additions may, within specified formula limits, have been deducted in arriving at their taxable income. The Association's deduction with respect to "qualifying loans", which are generally loans secured by certain interests in real property, may have been computed using an amount based on the Association's actual loss experience, or a percentage equal to 8% of the Association's taxable income, computed with certain modifications and reduced by the amount of any permitted additions to the nonqualifying reserve. Each year the Association selected the most favorable way to calculate the deduction attributable to an addition to the tax bad debt reserve. Recently enacted legislation repealed the reserve method of accounting for bad debt reserves for tax years beginning after December 31, 1995. As a result, savings associations will no longer be able to calculate their deduction for bad debts using the percentage-of-taxable-income method. Instead, savings associations will be required to compute their deduction based on specific charge-offs during the taxable year or, if the savings association or its controlled group had assets of less than $500 million, based on actual loss experience over a period of years. This legislation also requires savings associations to recapture into income over a six-year period their post-1987 additions to their bad debt tax reserves, thereby generating additional tax liability. At September 30, 1996, the Association's post-1987 reserves totalled approximately $3.8 million. The recapture may be suspended for up to two years if, during those years, the institution satisfies a residential loan requirement. The Association anticipates meeting the residential loan requirement for the taxable year ending September 30, 1997. Under prior law, if the Association failed to satisfy the qualifying thrift definitional tests in any taxable year, it would be unable to make additions to its bad debt reserve. Instead, the Association would be required to deduct bad debts as they occur and would additionally be required to recapture its bad debt reserve deductions ratably over a multi-year period. At September 30, 1996, the Association's total bad debt reserve for tax purposes was approximately $14.3 million. Among other things, the qualifying thrift definitional tests required the Association to hold at least 60% of its assets as "qualifying assets." Qualifying assets generally include cash, obligations of the United States or any agency or instrumentality thereof, certain obligations of a state or political subdivision thereof, loans secured by interests in improved residential real property or by savings accounts, student loans and property used by the Association in the conduct of its banking business. Under current law, a savings association will not be required to recapture its pre-1988 bad debt reserves if it ceases to meet the qualifying thrift definitional tests. Distributions. To the extent that the Association makes "nondividend distributions" to the Company that are considered as made: (i) from the reserve for losses on qualifying real property loans, to the extent the reserve for such losses exceeds the amount that would have been allowed under the experience method; or (ii) from the supplemental reserve for losses on loans ("Excess 32 Distributions"), then an amount based on the amount distributed will be included in the Association's taxable income. Nondividend distributions include distributions in excess of the Association's current and accumulated earnings and profits, distributions in redemption of stock, and distributions in partial or complete liquidation. However, dividends paid out of the Association's current or accumulated earnings and profits, as calculated for federal income tax purposes, will not be considered to result in a distribution from the Association's bad debt reserve. Thus, any dividends to the Company that would reduce amounts appropriated to the Association's bad debt reserve and deducted for federal income tax purposes would create a tax liability for the Association. The amount of additional taxable income attributable to an Excess Distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, if the Association makes a "nondividend distribution", then approximately one and one-half times the amount so used would be includable in gross income for federal income tax purposes, assuming a 35% corporate income tax rate (exclusive of state and local taxes). See "REGULATION OF THE ASSOCIATION" for limits on the payment of dividends by the Association. The Association does not intend to pay dividends that would result in a recapture of any portion of its tax bad debt reserve. Corporate Alternative Minimum Tax. The Internal Revenue Code of 1986, as amended, imposes a tax on alternative minimum taxable income ("AMTI") at a rate of 20%. The excess of the tax bad debt reserve deduction using the percentage of taxable income method over the deduction that would have been allowable under the experience method is treated as a preference item for purposes of computing the AMTI. In addition, only 90% of AMTI can be offset by net operating loss carryovers. AMTI is increased by an amount equal to 75% of the amount by which the Association's adjusted current earnings exceeds its AMTI (determined without regard to this preference and prior to reduction for net operating losses). For taxable years beginning after December 31, 1986, and before January 1, 1996, an environmental tax of .12% of the excess of AMTI (with certain modification) over $2.0 million is imposed on corporations, including the Association, whether or not an Alternative Minimum Tax ("AMT") is paid. Other Federal Tax Matters. There have not been any Internal Revenue Service audits of the Association's or the Company's federal income tax returns during the past five years. Oregon Taxation The Company and the Association are subject to an Oregon corporate excise tax at a statutory rate of 6.6% (3.3% for the fiscal year ended September 30, 1996) of income. Neither the Company's nor the Association's state income tax returns have been audited during the past five years. Competition The Association originates most of its loans to and accepts most of its deposits from residents of Klamath, Jackson and Deschutes counties. The Association is the oldest financial institution headquartered in Klamath Falls. The Association believes that it is a major competitor in the markets in which it operates. Nonetheless, the Association faces competition in attracting deposits and making real estate loans from various financial institutions, including banks, savings associations and mortgage brokers. In addition, the Association has faced additional significant competition for investors' funds from short-term money market securities and other corporate and government securities. The financial institution industry in the Association's market area is characterized by a mix of local independent financial institutions and offices of larger out-of-state financial institutions, including several multi-national bank holding companies. The ability of the Association to attract and retain savings deposits depends on its ability to generally provide a rate of return and liquidity risk comparable to that offered by competing investment opportunities. The Association competes for loans principally through the interest rates and loan fees it charges and the efficiency and quality of services it provides borrowers. Competition may increase as restrictions on the interstate operations of financial institutions continue to be reduced. 33 Personnel As of September 30, 1996, the Association had 100 full-time and two part-time employees. The employees are not represented by a collective bargaining unit. The Association believes its relationship with its employees is good. Executive Officers. The following table sets forth certain information regarding the executive officers of the Company. Name Age(1) Position Gerald V. Brown 60 President and Chief Executive Officer Robert A. Tucker 48 Senior Vice President and Treasurer George L. Hall 45 Senior Vice President and Secretary Marshall J. Alexander 46 Vice President and Chief Financial Officer - -------------- (1) At September 30, 1996. Gerald V. Brown was appointed a director and the President of the Association in June 1994 to succeed the retiring President, James Bocchi. From 1982 until his appointment as President, Mr. Brown served as Senior Vice President and Secretary, supervising all loan activities of the Association. Robert A. Tucker has been employed by the Association since 1973. He has served as Senior Vice President and Treasurer since November 1989. George L. Hall has been employed by the Association since 1988. He has served as Senior Vice President and Secretary since June 1994. Marshall J. Alexander has been employed by the Association since 1986. He has served as Vice President and Chief Financial Officer since August 1994. 34 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, 1996.
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 Loan Center - ----------- 585 SW 6th, Suite #2 1996 Leased 900 Redmond, Oregon
The net book value of the Association's investment in office, properties and equipment totalled $5.0 million at September 30, 1996. See Note 5 of the Notes to the Consolidated Financial Statements in the Annual Report. Item 3. Legal Proceedings Periodically, there have been various claims and lawsuits involving the Association, mainly as a defendant, such as claims to enforce liens, condemnation proceedings on properties in which the Association holds security interests, claims involving the making and servicing of real property loans and other issues incident to the Association's business. The Association is not a party to any pending legal proceedings that it believes would have a material adverse effect on the financial condition or operations of the Association. 35 Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended September 30, 1996. PART II Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters The information contained under the section captioned "Common Stock Information" on page 16 of the Annual Report is incorporated herein by reference. Item 6. Selected Financial Data The information contained under the section captioned "Selected Consolidated Financial Data" on page 4 of the Annual Report is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information contained in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" beginning on page 8 of the Annual Report is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data (a) Financial Statements Independent Auditors' Reports* Consolidated Balance Sheets as of September 30, 1996 and 1995* Consolidated Statements of Earnings for the Years Ended September 30, 1996, 1995 and 1994* Consolidated Statements of Shareholders' Equity for the Years Ended September 30, 1996, 1995 and 1994* Consolidated Statements of Cash Flows for the Years Ended September 30, 1996, 1995 and 1994* Notes to the Consolidated Financial Statements* * Included in the Annual Report attached as Exhibit 13 hereto and incorporated herein by reference. All schedules have been omitted as the required information is either inapplicable or included in the Consolidated Financial Statements or related Notes contained in the Annual Report. (b) Supplementary Data The information contained in Note 19 to the Consolidated Financial Statements included in the Annual Report is incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Reference is made to the Company's Current Report on Form 8-K dated May 21, 1996, as amended on May 31, 1996, which are incorporated herein by reference. 36 PART III Item 10. Directors and Executive Officers of the Registrant The information contained under the section captioned "Proposal I - Election of Directors" contained in the Company's Proxy Statement, and "Part I - -- Business -- Personnel -- Executive Officers" of this report, is incorporated herein by reference. Reference is made to the cover page of this report for information regarding compliance with Section 16(a) of the Exchange Act. Item 11. Executive Compensation The information contained under the sections captioned "Executive Compensation", "Directors' Compensation" and "Benefits" under "Proposal I - Election of Directors" in the Proxy Statement is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management (a) Security Ownership of Certain Beneficial Owners Information required by this item is incorporated herein by reference to the section captioned "Security Ownership of Certain Beneficial Owners and Management" of the Proxy Statement (b) Security Ownership of Management The information required by this item is incorporated herein by reference to the sections captioned "Proposal I - Election of Directors" and "Security Ownership of Certain Beneficial owners and Management" of the Proxy Statement. (c) Changes in Control The Company is not aware of any arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the Company. The information required by this item is incorporated herein by reference to the sections captioned "Proposal I - Election of Directors" and "Security Ownership of Certain Beneficial Owners and Management" of the Proxy Statement. Item 13. Certain Relationships and Related Transactions The information set forth under the section captioned "Proposal I - Election of Directors - Certain Transactions with the Association" in the Proxy Statement is incorporated herein by reference. 37 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) Exhibits 3(a) Articles of Incorporation of the Registrant* 3(b) Bylaws of the Registrant* 10(a) Employment Agreement with Gerald V. Brown*** 10(b) Employment Agreement with Marshall J. Alexander*** 10(c) Employment Agreement with George L. Hall*** 10(d) Employment Agreement with Robert A. Tucker*** 10(e) 1996 Stock Option Plan** (13) Annual Report to Shareholders (22) Subsidiaries of the Registrant - ------------------- * Incorporated by reference to the Registrant's Registration Statement on Form S-1, filed on June 19, 1995. ** Incorporated by reference to the Registrant's Definitive Proxy Statement for the 1996 Annual Meeting of Shareholders. *** Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended September 30, 1995. (b) Reports on Form 8-K No Reports on Form 8-K were filed during the quarter ended September 30, 1996. 38 SIGNATURES Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KLAMATH FIRST BANCORP, INC. Date: December 24, 1996 By:/s/ Gerald V. Brown -------------------- Gerald V. Brown President and Chief Executive Officer Pursuant to the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURES TITLE DATE - ---------- ----- ---- /s/ Gerald V. Brown - ------------------------- President, Chief December 24, 1996 Gerald V. Brown Executive Officer and Director (Principal Executive Officer) /s/ Marshall J. Alexander - ------------------------- Vice President and December 24, 1996 Marshall J. Alexander Chief Financial Officer (Principal Financial and Accounting Officer) /s/ Rodney N. Murray - ------------------------- Chairman of the Board December 24, 1996 Rodney N. Murray of Directors /s/ Bernard Z. Agrons - ------------------------- Director December 24, 1996 Bernard Z. Agrons /s/ Timothy A. Bailey - ------------------------- Director December 24, 1996 Timothy A. Bailey /s/ James D. Bocchi - ------------------------- Director December 24, 1996 James D. Bocchi /s/ William C. Dalton - ------------------------- Director December 24, 1996 William C. Dalton /s/ J. Gillis Hannigan - ------------------------- Director December 24, 1996 J. Gillis Hannigan /s/ Adolph Zamasky - ------------------------- Director December 24, 1996 Adolph Zamsky EX-13 2 1996 ANNUAL REPORT TO SHAREHOLDERS EXHIBIT 13 1996 Annual Report to Shareholders TABLE OF CONTENTS ----------------- DIRECTORS AND OFFICERS............................... 3 SELECTED CONSOLIDATED FINANCIAL DATA................. 4-5 LETTER TO OUR SHAREHOLDERS........................... 6-7 EXECUTIVE OFFICERS................................... 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION..... 9-22 COMMON STOCK INFORMATION............................. 23 INDEPENDENT AUDITOR'S REPORT......................... 24-25 CONSOLIDATED BALANCE SHEETS.......................... 26-27 CONSOLIDATED STATEMENTS OF EARNINGS.................. 28-29 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY...... 30 CONSOLIDATED STATEMENTS OF CASH FLOWS................ 31-33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS........... 34-58 BRANCH OFFICERS AND CORPORATE INFORMATION............ 59-60 KLAMATH FIRST FEDERAL SAVINGS & LOAN ASSOCIATION AND KLAMATH FIRST BANCORP, INC. BOARD OF DIRECTORS James D. Bocchi, Retired; President of Klamath First Federal Savings and Loan Association from 1984 until June 1994 J. Gillis Hannigan, Retired; Executive Vice President of Modoc Lumber in Klamath Falls, Oregon, until January 1995 Adolph Zamsky, Retired; Certified Public Accountant in both Oregon and California, working out of Klamath Falls, Oregon from 1945 to 1977 Rodney N. Murray, Director and Chairman of the Board, owner and operator of Rodney Murray Ranch, former owner and manager and President of Klamath Falls Creamery, Inc., located in Klamath Falls, Oregon Gerald V. Brown, President and Chief Executive Officer of Klamath First Federal Savings and Loan Association since June 1994 Timothy A. Bailey, President of Klamath Medical Service Bureau, a health insurance company headquartered in Klamath Falls, Oregon William C. Dalton, Employed by Malin Potato, Merrill, Oregon, potato buyer for Klamath Potato Distributors from 1988 to 1992, and former owner of W.C. Dalton and Company, farming Bernard Z. Agrons, Retired; Weyerhaeuser Company Vice President for the Eastern Oregon Region until 1981; Former State Representative in the Oregon State Legislature from 1983 to 1991 KLAMATH FIRST FEDERAL SAVINGS & LOAN ASSOCIATION AND KLAMATH FIRST BANCORP, INC. OFFICERS Gerald V. Brown, President and Chief Executive Officer Robert A. Tucker, Senior Vice President - Treasurer George L. Hall, Senior Vice President - Secretary Marshall J. Alexander, Vice President and Chief Financial Officer Frank X. Hernandez, Human Resources Officer Robert L. Salley, Vice President Gerald A. Page, Vice President Carol Starkweather, Assistant Vice President Tina M. Douglas, Assistant CFO - Controller Diane Davis, Branch Manager/Ashland Phillip Waggoner, Branch Manager/Bend Gale Ramey, Branch Manager/Campus Tracie Chandler, Branch Manager/Madison Richard Knight, Branch Manager/Medford Ted Eslick, Loan Center Manager/Redmond Donna Ross, Branch Manager/Shasta 3 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.
FINANCIAL CONDITION DATA At September 30, ---------------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- (In thousands) Assets ..................................................... $671,969 $647,840 $448,939 $403,879 $366,864 Cash and cash equivalents .................................. 16,180 175,994 19,557 23,480 36,177 Loans receivable, net ...................................... 473,556 403,544 360,122 310,668 289,222 Investment securities held to maturity ..................... 9,827 42,209 44,564 57,997 30,878 Investment securities available for sale ................... 75,987 12,606 12,224 -- -- Mortgage backed & related securities held to maturity ...... 6,783 -- -- -- -- Mortgage backed & related securities available for sale .... 74,109 -- -- -- -- Stock in FHLB of Seattle, at cost .......................... 4,774 4,426 4,156 3,804 3,289 Advances from FHLB of Seattle .............................. 90,000 20,000 -- -- -- Savings deposits ........................................... 399,673 384,380 389,751 349,952 320,430 Shareholders' equity ....................................... 153,411 164,685 49,308 44,949 37,792 SELECTED OPERATING DATA Year Ended September 30, ------------------------------------------------------------------------------ 1996 1995 1994 1993 1992 -------- ---------- --------- ---------- -------- (In thousands) Total interest income ..................... $ 45,649 $ 35,107 $ 32,408 $ 31,091 $ 30,690 Total interest expense .................... 23,286 20,441 16,555 16,070 18,941 -------- ---------- --------- ---------- -------- Net interest income ....................... 22,363 14,666 15,853 15,021 11,749 Provision for loan losses ................. 120 120 150 120 120 -------- ---------- --------- ---------- -------- Net interest income after provision for loan losses ........................... 22,243 14,546 15,703 14,901 11,629 Non-interest income ....................... 522 381 352 1,112 343 BIF/SAIF Assessment ....................... 2,473 - - - - Non-interest expense ...................... 9,769 6,004 6,034 5,191 4,563 -------- ---------- --------- ---------- -------- Earnings before income taxes and cumulative effect of a change in accounting principle ...................... 10,523 8,923 10,021 10,822 7,409 Provision for income tax .................. 4,413 3,349 3,867 3,665 2,664 -------- ---------- --------- ---------- -------- Earnings before cumulative effect of a change in accounting principle ....... 6,110 5,574 6,154 7,157 4,745 Cumulative effect at October 1,1993 of a change in accounting for income taxes .............................. - - 866 - - -------- ---------- --------- ---------- -------- Net Earnings .............................. $ 6,110 $ 5,574 $ 5,288 $ 7,157 $ 4,745 ======== ========== ========= ========== ======== 4 At or For the Year Ended September 30, ---------------------------------------------------------- KEY OPERATING RATIOS 1996 1995 1994 1993 1992 ------ ------ ------ ------ ------ PERFORMANCE RATIOS Return on average assets (net income divided by average assets) ..................... 0.99% 1.19% 1.26% 1.88% 1.34% Return on average equity (net income divided by average equity) ..................... 3.69% 10.44% 10.93% 16.87% 13.11% Interest rate spread (difference between average yield on interest-earning assets and average cost of interest-bearing liabilities) .............................. 2.22% 2.73% 3.40% 3.58% 2.91% Net interest margin (net interest income as a percentage of average interest-earning assets) ........................ 3.65% 3.24% 3.84% 4.04% 3.42% Average interest-earning assets to average interest-bearing liabilities ................................................ 137.78% 111.29% 111.13% 110.61% 109.16% Net interest income after provision for loan losses to total non-interest expenses ...................................... 181.69% 242.27% 260.24% 287.05% 254.85% Non-interest expense to average total assets ............... 1.99% 1.29% 1.43% 1.36% 1.29% Dividend payout ratio (dividends declared per share divided by net income per share) ........................... 44.64% - - - - ASSET QUALITY RATIOS Allowance for loan losses to total loans at end of period .. 0.19% 0.19% 0.20% 0.20% 0.19% Non-performing assets to total assets ...................... 0.04% 0.12% 0.05% 0.07% 0.46% Non-performing loans to total loans, before net items ...... 0.04% 0.18% 0.05% 0.06% 0.45% CAPITAL RATIOS Equity to assets ........................................... 22.83% 25.42% 10.98% 11.13% 10.30% Tangible capital ratio ..................................... 19.22% 18.57% 10.98% 11.13% 10.30% Core capital ratio ......................................... 19.22% 18.57% 10.98% 11.13% 10.30% Risk-based capital ratio ................................... 42.41% 36.87% 22.61% 23.15% 20.82% OTHER DATA NUMBER OF Real estate loans outstanding .............................. 7,704 7,110 6,654 6,169 5,867 Deposit accounts ........................................... 38,651 38,260 35,205 33,147 31,945 Full service offices ....................................... 7 7 6 6 5
5 Dear Shareholder: October 4, 1996 marked our first anniversary as a stock company. During this past year we have been busy and, we believe, successful in implementing many of the strategies to enhance shareholder value that we outlined at our first Annual Shareholders' Meeting last April. Growth in our core savings and loan business resulted in loan and deposit growth and good earnings this past year. Fiscal 1996 net earnings were $6.1 million, which includes the effect of a $2.5 million one-time assessment recorded on September 30, 1996 to recapitalize the Savings Association Insurance Fund and also a loss-on-sale of $1.6 million on the Association's investment in a U.S. federal securities mutual bond fund. New loan originations were approximately $135.6 million, which resulted in a 17.3% increase in our total loan portfolio. This was accomplished through competitive loan pricing, aggressive marketing, excellent customer service and the opening in March 1996 of a new lending office in Redmond, Oregon. The Redmond office has shown good acceptance and we are excited about its prospects in that fast growing community. By the new year we hope to add to our loan product mix by introducing a new "Equity Credit Line." Our deposit base increased $15.3 million or 4.0% during the year. We introduced two new checking accounts this past year: a "Basic Checking" account for customers who write a limited number of checks each month and a "Small Business Checking" account to offer our small business customers an alternative to the traditional commercial checking account. In addition to taking measures aimed at increasing our core business of deposit taking and residential mortgage lending, we have sought other means to leverage our capital. We have aggressively used borrowed funds to purchase investment securities with the aim of earning the difference between the cost of the borrowings and the return earned on the investment securities. This is commonly known as "wholesale leveraging." At September 30, 1996, we had $104.9 million in borrowed funds, of which $56.9 million was primarily used for liquidity to fund loan growth and $48.0 million was used to purchase investment securities. This strategy has been successful as evidenced by a 1.23% return on assets on these activities. Subject to market conditions, we plan to continue and expand this activity. Another shareholder value enhancement strategy is our dividend policy. Since becoming a stock company we have paid a dividend each quarter, increasing from $0.05 per share in January to $0.065 in April to our currently announced level of $0.07 per share. Many of our shareholders are aware that several newly converted thrift institutions have authorized special "return of capital" distributions, which were entirely or substantially tax free. In each instance that we know of, the institution never filed a consolidated tax return, which, under complex federal income tax regulations, is a critical factor in determining whether a special distribution will be taxable or not. After extensive analysis and discussions with the Internal Revenue Service, we have concluded that, at this time, current federal income tax regulations effectively preclude a tax-free "return of capital" distribution to our shareholders. Nevertheless, the Board of Directors will continue to assess the viability of all other shareholder enhancement strategies that suggest a comparable long-term benefit to our shareholders. Stock repurchases are another element of our shareholder value enhancement strategy that we implemented last year. This past September we completed the repurchase of 5.07% of our outstanding common shares by repurchasing 620,655 shares at an average price of $14.33 per share. These repurchases increased earnings per share by $0.01 and return on equity by 17 basis points. 6 The final element of our shareholder value enhancement strategy that we discussed at last year's Annual Meeting was the expansion of our franchise through the acquisition of other institutions or their branches. We continue to explore such expansion opportunities. We appreciate your support. "We'd Be Honored" if you stopped by one of our branches to say hello or call us if you have any questions. Sincerely, /s/ Gerald V. Brown - -------------------- Gerald V. Brown, President and Chief Executive Officer /s/ Rodney N. Murray - --------------------- Rodney N. Murray, Chairman of the Board 7 CORPORATE EXECUTIVE OFFICERS George L. Hall has been with Klamath First Federal Savings and Loan Association since 1988. He is Senior Vice President-Lending/Secretary responsible for all lending activities of the Association. Mr. Hall brought over twelve years of expertise in mortgage lending to Klamath First Federal. He has also served the institution as a Loan Officer and Branch Manager. Robert A. Tucker has been with Klamath First Federal Savings & Loan Association since 1973. He is Senior Vice President-Operations/Treasurer responsible for all operations of the Association. In his 23 years with Klamath First Federal, Mr. Tucker has served as Loan Officer, Assistant Secretary, Branch Manager, Assistant Vice President and Vice President. Gerald V. Brown has been with Klamath First Federal since 1957. He began as a teller, and, in his 39 years with Klamath First Federal, has progressed up through the ranks to his current position as President and Chief Executive Officer. Mr. Brown has served on the Board of Directors for Klamath First Federal Savings & Loan Association since 1994. Marshall J. Alexander has been with Klamath First Federal Savings & Loan Association since 1986. He began as the Association's Controller, and became Vice President and Chief Financial Officer in August of 1994. Mr. Alexander brought over ten years experience in financial management to the Association. He supervises the accounting department as well as manages the assets of the Association. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Klamath First Bancorp, Inc. (the "Company"), an Oregon corporation, became the unitary savings and loan holding company for Klamath First Federal Savings and Loan Association (the "Association"). The Association is a traditional, community-oriented, savings and loan association that focuses on customer service within its primary market area. Accordingly, the Association is primarily engaged in attracting deposits from the general public through its offices and using those and other available sources of funds to originate permanent residential one- to four-family real estate loans within its market area and to a lesser extent on commercial property and multi-family dwellings. The Company's profitability depends primarily on its net interest income, which is the difference between interest and dividend income on interest-earning assets, principally loans and investment securities, and interest expense on interest-bearing deposits and borrowings. Because the Company is primarily dependent on net interest income for its earnings, the focus of the Company's planning is to devise and employ strategies that provide stable, positive spreads between the yield on interest-earning assets and the cost of interest-bearing liabilities in order to maximize the dollar amount of net interest income. The Company's net earnings are dependent, to a lesser extent, on the level of its non-interest income, such as service charges and other fees, and its non-interest expense, such as employee compensation and benefits, occupancy and equipment expense, deposit insurance premiums and miscellaneous other expenses, as well as federal and state income tax expense. The Association is regulated by the Office of Thrift Supervision ("OTS") and its deposits are insured up to applicable limits under the Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC"). The Association is a member of the Federal Home Loan Bank system. The Association conducts its business through seven office facilities, and one loan production office, with the main office located in Klamath Falls, Oregon. The Association considers its primary market area to be the counties of Klamath, Deschutes and Jackson in Southern and Central Oregon. 9 FEDERAL LEGISLATION On September 30, 1996, the President signed into law an omnibus appropriations act (the "Act") that includes several changes that affect the Association. The signed Act (i) recapitalizes the SAIF through a one-time special assessment; (ii) provides for the conditional merger of the Bank Insurance Fund ("BIF") and the SAIF as of January 1, 1999 into one Deposit Insurance Fund ("DIF"), at which time banks and thrifts would pay the same deposit insurance premiums; and (iii) grants financial institutions limited regulatory relief. With respect to the assessment to recapitalize SAIF, the Act requires SAIF-insured institutions to recapitalize the SAIF through a one-time special assessment of 65.7 basis points on the SAIF deposit assessment base, payable no later than November 29, 1996. Based on the Association's assessment base of $376.4 million at March 31, 1995, the date used in the Act, the one-time assessment is $2.5 million and was accrued during the quarter ended September 30, 1996. In separate legislation enacted this past year, the reserve method of accounting for thrift and bad debt reserves (including the percentage of taxable income method) was repealed for tax years beginning after December 31, 1995. The resulting change in accounting method triggers bad debt reserve recapture for post-1987 reserves over a six-year period, thereby generating an additional tax liability. At September 30, 1996, the Association's post-1987 reserves amounted to $3.8 million. Pre-1988 reserves would only be subject to recapture if the institution fails to qualify as a thrift. A special provision suspends recapture of post-1987 reserves for up to two years if, during those years, the institution satisfies a "residential loan requirement." Notwithstanding this special provision, however, recapture would be required to begin no later than the first taxable year beginning after December 31, 1997. (Graph in hardcopy report) TOTAL ASSETS (in thousands)
TOTAL YEAR ASSETS 1996 $671,969 1995 647,840 1994 448,939 1993 403,879 1992 366,864
10 CHANGE IN INDEPENDENT AUDITORS On May 21, 1996, the Company's Board of Directors, at the recommendation of the Audit Committee, terminated the engagement of KPMG Peat Marwick LLP and engaged Deloitte & Touche LLP, as the Company's auditors. The report of KPMG Peat Marwick LLP on the Company's financial statements for either of the last two fiscal years preceding the date of termination did not contain an adverse opinion or a disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope, or accounting principles, except that the report of KPMG Peat Marwick LLP dated November 3, 1995 with respect to the Company's financial statements at September 30, 1994 and 1995 and for the three years in the period ended September 30, 1995 disclosed that the Company changed its method of accounting for certain investments in debt and equity securities and its method of accounting for income taxes in fiscal 1994 to adopt the provisions of Statement of Financial Accounting Standard ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities", and SFAS No. 109, "Accounting for Income Taxes", respectively. During the Company's two most recent fiscal years and subsequent interim periods preceding the date of the termination of the engagement of KPMG Peat Marwick LLP, the company was not in disagreement with KPMG Peat Marwick LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement, if not resolved to the satisfaction of KPMG Peat Marwick LLP, would have caused KPMG Peat Marwick LLP to make reference to the subject matter of the disagreement in connection with its report. The Company had not consulted with Deloitte & Touche LLP during its two most recent fiscal years nor during any subsequent interim period prior to its engagement regarding the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's financial statements. ASSET AND LIABILITY MANAGEMENT AND INTEREST RATE RISK The ability to maximize net interest income is largely dependent upon the achievement of a positive interest rate spread that can be sustained during fluctuations in prevailing interest rates. Interest rate sensitivity is a measure of the difference between amounts of interest-earning assets and interest-bearing liabilities which either reprice or mature within a given period of time. The difference, or the interest rate repricing "gap", provides an indication of the extent to which an institution's interest rate spread will be affected by changes in interest rates. A gap is considered positive when the amount of interest-rate sensitive assets exceeds the amount of interest-rate sensitive liabilities, and is considered negative when the amount of interest-rate sensitive liabilities exceeds the amount of interest-rate sensitive assets. Generally, during a period of rising interest rates, a negative gap within shorter maturities would result in a decrease in net interest income. Conversely, during a period of falling interest rates, a negative gap within shorter maturities would result in an increase in net interest income. At September 30, 1996, the Association's one-year cumulative gap was a negative 25.88% of total assets compared to a negative 1.07% of total assets at September 30, 1995 and a negative 30.05% at September 30, 1994. The September 30, 1995 one-year cumulative gap was unusually low and was a substantial improvement for the Company compared to prior years. This was a result of the subscription funds from the initial stock offering being invested in overnight funds, or for gap, the less than one-year repricing period. The cumulative one-year gap has remained improved. 11 The Association continues to primarily originate fixed rate residential loans for its portfolio. In an effort to reduce its exposure to interest rate risk, the Association has: (i) purchased adjustable rate mortgage-backed securities, (ii) placed greater emphasis on the origination of adjustable-rate residential loans, and (iii) emphasized longer term fixed rate deposits. We will continue to explore opportunities in these areas. 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, ----------------------------------------------- 1996 1995 1994 -------- -------- ------- (In thousands) Earning assets maturing or repricing within one year ....................... $174,921 $253,115 $84,926 Interest-bearing liabilities maturing or repricing within one year .................................. 348,852 260,073 219,845 Deficiency of earning assets over interest-bearing liabilities as a percent of total assets ............... (25.88)% ( 1.07)% (30.05)% Percent of assets to liabilities maturing or repricing within one year .................................. 50.14% 97.32% 38.63% 12 INTEREST SENSITIVITY GAP ANALYSIS The following table presents the difference between the Company's interest-earning assets and interest-bearing liabilities within specified maturities at September 30, 1996. This table does not necessarily indicate the impact of general interest rate movements on the Company's net interest income because the repricing of certain assets and liabilities is subject to competitive and other limitations. As a result, certain assets and liabilities indicated as maturing or otherwise repricing within a stated period may in fact mature or reprice at different times and at different volumes. Greater Greater Greater Greater Greater Greater Greater than than than than than than than 3 Months 3 Months 6 Months 1 to 3 3 to 5 5 to 10 10 to 20 20 ASSETS or Less to 6 Months to 1 Year Years Years Years Years Years TOTAL -------- ----------- ----------- ---------- ----------- ----------- --------- ---------- ----------- PERMANENT 1-4 MORTGAGES (In thousands) Adjustable Rate ........ $ 18,946 $ 4,788 $17,415 $ 1,109 $ - $ - $ - $ - $ 42,258 Fixed Rate ............. 198 146 540 308 790 10,912 79,686 317,552 410,132 OTHER MORTGAGE LOANS Adjustable Rate ........ 2,673 466 5,604 249 - - - - 8,992 Fixed Rate ............. - - 96 106 1,982 2,157 10,062 74 14,477 Mortgage Backed and Related Securities ..... 48,520 16,259 16,253 - - - - - 81,032 Non-Real Estate Loans .. 451 337 371 494 342 583 1,341 - 3,919 Investment Securities .. 33,077 2,000 6,781 4,914 37,592 16,507 - - 100,871 -------- ----------- ----------- ---------- ----------- ----------- --------- ---------- ----------- Total Rate Sensitive Assets ................. $103,865 $23,996 $47,060 $ 7,180 $40,706 $30,159 $91,089 $317,626 $ 661,681 ======== =========== =========== ========== =========== =========== ========= ========== =========== LIABILITIES Deposits - Fixed Maturity .. $52,085 $50,307 $74,463 $67,092 $20,736 $24,505 $ - $ - $ 289,188 Deposits - Now ......... 1,821 1,821 3,642 8,499 8,499 - - - 24,282 Deposits - Money Market .... 13,607 14,129 14,129 10,466 - - - - 52,331 Deposits - Passbook .... 2,528 2,528 5,057 11,799 11,799 - - - 33,711 Other Interest Bearing Liabilities .... 98,735 14,000 - - - - - - 112,735 -------- ----------- ----------- ---------- ----------- ----------- --------- ---------- ----------- Total Rate Sensitive Liabilities ............ $168,776 $82,785 $97,291 $97,856 $41,034 $24,505 $ - $ - $ 512,247 ======== =========== =========== ========== =========== =========== ========= ========== =========== Interest Rate Sensitivity Gap ........ $(64,911) $ (58,789) $ (50,231) $(90,676) $ (328) $ 5,654 $ 91,089 $317,626 $ 149,434 Cumulative Interest Rate Sensitivity Gap ... $(64,911) $(123,700) $(173,931) $264,607) $(264,935) $(259,281) $(168,192) $149,434 Sensitivity Gap to Total Assets ........... (9.66%) (8.75%) (7.48%) (13.49%) (0.05%) 0.84% 13.56% 47.27% Cumulative Interest Rate Sensitivity Gap To Total Assets ........ (9.66%) (18.41%) (25.88%) (39.38%) (39.43%) (38.59%) (25.03%) 22.24%
13 Certain shortcomings are inherent in gap analysis that may result in an institution with a nominally negative gap having interest rate behavior associated with a positive gap. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. LIQUIDITY AND CAPITAL RESOURCES The Company generates cash through operating activities, primarily as a result of net income. The adjustments to reconcile net income to net cash provided by operations during the periods presented consisted primarily of the provision for loan losses, depreciation and amortization expense, amortization of deferred loan origination fees, increases or decreases in various escrow accounts and increases or decreases in other assets and liabilities. The primary investing activity of the Association is lending, which is funded with cash provided from operations and financing activities, as well as proceeds from amortization and prepayments on existing loans and mortgage backed and related securities and proceeds from maturities of other investment securities. For additional information about cash flows from operating, financing and investing activities, see the Consolidated Statements of Cash Flows included in the Consolidated Financial Statements. The Association is required under applicable federal regulations to maintain specified levels of "liquid" investments in qualifying types of U.S. Government, federal agency and other investments having maturities of five years or less. Current OTS regulations require that a savings association maintain liquid assets of not less than 5.00% of its average daily balance of net withdrawable deposit accounts and borrowings payable in one year or less, of which short-term liquid assets must consist of not less than 1.00%. At September 30, 1996, the Association's regulatory liquidity, as measured for regulatory purposes, was 10.47%. Under capital standards mandated by the Financial Institution Reform, Recovery, and Enforcement Act, the Association must have: (i) tangible capital equal to 1.5% of adjusted total assets, (ii) core capital equal to 3.0% of adjusted total assets, and (iii) total risk-based capital equal to 8.0% of risk-weighted assets. At September 30, 1996, the Association was in compliance with all regulatory capital requirements effective as of such date, with tangible, core and risk-based capital of 19.2%, 19.2% and 42.4%, respectively. (See Note 15 To Consolidated Financial Statements). ASSET QUALITY NON-PERFORMING ASSETS At September 30, 1996, the ratio of non-performing assets (including non-accrual loans, accruing loans greater than 90 days delinquent, real estate owned and other repossessed assets) to total assets was .04%. The Association intends to seek to maintain asset quality by continuing its focus on one-to-four family lending. However, in its efforts to expand and diversify its loan portfolio, the Association intends to evaluate other available lending options such as credit cards, equity lines of credit, and other consumer loan products. In doing this, the Association will evaluate the trade off associated with planned loan growth and the greater credit risk associated with such forms of lending. 14 CLASSIFIED ASSETS The Association has established a Classification of Assets Committee that meets at least quarterly to approve and develop action plans to resolve the problems associated with the assets, to review recommendations for new classifications, and to make any changes in present classifications, as well as making recommendations for the adequacy of reserves. In accordance with regulatory requirements, the Association reviews and classifies on a regular basis, and as appropriate, its assets as "special mention", "substandard", "doubtful" and "loss". In 1996 the Classification of Assets Committee changed its classification of asset categories to include the more common classification category Special Mention. In the past the Association included what normally was considered Special Mention in the Substandard category. However, to conform to the more common practice, the assets previously classified Substandard are now classified as either Special Mention or Substandard per the category's definitions. All non-accrual loans and non-performing assets are included in classified assets. The following table sets forth at the dates indicated the amounts of classified assets:
At September 30, ---------------------- 1996 1995 1994 ---- ----- ----- (In thousands) Loss ................................... $ - $ - $ 33 Doubtful ............................... - - 59 Substandard ............................ 281 1,095 1,018 Special Mention ........................ 645 - - ---- ----- ----- $ 926 $1,095 $1,110 ==== ===== =====
ALLOWANCE FOR LOAN LOSSES The Association has established a systematic methodology for determination of provisions for loan losses. The methodology is set forth in a formal policy and takes into consideration the need for an overall general valuation allowance as well as specific allowances that are tied to individual loans. Provision for loan losses are recorded based on the Association's evaluation of specific loans in its portfolio, historical loan loss experience, the volume and type of lending, general economic conditions and the existing level of the Association's allowance for loan losses. 15 The following table sets forth at the dates indicated the loan loss allowance and charge-offs:
At September 30, ------------------ 1996 1995 1994 ---- ---- ---- (In thousands) Loan loss allowance .................... $928 $808 $755 Charge-offs ............................ - 67 23
AVERAGE BALANCES, NET INTEREST INCOME AND YIELDS EARNED AND RATES PAID The following table presents, for the periods indicated, information regarding average balances of assets and liabilities, as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate spread, net interest margin and the ratio of average interest-earning assets to average interest-bearing liabilities. Dividends received are included as interest income. The table does not reflect any effect of income taxes. All average balances are based on month-end balances. Non-accrual loans are reflected as carrying a zero yield.
Years Ended September 30, -------------------------------------------------------------------------------------------------------- 1996 1995 1994 ---------------------------- ---------------------------- ---------------------------- Average Yield/ Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate Balance Interest Rate -------- -------- ------ --------- --------- ------ -------- -------- ------ INTEREST-EARNING ASSETS (In thousands) Loans receivable ....... $440,510 $ 35,262 8.00% $381,689 $ 30,117 7.89% $338,679 $ 27,511 8.12% Mortgage backed and related securities ..... 52,275 3,005 5.75% - - - - - Investment securities .. 87,929 5,514 6.27% 52,097 3,869 7.43% 56,995 4,041 7.09% Federal funds sold ..... 23,011 1,259 5.47% 13,005 722 5.55% 9,359 320 3.42% Interest bearing deposit ................ 4,882 262 5.37% 2,454 130 5.30% 3,394 183 5.39% FHLB Stock ............. 4,552 348 7.64% 3,935 270 6.86% 3,969 353 8.89% -------- -------- --------- --------- -------- -------- Total interest-earning assets ................. 613,159 45,650 7.45% 453,180 35,108 7.75% 412,396 32,408 7.86% Non-interest-earning assets ................. 2,130 13,661 8,216 -------- -------- --------- --------- -------- -------- Total Assets ........... $615,289 $466,841 $420,612 ======== ========= ======== 16 Years Ended September 30, -------------------------------------------------------------------------------------------------------- 1996 1995 1994 ---------------------------- ---------------------------- ---------------------------- Average Yield/ Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate Balance Interest Rate -------- -------- ------ -------- --------- ------ -------- -------- ------ INTEREST-BEARING LIABILITIES Tax and insurance reserve ................ $ 4,490 $ 148 3.30% $ 4,533 $ 180 3.97% $ 4,489 $ 184 4.10% Passbook accounts ...... 34,198 983 2.87% 44,345 1,235 2.78% 44,237 1,183 2.67% Now accounts ........... 22,064 546 2.47% 22,242 542 2.44% 21,654 558 2.58% Money market accounts .. 50,308 1,950 3.88% 55,891 2,206 3.95% 65,944 2,193 3.33% Certificate accounts ... 282,446 16,772 5.94% 264,873 15,327 5.79% 234,772 12,436 5.30% FHLB advances/Short term borrowings ........ 51,517 2,888 5.60% 15,305 950 6.21% - - -------- -------- --------- --------- -------- -------- Total interest-bearing liabilities ............ 445,023 23,287 5.23% 407,189 20,440 5.02% 371,096 16,554 4.46% Non-interest-bearing liabilities ............ 4,892 6,279 1,132 -------- -------- --------- --------- -------- -------- Total liabilities ...... 449,915 413,468 372,228 -------- --------- -------- Shareholders' equity 165,374 53,373 48,384 -------- --------- -------- Total liabilities and shareholders' equity ................. $615,289 $466,841 $420,612 ======== ========= ======== Net interest income .... $ 22,363 $ 14,668 $15,854 ======== ========= ======== Interest rate spread ... 2.22% 2.73% 3.40% ====== ======= ====== Net interest margin .... 3.65% 3.24% 3.84% ====== ======= ====== Average interest-earning assets to average interest-bearing liabilities ............ 137.78% 111.29% 111.13% ====== ======= ====== 17 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 Years Ended September 30, For the Years Ended September 30, ------------------------------------------------ --------------------------------------------- 1995 VS 1996 1995 VS 1994 ------------------------------------------------ --------------------------------------------- Increase (Decrease) Due To Increase (Decrease) Due To Net Increase Net Increase Rate Volume Rate/Vol (Decrease) Rate Volume Rate/Vol (Decrease) -------- --------- --------- ------------ -------- -------- -------- ----------- (In thousands) INTEREST EARNING ASSETS Loans ..................... $ 420 $ 4,641 $ 85 $ 5,146 $ (788) $ 3,494 $ (100) $ 2,606 Mortgage backed and related securities ........ - - 3,006 3,006 - - - - Investment securities ..... (604) 2,662 (416) 1,642 191 (347) (16) (172) Federal funds sold ........ (10) 555 (8) 537 199 125 78 402 Interest bearing deposits .................. 2 129 2 133 (3) (51) 1 (53) FHLB stock ................ 31 42 5 78 (81) (3) 1 (83) -------- --------- --------- ------------ -------- -------- -------- ----------- Total Interest-Earning Assets .................... $ (161) $ 8,029 $ 2,674 $ 10,542 $ (482) $ 3,218 $ (36) $ 2,700 ======== ========= ========= ============ ======== ======== ======== =========== INTEREST BEARING LIABILITIES Tax and insurance reserves $ (30) $ (2) $ - $ (32) $ (6) $ 2 $ - $ (4) Passbook accounts ......... 40 (282) (9) (251) 49 3 - 52 Now accounts .............. 7 (4) - 3 (30) 15 (1) (16) Money market accounts ..... (39) (221) 4 (256) 409 (334) (62) 13 Certificate accounts ...... 397 1,017 32 1,446 1,150 1,594 147 2,891 FHLB advances/Short term borrowings ................ (93) 2,249 (221) 1,935 - - 950 950 -------- --------- --------- ------------ -------- -------- -------- ----------- Total Interest-Bearing Liabilities ............... $ 282 $ 2,757 $ (194) $ 2,845 $ 1,572 $ 1,280 $ 1,034 $ 3,886 ======== ========= ========= ============ ======== ======== ======== =========== Increase (Decrease) in Net Interest Income ........... $ 7,697 $ (1,186) ============ ===========
18 COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1995 AND 1996. GENERAL Net earnings increased $500,000 or 8.9% from $5.6 million for the year ended September 30, 1995, to $6.1 million for the year ended September 30, 1996. This increase was attributable to several factors. Net interest income increased $7.7 million or 52.4% from $14.7 million for the year ended September 30, 1995 to $22.4 million for the year ended September 30, 1996. This increase was primarily attributable to an increase in total average interest-earning assets from $453.2 at September 30, 1995 to $613.2 at September 30, 1996. The increase in net interest income was partially offset by an increase in non-interest expense of $6.2 million or 103.3% from $6.0 million for the year ended September 30, 1995 to $12.2 million for the year ended September 30, 1996. This increase is primarily attributable to a $1.7 million increase in compensation expense, due largely to the Employee Stock Option Plan ("ESOP"), the $2.5 million BIF/SAIF assessment, and the $1.6 million loss on sale of an investment subsequent to year end. INTEREST INCOME Additional interest income generated by the $146.4 million increase in average interest earning assets contributed to an increase of $10.5 million or 29.9% from $35.1 million for the year ended September 30, 1995 to $45.6 million for the year ended September 30, 1996. Of this increase, $5.1 million is attributable to additional loan income due to an increase in loans receivable. The increase in loans receivable was primarily a result of strong new purchase loan originations exceeding loan refinancing which resulted in greater net loan growth for 1996. The remaining increase of $5.4 million was a result of investing the proceeds of the stock sale and borrowings in 30 year adjustable rate agency mortgage backed securities ("MBS"), fixed rate U.S. agency securities with maturities of less than five years, fixed and adjustable corporate securities and overnight funds. The average balance of investments increased by $101.2 million for the year ended September 30, 1996 compared with the comparable period in 1995. INTEREST EXPENSE Interest expense increased $2.8 million due to increases in deposits and borrowings. Interest expense on deposits increased $1.0 million or 5.2% from $19.3 million for the year ended September 30, 1995 to $20.3 million for the year ended September 30, 1996. Total deposits increased by $15.3 million from September 30, 1995 to September 30, 1996, and the average interest paid on interest-bearing deposits increased 22 basis points from 4.99% for the year ended September 30, 1995 to 5.21% for the year ended September 30, 1996. This increase was a result of the increased pricing competition in the Company's market area. Interest expense on borrowings increased $1.9 million due to increased borrowings of $84.9 million. The Company will continue to rely on borrowings to fund loan growth as long as we can borrow at lower rates for comparable maturities than required to attract similar structured deposits. PROVISION FOR LOAN LOSSES The provision for loan losses was $120,000 with no recoveries or charge offs during the year ended September 30, 1996 compared to $120,000 and charge offs of $67,000 during the year ended September 30, 1995, for a net increase in provision for the year of $120,000. At September 30, 1996, the allowance for loan losses was equal to 356.9% of non-performing assets compared to 106.6% at September 30, 1995. The increase in the coverage ratio at year end 1996 was the result of a decrease in non-accrual loans which were foreclosed and sold during the year. 19 NON-INTEREST INCOME Non-interest income increased $141,000 or 37.0% to $522,000 for the year ended September 30, 1996 from $381,000 for the year ended September 30, 1995. The increase was attributable to increases in fees and service charges and other income, as a result of increased loan activity, ATM fees and service charges on checking accounts. NON-INTEREST EXPENSE Non-interest expense increased $6.2 million, or 103.3%, for the year ended September 30, 1996, from a total of $6.0 million for the prior year to $12.2 million for the year ended September 30, 1996. Of this increase, $2.5 million was attributable to the BIF/SAIF special assessment, $1.6 million was attributable to the loss on sale of an investment subsequent to year end, and $1.7 million is attributable to an increase in compensation expense. Of the $1.7 million increase in compensation expense, $1.4 million is due to compensation expense associated with the ESOP. The ratio of non-interest expense to average total assets was 1.99% and 1.29% for the years ended September 30, 1996 and 1995, respectively. INCOME TAXES The provision for income taxes increased $1.0 million for the year ended September 30, 1996 compared with the prior year, primarily as a result of higher pretax earnings. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1994 AND 1995 GENERAL Earnings decreased $580,000 or 9.4%, from $6.2 million for the year ended September 30, 1994 to $5.6 million for the year ended September 30, 1995, before the cumulative effect of a change in method of accounting for income taxes due to the adoption of SFAS No. 109 on October 1, 1993. This decrease was mainly attributable to a decrease in interest rate spread from 3.4% at September 30, 1994 to 2.7% at September 30, 1995 which resulted in net interest income decreasing by $1.2 million, or 7.5%. Net earnings increased $286,000, or 5.4%, from $5.3 million for the year ended September 30, 1994 to $5.6 million for the year ended September 30, 1995 in the absence of the prior year's $866,000 cumulative effect of the change in method of accounting for income taxes. The additional reasons for the changes in net earnings are discussed more specifically below. INTEREST INCOME The additional interest income generated by the $43.0 million increase in average balance of loans receivable in 1995 over the prior year slightly offset the 23 basis point decrease in loan yield from the prior year to produce a $2.6 million increase in interest income from loans. The increase in loans receivable was primarily a result of strong loan demand and less loan refinancing which resulted in greater net loan growth for 1995 despite less loan production. The decrease in loan yield was primarily a result of the refinancing to lower yielding loans over the previous year while rates were still declining and initiating an adjustable rate program this year emphasizing rates below market rates (teaser rates) to generate adjustable rate loan volume. 20 The average balance of investment securities decreased by $4.9 million in 1995 compared with 1994. A 34 basis point increase in the yield on investment securities from the prior year did not offset the decrease in volume, resulting in a $172,000 decrease in interest income from investment securities. Interest income on federal funds sold increased $401,845 in 1995 from 1994 as a result of investing the proceeds of the stock sale during the subscription period. Investment securities include an investment of $12.6 million in a U.S. Federal securities mutual bond fund classified as available for sale. A decrease in interest rates during 1995 resulted in increasing the carrying value of the U.S. Federal securities mutual bond fund at September 30, 1995 by $382,000. INTEREST EXPENSE Savings deposit interest expense increased $2.9 million for the year ended September 30, 1995 as compared to the comparable period in 1994. The increase was attributable to a $20.8 million increase in the average balance of deposits during this period, which can be primarily attributed to the increase in savings account activity during the stock sale subscription period. The weighted average rate paid on deposits increased 51 basis points from 4.46% during the year ended September 30, 1994 to 4.97% during the year ended September 30, 1995. Average FHLB advances outstanding during this period were $15.3 million with a weighted average rate of 6.21%. PROVISION FOR LOAN LOSSES The provision for loan losses was $120,000, recoveries were zero, and charge offs were $67,000 during the year ended September 30, 1995 compared to $150,000 and charge offs of $23,000 during the year ended September 30, 1994, for a net increase in provision for the year of $53,000. At September 30, 1995, the allowance for loan losses was equal to 106.60% of non-performing assets compared to 311.98% at September 30, 1994. The decrease in the coverage ratio at year end 1995 was the result of foreclosure proceedings initiated against two properties, which totalled $445,343 of the total non-performing assets of $758,000. No losses are expected on these loans as the loans are well secured with an estimated value of $745,000, or an excess loan to value of $299,657. NON-INTEREST INCOME Non-interest income increased $29,000, or 8.2%, to $381,000 for the year ended September 30, 1995 from $352,000 for the year ended September 30, 1994. The increase was mainly attributable to increased income from the sale of real estate owned. NON-INTEREST EXPENSE Non-interest expense decreased $30,000, or 0.5%, for the year ended September 30, 1995, from a total of $6.03 million for the prior year to $6.00 million for the year ended September 30, 1995. Of this decrease, $200,000 was attributable to a decrease in compensation and benefit expense in 1995, primarily reflecting certain one-time increased bonus payments to employees and increased fees paid to directors in the prior year. This was partially offset by an increase in SAIF insurance premiums, primarily as a result of growth in deposits, costs incident to greater loan volume and increased occupancy and personnel expenses as a result of the new Klamath Falls, Oregon branch. The ratio of non-interest expense to average total assets was 1.43% and 1.29% for the years ended September 30, 1994 and 1995, respectively 21 INCOME TAXES Effective October 1, 1993, the Association adopted SFAS No. 109 which requires a change from the deferred method of accounting for income taxes of Accounting Principles Board ("APB") No. 11 to the asset and liability method of accounting for income taxes. The implementation of SFAS No. 109 decreased net earnings by $866,000 for the year ended September 30, 1994. The provision for income taxes decreased $517,000 for the year ended September 30, 1995 compared with the prior year, primarily as a result of lower pretax earnings. (Graph in hardcopy report) TOTAL NET EARNINGS (in thousands)
NET YEAR EARNINGS 1996 $6,110 1995 5,574 1994 5,288 1993 7,157 1992 4,745
22 COMMON STOCK INFORMATION Since October 4, 1995, Klamath First Bancorp's common stock has traded on the National Association of Security Dealers Automated Quotations ("NASDAQ") National Market System under the symbol "KFBI". As of October 11, 1996, there were approximately 4,400 shareholders of record or through nominee or street name accounts with brokers. The following represents reported high and low trading price and dividends declared each respective quarter of fiscal 1996. Information as to market prices for the Company's common stock is not presented for fiscal year 1995 because the shares were not yet issued and outstanding.
DIVIDEND FISCAL 1996 HIGH LOW DECLARED ------ ------- ---------- First Quarter ........... 13 3/4 12 1/16 $ 0.050 Second Quarter .......... 13 3/4 12 1/2 $ 0.065 Third Quarter ........... 14 5/8 13 $ 0.065 Fourth Quarter .......... 14 3/4 13 3/8 $ 0.070
Any dividend payments by the Company are subject to the sole discretion of the Board of Directors and depend primarily on the ability of the Association to pay dividends to the Company at least annually. Under Federal regulations, the dollar amount of dividends a federal savings association may pay depends on the Association's capital surplus position and recent net income. Generally, if an association satisfies its regulatory capital requirements, it may make dividend payments up to the limits prescribed in the OTS regulations. However, institutions that have converted to the stock form of ownership may not declare or pay a dividend on, or repurchase any of, its common stock if the effect thereof would cause the regulatory capital of the institution to be reduced below the amount required for the liquidation account which was established in accordance with OTS regulations and the Association's Plan of Conversion. In addition, earnings of the Association appropriated to bad debt reserves and deducted for federal income tax purposes are not available for payment of cash dividends without payment of taxes at the then current tax rate by the Association on the amount removed from the reserves for such distributions. The Association does not contemplate any distributions that would limit the Association's bad debt deduction or create federal tax liabilities. 23 INDEPENDENT AUDITORS' REPORTS Board of Directors Klamath First Bancorp, Inc. Klamath Falls, Oregon We have audited the accompanying consolidated balance sheet of Klamath First Bancorp, Inc. and subsidiary (the "Company") as of September 30, 1996, and the related consolidated statement of earnings, shareholders' equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Klamath First Bancorp, Inc. and subsidiary as of September 30, 1996, and the results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP - -------------------------- Deloitte & Touche LLP Portland, Oregon November 25, 1996 24 Board of Directors Klamath First Bancorp, Inc. Klamath Falls, Oregon We have audited the accompanying consolidated balance sheet of Klamath First Bancorp, Inc. and subsidiaries as of September 30, 1995, and the related consolidated statements of earnings, stockholders' equity and cash flows for the two years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Klamath First Bancorp, Inc. and subsidiaries as of September 30, 1995 and the results of their operations and their cash flows for the two years then ended in conformity with generally accepted accounting principles. As discussed in note 1 to the consolidated financial statements, the Company changed its method of accounting for certain investments in debt and equity securities and its method of accounting for income taxes in fiscal 1994 to adopt the provisions of Financial Accounting Standards Board's Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities", and SFAS No. 109, "Accounting for Income Taxes", respectively. /s/ KPMG Peat Marwick LLP - -------------------------- KPMG Peat Marwick LLP Portland, Oregon November 3, 1995 25 KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
September 30, ------------------------------ ASSETS 1996 1995 ------------- ------------- Cash and due from banks ............................ $ 6,841,554 $ 4,033,723 Interest bearing deposits .......................... - 994,157 Federal funds sold ................................. 9,338,079 170,966,390 ------------- ------------- Total cash and cash equivalents .................... 16,179,633 175,994,270 Investment securities available for sale, at fair value (amortized cost: $77,071,211 and $13,723,044) ....................... 75,986,611 12,605,654 Investment securities held to maturity, at amortized cost (fair value: $9,860,165 and $42,178,800) ........................ 9,827,193 42,209,497 Mortgage backed and related securities available for sale, at fair value (amortized cost: $74,249,350) ...................... 74,109,321 - Mortgage backed and related securities held to maturity, at amortized cost (fair value: $6,736,007) ........................... 6,783,001 - Loans receivable, net .............................. 473,555,988 403,543,725 Real estate owned .................................. 69,483 24,384 Premises and equipment, net ........................ 4,964,262 5,231,903 Stock in Federal Home Loan Bank of Seattle, at cost ................................... 4,773,800 4,425,900 Accrued interest receivable, net ................... 5,037,285 3,431,594 Other assets ....................................... 682,814 372,654 ------------- ------------- Total assets ....................................... $ 671,969,391 $ 647,839,581 ============= ============= 26 LIABILITIES AND SHAREHOLDERS' EQUITY September 30, ------------------------------ LIABILITIES 1996 1995 ------------- ------------- Savings deposits ................................... $ 399,673,180 $ 384,379,531 Stock over subscription ............................ - 65,685,300 Accrued interest on savings deposits ............... 712,408 1,028,766 Advances from borrowers for taxes and insurance ...................................... 7,831,127 7,966,422 Advances from Federal Home Loan Bank of Seattle ......................................... 90,000,000 20,000,000 Short term borrowings .............................. 14,904,400 - Accrued interest on borrowings ..................... 323,163 - Pension liability .................................. 668,088 616,035 Deferred federal and state income taxes ............ 735,596 896,876 Other liabilities .................................. 3,710,455 2,581,586 ------------- ------------- Total liabilities .................................. 518,558,417 483,154,516 ------------- ------------- SHAREHOLDERS' EQUITY Preferred stock, $.01 par value, 500,000 shares authorized; none issued - - Common stock, $.01 par value, 35,000,000 shares authorized, 1996 - 11,612,470 issued, 10,242,360 outstanding; 1995 - issued and outstanding 12,233,125 shares .... 116,124 122,331 Additional paid-in capital ......................... 110,762,678 119,230,653 Retained earnings - substantially restricted ....... 59,082,479 55,811,362 Unearned shares issued to ESOP ..................... (8,807,850) (9,786,500) Unearned shares issued to MRDP ..................... (6,694,470) - Net unrealized loss on securities available for sale (1,047,987) (692,781) ------------- ------------- Total shareholders' equity ......................... 153,410,974 164,685,065 ------------- ------------- Total liabilities and shareholders' equity ......... $ 671,969,391 $ 647,839,581 ============= ============= See notes to consolidated financial statements.
27 KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF EARNINGS
Years ended September 30, --------------------------------------- INTEREST INCOME 1996 1995 1994 ----------- ----------- ----------- Loans receivable ....................... $35,261,655 $30,116,911 $27,511,193 Mortgage backed and related securities . 3,004,823 - - Investment securities .................. 5,862,520 4,138,524 4,393,812 Federal funds sold ..................... 1,258,614 721,940 320,095 Interest bearing deposits .............. 261,811 129,716 182,516 ----------- ----------- ----------- Total interest income .................. 45,649,423 35,107,091 32,407,616 ----------- ----------- ----------- INTEREST EXPENSE Savings deposits ....................... 20,251,039 19,310,599 16,370,065 FHLB advances .......................... 2,689,790 949,059 - Other .................................. 345,698 181,515 184,336 ----------- ----------- ----------- Total interest expense ................. 23,362,896 20,441,173 16,554,401 ----------- ----------- ----------- Net interest income .................... 23,286,527 14,665,918 15,853,215 Provision for loan losses .............. 120,000 120,000 150,000 ----------- ----------- ----------- Net interest income after provision for loan losses ........................ 22,242,896 14,545,918 15,703,215 ----------- ----------- ----------- NON-INTEREST INCOME Fees and service charges ............... 260,320 185,053 143,829 Gain on sale of real estate owned ...... 22,233 84,022 49,725 Other income ........................... 239,105 112,090 158,544 ----------- ----------- ----------- Total non-interest income .............. 521,658 381,165 352,098 ----------- ----------- ----------- NON-INTEREST EXPENSE Compensation, employee benefits and related expense ........................ 4,476,052 2,753,726 2,953,508 Occupancy expense ...................... 971,431 917,364 821,365 Data processing expense ................ 343,319 318,819 282,064 Insurance premium expense .............. 907,825 877,366 818,311 Special SAIF assessment ................ 2,472,954 - - Loss on sale of real estate owned ...... 6,271 - - Realized loss on U.S. Federal securities mutual bond fund ............ 1,642,625 - - Other expense .......................... 1,421,753 1,136,780 1,159,210 ----------- ----------- ----------- Total non-interest expense ............. 12,242,230 6,004,055 6,034,458 ----------- ----------- -----------
28
Years ended September 30, --------------------------------------- INTEREST INCOME 1996 1995 1994 ----------- ----------- ----------- Earnings before income taxes and cumulative effect of a change in accounting principle ................ 10,522,324 8,923,028 10,020,855 Provision for income tax ............... 4,412,527 3,348,925 3,866,001 ----------- ----------- ----------- Net earnings before cumulative effect of a change in accounting principle .............................. 6,109,797 5,574,103 6,154,854 Cumulative effect at October 1, 1993 of a change in accounting for income taxes ....................... - - 866,518 ----------- ----------- ----------- Net earnings ........................... $ 6,109,797 $ 5,574,103 $ 5,288,336 =========== =========== =========== Earnings per common share (based on weighted average shares outstanding) ... $ .56 N/A N/A Weighted average number of shares outstanding ............................ 11,004,939 N/A N/A See notes to consolidated financial statements.
29 KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Additional Unearned Unrealized Unearned Total Common Stock Common Stock paid-in Retained ESOP shares gain(loss) on shares issued shareholders' Shares Amount capital earnings at cost securities to MRDP equity ------------ ------------ ------------- ------------ ------------ ------------- -------------- --------------- Balance at October 1, 1993 ..... $ - $ - $ - $44,948,923 $ - $ - $ - $ 44,948,923 Unrealized loss on securities available for sale ............ - - - - - (929,615) - (929,615) Net earnings ........ - - - 5,288,336 - - - 5,288,336 ------------ ------------ ------------- ------------ ------------ ------------- -------------- --------------- Balance at September 30, 1994 .. - - - 50,237,259 - (929,615) - 49,307,644 Issuance of common stock ............... 12,233,125 122,331 119,230,653 - (9,786,500) - - 109,566,484 Unrealized gain on securities avail- able for sale ....... - - - - - 236,834 - 236,834 Net earnings ........ - - - 5,574,103 - - - 5,574,103 ------------ ------------ ------------- ------------ ------------ ------------- -------------- --------------- Balance at September 30, 1995 .. 12,233,125 122,331 119,230,653 55,811,362 (9,786,500) (692,781) - 164,685,065 Cash dividends ...... - - - (2,838,680) - - - (2,838,680) Earned ESOP shares .. - - 417,652 - 978,650 - - 1,396,302 Unrealized loss on investments available for sale ............ - - - - - (355,206) - (355,206) Unearned shares issued to MRDP Trust ....... - - - - - - (6,694,470) (6,694,470) Stock retirement ..... (620,655) (6,207) (8,885,627) - - - - (8,891,834) Net earnings ......... - - - 6,109,797 - - - 6,109,797 ------------ ------------ ------------ ------------ ------------ ------------- -------------- --------------- Balance at September 30, 1996 .............$11,612,470 $116,124 $110,762,678 $59,082,479 ($8,807,850) ($1,047,987) ($6,694,47) $153,410,974 ============ ============ ============ ============ ============ ============= ============== =============== See notes to consolidated financial statements. 30 KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended September 30, ----------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES 1996 1995 1994 ------------- ------------- ------------- Net earnings .......................................... $ 6,109,797 $ 5,574,103 $ 5,288,336 ------------- ------------- ------------- ADJUSTMENTS TO RECONCILE NET EARNINGS TO NET CASH PROVIDED BY OPERATING ACTIVITIES Depreciation ......................................... 403,074 360,069 317,589 Provision for loan losses ............................. 120,000 120,000 150,000 Compensation expense related to ESOP benefit .......... 1,396,302 - - Net amortization of premiums paid on investment and mortgage backed and related securities ................................ 210,599 204,444 246,771 Realized loss on sale of U.S. Federal securities mutual bond fund ........................... 1,642,625 - - Increase in deferred loan fees, net of amortization ... 703,055 490,802 914,139 Accretion of discounts on purchased loans ............. (14,683) (7,239) (26,359) Net gain on sale of real estate owned and premises and equipment ............................................. (5,209) (33,544) (58,811) FHLB stock dividends .................................. (347,900) (269,600) (352,600) CHANGES IN ASSETS AND LIABILITIES Accrued interest receivable ........................... (1,605,691) (160,744) (166,118) Other assets .......................................... (310,160) 188,504 (23,691) Accrued interest on savings deposits .................. (316,358) 630,370 (34,495) Accrued interest on borrowings ........................ 323,163 - - Pension liabilities ................................... 52,053 58,020 - Deferred federal and state income taxes ............... (409,246) 746,966 532,517 Other liabilities ..................................... 315,996 (185,361) 478,936 ------------- ------------- ------------- Total adjustments ..................................... 2,157,620 2,142,687 1,977,878 ------------- ------------- ------------- Net cash provided by operating activities ............. 8,267,417 7,716,790 7,266,214 ------------- ------------- ------------- 31 Years ended September 30, ----------------------------------------------- 1996 1995 1994 ------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturity of investment securities held to maturity .............................................. 69,552,392 7,006,177 - Principal repayments received on mortgage backed and related securities .................................... 12,083,872 - - Principal repayments received on loans ................ 64,529,602 40,398,099 79,225,557 Loan originations ..................................... (135,566,747) (84,714,297) (130,024,113) Purchase of investment securities held to maturity .... (42,971,553) (4,855,539) (537,478) Purchase of investment securities available for sale .. (60,969,781) - - Purchase of mortgage backed and related securities held to maturity ........................................... (7,423,182) - - Purchase of mortgage backed and related securities available for sale .................................... (84,123,187) - - Proceeds from sale of real estate owned and premises and equipment ......................................... 177,595 359,033 406,417 Purchases of premises and equipment ................... (136,406) (1,167,757) (553,602) ------------- ------------- ------------- Net cash used in investing activities ................. (184,847,395) (42,974,284) (51,483,219) ------------- ------------- ------------- 32 Years ended September 30, ----------------------------------------------- 1996 1995 1994 ------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES Increase/(decrease) in savings deposits, net of withdrawal ..................................... $ 15,293,649 $ (5,370,987) $ 39,798,168 Proceeds from FHLB advances ........................... 105,000,000 20,000,000 - Repayments of FHLB advances ........................... (35,000,000) - - Proceeds from short term borrowings ................... 21,938,300 - - Repayments of short term borrowings ................... (7,033,900) - - Proceeds from issuance of common stock ................ - 121,268,633 - Proceeds from stock over subscription ................. - 65,685,300 - Repayment from stock over subscription ................ (65,685,300) - - Funding provided to ESOP for purchase of common stock ................................................. - (9,786,500) - Funding provided to MRDP Trust for purchase of common stock ................................................. (6,694,470) - - Stock retirement ...................................... (8,891,834) - - Advances from borrowers for tax and insurance ......... (135,297) (101,700) 496,161 Dividends paid ........................................ (2,025,807) - - ------------- ------------- ------------- Net cash provided by financing activities ............. 16,765,341 191,694,746 40,294,329 ------------- ------------- ------------- Net (decrease) increase in cash and cash equivalents .. (159,814,637) 156,437,252 (3,922,676) Cash and cash equivalents at beginning of year ........ 175,994,270 19,557,018 23,479,694 ------------- ------------- ------------- Cash and cash equivalents at end of year .............. $ 16,179,633 $ 175,994,270 $ 19,557,018 ============= ============= ============ SUPPLEMENTAL SCHEDULE OF INTEREST AND INCOME TAXES PAID Interest paid ......................................... $ 23,483,212 $ 19,810,803 $ 16,589,906 Income taxes paid ..................................... 4,555,053 2,570,000 4,020,000 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES Transfer of investment securities from held to maturity to available for sale at estimated fair market value .......................................... $ 27,171,074 $- $- Transfer of mortgage backed and related securities from held to maturity to available for sale at estimated fair value................................... 1,717,890 - - Net unrealized gain (loss) on securities available for sale .............................................. (355,206) 236,834 (929,615) Dividends declared and accrued in other liabilities ... 812,873 - - See notes to consolidated financial statements.
33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1)Summary of Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements include the accounts of Klamath First Bancorp, Inc. (the Company) and its wholly-owned subsidiary Klamath First Federal Savings and Loan Association (the Association). The Company became the holding company of the Association upon conversion of the Association from a federally-chartered mutual savings and loan association to a federally-chartered capital stock savings and loan association (Note 11). This transaction has been accounted for in a manner similar to a "pooling of interests" in accordance with APB Opinion No. 16, "Business Combinations." The Company's consolidated financial statements also include the assets and liabilities of First Service Corporation of Southern Oregon ("FSC") which was wholly-owned by the Association. As of July 31, 1996, FSC was officially liquidated into the Association. All significant intercompany balances and transactions have been eliminated in consolidation for September 30, 1995. Nature of Operations The Company and subsidiary provide banking and limited nonbanking services to its customers who are located principally in the Klamath, Jackson, and Deschutes counties of Southern and Central Oregon. These services primarily include attracting deposits from the general public and using such funds, together with other borrowings, to invest in various real estate loans, investment securities, and mortgage backed and related securities. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make assumptions that result in estimates that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of related revenue and expense during the reporting period. Actual results could differ from those estimates. Investment Securities The Company has adopted Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Under this pronouncement, securities held to maturity are stated at cost only if the Company has the positive intent and the ability to hold the securities to maturity. Securities available for sale, including mutual funds, and trading securities are stated at fair value. Realized gains and losses on the sale of securities, recognized on a specific identification basis, and valuation adjustments of trading account securities are included in non-interest income or expense. Net unrealized gains or losses on securities available for sale are included as a component of shareholders' equity, net of tax, until realized. Unrealized losses on securities resulting from an other than temporary decline in the fair value are recognized in earnings when incurred. During December 1995, the Association reclassified $27,171,074 of investment securities and $1,717,890 of mortgage backed and related securities from held to maturity to available for sale at fair values, with unrealized gains and losses of $200,508 and $100,421, respectively. The reclassification was made in accordance with the Financial Accounting Standards Board ("FASB") special report, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities", that permitted a one-time reassessment of the appropriateness of the held to maturity classification, without affecting the classification of the remaining securities held to maturity. Stock Investments The Company held stock in the Federal Home Loan Bank ("FHLB") and U.S. Federal securities mutual bond fund at September 30, 1996 and 1995. These investments are carried at the lower of cost or fair value. 34 Provision for Loan Losses Allowances for losses on specific problem real estate loans and real estate owned are charged to earnings when it is determined that the value of these loans and properties, in the judgment of management, is impaired. In addition to specific reserves, the Company also maintains general provisions for loan losses based on evaluating known and inherent risks in the loan portfolio, including management's continuing analysis of the factors underlying the quality of the loan portfolio. These factors include changes in the size and composition of the loan portfolio, actual loan loss experience, current and anticipated economic conditions, detailed analysis of individual loans for which full collectibility may not be assured, and determination of the existence and realizable value of the collateral and guarantees securing the loans. The reserve is an estimate based upon factors and trends identified by management at the time financial statements are prepared. The ultimate recovery of loans is susceptible to future market factors beyond the Company's control, which may result in losses or recoveries differing significantly from those provided in the consolidated financial statements. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's valuation allowances on loans and real estate owned. Delinquent interest on loans past due 90 days or more is charged off or an allowance established by a charge to income equal to all interest previously accrued and interest is subsequently recognized only to the extent cash payments are received until delinquent interest is paid in full and, in management's judgment, the borrower's ability to make periodic interest and principal payments is back to normal, in which case the loan is returned to accrual status. Effective October 1, 1995, the Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures." These statements address the disclosure requirements and allocations of the allowance for credit losses for certain impaired loans. A loan within the scope of these statements is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. When a loan has been identified as being impaired, the amount of the impairment is measured by using discounted cash flows, except when it is determined that the sole source of repayment for the loan is the operation or liquidation of the underlying collateral. In such case, the current fair value of the collateral, reduced by costs to sell, is used. When the measurement of the impaired loan is less than the recorded investment in the loan (including accrued interest, net deferred loan fees or costs, and unamortized premium or discount), an impairment is recognized by creating or adjusting an allocation of the allowance for credit losses. SFAS No. 114, as amended, does not change the timing of charge-offs of loans to reflect the amount ultimately expected to be collected. At September 30, 1996, the Company had no loans deemed to be impaired as defined by SFAS 114. Depreciation of Premises and Equipment Premises and equipment are depreciated on the straight-line basis over the estimated useful lives of the various classes of assets from their respective dates of acquisition. Taxes on Income The Company has adopted SFAS No. 109, "Accounting for Income Taxes", which caused a cumulative effect of $866,518 in the September 30, 1994 consolidated statement of earnings. Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Loan Origination Fees Loan origination fees and direct costs are deferred and recognized over the contractual lives of the related loans as an adjustment of the loans' yield using the level-yield method. 35 Unearned Discounts Loan discounts are accreted to income over the average lives of the related loans using the level-yield interest method, adjusted for estimated prepayments. Real Estate Owned Property acquired by foreclosure or deed in lieu of foreclosure is carried at the lower of estimated fair value, less estimated costs to sell, or the balance of the loan on the property at date of acquisition, not to exceed net realizable value. Costs, excluding interest, relating to the improvement of property are capitalized, whereas those relating to holding the property are charged to expense. Pension Cost It is Company policy to fund retirement costs accrued. All such costs are computed on the basis of accepted actuarial methods. Earnings Per Common Share Earnings per common share is computed based on weighted average number of shares of common stock and common stock equivalents assumed to be outstanding during the period. Earnings per common share were not calculated for September 30, 1995, as no shares were outstanding during the year. (Note 11). Cash Equivalents Cash equivalents are considered to be cash held as demand deposits at various banks and regulatory agencies. In the consolidated financial statements, "cash and due from banks", "interest bearing cash deposits" and "Federal funds sold" are considered to be cash equivalents. (2) Cash and Due from Banks The Company is required to maintain an average reserve balance with the Federal Reserve Bank, or maintain such reserve balance in the form of cash. The amount of this required reserve balance was approximately $475,000 and $469,000 at September 30, 1996 and 1995, respectively, and was met by holding cash and maintaining an average balance with the Federal Reserve Bank in excess of this amount. 36 (3)Investments and Mortgage Backed and Related Securities Amortized cost and approximate fair value of securities available for sale and held to maturity are summarized by type and maturity as follows:
September 30, 1996 ---------------------------------------------- Cost Basis or Gross Unrealized Fair Amortized Cost Gains Losses Value -------------- ------ ---------- ----------- Investment securities available for sale U.S. Federal securities mutual bond fund ........................... $12,080,418 $ - $ - $12,080,418 U.S. GOVERNMENT OBLIGATIONS Maturing after one year through five years . 43,720,065 - 875,092 42,844,973 Maturing after five years through ten years 15,996,758 - 217,858 15,778,900 STATE AND MUNICIPAL OBLIGATIONS Maturing after one year through five years . 250,000 820 - 250,820 CORPORATE OBLIGATIONS Maturing after one year through five years . 5,023,970 7,530 - 5,031,500 -------------- ------ ---------- ----------- $77,071,211 $8,350 $1,092,950 $75,986,611 ============== ====== ========== =========== On October 31, 1996 the Company sold its interest in the U.S. Federal securities mutual bond in the amount of $12,080,418 resulting in a realized loss of $1,642,625. The realized loss has been appropriately reflected in the consolidated financial statements as of September 30, 1996. September 30, 1996 -------------------------------------------- Amortized Gross Unrealized Fair Cost Gains Losses Value ---------- -------- ---------- --------- Investment securities held to maturity: STATE AND MUNICIPAL OBLIGATIONS Maturing within one year .................... $ 181,351 $ - $ 523 $ 180,828 Maturing after one year through five years .. 535,680 - 5,893 529,787 Maturing after five years through ten years . 510,388 28,262 - 538,650 CORPORATE OBLIGATIONS Maturing within one year .................... 6,599,774 11,926 - 6,611,700 Maturing after one year through five years... 2,000,000 - 800 1,999,200 ---------- -------- ---------- --------- $9,827,193 $ 40,188 $ 7,216 $9,860,165 ========== ========= ======= ========== 37 September 30, 1995 -------------------------------------------------------- Cost Basis Or Gross Unrealized Fair Amortized Cost Gains Losses Value -------------- ---------- ----------- ------------ Investment securities available for sale U.S. Federal securities mutual bond fund ... $13,723,044 $- $ 1,117,390 $12,605,654 ============== =========== =========== =========== Investment securities held to maturity U.S. GOVERNMENT OBLIGATIONS Maturing after one year through five years . $13,079,782 $- $ 143,532 $12,936,250 Maturing after five years through ten years 13,996,443 62,597 - 14,059,040 Maturing after ten years ................... 1,885,225 - 7,282 1,877,943 STATE AND MUNICIPAL OBLIGATIONS Maturing after five years through ten years 511,874 40,493 - 552,367 CORPORATE OBLIGATIONS Maturing within one year ................... 6,032,223 21,097 - 6,053,320 Maturing after one year through five years . 6,703,950 - 4,070 6,699,880 -------------- ----------- ----------- ------------ $42,209,497 $ 124,187 $ 154,884 $42,178,800 ============== =========== =========== =========== September 30, 1996 -------------------------------------------------------- Gross Unrealized Fair Amortized Cost Gains Losses Value -------------- ---------- ----------- ------------ MORTGAGE BACKED AND RELATED SECURITIES AVAILABLE FOR SALE FNMA maturing after ten years .............. $15,905,450 $ 68,004 $ 14,292 $15,959,162 FHLMC maturing after ten years ............. 39,204,476 61,911 87,527 39,178,860 SBA maturing after ten years ............... 19,139,424 1,902 170,027 18,971,299 -------------- ---------- ----------- ------------ $74,249,350 $ 131,817 $ 271,846 $74,109,321 ============== =========== =========== =========== 38 September 30, 1996 -------------------------------------------------------- Gross Unrealized Fair Amortized Cost Gains Losses Value -------------- ---------- ----------- ------------ MORTGAGE BACKED AND RELATED SECURITIES HELD TO MATURITY GNMA maturing after ten years .............. $ 6,783,001 $- $ 46,994 $ 6,736,007 ============== ====== =========== ============
Expected maturities of mortgage backed and related securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The Company pledged investment securities of $10,146,000 and $8,990,000 to secure public deposits at September 30, 1996 and 1995, respectively. The Company has also pledged securities of $15,177,000 to secure short-term borrowings of reverse repurchase agreements at September 30, 1996. (Note 9) 39 4) Loans Receivable Loans receivable are summarized as follows:
September 30, --------------------------- 1996 1995 ------------ ------------ REAL ESTATE LOANS Permanent residential 1-4 family ............ $447,004,234 $381,683,453 Multi-family residential .................... 6,555,483 7,432,704 Construction ................................ 14,276,158 9,806,875 Commercial .................................. 15,644,797 13,984,331 Land ........................................ 1,151,573 1,072,019 ------------ ------------ Total real estate loans ..................... 484,632,245 413,979,382 ------------ ------------ NON-REAL ESTATE LOANS Savings account ............................. 1,640,294 1,965,531 Home improvement ............................ 1,976,728 - Other ....................................... 302,397 366,828 ------------ ------------ Total non-real estate loans ................. 3,919,419 2,332,359 ------------ ------------ Total loans ................................. 488,551,664 416,311,741 LESS Undisbursed portion of loans ................ 8,622,476 7,203,187 Deferred loan fees .......................... 5,445,380 4,757,009 Allowance for loan losses ................... 927,820 807,820 ------------ ------------ $473,555,988 $403,543,725 ============ ============
The weighted average interest rate on loans at September 30, 1996 and 1995 was 7.74% and 7.73%, respectively. The Company serviced loans owned by others of $1,240,003, $1,692,000, and $1,981,000 at September 30, 1996, 1995 and 1994, respectively. 40
Activity in allowance for loan losses is summarized as follows: Years ended September 30, ---------------------------------- 1996 1995 1994 --------- --------- --------- Balance, beginning of year .......... $ 807,820 $ 754,803 $ 627,550 Charge-offs ......................... - (66,983) (22,747) Additions ........................... 120,000 120,000 150,000 --------- --------- --------- Balance, end of year ................ $ 927,820 $ 807,820 $ 754,803 ========= ========= =========
5) Premises and Equipment Premises and equipment consist of the following:
September 30, -------------------------- 1996 1995 ----------- ----------- Land ........................................ $ 1,056,269 $ 1,056,269 Office buildings and construction in progress 5,384,136 5,377,006 Furniture, fixtures and equipment ........... 1,874,784 1,746,527 Automobiles ................................. 36,226 36,226 Less accumulated depreciation ............... (3,387,153) (2,984,125) ----------- ----------- $ 4,964,262 $ 5,231,903 =========== ===========
(6) Accrued Interest Receivable The following is a summary of accrued interest receivable:
September 30, -------------------------- 1996 1995 ------------ ----------- Loans receivable ............................... $3,232,731 $2,774,153 Mortgage backed and related securities ......... 765,187 - Investment securities .......................... 1,039,367 657,441 ------------ ----------- $5,037,285 $3,431,594 ============ ===========
41 (7) Savings Deposits The following is a summary of savings deposits:
September 30, ------------------------------------------------------ 1996 1995 Amount Percent Amount Percent -------------- ------- ------------ ------- Non-interest checking ..................... $ 161,283 0.0% $ - - -------------- ------- ------------ ------- NOW accounts, 2.53% and 2.50%, respectively 24,282,019 6.1 22,037,105 5.7 -------------- ------- ------------ ------- Passbook accounts, 3.05% to 3.30% and 3.00% to 3.25%, respectively .................... 33,711,189 8.4 37,237,212 9.7 -------------- ------- ------------ ------- Money market deposit accounts, variable rates of 2.53% to 4.55% and 2.50% to 4.64%, respectively .............................. 52,330,731 13.1 48,011,632 12.5 -------------- ------- ------------ ------- CERTIFICATE ACCOUNTS Less than 4% .............................. 1,633,300 0.4 1,943,080 0.5 4.00% to 5.99% ............................ 220,873,790 55.3 165,112,903 43.0 6.00% to 7.99% ............................ 44,574,877 11.2 83,008,401 21.6 8.00% to 9.99% ............................ 22,105,991 5.5 27,029,198 7.0 -------------- ------- ------------ ------- 289,187,958 72.4 277,093,582 72.1 -------------- ------- ------------ ------- $ 399,673,180 100.0% $384,379,531 100.0% ============== ======= ============ ======= 42 Following is a summary of interest expense on deposits: Years ended September 30, --------------------------------------- 1996 1995 1994 ----------- ----------- ----------- NOW accounts ........................... $ 546,383 $ 542,169 $ 557,968 Passbook accounts ...................... 982,814 1,235,170 1,183,115 Money market deposit accounts .......... 1,950,419 2,206,038 2,193,356 Certificate accounts ................... 16,835,250 15,395,663 12,489,201 ----------- ----------- ----------- 20,314,866 19,379,040 16,423,640 Less early withdrawal penalties ........ 63,827 68,441 53,575 ----------- ----------- ----------- Net interest on deposits ............... $20,251,039 $19,310,599 $16,370,065 =========== =========== ===========
The weighted average interest rate of savings deposits was 5.26% and 4.96% at September 30, 1996 and 1995, respectively. At September 30, 1996, deposit maturities were as follows:
Within 1 year ............................................ $212,876,848 1 year to 3 years ........................................ 74,462,772 3 years to 5 years ....................................... 67,092,484 Thereafter ............................................... 45,241,076 ----------- $399,673,180 ============ Deposits in excess of $100,000 aggregated $64,936,532 and $67,387,146 at September 30, 1996 and 1995, respectively. Deposits in excess of $100,000 are not insured by the Federal Deposit Insurance Corporation ("FDIC").
43 (8) Advances from FHLB As a member of the FHLB, the Association maintains a credit line that is a percentage of their total regulatory assets, subject to collateralization requirements. At September 30, 1996, the credit line was 30 percent of total assets of the Association. Advances are collateralized in aggregate, as provided for in the Advances, Security and Deposit Agreements with the FHLB, by certain mortgages or deeds of trust, securities of the U.S. Government and agencies thereof and cash on deposit with the FHLB. At September 30, 1996 the minimum book value of eligible collateral pledged for these borrowings was $103,061,850. Scheduled maturites of advances from the FHLB were as follows:
September 30, ------------------------------------------------------------------------- 1996 1995 Range of Range of Amount Interest Rates Amount Interest Rates ----------- -------------- -------------- -------------- FHLB ADVANCES Due within one year ......................... $65,000,000 5.40%-5.64% $20,000,000 5.94% After three but within four years ........... 25,000,000 5.53%-5.74% - - ----------- -------------- $90,000,000 $20,000,000 =========== ============== Financial data pertaining to the weighted average cost, the level of FHLB advances and the related interest expense were as follows: Year ended September 30, ---------------------------------- 1996 1995 1994 ----------- ----------- ---- Weighted average interest rate at end of year ............................. 5.50% 5.94% - Weighted daily average interest rate during the year ...................... 5.60% 6.21% - Daily average FHLB advances ............................................... $47,986,339 $15,304,932 $- Maximum FHLB advances at any month end .................................... 90,000,000 22,000,000 - Interest expense during the year .......................................... 2,689,790 949,059 -
44 (9) Short Term Borrowings Securities sold under agreements to repurchase in 1996 consisted of the following: Reverse repurchase agreements $14,904,400 The Company sold, under agreements to repurchase, specific securities of the U.S. government and its agencies and other approved investments to a broker-dealer. The securities underlying the agreement with the broker-dealer were delivered to the dealer who arranged the transaction. Securities delivered to broker-dealers may be loaned out in the ordinary course of operations. All of the reverse repurchase agreements were due within 30 days and were renewed subsequent to year end with additional principal outstanding of approximately $53,000 and an interest rate of 5.65%. Financial data pertaining to the weighted average cost, the level of securities sold under agreements to repurchase and the related interest expense were as follows:
Year ended September 30, --------------------------- 1996 1995 1994 ------------ ------ ------ Weighted average interest rate at end of year ......................... 5.65% - - Weighted daily average interest rate during the year .................. 5.55% - - Daily average of securities sold under agreements to repurchase ....... $ 3,530,795 $ - $ - Maximum securities sold under agreements to repurchase at any month end 14,904,000 - - Interest expense during the year ...................................... 196,130 - - The Company has an unused line of credit totaling $15.0 million with U.S. National Bank of Oregon at September 30, 1996 and 1995. 45 (10) Taxes on Income The following is a summary of income tax expense: Years ended September 30, ---------------------------------------- 1996 1995 1994 ----------- ----------- ----------- CURRENT TAXES Federal ................................... $ 4,384,720 $ 2,154,240 $ 3,302,357 State ..................................... 437,053 447,719 677,646 ----------- ----------- ----------- Current tax provision ..................... 4,821,773 2,601,959 3,980,003 ----------- ----------- ----------- DEFERRED TAXES Federal ................................... (372,005) 618,488 (94,385) State ..................................... (37,241) 128,478 (19,617) ----------- ----------- ----------- Deferred tax provision .................... (409,246) 746,966 (114,002) ----------- ----------- ----------- Provision for income taxes ................ $ 4,412,527 $ 3,348,925 $ 3,866,001 =========== =========== =========== An analysis of income tax expense, setting forth the reasons for the variation from the "expected" Federal corporate income tax rate of 34.0% and the effective rate provided, is as follows: Years ended September 30, --------------------------- 1996 1995 1994 ------ ------ ------ Federal "expected" corporate income tax rate ........ 34.0% 34.0% 34.0% State income taxes, net of Federal income tax benefit 2.2 4.4 4.4 Nondeductible ESOP compensation expense ............. 4.0 - - Other ............................................... 1.7 (.9) .2 ------ ------ ------ 41.9% 37.5% 38.6% ====== ====== ======
46 Deferred income taxes for the years ended September 30, 1996 and 1995 reflect the impact of "temporary differences" between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. 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, ---------------------- 1996 1995 --------- ---------- DEFERRED TAX ASSETS Deferred loan fees ................................ $ 525,560 $1,157,492 Allowance for losses on loans ..................... 369,768 324,634 Unrealized loss on securities available for sale .. 176,643 424,608 Pension liability ................................. 263,893 237,173 SAIF special assessment ........................... 976,319 - Unearned ESOP shares .............................. 129,076 - Other ............................................. - 3,811 --------- ---------- Total gross deferred tax assets ................... 2,441,259 2,147,718 --------- ---------- DEFERRED TAX LIABILITIES FHLB stock dividends .............................. 1,256,630 1,090,832 Tax bad debt reserve in excess of base-year reserve 1,472,206 1,472,206 Other ............................................. 448,019 481,556 --------- ---------- Total gross deferred tax liabilities .............. 3,176,855 3,044,594 --------- ---------- Net deferred tax liability ........................ $ 735,596 $ 896,876 ========== ==========
The company has created a valuation allowance arising from the realized loss on the U.S. Federal securities mutual bond fund of $648,837 offsetting a deferred tax asset as of September 30, 1996 because management believes that it is more likely than not that the tax asset will not be realized by available carrybacks, offsetting future taxable income from reversing taxable temporary differences, and anticipated future investment gains. There was no valuation allowance at September 30, 1995. The Company has qualified under provisions of the Internal Revenue Code to compute federal income taxes after deductions of additions to the bad debt reserves. At September 30, 1996, the Company had a taxable temporary difference of approximately $10,486,000 that arose before 1988 (base-year amount). In accordance with SFAS No. 109, a deferred tax liability of approximately $3,824,000 has not been recognized for the temporary difference. Management does not expect this temporary difference to reverse in the foreseeable future. 47 (11) Shareholders' Equity The Company was incorporated under Oregon law in June 1995 to acquire and hold all of the outstanding capital stock of the Association, as part of the Association's conversion from a federally-chartered mutual savings and loan association. In connection with the conversion, which was consummated on October 4, 1995, the Company issued and sold 12,233,125 shares of common stock (par value of $.01 per share) at a price of $10.00 per share for net total proceeds of $119,352,984 after conversion expenses of $2,978,266. The Company retained one-half of the net proceeds and used the remaining net proceeds to purchase the newly issued capital stock of the Association. The net conversion proceeds of $119,352,984 and over subscription proceeds of $65,685,300 were held in withdrawable accounts at the Association at September 30, 1995. Since, among other things, all required regulatory approvals to consummate the conversion were received prior to September 30, 1995, the conversion has been accounted for as being effective as of September 30, 1995, with the net conversion offering proceeds of $119,352,984 shown on the statement of shareholders' equity as proceeds from the sale of common stock and stock oversubscription proceeds of $65,685,300 recorded as a liability. The oversubscription proceeds were refunded, with accrued interest, on October 4, 1995. Subsequent to the ratification of the adoption of the 1996 Management Recognition and Development Plan ("MRDP") at the annual meeting on April 9, 1996, 489,325 shares of stock were purchased in the open market at a cost of $6.7 million, to be held in trust for future allocation to management in accordance with the terms of the MRDP. During September 1996, the Board of Directors approved and the Company engaged in a stock repurchase program and retirement of 620,655 shares or 5.07% of the common stock. The Association may not declare or pay cash dividends if the effect thereof would reduce its regulatory capital below the amount required for the liquidation account discussed below. At the time of conversion, the Association established a liquidation account in an amount equal to its retained earnings as of June 30, 1995, the date of the latest statement of financial condition used in the final conversion prospectus. The liquidation account will be maintained for the benefit of eligible withdrawable account holders who have maintained their deposit accounts in the Association after conversion. In the event of a complete liquidation of the Association (and only in such an event), eligible depositors who have continued to maintain accounts will be entitled to receive a distribution from the liquidation account before any liquidation may be made with respect to common stock. The Company's Articles of Incorporation authorize the issuance of 500,000 shares of preferred stock, having a par value of $.01 per share, in series and to fix and state the powers, designations, preferences and relative rights of the shares of such series, and the qualifications, limitations and restrictions thereof. (12) Employee Benefit Plans Employee Retirement Plan The Company is a member of a multiple-employer trusteed pension plan ("Plan") covering all employees with one year of service and pays direct pensions to certain retired employees. Pension expense of $198,000, $185,000 and $120,000 was incurred during the years ended September 30, 1996, 1995 and 1994, respectively. Separate actuarial valuations, including computed value of vested benefits, are not made with respect to each contributing employer, nor are the plan assets so segregated by the trustee. The Plan had an over-funded accumulated benefit of approximately $385 million at June 30, 1996. Director Deferred Compensation Plan The Company also has an unfunded supplemental benefits plan to provide members of the Board of Directors with supplemental retirement benefits. Supplemental benefits are based on monthly fees approved by the Compensation Committee of the Board. Pension costs recognized for the years ended September 30, 1996, 1995 and 1994 were $71,053, $70,020 and $0 respectively. At September 30, 1996 and 1995, the projected benefit obligation was $668,088 and $616,035, respectively. 48 Management Recognition and Development Plan ("MRDP") In February 1996, the Board of Directors approved a MRDP plan for the benefit of officers and non-employee directors which authorizes the grant of 489,325 common stock shares. The MRDP was approved by the Company's shareholders on April 9, 1996. Those eligible to receive benefits under the MRDP plan are determined by members of a committee appointed by the Board of Directors of the Company. MRDP awards vest over a five-year period in equal installments beginning on April 9, 1997 (the first anniversary of the effective date of the MRDP) or upon the participant's death or disability. The Company will recognize compensation expense in the amount of the fair value of the common stock in accordance with the vesting schedule during the years in which the shares are payable. There were no shares vested under the plan at September 30, 1996. Accordingly, the Company recognized no compensation expense for the MRDP for the year ended September 30, 1996. Stock Option Plan In February 1996, the Board of Directors adopted a Stock Option Plan ("Stock Plan") for the benefit of certain employees and directors. The Stock Plan was approved by the Company's shareholders on April 9, 1996. The maximum number of common shares which may be issued under the Stock Plan is 1,223,313 shares with a maximum term of ten years for each option from the date of grant. The initial awards were granted on April 9, 1996 at the fair value of the common stock on that date ($13.125). All initial awards vest in equal installments over a five year period from the grant date and expire during April 2006. Unvested options become immediately exercisable in the event of death or disability. No options had vested or were exercised as of the year ended September 30, 1996. (13) Employee Stock Ownership Plan ("ESOP") As part of the conversion discussed in note 11, an ESOP was established for all employees that are age 21 or older and have completed two years of service with the Company. The ESOP borrowed $9,786,500 from the Company and used the funds to purchase 978,650 shares of the common stock of the Company issued in the conversion. The loan will be repaid principally from the Company's discretionary contributions to the ESOP over a period of ten years. The loan had an outstanding balance of $8,807,850 and $9,786,500 at September 30, 1996 and 1995, respectively, and an interest rate of 8.75%. The loan obligation of the ESOP is considered unearned compensation and, as such, recorded as a reduction of the Company's shareholders' equity. Both the loan obligation and the unearned compensation are reduced by the amount of loan repayments made by the ESOP. Shares purchased with the loan proceeds are held in a suspense account for allocation among participants as the loan is repaid. Contributions to the ESOP and shares released from the suspense account are allocated among participants on the basis of compensation in the year of allocation. Benefits are fully vested at all times under the ESOP. Forfeitures are reallocated to remaining plan participants and may reduce the Company's contributions. Benefits may be payable upon retirement, death, disability, or separation from service. Since the Company's annual contributions are discretionary, benefits payable under the ESOP cannot be estimated. Compensation expense is recognized to the extent of the fair value of shares committed to be released. The Company recorded compensation expense under the ESOP of $1.4 million and 97,865 shares were allocated among the participants in 1996. 49 (14) Fair Value of Financial Instruments Financial instruments have been construed to generally mean cash or a contract that implies an obligation to deliver cash or another financial instrument to another entity. The estimated fair values of the Company's financial instruments are as follows:
September 30, 1996 September 30, 1995 --------------------------------------------------------- Carrying Fair Carrying Fair amount value amount value ------------ --------- ----------- ----------- FINANCIAL ASSETS Cash and due from banks ................................ $ 6,841,554 $ 6,841,554 $ 5,027,880 $ 5,027,880 Federal funds sold ..................................... 9,338,079 9,338,079 170,966,390 170,966,390 Investment securities available for sale ............... 75,986,611 75,986,611 12,605,654 12,605,654 Investment securities held to maturity ................. 9,827,193 9,860,165 42,209,497 42,178,800 Mortgage backed and related securities available for sale ................................................... 74,109,321 74,109,321 - - Mortgage backed and related securities held to maturity 6,783,001 6,736,007 - - Loans receivable, net .................................. 473,555,988 467,682,131 403,543,725 408,824,175 FHLB stock ............................................. 4,773,800 4,773,800 4,425,900 4,425,900 FINANCIAL LIABILITIES Savings deposits ....................................... 399,673,180 402,769,799 384,379,531 389,681,552 FHLB advances .......................................... 90,000,000 89,974,165 20,000,000 19,997,055 Short term borrowings .................................. 14,904,400 14,904,400 - - OFF BALANCE SHEET FINANCIAL INSTRUMENTS Mortgage loan commitments .............................. 10,840,110 10,840,110 7,937,473 7,937,473 Financial assets and financial liabilities other than securities are not traded in active markets. The above estimates of fair value require subjective judgments and are approximate. Changes in the following methodologies and assumptions could significantly affect the estimates. These estimates may also vary significantly from the amounts that could be realized in actual transactions. Financial Assets The estimated fair value approximates the book value of cash, interest bearing cash accounts, and federal funds sold. For securities, the fair value is based on quoted market prices. The fair value of loans is estimated by discounting future cash flows using current rates at which similar loans would be made. The fair value of FHLB stock approximates the book value.
50 Financial Liabilities The estimated fair value of savings deposits, FHLB advances, and short term borrowings are estimated by discounting the future cash flows using current rates at which similar deposits, FHLB advances and short term borrowings would be made. Off-Balance Sheet Financial Instruments Off-balance sheet financial instruments are limited to commitments to originate mortgage loans. Fair value considers the difference between current levels of interest rates and committed rates. See note 16 to the consolidated financial statements. The Company did not hold any derivative financial instruments in its investment portfolio at or during the years ended September 30, 1996, 1995, or 1994. (15) Regulatory Capital Requirements The Company is not subject to any regulatory capital requirements. The Association however, is subject to various regulatory capital requirements administered by the Office of Thrift Supervision ("OTS"). Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Association's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Association must meet specific capital guidelines that involve quantitative measures of the Association's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Association's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Association to maintain minimum amounts and ratios of total and Tier I capital to risk-weighted assets, of Tier I capital to total assets, and tangible capital to tangible assets (set forth in the table below). Management believes that the Association meets all capital adequacy requirements to which it is subject as of September 30, 1996. As of September 30, 1996, the most recent notification from the OTS categorized the Association as "well capitalized" under the regulatory framework for prompt corrective action. To be categorized as "well capitalized", the Association must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. 51 The Association's actual and required minimum capital ratios are presented in the following table:
As of September 30, 1996 ----------------------------------------------------------------------------------- To Be Categorized as "Well Capitalized" For Capital Under Prompt Corrective Adequacy Purposes Action Provision -------------------- ---------------------- Actual Amount Actual Ratio Amount Ratio Amount Ratio ------------- ------------ ------------ ----- ------------ ----- Total Capital: (to risk weighted assets).............. $121,036,745 42.4% $ 22,832,496 8.0% $ 28,540,620 10.0% Tier I Capital: (to risk weighted assets).............. 120,108,925 42.1% N/A N/A 17,124,372 6.0% Tier I Capital: (to total assets)....................... 120,108,925 19.2% 18,746,701 3.0% 31,244,502 5.0% Tangible Capital: (to tangible assets).............. 120,108,925 19.2% 9,373,351 1.5% N/A N/A As of September 30, 1995 ----------------------------------------------------------------------------------- To Be Categorized as "Well Capitalized" For Capital Under Prompt Corrective Adequacy Purposes Action Provision -------------------- ---------------------- Actual Amount Actual Ratio Amount Ratio Amount Ratio ------------- ------------ ------------ ----- ------------ ----- Total Capital: (to risk weighted assets) ............. $116,279,395 36.9% $ 25,227,600 8.0% $ 31,534,500 10.0% Tier I Capital: (to risk weighted assets) ............. 115,471,575 36.6% N/A N/A 18,920,700 6.0% Tier I Capital: (to total assets) ...................... 115,471,575 18.6% 18,647,569 3.0% 31,079,281 5.0% Tangible Capital: (to tangible assets) ............. 115,471,575 18.6% 9,323,784 1.5% N/A N/A
(Graph in Hardcopy Report) SHARHOLDERS'S EQUITY (in thousands)
TOTAL YEAR EQUITY 1996 $153,411 1995 164,685 1994 49,308 1993 44,949 1992 37,792
52 The following table is a reconciliation of the Association's capital, calculated according to generally accepted accounting principles (GAAP), to regulatory tangible and risked-based capital:
September 30, 1996 SHAREHOLDERS' EQUITY ------------ Association's Equity ....... $119,820,720 1996 153,411 Unrealized securities loss . 288,205 1995 164,685 ------------ Tangible capital ........... $120,108,925 1994 49,308 General valuation allowances 927,820 1993 44,949 ------------ Total capital .............. $121,036,745 1992 37,792 ============
On August 23, 1993, the OTS issued a regulation which would add an interest rate risk component to the risk-based capital standards (the "final IRR rule"). Institutions with a greater than normal interest rate risk exposure will be required to take a deduction from the total capital available to meet their risk-based capital requirement. That deduction is equal to one-half of the difference between the institution's actual measured exposure and the normal level of exposure as defined by the regulation. Although no such deduction was required as a result of the Association's most recent regulatory examination, a deduction may be required as a result of future examinations. The final IRR rule has been postponed and it is not practicable to determine when it will become effective. At periodic intervals, the OTS and the Federal Deposit Insurance Corporation ("FDIC") routinely examine the Association as part of their legally prescribed oversight of the thrift industry. Based on these examinations, the regulators can direct that the Association's financial statements be adjusted in accordance with their findings. A future examination by the OTS or the FDIC could include a review of certain transactions or other amounts reported in the Association's 1996 financial statements. In view of the uncertain regulatory environment in which the Association now operates, the extent, if any, to which a forthcoming regulatory examination may ultimately result in adjustments to the 1996 financial statements cannot presently be determined. On September 30, 1996, the United States Congress passed and the President signed into law the omnibus appropriations package, including the Bank Insurance Fund/Savings Association Insurance Fund ("BIF/SAIF") and Regulatory Burden Relief packages. Included in this legislation is a requirement for SAIF-insured institutions to recapitalize the SAIF insurance fund through a one-time special assessment to be paid within 60 days of the first of the month following enactment. The FDIC is charged with the ultimate responsibility of determining the specific assessment amount which is 65.7 basis points of the March 31, 1995 SAIF deposit assessment base. As the Association is insured by the SAIF, this assessment resulted in a pre-tax charge to non-interest expense for the quarter ending September 30, 1996 of $2.5 million based on the March 31, 1995 SAIF deposit assessment base of $376.4 million. 53 (16) Financial Instruments with Off-Balance Sheet Risk and Concentrations of Credit Risk The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments generally include commitments to originate mortgage loans. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The Company's maximum exposure to credit loss in the event of nonperformance by the borrower is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for on-balance-sheet instruments. Commitments to extend credit are conditional 60 day agreements to lend to a customer subject to the Company's usual terms and conditions. At September 30, 1996, loan commitments amounted to approximately $10,840,110, comprised of a $146,000 variable rate loan at 6.00%, and $10,694,110 in fixed rate loans ranging from 7.00% to 10.875%. At September 30, 1995, loan commitments amounted to $7,967,473, comprised of a $31,000 variable rate loan at 6.38%, and $7,936,473 in fixed rate loans ranging from 7.00% to 9.75%. The Company originates residential real estate loans and, to a lesser extent, commercial real estate and consumer loans. Over 95% of the mortgage loans in the Association's portfolio are secured by properties located in Klamath, Jackson and Deschutes counties in Southern and Central Oregon. 54 (17) Parent Company Financial Information Condensed financial information as of September 30, 1996 and 1995, for Klamath First Bancorp, Inc. is presented and should be read in conjunction with the consolidated financial statements and the notes thereto:
At September 30, ------------------------------ Statement of Financial Condition 1996 1995 ------------- ------------- ASSETS Cash and cash equivalents ................ $ 4,819,110 $ 117,720,840 Investment and mortgage backed securities 43,726,942 - Investment in wholly-owned subsidiary .... 119,820,720 114,778,794 Other assets ............................. 1,038,320 - ------------- ------------- Total assets ............................. $ 169,405,092 $ 232,499,634 ============= ============= LIABILITIES Short-term borrowings .................... $ 14,904,400 $- Stock over subscription .................. - 65,685,300 Accrued conversion costs ................. - 1,915,649 Other liabilities ........................ 1,089,718 213,620 ------------- ------------- Total liabilities ........................ 15,994,118 67,814,569 ------------- ------------- SHAREHOLDERS' EQUITY Common stock ............................. 116,124 122,331 Additional paid-in capital ............... 110,762,677 119,230,653 Retained earnings ........................ 58,034,493 55,118,581 Unearned ESOP shares at cost ............. (8,807,850) (9,786,500) Unearned MRDP shares at cost ............. (6,694,470) - ------------- ------------- Total shareholder's equity ............... 153,410,974 164,685,065 ------------- ------------- Total liabilities and shareholder's equity $ 169,405,092 $ 232,499,634 ============= ============= For the year ended September 30, -------------------------------- Statement of Earnings 1996 1995 ---------- ---------- Equity in undistributed income of subsidiary ...... $4,045,267 $ -- Total interest income ............................. 3,115,776 229,899 Total interest expense ............................ 196,130 203,491 Non-interest income ............................... 857,843 -- Non-interest expense .............................. 484,778 -- ---------- ---------- Earnings before income taxes ...................... 7,337,978 26,408 Provision for income tax .......................... 1,228,181 10,129 ---------- ---------- Net earnings ...................................... $6,109,797 $ 16,279 ========== ==========
55
For the Years Ended September 30, ------------------------------- Statement of Cash Flows 1996 1995 -------------- ------------ Net cash flows from operating activities ................... $ (552,188) $ 229,899 -------------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES Investment in subsidiary ................................... (176,157) (59,676,492) Maturity of investment and mortgage backed securities ...... 27,734,452 - Purchase of investment and mortgage backed securities ...... (72,168,427) - -------------- ------------ Net cash flows from investing activities ................... (44,610,132) (59,676,492) -------------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from sale of common stock ......................... - 121,268,633 Proceeds from stock over subscription ...................... - 65,685,300 Repayments from stock over subscription .................... (65,685,300) - Proceeds from ESOP loan repayment .......................... 653,601 - Loan to ESOP ............................................... - (9,786,500) Proceeds from short-term borrowings ........................ 21,938,300 - Repayments of short-term borrowings ........................ (7,033,900) - Purchase of stock for MRDP Trust ........................... (6,694,470) - Stock retirement ........................................... (8,891,834) - Dividends paid ............................................. (2,025,807) - -------------- ------------ Net cash flows from financing activities ................... (67,739,410) 177,167,433 -------------- ------------ Net increase/(decrease) in cash and cash equivalents ....... (112,901,730) 117,720,840 Cash and cash equivalents beginning of year ................ 117,720,840 - -------------- ------------ Cash and cash equivalents end of year ...................... $ 4,819,110 $117,720,840 ============= ============
56 (18) Recently Issued Accounting Standards In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation", which applies to all transactions in which an entity acquires goods or services by issuing equity instruments or by incurring liabilities where the payment amounts are based on the entity's common stock price, except for employee stock ownership plans (ESOP's). The SFAS covers transactions with employees and non-employees and is applicable to both public and non-public entities. SFAS No. 123 requires that, except for transactions with employees that are within the scope of APB Opinion No. 25, all transactions in which goods or services are the consideration received for the issuance of equity instruments are to be accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. However, it also allows an entity to continue to measure compensation costs for those plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees." Entities electing to follow the accounting methods in Opinion No. 25 must make pro forma disclosures of net income and, if presented, earnings per share, as if the fair value method of accounting defined in the statement had been applied. SFAS No. 123 will apply to the Company for the year ending September 30, 1997. The Company has not yet determined which method it will adopt. In June 1996, FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". SFAS No. 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996, and is to be applied prospectively. SFAS No. 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. The standards are based on consistent application of a financial-components approach that focuses on control. Under the approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. SFAS No. 125 provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. The Company plans to implement SFAS No. 125 on January 1, 1997 which complies with the required date of implementation. The Company does not expect implementation to have a material impact on the Company's financial position or results of operations. 57 (19) Selected Quarterly Financial Data (unaudited)
1996 ------------------------------------------ December March June September -------- ------- -------- ---------- (In thousands) Total interest income ............. $ 10,919 $ 11,138 $ 11,444 $ 12,149 Total interest expense ............ 5,567 5,626 5,781 6,314 -------- ------- -------- ---------- Net interest income ............... 5,352 5,512 5,663 5,835 Provision for loan losses ......... 30 30 30 30 -------- ------- -------- ---------- Net interest income after provision 5,322 5,482 5,633 5,805 Non-interest income ............... 79 98 95 249 Non-interest expense .............. 1,840 1,928 1,879 6,595 -------- ------- -------- ---------- Earnings/(loss) before income taxes 3,561 3,652 3,849 (541) Provision for income tax .......... 1,320 1,245 1,438 409 -------- ------- -------- ---------- Net earnings/(loss) ............... $ 2,241 $ 2,407 $ 2,411 $ (950) ======== ======== ======== ========= Net earnings/(loss) per share ..... $ .20 $ .21 $ .22 $ (.09) ======== ======== ======== ========= In the fourth quarter of 1996, the Company recorded a $2.5 million expense for the special SAIF assessment and a realized loss on U.S. Federal securities mutual bond fund of $1.6 million. 1995 -------------------------------------- December March June September -------- ------ ------ --------- (In thousands) Total interest income ................ $8,541 $8,603 $8,945 $9,018 Total interest expense ............... 4,663 4,849 5,208 5,721 -------- ------ ------ --------- Net interest income .................. 3,878 3,754 3,737 3,297 Provision for loan losses ............ - 60 30 30 -------- ------ ------ --------- Net interest income after provision .. 3,878 3,694 3,707 3,267 Non-interest income .................. 77 92 81 131 Non-interest expense ................. 1,566 1,555 1,583 1,300 -------- ------ ------ --------- Earnings before income taxes ......... 2,389 2,231 2,205 2,098 Provision for income tax ............. 898 897 833 721 -------- ------ ------ --------- Net earnings ......................... $1,491 $1,334 $1,372 $1,377 ======== ====== ====== =========
58 Earnings per share were not calculated for September 30, 1995, as no shares were outstanding during the year. KLAMATH FIRST BANCORP INC. AND SUBSIDIARY BRANCH OFFICES AND CORPORATE INFORMATION Main Office 540 Main Street Klamath Falls, OR 97601 Ashland Branch 512 Walker Ave. Ashland, OR 97520 Bend Branch 61515 S. HWY 97 Bend, OR 97702 Campus Branch 2323 Dahlia Street Klamath Falls, OR 97601 Madison Branch 2300 Madison Klamath Falls, OR 97603 Medford Branch 1420 E. McAndrews Rd. Medford, OR 97504 Redmond Loan Center 585 SW 6th Suite #2 Redmond, OR 97756 Shasta Branch 2943 South 6th Street Klamath Falls, OR 97603 Corporate Headquarters 540 Main Street Klamath Falls, Or 97601 (541) 882-3444 Independent Auditors Deloitte & Touche LLP 3900 U.S. Bancorp Tower 111 SW Fifth Avenue Portland, OR 97204-3698 (503) 222-1341 General Counsel William L. Sisemore, AAL 540 Main Street Klamath Falls, OR 97601 (541) 882-7139 59 Special Counsel Breyer and Aguggia 1300 I Street, NW Suite 470 East Washington, DC 20005 (202) 737-7900 Transfer Agent Registrar & Transfer Co. 10 Commerce Drive Cranford, NJ 07016-3572 1-800-866-1340 Common Stock Traded over-the-counter/National Market System NASDAQ Symbol: KFBI Form 10-K Information Available without charge to shareholders of record upon written request to Marshall Alexander, Chief Financial Officer Klamath First Bancorp, Inc. 540 Main Street Klamath Falls, OR 97601 ANNUAL MEETING The annual meeting of shareholders will be held Wednesday, January 22, 1997, beginning at 2:00 p.m.,Pacific Time at: The Shilo Inn 2500 Almond Street Klamath Falls, OR 97601 Shareholders of record as of the close of business on November 22, 1996 shall be those entitled to notice of and to vote at the meeting. 60 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-27 4 ART. 9 FDS FOR FISCAL YEAR END 96 10-K
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. 1,000 YEAR SEP-30-1996 SEP-30-1996 6,842 0 9,338 0 150,096 16,610 16,596 473,556 928 671,969 399,673 79,904 13,981 25,000 0 0 116 153,295 671,969 35,262 8,867 1,520 45,649 20,251 23,287 22,363 120 (1,643) 10,600 10,522 10,522 0 0 6,110 .56 .56 2.22 191 0 79 0 808 0 0 928 0 0 928
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