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, 2000
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 November 22, 2000, there were issued and outstanding 7,318,726 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 November 22, 2000 of $11.50,
was $66,603,515.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Registrant's Annual Report to Shareholders for the Fiscal Year
Ended September 30, 2000 ("Annual Report") (Parts I and II).
2. Portions of Registrant's Definitive Proxy Statement for the 2000 Annual
Meeting of Shareholders (Part III).
PART I
Item 1. Business
General
Klamath First Bancorp, Inc. ("Company"), an Oregon corporation, was
organized on June 16, 1995 for the purpose of becoming the holding company for
Klamath First Federal Savings and Loan Association ("Association") upon the
Association's conversion from a federal mutual to a federal stock savings and
loan association ("Conversion"). The Conversion was completed on October 4,
1995. At September 30, 2000, the Company had total assets of $995.6 million,
total deposits of $695.4 million and shareholders' equity of $108.7 million. All
references to the Company herein include the Association where applicable.
The Association was organized in 1934. The Association is regulated by the
Office of Thrift Supervision ("OTS") and its deposits are insured up to
applicable limits under the Savings Association Insurance Fund ("SAIF") of the
Federal Deposit Insurance Corporation ("FDIC"). The Association also is a member
of the Federal Home Loan Bank ("FHLB") System through the FHLB of Seattle.
In July 1997, the Association acquired 25 former First Interstate Bank
branches from Wells Fargo Bank, N.A. The new branches are located in rural
communities throughout Oregon, expanding and complementing the existing network
of branches. The acquisition was accounted for as a purchase and resulted in the
addition of approximately $241.3 million in deposits on the acquisition date of
July 18, 1997.
The Association is a 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, as well as commercial real estate and multi-family residential
loans, loans to consumers, and loans for commercial purposes. At September 30,
2000, permanent residential one- to four-family real estate loans totaled $639.2
million, or 85.12% of total loans. While the Association has historically
emphasized fixed rate mortgage lending, it has been diversifying its loan
portfolio by focusing on increasing the number of originations of commercial
real estate loans, multi-family residential loans, residential construction
loans, small business loans and non-mortgage consumer loans. A significant
portion of these newer loan products carry adjustable rates, higher yields, or
shorter terms than the traditional fixed rate mortgages. This lending strategy
is designed to enhance earnings, reduce interest rate risk, and provide a more
complete range of financial services to customers and the local communities
served by the Association. At September 30, 2000, the Association's total loan
portfolio consisted of 89.38% fixed rate and 10.62% adjustable rate loans, after
deducting loans in process and non-performing loans.
Announcement of Stock Repurchase
In May 2000, the Company announced its intention to repurchase 5% of its
outstanding common stock, or approximately 375,648 shares, to be accomplished
through the open market over a twelve month period. As of September 30, 2000,
the Company had repurchased 125,000 shares, or 33.28% of the planned shares, at
a weighted average price of $11.20.
Market Area
As a result of the branch acquisition in 1997, the Association's market
area expanded to include 33 locations in 22 of Oregon's 36 counties. Since that
time three more branch locations were added. The Association's primary market
area, which encompasses the State of Oregon and some adjacent areas of
California and Washington, can be characterized as a predominantly rural area
containing a number of communities that are experiencing moderate to rapid
population growth. The favorable population growth in the market area,
particularly in Southern Oregon, has been supported in large part by the
favorable climate, and by favorable real estate values. The economy of the
market area is still based primarily on agriculture and lumber and wood
products, but is experiencing diversification into light
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manufacturing, health care and other services, and other sectors. Tourism is a
significant industry in many regions of the market area including Central Oregon
and the Southern Oregon coast.
Yields Earned and Rates Paid
The following table sets forth, for the periods and at the date indicated,
the weighted average yields earned on interest-earning assets, the weighted
average interest rates paid on interest-bearing liabilities, and the interest
rate spread between the weighted average yields earned and rates paid.
Year Ended
At September 30,
September 30, --------------------------
2000 2000 1999 1998
------------- ---- ---- ----
Weighted average yield:
Loans receivable .............................. 7.56% 7.64% 7.80% 8.06%
Mortgage backed and related securities ........ 6.75 5.86 5.50 6.03
Investment securities ......................... 6.60 6.00 5.88 6.05
Federal funds sold ............................ 6.69 5.59 4.93 5.45
Interest-earning deposits ..................... 6.50 5.63 4.75 5.35
FHLB stock .................................... 6.50 6.69 7.50 7.73
Combined weighted average yield on
interest-bearing assets ......................... 7.35 7.22 7.25 7.34
------------- ---- ---- ----
Weighted average rate paid on:
Tax and insurance reserve ..................... 2.28 2.02 2.07 2.47
Passbook and statement savings ................ 2.31 1.78 2.15 2.70
Interest-bearing checking ..................... 1.14 1.12 1.23 1.48
Money market .................................. 4.30 4.17 3.87 3.86
Certificates of deposit ....................... 5.98 5.40 5.38 5.69
FHLB advances/Short term borrowings ........... 5.95 5.90 5.26 5.63
Combined weighted average rate on
interest-bearing liabilities .................... 5.16 4.72 4.52 4.77
------------- ---- ---- ----
Net interest spread .............................. 2.19% 2.50% 2.73% 2.57%
============= ==== ==== ====
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 13 of the 2000 Annual Report to
Shareholders ("Annual Report"), which section is incorporated herein by
reference.
2
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.
Rate/Volume Analysis
Reference is made to the section entitled "Rate/Volume Analysis" on page 14
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 82% of the mortgage loans in the Association's portfolio are
secured by properties located in Klamath, Jackson and Deschutes counties in
Southern and Central Oregon. With the expanded market area provided by the
branch acquisition in 1997, the Association's mortgage lending has diversified
throughout the state of Oregon. It is management's intention, subject to market
conditions, that the Association will continue to originate long-term mortgage
loans for the purchase, construction or refinance of one- to four-family
residential real estate to meet the needs of customers in our market area.
However, to enhance interest income and reduce interest rate risk, the
Association is placing increased emphasis on the origination or purchase of
adjustable rate loans secured by one- to four-family residential, multi-family
residential and commercial real estate, the majority of which are located
outside Klamath, Jackson, and Deschutes counties. Subject to market conditions,
the Association sells loans to the Federal National Mortgage Association
("Fannie Mae").
Permanent residential one- to four-family mortgage loans amounted to $639.2
million, or 85.12%, of the Association's total loan portfolio before net items,
at September 30, 2000. The Association originates other loans secured by
multi-family residential and commercial real estate, construction and land
loans. Those loans amounted to $90.0 million, or 11.98%, of the total loan
portfolio, before net items, at September 30, 2000. Approximately 2.90%, or
$21.8 million, of the Association's total loan portfolio, before net items, as
of September 30, 2000, 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 $16.3 million at September 30, 2000. At September 30, 2000, the
Association had 26 borrowing relationships with outstanding balances in excess
of $1.0 million, the largest of which amounted to $5.9 million and consisted of
28 loans, 27 of which were secured by commercial, multi- family and single
family real estate and one which is an unsecured line of credit.
The Association has emphasized the origination or purchase of adjustable
rate loans in order to increase the interest rate sensitivity of its loan
portfolio. The Association has been successful in expanding the production of
adjustable rate consumer loans and has purchased adjustable rate single family,
multi-family residential and non-residential real estate loans. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Market Risk and Asset/Liability Management" and "INTEREST
SENSITIVITY GAP ANALYSIS" in the Annual Report. At September 30, 2000, $78.6
million, or 10.62% of loans in the Association's total loan portfolio, after
loans in process and non-performing loans, consisted of adjustable rate loans.
3
Loan Portfolio Analysis. The following table sets forth the composition of the
loan portfolio by type of loan at the dates indicated.
At September 30,
-------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------ ----------------- ---------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(Dollars in thousands)
Real estate loans:
Permanent residential
one- to four-family ......... $639,165 85.12% $647,130 83.56% $577,471 81.95% $498,595 86.47% $447,004 91.50%
Multi-family residential ...... 19,015 2.53 18,412 2.38 19,230 2.73 16,881 2.93 6,555 1.34
Construction .................. 25,289 3.37 53,219 6.87 64,289 9.12 30,487 5.29 14,276 2.92
Commercial .................... 42,277 5.63 37,079 4.79 29,457 4.18 22,639 3.93 15,645 3.20
Land .......................... 3,394 0.45 2,064 0.27 2,185 0.31 1,586 0.27 1,152 0.24
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total real estate loans ......... 729,140 97.10 757,904 97.87 692,632 98.29 570,188 98.89 484,632 99.20
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Non-real estate loans:
Savings accounts .............. 1,957 0.26 1,800 0.23 1,991 0.28 1,711 0.30 1,640 0.34
Home improvement and home eq. . 8,338 1.11 6,726 0.87 5,750 0.82 3,486 0.60 1,977 0.40
Other ......................... 11,474 1.53 8,011 1.03 4,330 0.61 1,190 0.21 302 0.06
-------- ----- -------- ----- -------- ----- -------- ---- -------- -----
Total non-real estate loans ..... 21,769 2.90 16,537 2.13 12,071 1.71 6,387 1.11 3,919 0.80
-------- ----- -------- ----- -------- ----- -------- ---- -------- -----
Total loans .................... 750,909 100.00% 774,441 100.00% 704,703 100.00% 576,575 100.00% 488,551 100.00%
====== ====== ====== ====== ======
Less:
Undisbursed portion of loans .... 10,350 24,176 26,987 17,096 8,622
Deferred loan fees .............. 7,440 7,988 7,620 6,358 5,445
Allowance for loan losses ....... 4,082 2,484 1,950 1,296 928
-------- -------- --------- -------- --------
Net loans ....................... $729,037 $739,793 $668,146 $551,825 $473,556
======== ======== ========= ======== ========
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,
-----------------------------------------
2000 1999
------------------- ------------------
Amount Percent Amount Percent
-------- ------- -------- -------
(Dollars in thousands)
Fixed rate................... $661,160 89.38% $676,644 90.59%
Adjustable-rate.............. 78,598 10.62 70,309 9.41
-------- ------ -------- ------
Total................... $739,758 100.00% $746,953 100.00%
======== ====== ======== ======
Permanent Residential One- to Four-Family Mortgage Loans. The primary
lending activity of the Association has been 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, 2000, $639.2 million, or 85.12%, 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 $75,924.
The Association presently originates both fixed-rate mortgage loans and
adjustable rate mortgages ("ARMs") secured by one- to four-family properties
with terms of 15 to 30 years. Historically, most of the loans originated by the
Association have been fixed rate loans secured by one- to four-family
properties. At September 30, 2000, $611.9 million, or 82.71% of the total loans
after loans in process and non-performing loans were fixed rate one- to
four-family loans and $35.6 million, or 4.81%, 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, 2000,
the Association charged origination fees ranging from 1.00% to 1.75% on its ARM
loans.
In an attempt to increase adjustable rate mortgages in the loan portfolio,
the Association uses below market "teaser" rates which are competitive with
other institutions originating mortgages in the Association's primary market
area. Initially, ARM loans are priced at the competitive teaser rate and after
one year reprice at 2.875% over the One-Year Constant Maturity Treasury Bill
Index, with a maximum increase or decrease of 2.00% in any one year and 6.00%
over the life of the loan. The Association has also introduced variable rate
loan products that bear fixed rates for the first three or five years and then
reprice annually thereafter. As a supplement to origination of ARM loans, the
Association purchases ARMs from other institutions when suitable loans can be
found which meet its underwriting criteria.
The retention of ARM loans in the Association's loan portfolio helps reduce
the Association's exposure to changes in interest rates. There are, however,
unquantifiable credit risks resulting from the potential of increased costs due
to changed rates to be paid by the customer. It is possible that, during periods
of rising interest rates, the risk of default on ARM loans may increase as a
5
result of repricing with increased costs to the borrower. The ARM loans
originated by the Association generally provide, as a marketing incentive, for
initial rates of interest below the rates which would apply were the adjustment
index used for pricing initially (discounting). Increased risks of default or
delinquency could occur because of discounting the rate. 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 loans 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 97% of the lesser of the appraised value or
purchase price of the property. All permanent residential one- to four-family
mortgage loans in excess of an 80% loan-to-value ratio require private mortgage
insurance.
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 80% of the lesser of the appraised value or
purchase price of the property and such loans are generally provided at an
interest rate higher than owner-occupied loans.
The Association offers fixed-rate, permanent residential one- to
four-family mortgage loans with terms of 15 to 30 years. Substantially all
permanent one- to four-family loans have original contractual terms to maturity
of 30 years. Such loans are amortized on a monthly basis with principal and
interest due each month and customarily include "due-on-sale" clauses. The
Association enforces due-on-sale clauses to the extent permitted under
applicable laws. Substantially all of the Association's mortgage loan portfolio
consists of conventional loans.
Historically, the Association has not originated significant amounts of
mortgage loans on second residences. However, with the branch offices in Bend
and the loan center in Redmond, located near popular ski areas and other outdoor
activities, and the branches along the Southern Oregon coast, located in an
increasingly popular resort and vacation area, the Association believes that
there is an opportunity to engage in such lending within the parameters of its
current underwriting policies. At September 30, 2000, $4.7 million, or 0.62%, of
the Association's loan portfolio consisted of loans on second homes.
Commercial and Multi-Family Real Estate Loans. The Association has
historically engaged in a limited amount of multi-family and commercial real
estate lending. The Association purchases participations in loans secured by
multi-family and commercial real estate in order to increase the balance of
adjustable rate loans in the portfolio. See "-- Loan Originations, Purchases,
and Sales." At September 30, 2000, $19.0 million, or 2.53%, of the Association's
total loan portfolio, before net items, consisted of loans secured by existing
multi-family residential real estate and $42.3 million, or 5.63%, 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 primarily include 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 $276,092 at September 30, 2000, the largest of which was a $2.3
million commercial real estate loan secured by a medical office building. This
loan has performed in accordance with its terms since origination. Originations
of commercial real estate and multi-family residential real estate amounted to
11.09%, 5.74%, and 3.20% of the Association's total loan originations in the
fiscal years ended September 30, 2000, 1999, and 1998, respectively. The
Association also purchased $2.4 million in multi-family residential loan
participations and $937,000 in commercial real estate participations during the
6
year ended September 30, 1999 and $507,600 in commercial real estate
participations during the year ended September 30, 2000.
The Association's commercial and multi-family loans generally have terms
which range up to 25 years and loan-to-value ratios of up to 75%. The
Association currently originates fixed and adjustable rate commercial and
multi-family real estate loans. Commercial real estate and multi-family
adjustable rate loans are priced to be competitive with other commercial lenders
in the Association's market area. A variety of terms are available to meet
specific commercial and multi-family residential financing needs. As of
September 30, 2000, $31.5 million, or 4.26%, after loans in process and
non-performing loans, of other mortgage loans, including commercial and
multi-family residential real estate loans, had adjustable rates of interest.
Multi-family residential and commercial real estate lending is generally
considered to involve a higher degree of risk than permanent residential one- to
four-family lending. Such lending typically involves large loan balances
concentrated in a single borrower or groups of related borrowers. In addition,
the payment experience on loans secured by income-producing properties is
typically dependent on the successful operation of the related real estate
project and thus may be subject to a greater extent to adverse conditions in the
real estate market or in the economy generally. The Association generally
attempts to mitigate the risks associated with multi-family residential and
commercial real estate lending by, among other things, lending on collateral
located in its market area and following strict underwriting standards. Loans
considered for purchase are subjected to the same underwriting standards as
those originated in- house.
Construction Loans. The Association makes all-in-one construction loans
(construction loans that convert to permanent financing) to individuals for the
construction of their single-family residences. The Association also makes loans
to builders for the construction of single-family residences which are not
presold at the time of origination ("speculative loans"). Permanent construction
loans generally begin to amortize as permanent residential one- to four-family
mortgage loans within one year of origination unless extended. Speculative loans
are scheduled to pay off in 12 to 18 months. At September 30, 2000, construction
loans amounted to $25.3 million (including $13.2 million of speculative loans),
or 3.37%, of the Association's total loan portfolio before net items. Much of
the Company's speculative construction lending had been in the Portland, Oregon
market. There was a softening in the market due to rising interest rates and
oversupply in that market. As a result, construction loan volume decreased
significantly during the year ended September 30, 2000. Permanent construction
loans have rates and terms which generally match the non-construction loans then
offered by the Association, except that during the construction phase, the
borrower pays only interest on the loan. The Association's construction loan
agreements generally provide that loan proceeds are disbursed in increments as
construction progresses. The Association periodically reviews the progress of
the underlying construction project through physical inspections. Permanent
construction loans are underwritten pursuant to the same general guidelines used
for originating permanent one- to four-family loans. Permanent construction
lending is generally limited to the Association's primary market area.
Construction financing is generally considered to involve a higher degree
of risk of loss than financing on improved, owner-occupied real estate because
of the uncertainties of construction, including the possibility of costs
exceeding the initial estimates and, in the case of speculative loans, the need
to obtain a purchaser. The Association has sought to minimize the risks
associated with permanent construction lending by limiting construction loans to
qualified owner-occupied borrowers with construction performed by qualified
state licensed builders located primarily in the Association's market area.
During 1997, the Association began originating construction loans in the
Portland, Oregon metropolitan area through mortgage brokers. These loans are
underwritten using the same standards as loans from the branch locations.
The Association's underwriting criteria are designed to evaluate and
minimize the risks of each construction loan. Interim construction loans are
qualified at permanent rates in order to ensure the capability of the borrower
to repay the loan.
Loan proceeds are disbursed only as construction progresses and inspections
warrant. These loans are underwritten to the same standards and to the same
terms and requirements as one- to four-family purchase mortgage loans, except
7
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 97% 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 upon which to build their permanent residence. These loans
generally have 20 year amortization periods, with a balloon payment due in five
years, and maximum loan-to-value ratios of 80%. As of September 30, 2000, $3.4
million, or 0.45%, of the Association's total loan portfolio consisted of land
loans.
Non-Real Estate Loans. Non-real estate lending is a growing part of the
Association's business. During 1997, the Association introduced several new
business and consumer loan products, including home equity lines of credit,
automobile and recreational vehicle loans, and personal and business lines of
credit, among others. Non-real estate loans generally have shorter terms to
maturity or repricing and higher interest rates than real estate loans. As of
September 30, 2000, $21.8 million, or 2.90%, of the Association's total loan
portfolio consisted of non-real estate loans. As of that date, $2.0 million, or
0.26%, of total loans were secured by savings accounts. At September 30, 2000,
$1.6 million, or 0.21%, 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. Other non-real estate loans at September
30, 2000 include $4.3 million in consumer automobile loans, $2.0 million in
unsecured business lines of credit and $1.3 million in commercial equipment
loans.
Loan Maturity and Repricing. The following table sets forth certain
information at September 30, 2000 regarding the dollar amount of total loans,
after loans in process and non-performing loans, maturing in the Association's
portfolio, based on the contractual terms to maturity or repricing date. Demand
loans, loans having no stated schedule of repayments and no stated maturity, and
overdrafts are reported as due in one year or less.
After One Year
Within One Year Through 5 Years After 5 Years Total
--------------- --------------- ------------- ----------
(In thousands)
Permanent residential
one- to four-family:
Adjustable rate ..... $ 25,415 $ 9,956 $ 220 $ 35,591
Fixed rate .......... 5,621 2,577 603,689 611,887
Other mortgage loans:
Adjustable rate ..... 14,278 17,247 -- 31,525
Fixed rate .......... 5,396 12,117 21,568 39,081
Non-real estate loans:
Adjustable rate .... 11,316 166 -- 11,482
Fixed rate ......... 1,697 6,290 2,205 10,192
---------- ---------- ---------- ----------
Total loans ....... $ 63,723 $ 48,353 $ 627,682 $ 739,758
========== ========== ========== ==========
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, 2000, which have fixed interest rates
and have adjustable rates, was $648.4 million and $27.6 million, respectively.
8
Loan Commitments. The Association issues commitments for fixed and
adjustable rate loans conditioned upon the occurrence of certain events. Such
commitments are made on specified terms and conditions and are honored for up to
45 days from commitment. The Association had outstanding loan commitments of
approximately $16.4 million at September 30, 2000 consisting of $3.8 million of
variable rate loans and $12.6 million of fixed rate loans. See Note 18 of Notes
to the Consolidated Financial Statements.
Loan Solicitation and Processing. The Association originates real estate
and other loans at each of its offices. Loan originations are obtained by a
variety of sources, including mortgage brokers, developers, builders, existing
customers, newspapers, radio, periodical advertising and walk-in customers,
although referrals from local realtors has been the primary source. Loan
applications are taken by lending personnel, and the loan processing department
obtains credit reports, appraisals and other documentation involved with a loan.
All of the Association's lending is subject to its written nondiscriminatory
underwriting standards, loan origination procedures and lending policies
prescribed by the Association's Board of Directors. Property valuations are
required on all real estate loans and are prepared by employees experienced in
the field of real estate or by independent appraisers approved by the
Association's Board of Directors. Additionally, all appraisals on loans in
excess of $250,000 must meet applicable regulatory standards.
The Association's loan approval process is intended to assess the
borrower's ability to repay the loan, the viability of the loan, the adequacy of
the value of the property that will secure the loan, 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, then is submitted to underwriting and finally
is presented to the loan committee for approval. The Association can generally
make loan commitments, subject to property valuation and possible other
conditions of approval, in three to five days if income and credit data of the
borrower are readily available.
Loan Originations, Purchases and Sales. The Association has originated
substantially all of the loans in its portfolio. During the year ended September
30, 2000, the Association originated $97.2 million in total loans, compared to
$224.2 million in the same period of 1999. The reduced level of loan
originations was attributable to increasing interest rates. The Association has
a program to sell loans to Fannie Mae. Through this program, $6.3 million in
fixed rate loans were sold during the year ended September 30, 2000, all of
which were one- to four-family mortgages. Servicing was retained on all loans
sold.
The Association has purchased permanent residential one- to four-family
mortgage loans on detached residences from various localities throughout the
Western United States, primarily Oregon, Washington, and California. These loans
were underwritten on the same basis as permanent residential one- to four-family
real estate loans originated by the Association. At September 30, 2000, the
balance of such loans was $9.5 million.
The Association also purchases multi-family and commercial real estate
mortgage loans secured by properties within the Association's primary market
area. At September 30, 2000, the balance of such purchased loans was $17.0
million. These loans were underwritten on the same basis as similar loans
originated by the Association.
9
The following table shows total loans originated, purchased and sold, loan
reductions and the net increase in the Association's loans during the periods
indicated.
Year Ended September 30,
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
(In thousands)
Total net loans at beginning of period $ 739,793 $ 668,146 $ 551,825
----------- ----------- -----------
Loans originated and purchased:
Real estate loans originated (1) .... 81,671 209,723 219,790
Real estate loans purchased ......... 508 15,500 7,792
Non-real estate loans originated .... 15,575 14,471 12,684
----------- ----------- -----------
Total loans originated ............ 97,754 239,694 240,266
----------- ----------- -----------
Loan reductions:
Principal paydowns .................. (98,853) (159,161) (122,029)
Loans sold .......................... (6,315) (5,584) --
Other reductions (2) ................ (3,342) (3,302) (1,916)
----------- ----------- -----------
Total loan reductions ............ (108,510) (168,047) (123,945)
----------- ----------- -----------
Total net loans at end of period ..... $ 729,037 $ 739,793 $ 668,146
=========== =========== ===========
<FN>
(1) Includes decreases/increases from loans-in-process.
(2) Includes net reductions due to deferred loans fees, discounts net of
amortization, provision for loan loss and transfers to real estate owned.
</FN>
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 is 1.00% on permanent loans and 1.75% 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, 2000, the Association had $7.4 million of net
loan fees which had been deferred and are being recognized as income over the
contractual maturities of the related loans.
10
Asset Quality
Delinquent Loans. The following table sets forth information concerning
delinquent loans at September 30, 2000, 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
1-4 family Construction Non-Real Estate Total
--------------------- ------------------ ------------------- ------------------
Amount Percentage Amount Percentage Amount Percentage Amount Percentage
------ ----------- ------ ---------- ------ ---------- ------ ----------
(Dollars in thousands)
Loans delinquent
for 90 days and more... $496 0.06% $219 0.03% $95 0.01% $810 0.10%
Delinquency Procedures. When a borrower fails to make a required payment on
a loan, the Association attempts to cure the delinquency by contacting the
borrower. In the case of loans past due, appropriate late notices are generated
on the seventh and fifteenth days after the due date. If the delinquency is not
cured, the borrower is contacted by telephone the twenty-fifth day after the
payment is due.
For real estate loans, in the event a loan is past due for 30 days or more,
the Association will attempt to arrange an in-person interview with the borrower
to determine the nature of the delinquency; based upon the results of the
interview and its review of the loan status, the Association may negotiate a
repayment program with the borrower. If a loan remains past due at 60 days, the
Association performs an in-depth review of the loan status, the condition of the
property and the circumstances of the borrower. If appropriate, an alternative
payment plan is established. At 90 days past due, a letter prepared by the
Association is sent to the borrower describing the steps to be taken to collect
the loan, including acceptance of a voluntary deed-in-lieu of foreclosure, and
of the initiation of foreclosure proceedings. A decision as to whether and when
to initiate foreclosure proceedings is made by senior management, with the
assistance of legal counsel, at the direction of the Board of Directors.
For consumer loans, at 60 days past due a letter demanding payment is sent
to the borrower. If the delinquency is not cured prior to becoming 90 days past
due, repossession procedures are implemented for collateralized loans. At 90
days past due, consumer loans are generally charged off and sent to an outside
collection agency.
Non-Performing Assets. The Association's non-performing assets consist of
non-accrual loans, accruing loans greater than 90 days delinquent, real estate
owned and other repossessed assets. All loans are reviewed on a regular basis
and are placed on a non-accrual status when, in the opinion of management, the
collection of additional interest is deemed insufficient to warrant further
accrual. Generally, the Association places all loans more than 90 days past due
on non-accrual status. Uncollectible interest on loans is charged-off or an
allowance for losses is established by a charge to earnings equal to all
interest previously accrued and interest is subsequently recognized only to the
extent cash payments are received until delinquent interest is paid in full and,
in management's judgment, the borrower's ability to make periodic interest and
principal payments is back to normal in which case the loan is returned to
accrual status.
Real estate acquired by foreclosure is classified as real estate owned
until such time as it is sold. See Note 1 of Notes to the Consolidated Financial
Statements. When such property is acquired, it is recorded at the lower of the
balance of the loan on the property at the date of acquisition (not to exceed
the net realizable value) or the estimated fair value. Costs, excluding
interest, relating to holding the property are expensed as incurred. Valuations
are periodically performed by management and an allowance for losses is
established by a charge to operations if the carrying value of the property
exceeds its estimated net realizable value. From time to time, the Association
also acquires personal property which is classified as other repossessed assets
and is carried on the books at estimated fair market value and disposed of as
soon as commercially reasonable.
11
As of September 30, 2000, the Association's total non-performing loans
amounted to $810,000, or 0.21% of total loans, before net items, compared with
$3.3 million, or 0.43% of total loans, before net items, at September 30, 1999.
The decrease relates primarily to two loans placed on nonaccrual status during
1999, a $1.5 million land development loan and a $925,711 commercial real estate
loan secured by an apartment complex. The land loan was paid off during the year
ended September 30, 2000 and the other property was sold after foreclosure. The
balance at September 30, 2000 relates to four construction loans on single
family residences.
Real estate owned decreased from the prior year primarily as a result of
the sale of a significant commercial real estate property during the year ended
September 30, 2000.
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,
-----------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Non-accruing loans:
One- to four-family real estate ..... $ 715 $ 915 $ 513 $ 245 $ 191
Commercial real estate .............. -- 2,400 -- -- --
Consumer ............................ 95 -- 11 9 --
Accruing loans greater than 90
days delinquent ....................... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total non-performing loans .......... 810 3,315 524 254 191
---------- ---------- ---------- ---------- ----------
Real estate owned ....................... 788 1,495 -- -- 69
Other repossessed assets ................ -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total repossessed assets ............ 788 1,495 -- -- 69
---------- ---------- ---------- ---------- ----------
Total non-performing assets ......... $ 1,598 $ 4,810 $ 524 $ 254 $ 260
========== ========== ========== ========== ==========
Total non-performing assets as a
percentage of total assets ............ 0.16% 0.46% 0.05% 0.03% 0.04%
==== ==== ==== ==== ====
Total non-performing loans as a
percentage of total loans,
before net items ...................... 0.21% 0.62% 0.07% 0.04% 0.04%
==== ==== ==== ==== ====
Allowance for loan losses as a
percentage of total non-performing
assets ................................ 255.44% 51.64% 372.14% 510.38% 356.92%
====== ===== ====== ====== ======
Allowance for loan losses as a percentage
of total non-performing loans ......... 503.95% 74.93% 372.14% 510.38% 485.86%
====== ===== ====== ====== ======
For the year ended September 30, 2000, 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.
12
Classified Assets. Federal regulations require that each insured savings
association classify its assets on a regular basis. In addition, in connection
with examinations of insured institutions, federal examiners have authority to
identify problem assets and, if appropriate, classify them. There are four
categories used to classify problem assets: "special mention," "substandard,"
"doubtful," and "loss." Special mention assets are not considered classified
assets, but are assets of questionable quality that have potential or past
weaknesses that deserve management's close attention and monitoring. Substandard
assets have one or more defined weaknesses and are characterized by the distinct
possibility that the insured institution will sustain some loss if the
deficiencies are not corrected. Doubtful assets have the weaknesses of
substandard assets with the additional characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of loss. An
asset classified loss is considered uncollectible and of such little value that
continuance as an asset of the institution is not warranted. Special mention
assets and assets classified as substandard or doubtful require the institution
to establish general allowances for loan losses. If an asset or portion thereof
is classified loss, the insured institution must either establish specific
allowances for loan losses in the amount of 100% of the portion of the asset
classified loss or charge-off such amount. General loss allowances established
to cover possible losses related to special mention assets and assets classified
substandard or doubtful may be included in determining an institution's
regulatory capital, while specific valuation allowances for loan losses do not
qualify as regulatory capital. Federal examiners may disagree with an insured
institution's classifications and the amounts reserved.
As of September 30, 2000, total classified assets amounted to 0.16% of
total assets, a significant decrease from 0.46% at September 30, 1999. Assets
classified substandard at September 30, 2000 totaled $1.7 million and included
$358,288 in one- to four-family construction loans and $812,400 in foreclosed
real estate consisting of single family residences that were originally
speculative construction loans. Assets classified substandard at September 30,
1999 totaled $4.8 million and included a $1.5 million land development loan, a
$925,711 loan on a 40-unit apartment complex, and a $1.4 million commercial real
estate property obtained through foreclosure. These problem assets were not
concentrated in any one market area. The land development loan was paid off and
the other two assets were sold in fiscal year 2000.
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, 2000, the
Association had an allowance for loan losses of $4.1 million, which was equal to
255.44% of non-performing assets and 0.54% of total loans.
Provisions for loan losses are charged to earnings to bring the total
allowance for loan losses to a level deemed appropriate by management.
Management considers historical loan loss experience, the volume and type of
lending conducted by the Association, industry standards, the amount of
non-performing assets, general economic conditions (particularly as they relate
to the Association's market area), and other factors related to the
collectibility of the Association's loan portfolio in their determination of the
adequacy of the allowance and the provision. The provisions for loan losses
charged against income for the years ended September 30, 2000, 1999 and 1998
were $1.8 million, $932,000, and $674,000, respectively. Management believes
that the amount maintained in the allowance 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,
--------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ ------------
(Dollars in thousands)
Total loans outstanding ................. $ 750,909 $ 774,441 $ 704,703 $ 576,575 $ 488,551
============ ============ ============ ============ ============
Average loans outstanding ............... $ 747,842 $ 721,658 $ 614,457 $ 515,555 $ 440,510
============ ============ ============ ============ ============
Allowance at beginning of period ........ $ 2,484 $ 1,950 $ 1,296 $ 928 $ 808
Charge-offs ............................. (607) (398) (20) (2) --
Recoveries .............................. 441 -- -- -- --
Provision for loan losses ............... 1,764 932 674 370 120
------------ ------------ ------------ ------------ ------------
Allowance at end of period .............. $ 4,082 $ 2,484 $ 1,950 $ 1,296 $ 928
============ ============ ============ ============ ============
Allowance for loan losses as a percentage
of total loans outstanding ............. 0.54% 0.32% 0.28% 0.22% 0.19%
==== ==== ==== ==== ====
Ratio of net charge-offs to average loans
outstanding during the period .......... 0.02% 0.06% --% --% --%
==== ==== ==== ==== ====
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,
----------------------------------------------------------------------------------------------------------------
2000 1999 1998
-------------------------------------- ----------------------------------- -----------------------------------
Percent of Percent of Percent of
Amount Allowance in Percent of Amount Allowance in Percent of Amount Allowance in Percent of
of Category to Total Loans of Category to Total Loans of Category to Total Loans
Allowance Total Loans by Category Allowance Total Loans by Category Allowance Total Loans by Category
---------- ------------ ----------- --------- ------------ ----------- --------- ------------ -----------
(Dollars in thousands)
Permanent residential
1-4 family ....... $ 1,449 0.19% 85.12% $ 1,103 0.14% 83.56% $ 1,141 0.16% 81.95%
Multi-family
residential ..... 365 0.05 2.53 267 0.03 2.38 124 0.02 2.73
Construction ..... 420 0.05 3.37 221 0.03 6.87 116 0.02 9.12
Commercial ....... 1,403 0.19 5.63 730 0.09 4.79 444 0.07 4.18
Land ............. 168 0.02 0.45 28 -- 0.27 29 -- 0.31
Non-real estate .. 277 0.04 2.90 135 0.02 2.13 96 0.01 1.71
---------- ---- ------ -------- ----- ------ -------- ---- ------
Total ......... $ 4,082 0.54% 100.00% $ 2,484 0.31% 100.00% $ 1,950 0.28% 100.00%
========== ====== ======== ====== ======== ======
At September 30,
-----------------------------------------------------------------------------
1997 1996
------------------------------------- --------------------------------------
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 ......... $ 887 0.15% 86.51% $ 925 0.19% 91.50%
Multi-family
residential........ 121 0.02 2.93 -- -- 1.34
Construction ....... -- -- 5.31 -- -- 2.92
Commercial ......... 250 0.04 3.93 -- -- 3.20
Land ............... 12 -- 0.27 -- -- 0.24
Non-real estate .... 26 0.01 1.05 3 -- 0.80
------ ---- ------ ------- ---- ------
Total ............ $1,296 0.22% 100.00% $ 928 0.19% 100.00%
====== ==== ====== ======= ==== ======
15
Although the Association believes that it has established its allowance for
loan losses in accordance with generally accepted accounting principles
("GAAP"), there can be no assurance that regulators, in reviewing the
Association's loan portfolio, will not request the Association to significantly
increase its allowance for loan losses, thereby reducing the Association's net
worth and earnings. In addition, because future events affecting borrowers and
collateral cannot be predicted with certainty, there can be no assurance that
the existing allowance for loan losses is adequate or that substantial increases
will not be necessary should the quality of any loans deteriorate as a result of
the factors discussed above. Any material increase in the allowance may
adversely affect the Association's financial condition and results of operation.
Investment Activities
Federally chartered savings institutions have the authority to invest in
securities of various federal agencies, certain insured certificates of deposit
of banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in commercial paper,
investment grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally chartered savings institution is otherwise
authorized to make directly. OTS regulations restrict investments in corporate
debt securities of any one issuer in excess of 15% of the Association's
unimpaired capital and unimpaired surplus, as defined by federal regulations,
which totaled $108.9 million at September 30, 2000, plus an additional 10% if
the investments are fully secured by readily marketable collateral. See
"REGULATION -- Federal Regulation of Savings Associations -- Loans to One
Borrower" for a discussion of additional restrictions on the Association's
investment activities.
The investment securities portfolio is managed in accordance with a written
investment policy adopted by the Board of Directors and administered by the
Investment Committee, which consists of the President and four Board members.
Generally, the investment policy is to invest funds among various categories of
investments and maturities based upon the need for liquidity, to achieve the
proper balance between its desire to minimize risk and maximize yield, and to
fulfill the asset/liability management policy. The President and the Chief
Financial Officer may independently invest up to 1.0% of total assets of the
Company within the parameters set forth in the Investment Policy, to be
subsequently reviewed with the Investment Committee at their next scheduled
meeting. Transactions or investments in any one security determined by type,
maturity and coupon in excess of $10.0 million or 1.0% of assets are not
permitted.
Investment securities held to maturity are carried at cost and adjusted for
amortization of premiums and accretion of discounts. As of September 30, 2000,
the investment securities portfolio held to maturity consisted of $266,838 in
tax-exempt securities issued by states and municipalities and $457,000 in other
obligations. Securities to be held for indefinite periods of time and not
intended to be held to maturity are classified as available for sale and carried
at fair value. Securities available for sale include securities that management
intends to use as part of its asset/liability management strategy that may be
sold in response to changes in interest rates or significant prepayment risks or
both. As of September 30, 2000, the portfolio of securities available for sale
consisted of $48.8 million in securities issued by the U.S. Treasury and other
federal government agencies, $24.9 million in tax exempt securities issued by
states and municipalities, and $42.9 million in investment grade corporate
investments.
During the years ended September 30, 2000, 1999 and 1998, neither the
Company nor the Association held any off-balance sheet derivative financial
instruments in their investment portfolios to which the provisions of SFAS No.
119, "Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments," would apply.
16
The following tables set forth certain information relating to the
investment securities portfolio held to maturity and securities available for
sale at the dates indicated.
At September 30,
---------------------------------------------------------------------------
2000 1999 1998
----------------------- ----------------------- -----------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Held to maturity:
State and municipal obligations $ 267 $ 270 $ 560 $ 577 $ 889 $ 926
Corporate obligations ......... -- -- -- -- 2,000 2,002
Other obligations ............. 457 457 -- -- -- --
Available for sale:
U.S. Government obligations ... 49,190 48,786 74,227 73,960 102,620 105,454
State and municipal obligations 25,600 24,943 24,848 23,881 17,406 18,103
Corporate obligations ......... 43,899 42,899 62,037 60,807 79,225 79,667
---------- ---------- ---------- ---------- ---------- ----------
Total ....................... $ 119,413 $ 117,355 $ 161,672 $ 159,225 $ 202,140 $ 206,152
========== ========== ========== ========== ========== ==========
17
At September 30,
---------------------------------------------------------------------------
2000 1999 1998
----------------------- ----------------------- -----------------------
Amortized Percent of Amortized Percent of Amortized Percent of
Cost Portfolio Cost Portfolio Cost Portfolio
---------- ---------- --------- ---------- --------- ----------
(Dollars in thousands)
Held to maturity:
State and municipal obligations $ 267 0.22% $ 560 0.35% $ 889 0.44%
Corporate obligations ......... -- -- -- -- 2,000 0.99
Other obligations ............. 457 0.38 -- -- -- --
Available for sale:
U.S. Government obligations ... 49,190 41.20 74,227 45.91 102,620 50.77
State and municipal obligations 25,600 21.44 24,848 15.37 17,406 8.61
Corporate obligations ......... 43,899 36.76 62,037 38.37 79,225 39.19
---------- ---------- ---------- ---------- ---------- ----------
Total ....................... $ 119,413 100.00% $ 161,672 100.00% $ 202,140 100.00%
========== ========== ========== ========== ========== ==========
The following table sets forth the maturities and weighted average yields
of the debt securities in the investment portfolio at September 30, 2000.
One Year After One Through After Five Through After Ten
or Less Five Years Ten Years Years Totals
---------------- --------------------- ------------------ ---------------- ------
Amount Yield Amount Yield Amount Yield Amount Yield
------- ----- --------- ----- ------ ----- ------- -----
(Dollars in thousands)
Held to maturity:
State and municipal
obligations ...... $ -- -- $ 267 9.96% $ -- -- $ -- -- $ 267
Other obligations ... -- -- -- -- -- -- 457 8.07 457
Available for sale:
U.S. Government
obligations ........ 24,005 6.01% 25,185 5.99% -- -- -- -- 49,190
State and municipal
obligations ........ 425 6.69% 586 6.00% 398 6.17% 24,191 7.61% 25,600
Corporate obligations 14,046 5.96% 10,026 6.47% -- -- 19,827 7.31% 43,899
-------- --------- ------ ------- --------
Total ............. $ 38,476 $ 36,064 $ 398 $44,475 $119,413
======== ========= ====== ======= ========
At September 30, 2000 the Association did not hold any securities from a
single issuer, other than the U.S. Government, whose aggregate book value was in
excess of 10% of the Company's stockholders' equity, or $10.9 million.
18
Mortgage-Backed and Related Securities
At September 30, 2000, the Company's net mortgage-backed and related
securities totaled $77.5 million at fair value ($77.6 million at amortized cost)
and had a weighted average yield of 6.75%. At September 30, 2000, 86.59% of the
mortgage-backed and related securities were adjustable rate securities.
Mortgage-backed and related securities ("MBS") can be divided into two main
groups. The first group, called mortgage participation certificates or
pass-through certificates, typically represents a participation interest in a
pool of single-family or multi-family mortgages. The principal and interest
payments on these mortgages are passed from the mortgage originators, through
intermediaries (generally U.S. Government agencies and government sponsored
enterprises) that pool and resell the participation interests in the form of
securities, to investors such as the Company. Such U.S. Government agencies and
government sponsored enterprises, which guarantee the payment of principal and
interest to investors, primarily include the Federal Home Loan Mortgage
Corporation ("FHLMC"), Fannie Mae (formerly the Federal National Mortgage
Association), the Government National Mortgage Association ("GNMA") and the U.S.
Small Business Administration ("SBA").
The second group, called collateralized mortgage obligations ("CMOs"),
consists of securities created from and secured by the securities in the first
group described above. CMOs are an example of a security called a derivative,
because they are derived from mortgage pass-through securities. Underwriters of
CMOs create these securities by dividing up the interest and principal cash
flows from the pools of mortgages and selling these different slices of cash
flows as a new and different class of individual securities or "tranches." At
September 30, 2000, the Company held $17.8 million of CMOs, comprised of two
classes, planned amortization class tranches ("PACs") and Floaters. The least
volatile CMOs are PACs. With PAC tranches, the yields, average lives, and
lockout periods when no payments are received are designed to closely follow the
actual performance of the underlying MBS. PACs are available in a variety of
short term maturities, usually two, three, five, or seven years. CMO floaters
are similar to adjustable rate mortgages; they carry an interest rate that
changes in a fixed relationship to an interest rate index, typically the London
Interbank Offer Rate ("LIBOR"). Floaters usually have caps that determine the
highest interest that can be paid by the securities. Except for caps on
floaters, PACs and floaters may help to manage interest rate risk by reducing
asset duration. They also may help manage price volatility since they typically
have short maturities or coupons that reset monthly or quarterly to reflect
changes in the index rate.
MBS typically are issued with stated principal amounts, and the securities
are backed by pools of mortgages that have loans with interest rates that fall
within a specific range and have varying maturities. MBS generally yield less
than the loans that underlie such securities because of the cost of payment
guarantees and credit enhancements. In addition, MBS are usually more liquid
than individual mortgage loans and may be used to collateralize certain
liabilities and obligations of the Company. These types of securities also
permit the Association to optimize its regulatory capital because they have low
risk weighting.
Expected maturities of MBS will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties. Prepayments that are faster than anticipated may
shorten the life of the security and may result in a loss of any premiums paid
and thereby reduce the net yield on such securities. Although prepayments of
underlying mortgages depend on many factors, including the type of mortgages,
the coupon rate, the age of mortgages, the geographical location of the
underlying real estate collateralizing the mortgages and general levels of
market interest rates, the difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates generally is the
most significant determinant of the rate of prepayments. During periods of
declining mortgage interest rates, if the coupon rate of the underlying
mortgages exceeds the prevailing market interest rates offered for mortgage
loans, refinancing generally increases and accelerates the prepayment of the
underlying mortgages and the related security. Under such circumstances, the
Company may be subject to reinvestment risk because, to the extent that the
Company's MBS amortize or prepay faster than anticipated, the Company may not be
able to reinvest the proceeds of such repayments and prepayments at a comparable
rate.
19
The following tables set forth certain information relating to the
mortgage-backed and related securities portfolio held to maturity and available
for sale at the dates indicated.
At September 30,
---------------------------------------------------------------------------
2000 1999 1998
----------------------- ----------------------- -----------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
---------- ---------- ---------- ---------- ---------- ------------
(Dollars in thousands)
Held to maturity:
GNMA .......................... $ 2,160 $ 2,146 $ 2,601 $ 2,596 $ 3,662 $ 3,696
Available for sale:
Fannie Mae .................... 13,498 13,598 24,319 24,410 12,866 12,985
FHLMC ......................... 32,902 33,282 18,375 18,371 14,722 15,158
GNMA .......................... 10,728 10,681 11,783 11,768 3,619 3,662
SBA ........................... -- -- -- -- 11,535 11,531
CMOs .......................... 18,355 17,770 18,598 18,146 -- --
---------- --------- ---------- ---------- ---------- ----------
Total ....................... $ 77,643 $ 77,477 $ 75,676 $ 75,291 $ 46,404 $ 47,032
========== ========== ========== ========== ========== ==========
At September 30,
----------------------------------------------------------------------------
2000 1999 1998
------------------------- ------------------------ -----------------------
Amortized Percent of Amortized Percent of Amortized Percent of
Cost Portfolio Cost Portfolio Cost Portfolio
----------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Held to maturity:
GNMA .......................... $ 2,160 2.78% $ 2,601 3.44% $ 3,662 7.89%
Available for sale:
Fannie Mae .................... 13,498 17.38 24,319 32.13 12,866 27.73
FHLMC ......................... 32,902 42.38 18,375 24.28 14,722 31.72
GNMA .......................... 10,728 13.82 11,783 15.57 3,619 7.80
SBA ........................... -- -- -- -- 11,535 24.86
CMOs .......................... 18,355 23.64 18,598 24.58 -- --
---------- ------ ---------- ------ ---------- ------
Total ....................... $ 77,643 100.00% $ 75,676 100.00% $ 46,404 100.00%
========== ====== ========== ====== ========== ======
Interest-Earning Deposits
The Company also had interest-earning deposits in the FHLB of Seattle
amounting to $4.4 million and $1.3 million at September 30, 2000 and 1999,
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
20
may be used on a short-term basis to compensate for reductions in the
availability of funds from other sources. They may also be used on a longer term
basis for general business purposes.
Deposits. The Association's deposits are attracted principally from within
the Association's primary market area through the offering of a broad selection
of deposit instruments, including checking accounts, money market deposit
accounts, passbook and statement savings accounts, and certificates of deposit.
Included among these deposit products are individual retirement account ("IRA")
certificates of approximately $87.4 million at September 30, 2000. Deposit
account terms vary, with the principal differences being the minimum balance
required, the time period the funds must remain on deposit and the interest
rate.
Beginning in 1996, the Association began accepting deposits from outside
its primary market area through both private placements and brokered deposits if
the terms of the deposits fit the Association's specific needs and are at a rate
lower than the rates on similar maturity borrowings through the FHLB of Seattle.
At September 30, 2000, these deposits totaled $10.4 million, or 1.50% 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, 2000, the Association experienced a net
decrease in deposits (before interest credited) of $49.7 million. The decrease
is primarily related to certificates of deposit and reflects the Company's
strategy to rely on FHLB of Seattle borrowed funds which could be acquired at
lower rates than deposits with corresponding terms. The Association has
conducted a special checking account campaign in an effort to attract and retain
low cost deposits. See "-- Borrowings."
At September 30, 2000, certificate accounts maturing during the year ending
September 30, 2001 totaled $162.2 million. Based on historical experience, the
Association expects that a significant amount will be renewed with the
Association at maturity. In the event a significant amount of such accounts are
not renewed at maturity, the Association would not expect a resultant adverse
impact on operations and liquidity because of the Association's borrowing
capacity. See "-- Borrowings."
In the unlikely event the Association is liquidated, depositors will be
entitled to full payment of their deposit accounts prior to any payment being
made to the Company, which is the sole shareholder of the Association.
Substantially all of the Association's depositors are residents of the State of
Oregon.
21
The following table indicates the amount of certificate accounts with
balances of $100,000 or greater by time remaining until maturity as of September
30, 2000.
Certificate
Maturity Period Accounts
---------------- --------------
(In thousands)
Three months or less.......................... $13,321
Over three through six months................. 13,780
Over six through twelve months................ 13,099
Over twelve months............................ 41,688
-------
Total....................................... $81,888
=======
The following table sets forth the deposit balances in the various types of
deposit accounts offered by the Association at the dates indicated.
At September 30,
----------------------------------------------------------------------------------------
2000 1999 1998
------------------------------- ------------------------------- --------------------
Percent Percent Percent
of Increase of Increase of
Amount Total (Decrease) Amount Total (Decrease) Amount Total
-------- -------- ---------- --------- ------- ---------- -------- -------
(Dollars in thousands)
Certificates of deposit ...... $372,748 53.60% ($19,338) $392,086 54.43% ($ 3,265) $395,351 57.33%
-------- -------- ---------- --------- ------- ---------- -------- -------
Transaction accounts:
Non-interest checking ........ 54,340 7.81 2,021 52,319 7.26 4,772 47,547 6.90
Interest-bearing checking .... 72,186 10.38 4,883 67,303 9.34 (3,258) 70,561 10.23
Passbook and statement savings 47,947 6.90 (11,843) 59,790 8.30 (1,624) 61,414 8.91
Money market deposits ........ 148,160 21.31 (743) 148,903 20.67 34,235 114,668 16.63
-------- -------- ---------- --------- ------- ---------- -------- -------
Total transaction accounts ... 322,633 46.40 (5,682) 328,315 45.57 34,125 294,190 42.67
-------- -------- ---------- --------- ------- ---------- -------- -------
Total deposits ............... $695,381 100.00% ($25,020) $720,401 100.00% $30,860 $689,541 100.00%
======== ======== ========= ======== ======= ========== ======== =======
The following table sets forth the deposit activities of the Association
for the periods indicated.
Year Ended September 30,
------------------------------------
2000 1999 1998
-------- -------- --------
(Dollars in thousands)
Beginning balance................................ $720,401 $689,541 $673,978
-------- -------- --------
Net inflow (outflow) of deposits before
interest credited............................... (49,728) 6,251 (8,753)
Interest credited................................ 24,708 24,609 24,316
-------- -------- --------
Net increase (decrease) in deposits.............. (25,020) 30,860 15,563
-------- -------- --------
Ending balance................................... $695,381 $720,401 $689,541
======== ======== ========
Borrowings. Deposit liabilities are the primary source of funds for the
Association's lending and investment activities and for its general business
purposes. The Association may rely upon advances from the FHLB of Seattle,
22
reverse repurchase agreements and bank lines of credit to supplement its supply
of lendable funds and to meet deposit withdrawal requirements. The FHLB of
Seattle serves as the Association's primary borrowing source after deposits.
The FHLB of Seattle functions as a central reserve bank providing credit
for savings and loan associations and certain other member financial
institutions. As a member, the Association is required to own capital stock in
the FHLB of Seattle and is authorized to apply for advances on the security of
certain of its mortgage loans and other assets (principally securities which are
obligations of, or guaranteed by, the U.S. Government) provided certain
creditworthiness standards have been met. Advances are made pursuant to several
different credit programs. Each credit program has its own interest rate and
range of maturities. Depending on the program, limitations on the amount of
advances are based on the financial condition of the member institution and the
adequacy of collateral pledged to secure the credit. As a member of the FHLB,
the Association maintains a credit line that is a percentage of its regulatory
assets, subject to collateral requirements. At September 30, 2000, 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.
For a portion of the year ended September 30, 1999, 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. All of the reverse repurchase agreements matured
during the quarter ended March 31, 1999 and were not renewed. Average balances
and rates on the reverse repurchase agreements for the year ended September 30,
1999 are included below.
The Company has established credit lines at two commercial banks. These
credit lines represent aggregate borrowing capacity of $21.7 million. At
September 30, 2000, borrowings under these lines of credit totaled $3.0 million.
The following table sets forth certain information regarding borrowings by
the Company and Association at the end of and during the periods indicated:
At September 30,
----------------
2000 1999
----- -----
Weighted average rate paid on:
FHLB advances ........................ 5.90% 5.34%
Short term borrowings ................ 9.01% --
Year Ended September 30,
---------------------------
2000 1999
------------ -------------
(Dollars in thousands)
Maximum amount outstanding at any month end:
FHLB advances ........................ $ 230,000 $ 197,000
Reverse repurchase agreements ........ -- 8,095
Short term borrowings ................ 3,000 --
Approximate average balance:
FHLB advances ........................ 207,218 173,740
Reverse repurchase agreements ........ -- 3,105
Short term borrowings ................ 1,290 --
Approximate weighted average rate paid on:
FHLB advances ........................ 5.80% 5.25%
Reverse repurchase agreements ........ -- 5.72
Short term borrowings ............... 9.34 --
23
REGULATION OF THE ASSOCIATION
General
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 and, in certain respects, the Federal Deposit Insurance
Act, and the regulations issued by the OTS and the FDIC to implement these
statutes. These laws and regulations delineate the nature and extent of the
activities in which federal savings associations may engage. Lending activities
and other investments must comply with various statutory and regulatory capital
requirements. In addition, the Association's relationship with its depositors
and borrowers is also regulated to a great extent, especially in such matters as
the ownership of deposit accounts and the form and content of the Association's
mortgage documents. The Association is required to file reports with the OTS and
the FDIC concerning its activities and financial condition in addition to
obtaining regulatory approvals prior to entering into certain transactions such
as mergers with, or acquisitions of, other financial institutions. There are
periodic examinations by the OTS and the FDIC to review the Association's
compliance with various regulatory requirements. The regulatory structure also
gives the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
policies, whether by the OTS, the FDIC or Congress, could have a material
adverse impact on the Company, the Association and their operations.
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 has extensive authority over the operations of savings associations. Among
other functions, the OTS issues and enforces regulations affecting federally
insured savings associations and regularly examines these institutions.
All savings associations are required to pay assessments to the OTS to fund
the agency's operations. The general assessments, paid on a semi-annual basis,
are determined based on the savings association's total assets, including
consolidated subsidiaries. The Association's OTS assessment for the fiscal year
ended September 30, 2000 was $188,140.
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 (i.e., borrowings) from
the FHLB of Seattle. The Association is in compliance with this requirement with
an investment in FHLB of Seattle stock of $11.9 million at September 30, 2000.
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.
24
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. The FDIC maintains two separate insurance funds: the Bank
Insurance Fund ("BIF") and the SAIF. The Association's deposit accounts are
insured by the FDIC under the SAIF to the maximum extent permitted by law. As
insurer of the Association's deposits, the FDIC has examination, supervisory and
enforcement authority over all savings associations.
Under applicable regulations, the FDIC assigns an institution to one of
three capital categories based on the institution's financial information, as of
the reporting period ending seven months before the assessment period. The
capital categories are: (i) well-capitalized, (ii) adequately capitalized, or
(iii) undercapitalized. An institution is also placed in one of three
supervisory subcategories within each capital group. The supervisory subgroup to
which an institution is assigned is based on a supervisory evaluation provided
to the FDIC by the institution's primary federal regulator and information that
the FDIC determines to be relevant to the institution's financial condition and
the risk posed to the deposit insurance funds. An institution's assessment rate
depends on the capital category and supervisory category to which it is assigned
with the most well-capitalized, healthy institutions receiving the lowest rates.
Effective January 1, 1997, the premium schedule for BIF and SAIF insured
institutions ranged from 0 to 27 basis points. However, SAIF insured
institutions and BIF insured institutions are required to pay a Financing
Corporation assessment in order to fund the interest on bonds issued to resolve
thrift failures in the 1980s. This amount is currently equal to about six basis
points for each $100 in domestic deposits for SAIF members while BIF insured
institutions pay an assessment equal to about 1.50 basis points for each $100 in
domestic deposits. These assessments, which may be revised based upon the level
of BIF and SAIF deposits, will continue until the bonds mature in the year 2015.
The FDIC is authorized to raise the assessment rates in certain
circumstances. The FDIC has exercised this authority several times in the past
and may raise insurance premiums in the future. If such action is taken by the
FDIC, it could have an adverse effect on the earnings of the Association.
Under the FDIA, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. Management of the Association does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
Liquidity Requirements. Under OTS regulations, each savings institution is
required to maintain an average daily balance of specified liquid assets equal
to a monthly average of not less than a specified percentage of its net
withdrawable accounts deposit plus short-term borrowings. This liquidity
requirement is currently 4%, but may be changed from time to time by the OTS to
any amount within the range of 4% to 10%. Monetary penalties may be imposed for
failure to meet liquidity requirements. The Association has never been subject
to monetary penalties for failure to meet its liquidity requirements.
25
Prompt Corrective Action. The OTS is required to take certain supervisory
actions against undercapitalized savings associations, the severity of which
depends upon the institution's degree of undercapitalization. Generally, an
institution that has a ratio of total capital to risk-weighted assets of less
than 8%, a ratio of Tier I (core) capital to risk-weighted assets of less than
4%, or a ratio of core capital to total assets of less than 4% (3% or less for
institutions with the highest examination rating) is considered to be
"undercapitalized." An institution that has a total risk-based capital ratio
less than 6%, a Tier I capital ratio of less than 3% or a leverage ratio that is
less than 3% is considered to be "significantly undercapitalized" and an
institution that has a tangible capital to assets ratio equal to or less than 2%
is deemed to be "critically undercapitalized." Subject to a narrow exception,
the OTS is required to appoint a receiver or conservator for a savings
institution that is "critically undercapitalized." OTS regulations also require
that a capital restoration plan be filed with the OTS within 45 days of the date
a savings institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." Compliance
with the plan must be guaranteed by any parent holding company in an amount of
up to the lesser of 5% of the institution's assets or the amount which would
bring the institution into compliance with all capital standards. In addition,
numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS also could take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
At September 30, 2000, the Association was categorized as "well
capitalized" under the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The federal banking regulatory agencies
have prescribed, by regulation, standards for all insured depository
institutions relating to: (i) internal controls, information systems and
internal audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii)
earnings; and (viii) compensation, fees and benefits ("Guidelines"). The
Guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before capital becomes impaired. If the OTS determines that the Association
fails to meet any standard prescribed by the Guidelines, the agency may require
the Association to submit to the agency an acceptable plan to achieve compliance
with the standard. Management is aware of no conditions relating to these safety
and soundness standards which would require submission of a plan of compliance.
Qualified Thrift Lender Test. All savings associations, including the
Association, are required to meet a qualified thrift lender ("QTL") test to
avoid certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (as defined by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. As an alternative, the savings association
may maintain 60% of its assets in those assets specified in Section 7701(a)(19)
of the Internal Revenue Code ("Code"). Under either test, such assets primarily
consist of residential housing related loans and investments. At September 30,
2000, the Association met the test and its QTL percentage was 83.39%.
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "-- Savings and Loan Holding Company Regulations."
26
Capital Requirements. Federally insured savings associations, such as the
Association, are required to maintain a minimum level of regulatory capital. The
OTS has established capital standards, including a tangible capital requirement,
a leverage ratio (or core capital) requirement and a risk-based capital
requirement applicable to such savings associations.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). At September 30, 2000, the
Association had tangible capital of $102.2 million, or 10.4% of adjusted total
assets, which is approximately $87.4 million above the minimum requirement of
1.5% of adjusted total assets in effect on that date. At September 30, 2000, the
Association had $8.1 million of intangible assets consisting of core deposit
intangible related to the Wells Fargo branch acquisition in 1997.
The capital standards also require core capital equal to at least 3% to 4%
of adjusted total assets, depending on an institution's supervisory rating. Core
capital generally consists of tangible capital. At September 30, 2000, the
Association had core capital equal to $102.2 million, or 10.4% of adjusted total
assets, which is $62.7million above the minimum leverage ratio requirement of 4%
as in effect on that date.
The OTS risk-based requirement requires savings associations to have total
capital of at least 8% of risk-weighted assets. Total capital consists of core
capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, are multiplied by a risk weight, ranging from
0% to 100%, based on the risk inherent in the type of asset. For example, the
OTS has assigned a risk weight of 50% for prudently underwritten permanent one-
to- four family first lien mortgage loans not more than 90 days delinquent and
having a loan-to-value ratio of not more than 80% at origination unless insured
to such ratio by an insurer approved by Fannie Mae or FHLMC.
On September 30, 2000, the Association had total risk-based capital of
approximately $106.1 million, including $102.2 million in core capital and $3.9
million in qualifying supplementary capital, and risk-weighted assets of $522.7
million, or total capital of 20.3% of risk-weighted assets. This amount was
$64.3million above the 8% requirement in effect on that date.
The OTS is authorized to impose capital requirements in excess of these
standards on individual associations on a case-by-case basis. The OTS and the
FDIC are authorized and, under certain circumstances required, to take certain
actions against savings associations that fail to meet their capital
requirements. The OTS is generally required to take action to restrict the
activities of an "undercapitalized association" (generally defined to be one
with less than either a 4% core capital ratio, a 4% Tier 1 risked-based capital
ratio or an 8% risk-based capital ratio). Any such association must submit a
capital restoration plan and until such plan is approved by the OTS may not
increase its assets, acquire another institution, establish a branch or engage
in any new activities, and generally may not make capital distributions. The OTS
is authorized to impose the additional restrictions that are applicable to
significantly undercapitalized associations.
The OTS is also generally authorized to reclassify an association into a
lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on the
Company or the Association may have a substantial adverse effect on their
operations and profitability.
27
Limitations on Capital Distributions. The OTS imposes various restrictions
on savings associations with respect to their ability to make distributions of
capital, which include dividends, stock redemptions or repurchases, cash-out
mergers and other transactions charged to the capital account. The OTS also
prohibits a savings association from declaring or paying any dividends or from
repurchasing any of its stock if, as a result of such action, the regulatory
capital of the association would be reduced below the amount required to be
maintained for the liquidation account established in connection with the
association's mutual to stock conversion.
The Association may make a capital distribution without OTS approval
provided that the Association notify the OTS 30 days before it declares the
capital distribution and that the following requirements are met: (i) the
Association has a regulatory rating in one of the two top examination
categories, (ii) the Association is not of supervisory concern, and will remain
adequately or well capitalized, as defined in the OTS prompt corrective action
regulations, following the proposed distribution, and (iii) the distribution
does not exceed the Association's net income for the calendar year-to-date plus
retained net income for the previous two calendar years (less any dividends
previously paid). If the Association does not meet these stated requirements, it
must obtain the prior approval of the OTS before declaring any proposed
distributions.
In the event the Association's capital falls below its regulatory
requirements or the OTS notifies it that it is in need of more than normal
supervision, the Association's ability to make capital distributions will be
restricted. In addition, no distribution will be made if the Association is
notified by the OTS that a proposed capital distribution would constitute an
unsafe and unsound practice, which would otherwise be permitted by the
regulation.
Loans to One Borrower. Federal law provides that savings institutions are
generally subject to the national bank limit on loans to one borrower. A savings
institution may not make a loan or extend credit to a single or related group of
borrowers in excess of 15% of its unimpaired capital and surplus. An additional
amount may be lent, equal to 10% of unimpaired capital and surplus, if secured
by specified readily-marketable collateral. At September 30, 2000, the
Association's limit on loans to one borrower was $16.3 million. At September 30,
2000, the Association's largest aggregate amount of loans to one borrower was
$5.9million, all of which were performing according to their original terms.
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 relative to transactions with
affiliates in the same manner and to the same extent as if the savings
association were a Federal Reserve member Association. Generally, transactions
between a savings association or its subsidiaries and its affiliates are
required to be on terms as favorable to the association as transactions with
non-affiliates. In addition, certain of these transactions, such as loans to an
affiliate, are restricted to a percentage of the association's capital.
Affiliates of the Association include the Company and any company which is under
common control with the Association. In addition, a savings association may not
lend to any affiliate engaged in activities not permissible for a savings
association holding company or acquire the securities of most affiliates. The
OTS has the discretion to treat subsidiaries of savings associations as
affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
28
Community Reinvestment Act. Under the federal Community Reinvestment Act
("CAR"), all federally- insured financial institutions have a continuing and
affirmative obligation consistent with safe and sound operations to help meet
all the credit needs of its delineated community. The CAR does not establish
specific lending requirements or programs nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to meet all the credit needs of its delineated community. The CAR
requires the federal banking agencies, in connection with regulatory
examinations, to assess an institution's record of meeting the credit needs of
its delineated community and to take such record into account in evaluating
regulatory applications to establish a new branch office that will accept
deposits, relocate an existing office, or merge or consolidate with, or acquire
the assets or assume the liabilities of, a federally regulated financial
institution, among others. The CAR requires public disclosure of an
institution's CAR rating. The Association received a "satisfactory" rating as a
result of its latest evaluation.
Regulatory and Criminal Enforcement Provisions. The OTS has primary
enforcement responsibility over savings institutions and has the authority to
bring action against all "institution-affiliated parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers or directors,
receivership, conservatorship or termination of deposit insurance. Civil
penalties cover a wide range of violations and can amount to $27,500 per day, or
$1.1 million per day in especially egregious cases. Under the FDIA, the FDIC has
the authority to recommend to the Director of the OTS that enforcement action be
taken with respect to a particular savings institution. If action is not taken
by the Director, the FDIC has authority to take such action under certain
circumstances. Federal law also establishes criminal penalties for certain
violations.
29
REGULATION OF THE COMPANY
General
The Company is a unitary savings and loan holding company within the
meaning of the HOLA. As such, it is registered with the OTS and is subject to
OTS regulations, examinations, supervision and reporting requirements. The
Company is also subject to the information, proxy solicitation, insider trading
restrictions, and other requirements of the Securities Exchange Act of 1934, as
amended.
Company Acquisitions
The HOLA and OTS regulations issued thereunder generally prohibit a savings
and loan holding company, without prior OTS approval, from acquiring more than
5% of the voting stock of any other savings association or savings and loan
holding company or controlling the assets thereof. They also prohibit, among
other things, any director or officer of a savings and loan holding company, or
any individual who owns or controls more than 25% of the voting shares of such
holding company, from acquiring control of any savings association not a
subsidiary of such savings and loan holding company, unless the acquisition is
approved by the OTS.
Holding Company Activities
As a unitary savings and loan holding company, the Company generally is not
subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan holding company. There generally are more restrictions on the
activities of a multiple savings and loan holding company than a unitary savings
and loan holding company. Specifically, if either federally insured subsidiary
savings association fails to meet the QTL test, the activities of the Company
and any of its subsidiaries (other than the Company or other federally insured
subsidiary savings associations) would thereafter be subject to further
restrictions. The HOLA provides that, among other things, no multiple savings
and loan holding company or subsidiary thereof which is not an insured
association shall commence or continue for more than two years after becoming a
multiple savings and loan association holding company or subsidiary thereof, any
business activity other than: (i) furnishing or performing management services
for a subsidiary insured institution, (ii) conducting an insurance agency or
escrow business, (iii) holding, managing, or liquidating assets owned by or
acquired from a subsidiary insured institution, (iv) holding or managing
properties used or occupied by a subsidiary insured institution, (v) acting as
trustee under deeds of trust, (vi) those activities previously directly
authorized by regulation as of March 5, 1987 to be engaged in by multiple
holding companies or (vii) those activities authorized by the Federal Reserve
Board as permissible for bank holding companies, unless the OTS by regulation,
prohibits or limits such activities for savings and loan holding companies.
Those activities described in (vii) above also must be approved by the OTS prior
to being engaged in by a multiple holding company.
Potential Impact of Current Legislation on Future Results of Operations
On November 12, 1999, the Gramm-Leach-Bliley Act (the "GLB Act") was
enacted into law. The GLB Act made sweeping changes in the financial services in
which various types of financial institutions may engage. The Glass-Steagull
Act, which generally prevented banks from affiliating with securities and
insurance firms, was repealed. A new "financial holding company," which owns
only well capitalized and well managed depository institutions, will be
permitted to engage in a variety of financial activities, including insurance
and securities underwriting and agency activities.
The GLB Act permits unitary savings and loan holding companies in existence
on May 4, 1999, including the Company, to continue to engage in all activities
that they were permitted to engage in prior to the enactment of the Act. Such
activities are essentially unlimited, provided that the thrift subsidiary
remains a qualified thrift lender. Any thrift holding company formed after May
4, 1999, will be subject to the same restrictions as a multiple thrift holding.
30
In addition, a unitary thrift holding company in existence on May 4, 1999, may
be sold only to a financial holding company engaged in activities permissible
for multiple savings and loan holding companies.
The GLB Act is not expected to have a material effect on the activities in
which the Company and the Association currently engage, except to the extent
that competition with other types of financial institutions may increase as they
engage in activities not permitted prior to enactment of the GLB Act.
Affiliate Restrictions
The affiliate restrictions contained in Sections 23A and 23B of the Federal
Reserve Act apply to all federally insured savings associations and any such
"affiliate." A savings and loan holding company, its subsidiaries and any other
company under common control are considered affiliates of the subsidiary savings
association under the HOLA. Generally, Sections 23A and 23B: (i) limit the
extent to which the insured association or its subsidiaries may engage in
certain covered transactions with an affiliate to an amount equal to 10% of such
institution's capital and surplus, and contain an aggregate limit on all such
transactions with all affiliates to an amount equal to 20% of such capital and
surplus, and (ii) require that all such transactions be on terms substantially
the same, or at least as favorable to the institution or subsidiary, as those
provided to a non-affiliate. The term "covered transaction" includes the making
of loans, purchase of assets, issuance of a guarantee and other similar types of
transactions. Also, a savings association may not make any loan to an affiliate
unless the affiliate is engaged only in activities permissible for bank holding
companies. Only the Federal Reserve may grant exemptions from the restrictions
of Sections 23A and 23B. The OTS, however, may impose more stringent
restrictions on savings associations for reasons of safety and soundness.
Qualified Thrift Lender Test
The HOLA requires any savings and loan holding company that controls a
savings association that fails the QTL test, as explained under "-- Qualified
Thrift Lender Test," must, within one year after the date on which the
association ceases to be a QTL, register as and be deemed a bank holding company
subject to all applicable laws and regulations.
TAXATION
Federal Taxation
General. The Company and the Association report their income on a fiscal
year basis using the accrual method of accounting and are subject to federal
income taxation in the same manner as other corporations, with some exceptions.
The following discussion of tax matters is intended only as a summary and does
not purport to be a comprehensive description of the tax rules applicable to the
Company and the Association.
Bad Debt Reserve. Historically, savings institutions such as the
Association which met certain definitional tests primarily related to their
assets and the nature of their business ("qualifying thrift") were permitted to
establish a reserve for bad debts and to make annual additions thereto, which
may have been deducted in arriving at their taxable income. The Association's
deductions with respect to "qualifying real property loans," which are generally
loans secured by certain interest in real property, were computed using an
amount based on the Association's actual taxable income, computed with certain
modifications and reduced by the amount of any permitted additions to the non-
qualifying reserve. Each year the Association selected the most favorable way to
calculate the deduction attributable to an addition to the tax bad debt reserve.
The provisions repealing the current thrift bad debt rules were passed by
Congress as part of "The Small Business Job Protection Act of 1996." The new
rules eliminated the 8% of taxable income method for deducting additions to the
tax bad debt reserves for all thrifts for tax years beginning after December 31,
1995. These rules also require that all institutions recapture all or a portion
31
of their bad debt reserves added since the base year (last taxable year
beginning before January 1, 1988). The Association has previously recorded a
deferred tax liability equal to the bad debt recapture and as such the new rules
will have no effect on net income or federal income tax expense. For taxable
years beginning after December 31, 1995, the Association's bad debt deduction
will be determined on the basis of net charge-offs during the taxable year. The
new rules allow an institution to suspend bad debt reserve recapture for the
1996 and 1997 tax years if the institution's lending activity for those years is
equal to or greater than the institution's average mortgage lending activity for
the six taxable years preceding 1996 adjusted for inflation. For this purpose,
only home purchase or home improvement loans are included and the institution
can elect to have the tax years with the highest and lowest lending activity
removed from the average calculation. If an institution is permitted to postpone
the reserve recapture, it must begin its six year recapture no later than the
1998 tax year (fiscal year ending September 30, 1999 for the Company). The
unrecaptured base year reserves will not be subject to recapture as long as the
institution continues to carry on the business of banking. In addition, the
balance of the pre-1988 bad debt reserves continue to be subject to provisions
of present law referred to below that require recapture in the case of certain
excess distributions to shareholders.
Distributions. To the extent that the Association makes "nondividend
distributions" to the Company, such distributions will be considered to result
in distributions from the balance of its bad debt reserves as of December 31,
1987 (or a lesser amount if the Association's loan portfolio decreased since
December 31, 1987) and then from the supplemental reserve for losses on loans
("Excess Distributions"), and an amount based on the Excess Distributions will
be included in the Association's taxable income. Nondividend distributions
include distributions in excess of the Association's current and accumulated
earnings and profits, distributions in redemption of stock and distributions in
partial or complete liquidation. However, dividends paid out of the
Association's current or accumulated earnings and profits, as calculated for
federal income tax purposes, will not be considered to result in a distribution
from the Association's bad debt reserve. The amount of additional taxable income
created from an Excess Distribution is an amount that, when reduced by the tax
attributable to the income, is equal to the amount of the distribution. The
Association does not intend to pay dividends that would result in a recapture of
any portion of its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Internal Revenue Code of 1986, as
amended ("Code") imposes a tax on alternative minimum taxable income ("AMTI")
at a rate of 20%. The excess of the tax bad debt reserve deduction using the
percentage of taxable income method over the deduction that would have been
allowable under the experience method is treated as a preference item for
purposes of computing the AMTI. In addition, only 90% of AMTI can be offset by
net operating loss carryovers. AMTI is increased by an amount equal to 75% of
the amount by which the Association's adjusted current earnings exceeds its AMTI
(determined without regard to this preference and prior to reduction for net
operating losses). For taxable years beginning after December 31, 1986, and
before January 1, 1996, an environmental tax of 0.12% of the excess of AMTI
(with certain modification) over $2.0 million is imposed on corporations,
including the Association, whether or not an Alternative Minimum Tax ("AMT") is
paid.
Dividends-Received Deduction. The Company may exclude from its income 100%
of dividends received from the Association as a member of the same affiliated
group of corporations. The corporate dividends-received deduction is generally
70% in the case of dividends received from unaffiliated corporations with which
the Company and the Association will not file a consolidated tax return, except
that if the Company or the Association owns more than 20% of the stock of a
corporation distributing a dividend, then 80% of any dividends received may be
deducted.
Other Federal Tax Matters. There have not been any Internal Revenue Service
audits of the Company's or the Association's federal income tax returns during
the past five years.
Oregon Taxation
The Company and the Association are subject to an Oregon corporate excise
tax at a statutory rate of 6.6% of income. Neither the Company's nor the
Association's state income tax returns have been audited during the past five
years.
32
Competition
The Association originates most of its loans to and accepts most of its
deposits from residents of its market area. The Association is the oldest
financial institution headquartered in Klamath Falls. The Association believes
that it is a major competitor in the markets in which it operates. Nonetheless,
the Association faces competition in attracting deposits and making real estate
loans from various financial institutions, including banks, savings associations
and mortgage brokers. In addition, the Association has faced additional
significant competition for investors' funds from short-term money market
securities and other corporate and government securities. The financial
institution industry in the Association's market area is characterized by a mix
of local independent financial institutions and offices of larger out-of-state
financial institutions, including several multi-national bank holding companies.
The ability of the Association to attract and retain savings deposits depends on
its ability to generally provide a rate of return and liquidity risk comparable
to that offered by competing investment opportunities. The Association competes
for loans principally through the interest rates and loan fees it charges and
the efficiency and quality of services it provides borrowers. Competition may
increase as restrictions on the interstate operations of financial institutions
continue to be reduced.
Personnel
As of September 30, 2000, the Association had 229 full-time and 56
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
Kermit K. Houser 57 President and Chief Executive Officer
Robert A. Tucker 52 Senior Vice President and
Chief Lending Officer/Secretary
Frank X. Hernandez 45 Senior Vice President and
Chief Operating Officer
Marshall J. Alexander 49 Senior Vice President and
Chief Financial Officer
<FN>
______________
(1) At September 30, 2000.
</FN>
Kermit K. Houser has served as President and Chief Executive Officer of the
Company and the Association since November 2000, replacing Gerald V. Brown who
resigned August 2000. Mr. Houser was previously employed in various capacities
by Bank of America from 1991 to November 2000, as senior vice president and
manager for commercial banking, executive vice president and senior credit
officer, and most recently as senior vice president and market executive for
Bank of America's South Valley commercial banking, in Fresno, California. Mr.
Houser has 29 years experience in banking, and has been an active member of
numerous civic and community organizations.
Robert A. Tucker has been employed by the Association since 1973. He has
served as Senior Vice President since November 1989. He served as Chief
Operating Officer from March 1997 to June 1998 and has served as Chief Lending
Officer and Secretary since July 1998.
Frank X. Hernandez has been employed by the Association since 1991. He
served as Human Resources Officer until July 1998 when he was appointed Senior
Vice President and Chief Operating Officer.
Marshall J. Alexander has been employed by the Association since 1986. He
has served as Vice President and Chief Financial Officer since August 1994 and
was named a Senior Vice President in November 1998.
33
Item 2. Properties
The following table sets forth the location of the Association's offices
and other facilities used in operations as well as certain additional
information relating to these offices and facilities as of September 30, 2000.
Year Square
Description/Address Opened Leased/Owned Footage
- --------------------------- -------- ------------ --------
Main Office
540 Main Street 1939 Owned 25,660
Klamath Falls, Oregon
Branch Offices
2943 South Sixth Street 1972 Owned 3,820
Klamath Falls, Oregon
2323 Dahlia Street 1979 Owned 1,876
Klamath Falls, Oregon
512 Walker Avenue 1977 Owned 4,216
Ashland, Oregon
1420 East McAndrews Road 1990 Owned 4,006
Medford, Oregon
61515 S. Highway 97 1993 Owned 5,415
Bend, Oregon
2300 Madison Street 1995 Owned 5,000
Klamath Falls, Oregon
721 Chetco Avenue 1997 Owned 5,409
Brookings, Oregon
293 North Broadway 1997 Owned 5,087
Burns, Oregon
111 West Main Street 1997 Owned 1,958
Carlton, Oregon
103 South Main Street 1997 Owned 2,235
Condon, Oregon
259 North Adams 1997 Owned 5,803
Coquille, Oregon
106 Southwest 1st Street 1997 Owned 4,700
Enterprise, Oregon
34
Year Square
Description/Address Opened Leased/Owned Footage
- --------------------------- -------- ------------- --------
555 1st Street 1997 Owned 1,844
Fossil, Oregon
708 Garibaldi Avenue 1997 Owned 1,400
Garibaldi, Oregon
29804 Ellensburg Avenue 1997 Owned 3,136
Gold Beach, Oregon
111 North Main Street 1997 Owned 4,586
Heppner, Oregon
810 South Highway 395 1997 Leased 6,000
Hermiston, Oregon
200 West Main Street 1997 Owned 4,552
John Day, Oregon
1 South E Street 1997 Owned 5,714
Lakeview, Oregon
206 East Front Street 1997 Owned 2,920
Merrill, Oregon
165 North 5th Street 1997 Owned 2,370
Monroe, Oregon
217 Main Street 1997 Owned 6,067
Nyssa, Oregon
48257 East 1st Street 1997 Owned 3,290
Oakridge, Oregon
227 West Main Street 1997 Owned 2,182
Pilot Rock, Oregon
716 Northeast Highway 101 1997 Owned 2,337
Port Orford, Oregon
178 Northwest Front Street 1997 Owned 2,353
Prairie City, Oregon
315 North Main Street 1997 Owned 3,638
Riddle, Oregon
38770 North Main Street 1997 Owned 2,997
Scio, Oregon
35
Year Square
Description/Address Opened Leased/Owned Footage
- --------------------------- -------- ------------- --------
508 Main Street 1997 Owned 2,282
Moro, Oregon
144 South Main Street 1997 Owned 2,146
Union, Oregon
165 North Maple Street 1997 Owned 2,192
Yamhill, Oregon
475 NE Windy Knolls Drive 1998 Owned 3,120
Bend, Oregon
185 East California 1998 Owned 2,116
Jacksonville, Oregon
1217 Plaza Boulevard, Suite A 2000 Leased 2,400
Central Point, Oregon
Loan Center
585 SW 6th, Suite #2 1996 Leased 900
Redmond, Oregon
Loan Processing Center
600 Main Street 1998 Leased 2,800
Klamath Falls, Oregon
The net book value of the Association's investment in office, properties
and equipment totaled $12.7 million at September 30, 2000. See Note 5 of Notes
to the Consolidated Financial Statements in the Annual Report.
Item 3. Legal Proceedings
Periodically, there have been various claims and lawsuits involving the
Association, mainly as a defendant, such as claims to enforce liens,
condemnation proceedings on properties in which the Association holds security
interests, claims involving the making and servicing of real property loans and
other issues incident to the Association's business. The Association is not a
party to any pending legal proceedings that it believes would have a material
adverse effect on the financial condition or operations of the Association.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended September 30, 2000.
36
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
The information contained under the section captioned "Common Stock
Information" on page 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 pages 4 and 5 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
7 of the Annual Report is incorporated herein by reference.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
The information contained in the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Market Risk and
Asset/Liability Management" beginning on page 7 of the Annual Report is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
(a) Financial Statements
Independent Auditors' Report*
Consolidated Balance Sheets as of September 30, 2000 and 1999*
Consolidated Statements of Earnings for the Years Ended
September 30, 2000, 1999 and 1998*
Consolidated Statements of Shareholders' Equity for the Years
Ended September 30, 2000, 1999 and 1998*
Consolidated Statements of Cash Flows for the Years Ended
September 30, 2000, 1999 and 1998*
Notes to the Consolidated Financial Statements*
* Included in the Annual Report attached as Exhibit 13 hereto and
incorporated herein by reference. All schedules have been omitted as the
required information is either inapplicable or included in the Consolidated
Financial Statements or related Notes contained in the Annual Report.
(b) Supplementary Data
The information entitled "Consolidated Supplemental Data - Selected
Quarterly Financial Data" on page 36 of the Annual Report is incorporated herein
by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There have been no changes in or disagreements with Accountants on
accounting and financial disclosure during the year ended September 30, 2000.
37
PART III
Item 10. Directors and Executive Officers of the Registrant
The information contained under the section captioned "Proposal I -
Election of Directors" contained in the Company's Proxy Statement, and "Part I
- -- Business -- Personnel -- Executive Officers" of this report, is incorporated
herein by reference. Reference is made to the cover page of this report for
information regarding compliance with Section 16(a) of the Exchange Act.
Item 11. Executive Compensation
The information contained under the sections captioned "Executive
Compensation", "Directors' Compensation" and "Benefits" under "Proposal I -
Election of Directors" in the Proxy Statement is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference
to the section captioned "Security Ownership of Certain Beneficial
Owners and Management" of the Proxy Statement.
(b) Security Ownership of Management
The information required by this item is incorporated herein by
reference to the sections captioned "Proposal I - Election of
Directors" and "Security Ownership of Certain Beneficial owners and
Management" of the Proxy Statement.
(c) Changes in Control
The Company is not aware of any arrangements, including any pledge by
any person of securities of the Company, the operation of which may at
a subsequent date result in a change in control of the Company.
The information required by this item is incorporated herein by reference
to the sections captioned "Proposal I - Election of Directors" and "Security
Ownership of Certain Beneficial Owners and Management" of the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information set forth under the section captioned "Proposal I -
Election of Directors - Certain Transactions with the Association" in the Proxy
Statement is incorporated herein by reference.
38
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Exhibits
3(a) Articles of Incorporation of the Registrant*
3(b) Bylaws of the Registrant*
10(a) Employment Agreement with Gerald V. Brown***
10(b) Employment Agreement with Marshall J. Alexander***
10(c) Employment Agreement with Robert A. Tucker***
10(d) Employment Agreement with Frank X. Hernandez****
10(e) 1996 Stock Option Plan**
10(f) 1996 Management Recognition and Development Plan**
13 Annual Report to Shareholders
22 Subsidiaries of the Registrant
23 Consent of Deloitte & Touche LLP with respect to
financial statements of the Registrant
27 Financial Data Schedule
___________________
* Incorporated by reference to the Registrant's Registration Statement on
Form S-1, filed on June 19, 1995.
** Incorporated by reference to the Registrant's Definitive Proxy Statement
for the 1996 Annual Meeting of Shareholders.
*** Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended September 30, 1995.
**** Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended September 30, 1998.
(b) Reports on Form 8-K
Reference is made to the Company's Current Reports on Form 8-K dated May
26, 2000, announcing the resignation of Gerald V. Brown as President and
Chief Executive Officer, and November 2, 2000, announcing that Kermit K.
Houser was the new President and Chief Executive Officer of the Company and
the Association, effective November 15, 2000, which are incorporated herein
by reference.
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
KLAMATH FIRST BANCORP, INC.
Date: December 28, 2000 By: /s/ Kermit K. Houser
Kermit K. Houser
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/ Kermit K. Houser President, Chief December 28, 2000
Kermit K. Houser Executive Officer and
Director (Principal
Executive Officer)
/s/ Marshall J. Alexander Senior Vice President and December 28, 2000
Marshall J. Alexander Chief Financial Officer
(Principal Financial
and Accounting Officer)
/s/ Rodney N. Murray Chairman of the Board December 28, 2000
Rodney N. Murray of Directors
/s/ Bernard Z. Agrons Director December 28, 2000
Bernard Z. Agrons
/s/ Timothy A. Bailey Director December 28, 2000
Timothy A. Bailey
/s/ James D. Bocchi Director December 28, 2000
James D. Bocchi
/s/ William C. Dalton Director December 28, 2000
William C. Dalton
/s/ J. Gillis Hannigan Director December 28, 2000
J. Gillis Hannigan
/s/ Dianne E. Spires Director December 28, 2000
Dianne E. Spires
40