Dear Shareholder,
It has been two years since joining Klamath First and eighteen months since
initiating reorganization of the company from a traditional thrift, focusing
upon local markets, into a truly statewide financial institution. This has been
an exciting transition period for us, resulting in many new opportunities for
staff who wished to accept change and, opportunities provided for others to join
us as the transition progressed. We also realigned and expanded our Management
Team, adding retail and commercial lending expertise, both complemented by a
strong Chief Credit Officer. To complete this team, Nina Drake joined Klamath
First in June 2002 as Human Resource Manager, bringing significant personnel
management experience. In addition to the Management changes, we have added
significant management strength to our Information Systems Group and Operations
Support Group. These individuals have been successful in other institutions and
their wide range of experience is having a positive affect on both our quality
of customer service and our operational efficiencies.
During this reorganization, the balance sheet restructure was completed. Klamath
First reduced interest rate exposure and added $28 million in Trust Preferred
Offerings to assure adequate capital cushion for expansion opportunities. The
first expansion was completed in September 2001 with the purchase of 13 Western
Bank/Washington Mutual branches which complemented our existing branching
structure. In addition to this purchase, we expanded into seven Wal-Mart
In-Store Branches in Southeast Washington State, Eastern and Western Oregon with
our full service, seven day banking operations plus two de novo full service
branches, one in Southwest Medford and the other in Redmond, Oregon. Our
agreement with Wal-Mart currently calls for two more In-Store Branches, to be
fully operational by July 2003.
Throughout this period, we have been in a dramatically declining interest rate
environment, which has impacted our earnings due to our large cash position
brought about by the earlier balance sheet restructure and the large deposit
base acquired through the branch acquisition last year. While it has had a
dampening effect on earnings, Klamath First is well positioned for growth, both
internally and through acquisition. Our loan portfolio quality is strong and
well reserved, our deposit base solid and our infrastructure now in place to
quickly pursue opportunities as they arise. We currently have 31% of our loan
portfolio in shorter term commercial loans and will complement this portfolio
with additional growth in consumer and adjustable rate residential mortgages
while continuing to aggressively process and sell fixed rate offerings.
As I travel the state, visiting branches and meeting current and potential
Klamath First customers, I am hearing that Klamath First has really changed.
"Your branches look great and your staff is excited and interested in us." These
types of comments are great to hear and indicate that we are on the right track.
The expense, time and effort are paying off.
Klamath First has changed. We are delivering a much wider variety of banking
products to the many communities we serve and have a motivated staff willing to
address our customers' needs and, all of us at Klamath First are focused on
improved bottom line profitability.
Kermit K. Houser
President and Chief Executive Officer
Year In Review
A Year in Review
In 2002, we expanded our reach with new banking offices and enhanced delivery
channels. We introduced our business banking division to our corporate business
customers and focused on the small business market with our Business First
Lending Center. Community involvement in the markets we served is evidenced with
increased awareness and exposure in a variety of community and civic projects.
Meeting Our Customers' Needs
This past year our Company expanded our branch network, which serves as a
cornerstone for our bank. New strategically located branches have broadened our
geographic presence throughout the state of Oregon and into Southern Washington.
In November 2001, we enhanced our presence in Washington with the opening of our
Richland office. This was our second In-Store location in the Tri-Cities area
and serves as a great complement to the Kennewick market. In-Store offices
feature expanded service delivery with seven days a week banking and Internet
and Voice Response banking access that blend with the Wal-Mart store hours.
In February 2002, we opened our second office in Medford with a new banking
center on the corner of Stewart and King Street on the city's West Side. The
Rogue Valley remains a very vital key to our branch banking network's success
and the Stewart location has provided added convenience to our Medford banking
customers.
Also, in February 2002, we made our debut along the I-5 corridor in the
Springfield market with our fifth In-Store Wal-Mart location. Springfield has
been an important link in our branch banking network.
Our sixth In-Store Wal-Mart location was opened in April 2002 in Hermiston. This
is our second banking location in Hermiston and reinforces our commitment to the
community.
In May 2002, we opened our seventh In-Store location. This new Eugene Wal-Mart
office continues to solidify our banking presence along the I-5 corridor.
Complementing the Springfield office, the Eugene location has expanded our
service delivery in this expanding and highly competitive marketplace.
Business First
In April 2002, the Business First Lending Center was developed to complement the
efforts of the Business Banking Group. Business First was designed to offer
lending solutions to businesses that borrow up to $250,000. The strategy of the
Business First Lending Center is to provide a quick, efficient and consistent
underwriting process and increase the return to our shareholders while providing
a competitive commercial lending product in all of the markets we serve. In
order to accomplish this, Klamath First's Business First Lending Center has
designed a proprietary underwriting template that combines credit scoring and
judgment to provide quick decisions at minimal cost to businesses.
Klamath First has a strong presence in small communities; however, our mission
is to become the preferred choice of business customers needing commercial loans
and services in these areas. Business Banking focuses on commercial business
with loan needs in excess of $250,000.
We now have a dedicated team of commercial banking professionals and a wide
range of customized products, all designed to make your banking faster, easier
and more flexible.
Klamath First's Business Banking Group will be setting the standard for business
banking in the Pacific Northwest.
Community First
We are committed to making a positive difference in every community and region
in which we do business. This impact is made both through the Company's Pelican
Club activities (a group of volunteer employees at Klamath First) and through
our support of local businesses, community groups, civic groups,
investments/donations and other banking and community development services.
Through financial and volunteer efforts, we have made significant investments in
and contributions to charities, affordable housing groups and non-profit
organizations within the regions we serve. We have also placed a renewed
emphasis on qualifying CRA (Community Reinvestment act) investments and
contributions in all of the regions and markets we serve.
At Klamath First Our Communities Come First.
KLAMATH FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION AND KLAMATH FIRST BANCORP,
INC.
BOARD OF DIRECTORS
Bernard Z. Agrons
Mr. Agrons is currently retired. He served as Weyerhauser Company's Vice
President for the Eastern Oregon Region until 1981. He was also a State
Representative in the Oregon Legislative Assembly from 1983 to 1991.
Timothy A. Bailey
Mr. Bailey formerly was Senior Vice President with Regence BlueCross BlueShield
of Oregon. He presently serves as Executive Director of the KMSB Foundation and
is an active member of the Oregon State Bar.
James D. Bocchi
Mr. Bocchi is currently retired. He was president of Klamath First Federal
Savings & Loan Association from 1984-1994.
Donald N. Bauhofer
Mr. Bauhofer is the Founder and President of the Pennbrook Company,
headquartered in Bend, Oregon. He is the Founder and CEO of Pennbrook Homes,
Inc. and Praxis Medical Group, the Co-Owner of Arrowood Development, and
Co-Owner and Director of Pacific Education Corporation.
William C. Dalton
Mr. Dalton is currently retired. He is the former owner of W.C. Dalton Company,
farming.
Kermit K. Houser
Mr. Houser serves as President and Chief Executive Officer of Klamath First,
positions he has held since November 2000.
Dianne E. Spires, CPA
Ms. Spires is a Partner in Rusth, Spires & Menefee, LLP, a public accounting
firm located in Klamath Falls and Lakeview, Oregon.
CHAIRMAN OF THE BOARD
Rodney N. Murray
Mr. Murray is the former owner and operator of Klamath Falls Creamery & Crater
Lake Dairy Products and owner of Rod Murray Ranch in Klamath Falls, Oregon.
CORPORATE EXECUTIVE OFFICERS
Kermit K. Houser President/CEO
Marshall J. Alexander EVP/CFO
Ben A. Gay EVP/CCO
Frank X. Hernandez SVP/COO
Craig M. Moore SVP/Chief Auditor/Corporate Counsel/Secretary
James E. Essany SVP/Corporate Marketing Director
M. Isabel Castellanos SVP/Retail Banking
Walt Dodrill SVP/Business Banking
Nina Drake VP/Human Resource Manager
All Branch Managers
In Memory of J. Gillis Hannigan
Long time board member J. Gillis Hannigan died July 30 of complications related
to surgery.
"Gil was a member of the Klamath First Board of Directors since 1987, and made
an outstanding contribution to the organization over the years. We are saddened
by his passing, "said Kermit K. Houser, President and CEO. "Our thoughts and
deepest sympathy are with his wife Jo Ann, and family."
A retired businessman, Mr. Hannigan was previously Executive Vice President of
Modoc Lumber, located in Klamath Falls, Oregon and Vice President of DiGiorgio
Corporation, headquartered in San Francisco, California.
The following tables set forth certain information concerning the consolidated
financial position and consolidated results of operations of Klamath First
Bancorp, Inc. and its wholly owned subsidiaries (the "Company") at the dates and
for the periods indicated. This information does not purport to be complete and
should be read in conjunction with, and is qualified in its entirety by
reference to, the Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Annual Report.
FINANCIAL CONDITION DATA (In thousands)
At September 30, 2002 2001 2000 1999 1998
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Assets .................................................... $1,513,495 $1,468,572 $ 995,575 $1,041,641 $1,031,302
Cash and cash equivalents ................................. 45,791 118,389 29,947 24,523 66,985
Loans receivable, net ..................................... 607,465 679,990 729,037 739,793 668,146
Investment securities held to maturity .................... -- 135 267 560 2,889
Investment securities available for sale .................. 119,542 154,676 116,628 158,648 203,224
Mortgage-backed & related securities
held to maturity .......................................... -- 1,621 2,160 2,601 3,662
Mortgage-backed & related securities
available for sale ........................................ 650,796 421,638 75,331 72,695 43,336
Stock in FHLB of Seattle, at cost ......................... 13,510 12,698 11,877 10,957 10,173
Advances from FHLB of Seattle ............................. 205,250 168,000 173,000 197,000 167,000
Deposit liabilities ....................................... 1,142,006 1,152,824 695,381 720,401 689,541
Shareholders' equity ...................................... 119,938 114,141 108,725 109,585 145,081
SELECTED OPERATING DATA (In thousands, except per share data)
Year Ended September 30, 2002 2001 2000 1999 1998
----------------------------------------------------------------------------------------------------------------------------
Total interest income ..................................... $ 87,293 $ 70,133 $ 72,158 $ 71,691 $ 69,733
Total interest expense .................................... 39,531 40,751 40,756 38,382 37,848
---------- ---------- ---------- ---------- ----------
Net interest income ....................................... 47,762 29,382 31,402 33,309 31,885
Provision for loan losses ................................. 156 387 1,764 932 674
---------- ---------- ---------- ---------- ----------
Net interest income
after provision for loan losses ........................... 47,606 28,995 29,638 32,377 31,211
Non-interest income ....................................... 12,614 11,013 4,094 3,629 3,202
Non-interest expense ...................................... 50,171 28,720 23,773 21,186 19,523
---------- ---------- ---------- ---------- ----------
Earnings before income taxes .............................. 10,049 11,288 9,959 14,820 14,890
Provision for income tax .................................. 3,260 3,717 3,533 5,665 5,339
---------- ---------- ---------- ---------- ----------
Net Earnings .............................................. $ 6,789 $ 7,571 $ 6,426 $ 9,155 $ 9,551
========== ========== ========== ========== ==========
Basic earnings per share .................................. $ 1.06 $ 1.14 $ 0.94 $ 1.21 $ 1.05
========== ========== ========== ========== ==========
KEY OPERATING RATIOS
At or for the Year Ended September 30, 2002 2001 2000 1999 1998
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Performance Ratios
Return on average assets
(net earnings divided by average assets) .................. 0.46% 0.72% 0.62% 0.88% 0.96%
Return on average equity
(net earnings divided by average equity) .................. 5.92% 6.64% 5.82% 7.55% 6.52%
Interest rate spread
(difference between average yield on
interest-earning assets and average cost of
interest-bearing liabilities) ............................. 3.04% 2.18% 2.50% 2.73% 2.57%
Net interest margin
(net interest income as a percentage of
average interest-earning assets) .......................... 3.48% 2.93% 3.14% 3.37% 3.36%
Average interest-earning assets to
average interest-bearing liabilities ...................... 115.18% 118.37% 115.71% 116.47% 119.84%
Net interest income after provision for loan
losses to total non-interest expenses ..................... 94.89% 100.96% 124.39% 152.82% 159.87%
Non-interest expense
to average total assets ................................... 3.37% 2.74% 2.29% 2.05% 1.96%
Efficiency ratio (non-interest expense
divided by net interest income plus
non-interest income) ...................................... 83.10% 55.48% 66.97% 57.36% 55.64%
Dividend payout ratio
(dividends declared per share
divided by net earnings per share) ........................ 49.06% 45.61% 54.79% 38.98% 34.50%
Book value per share ...................................... $ 18.84 $ 17.40 $ 16.25 $ 15.52 $ 16.30
Asset Quality Ratios
Allowance for loan losses
to total loans at end of period ........................... 1.19% 1.13% 0.54% 0.32% 0.28%
Non-performing assets to total assets ..................... 0.12% 0.05% 0.16% 0.46% 0.05%
Non-performing loans to total loans,
before net items .......................................... 0.18% 0.04% 0.11% 0.43% 0.07%
Capital Ratios
Equity to assets ratio .................................... 7.92% 7.77% 10.92% 10.52% 14.07%
Tangible capital ratio .................................... 6.55% 5.16% 10.35% 8.91% 8.26%
Core capital ratio ........................................ 6.55% 5.16% 10.35% 8.91% 8.26%
Risk-based capital ratio .................................. 14.01% 10.36% 20.30% 17.41% 16.13%
Other Data
Number of loans outstanding ............................... 11,835 12,624 8,807 9,297 9,155
Number of deposit accounts ................................ 131,001 111,542 85,706 85,112 82,585
Number of full service offices ............................ 57 52 35 34 34
Special Note Regarding Forward-Looking Statements
Management's Discussion and Analysis of Financial Condition and Results of
Operations and other portions of this Annual Report contain certain
"forward-looking statements" concerning the future operations of Klamath First
Bancorp, Inc. Management desires to take advantage of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995 and is
including this statement for the express purpose of availing the Company of the
protections of such safe harbor with respect to all "forward-looking statements"
contained in the Annual Report. We have used "forward-looking statements" to
describe future plans and strategies, including our expectations of the
Company's future financial results. Management's ability to predict results or
the effect of future plans or strategies is inherently uncertain. Factors which
could affect actual results include interest rate trends, the general economic
climate in the Company's market area and the country as a whole which could
affect the collectibility of loan balances, the ability to increase non-interest
income through expansion of new lines of business, the ability of the Company to
control costs and expenses, competitive products and pricing, loan delinquency
rates, and changes in federal and state regulation. These factors should be
considered in evaluating the "forward-looking statements", and undue reliance
should not be placed on such statements.
General
Klamath First Bancorp, Inc. (the "Company"), an Oregon corporation, is the
unitary savings and loan holding company for Klamath First Federal Savings and
Loan Association (the "Association").
The Association is a progressive, community-oriented financial institution 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 and loans
on commercial real estate, multi-family residential properties, and to consumers
and businesses within its market area. 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, multi-family residential loans, residential construction loans,
commercial and industrial loans, 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. The acquisition of 13 branches from
Washington Mutual Bank, which was completed in September 2001, moved the Company
strongly in this direction.
The Company's profitability depends primarily on its net interest income, which
is the difference between interest and dividend income on interest-earning
assets, principally loans and investment securities, and interest expense on
interest-bearing deposits and borrowings. Because the Company is primarily
dependent on net interest income for its earnings, the focus of the Company's
planning is to devise and employ strategies that provide stable, positive
spreads between the yield on interest-bearing assets and the cost of
interest-bearing liabilities in order to maximize the dollar amount of net
interest income. The Company's net earnings are dependent, to a lesser extent,
on the level of its non-interest income, such as service charges, commission
income, and other fees, and the controlling of its non-interest expense, such as
employee compensation and benefits, occupancy and equipment expense, deposit
insurance premiums and miscellaneous other expenses, as well as federal and
state income taxes.
The Association is regulated by the Office of Thrift Supervision ("OTS") and its
deposits are insured up to applicable limits under the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC").
The Association is a member of the Federal Home Loan Bank system. The
Association conducts its business through 57 office facilities, with the main
office located in Klamath Falls, Oregon. The Association considers its primary
market area to be the state of Oregon, particularly the 26 counties in which the
offices are located. During 2001, the Company expanded into the Tri-Cities area
of Washington state by opening in-store branches in Kennewick and Richland.
Federal Legislation
In Federal legislation enacted in 1996, the reserve method of accounting for
thrift bad debt reserves (including the percentage of taxable income method) was
repealed for tax years beginning after December 31, 1995. The resulting change
in accounting method triggers bad debt reserve recapture for post-1987 reserves
over a six-year period, thereby generating an additional tax liability. At
September 30, 2002 and 2001, the Association's post-1987 reserves amounted to
$2.0 million and $2.6 million, respectively. Pre-1988 reserves would only be
subject to recapture if the institution fails to qualify as a thrift. Recapture
of post-1987 reserves was required to begin during the tax year ended September
30, 1999.
The Sarbanes-Oxley Act was enacted by Congress during the summer of 2002 to
enhance corporate governance practices. The Company's management and board of
directors are informed about the requirements of the Sarbanes-Oxley Act and the
Company is actively monitoring regulatory implementation of the Act. However,
due to the regulated environment in which financial institutions operate, many
requirements of the new legislation are already part of the Company's internal
control structure. Therefore, the Act is not expected to result in material
changes to the Company's corporate governance processes.
Market Risk and Asset/Liability Management
The Company's financial performance is affected by the success of the fee
generating products it offers to its customers, the credit quality of its loans
and securities, and the extent to which its earnings are affected by changes in
interest rates. Credit risk is the risk that borrowers will become unable to
repay their debts as they become due. The Company relies on high quality
underwriting standards, loan review, and an adequate allowance for loan losses
to mitigate its credit risk.
Interest rate risk is the risk of loss in principal value and risk of earning
less net interest income due to changes in interest rates. Put simply, savings
institutions solicit deposits and lend the funds they receive to borrowers. The
difference between the rate paid on deposits and the rate received on loans is
the interest rate spread. If the rates paid on deposits change, or reprice, with
the same timing and magnitude as the rates change on loans, there is perfect
matching of interest rate changes and thus, no change in interest rate spread
and no interest rate risk. In actuality, interest rates on deposits and other
liabilities do not reprice at the same time or with the same magnitude as those
on loans, investments and other interest-earning assets. For example,
historically the Company primarily originated fixed-rate residential loans for
its portfolio. Because fixed-rate loans do not reprice until payoff and because
the majority of residential loans have terms of 15 to 30 years (with actual
expected lives of seven to ten years), the interest rate characteristics of the
loan portfolio do not exactly match the Company's liabilities, which consist of
deposits with maturities ranging up to ten years and borrowings which mature or
reprice in five years or less. When interest rates change, this mismatch creates
changes in interest rate spread that influence net interest income and result in
interest rate risk.
Changes in interest rates also impact the fair value of the assets and
liabilities on the Company's balance sheet, expressed as changes in the net
portfolio value ("NPV"). NPV represents the market value of portfolio equity and
is equal to the market value of assets minus the market value of liabilities
plus or minus the estimated market value of off-balance sheet instruments. For
example, the market value of investment securities and loans is impacted by
changes in interest rates. Fixed-rate loans and investments held in the
Company's portfolio increase in market value if interest rates decline.
Conversely, the market value of fixed-rate portfolio assets decreases in an
increasing interest rate environment. It is generally assumed that assets with
adjustable rates are less subject to market value changes due to interest rate
fluctuations based on the premise that their rates will adjust with the market.
The OTS Thrift Bulletin 13a ("TB 13a") contains the prevailing guidance on the
management of interest rate risk and provides a description of how the
"Sensitivity to Market Risk" rating is to be determined. Sensitivity to Market
Risk represents the "S" component of the CAMELS rating which is used by
regulators in their evaluation of financial institutions. The OTS has
established detailed minimum guidelines for two areas of interest rate risk
management. These guidelines establish minimum expectations for (1) the
establishment and maintenance of board-approved risk limits and (2) an
institution's ability to measure interest rate risk exposure. Each thrift's
board of directors is responsible for establishing risk limits for the
institution. The interest rate risk limits are expected to include limits on the
change in NPV as well as limits on earnings sensitivity.
NPV limits include minimums for the NPV ratio, which is calculated by dividing
the NPV by the present value of the institution's assets for a given rate
scenario. The board of directors has specified the minimum NPV ratio it is
willing to allow under interest rate shifts of 100 and 200 basis points up and
down. Both the NPV limits and the actual NPV forecast calculations play a role
in determining a thrift's Sensitivity to Market Risk. The prudence of the limits
and the compliance with board-prescribed limits are factors in the determination
of whether or not the institution's risk management is sufficient. In addition,
the NPV ratio permitted by the institution's policies under an adverse 200 basis
point rate shift scenario is combined with the institution's current interest
rate sensitivity to determine the institution's "Level of Interest Rate Risk".
The Level of Interest Rate Risk is then utilized in conjunction with an
assessment of the "Quality of Risk Management Practices" to determine the "S"
component of the CAMELS rating.
The Company's exposure to interest rate risk is reviewed on at least a quarterly
basis by the Board of Directors and the Asset Liability Management Committee
("ALCO"), which includes senior management representatives. The ALCO monitors
and considers methods of managing interest rate risk by monitoring changes in
NPV, the NPV ratio, and net interest income under various interest rate
scenarios. The ALCO attempts to manage the various components of the Company's
balance sheet to minimize the impact of sudden and sustained changes in interest
rates on NPV and the NPV ratio. If potential changes to NPV and the NPV ratio
resulting from hypothetical interest rate swings are not within the limits
established by the Board, the Board may direct management to adjust its asset
and liability mix to bring interest rate risk within Board-approved limits.
NPV is calculated based on the net present value of estimated cash flows
utilizing market prepayment assumptions and market rates of interest provided by
independent broker quotations and other public sources. Computation of
forecasted effects of hypothetical interest rate changes are based on numerous
assumptions, including relative levels of market interest rates, loan
prepayments, and deposit decay, and should not be relied upon as indicative of
actual future results. Further, the computations do not contemplate any actions
the ALCO could undertake in response to changes in interest rates.
The Company has historically originated primarily fixed-rate residential loans.
Many of these loans have been sold to the Federal National Mortgage Association
("FNMA") with servicing retained, and currently loans are sold to other entities
with servicing released, while few are held in the Company's portfolio. In order
to reduce the exposure to interest rate fluctuations, the Company has developed
strategies to manage its liquidity, shorten the effective maturities and
increase the repricing of certain interest-earning assets, and increase the
effective maturities of certain interest-bearing liabilities. During recent
years, the Company undertook significant projects to manage and reduce interest
rate risk. In February 2001, the Company securitized $190.3 million in
fixed-rate single family mortgage loans. The loans were sold to FNMA with
servicing retained and the resulting FNMA mortgage-backed securities ("MBS")
were recorded as available for sale securities on the Company's books.
Subsequently, the MBS were sold with the two-fold benefit of producing $5.4
million in gain on sale of investments and reducing long term fixed-rate assets
from the interest rate risk profile. The second significant event impacting
interest rate risk was the acquisition of 13 branches from Washington Mutual
Bank in September 2001. These were commercial bank branches which included
$118.8 million of commercial loans and $50.7 million of consumer loans. Most of
these loans are adjustable rate shorter term loans. Cash obtained in the
transaction was primarily invested in MBS and collateralized mortgage
obligations ("CMO's") having shorter terms than conventional single-family
mortgage loans. All these events serve to improve the Company's interest rate
risk position.
The Company's Board of Directors has established risk limits which are in
compliance with TB 13a. NPV values for the Association are regularly calculated
by the OTS based on regulatory guidelines. The following table presents the
Association's projected change in NPV and the NPV ratio for the various rate
shock levels as of September 30, 2002 and 2001, using the regulatory
calculations. The assets and liabilities at the parent company level are not
considered in the analysis. The exclusion of holding company assets and
liabilities does not have a significant effect on the analysis of NPV
sensitivity. All market rate sensitive instruments presented in these tables are
classified as either held-to-maturity or available-for-sale. The Association has
no trading securities.
PROJECTED CHANGES IN NET PORTFOLIO VALUE:
At September 30, 2002 2001
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Sensitivity Sensitivity
NPV Measure NPV Measure
Change in Interest Rates Ratio(Basis Points) Ratio(Basis Points)
200 basis point rise ....... 6.67% (126) 5.22% (208)
100 basis point rise ....... 7.79% (14) 6.53% (77)
Base Rate Scenario ......... 7.93% -- 7.30% --
100 basis point decline .... 7.11% (82) 7.12% (19)
200 basis point decline .... N/A N/A 6.68% (62)
The improvement noted in the sensitivity measure is an ongoing result of the
actions taken as noted above, including the sale of fixed-rate single family
mortgage loans and the branch acquisition, which provided a portfolio of
primarily adjustable-rate and shorter term loans. In addition, fiscal 2002 saw
significant prepayments on fixed-rate mortgage loans, reducing the balances of
such long term assets. Proceeds from loan repayments were reinvested in shorter
term, less than five years, mortgage-backed assets. Also, new single family loan
production is being sold in the secondary market, again acting to reduce such
long term asset balances.
The preceding table indicates that at September 30, 2002, in the event of a
sudden and sustained increase in prevailing market interest rates, the
Association's NPV and NPV ratio would be expected to decrease, but would
decrease to a lesser extent than under previous asset/liability mixes.
Certain shortcomings are inherent in the method of analysis presented in the
computation of NPV. Actual values may differ from those projections presented,
if market conditions vary from assumptions used in the calculation of NPV.
Certain assets, such as adjustable-rate loans, have features which restrict
changes in interest rates on a short-term basis and over the life of the assets.
In addition, the proportion of adjustable-rate loans in the Association's
portfolio could decrease in future periods if market interest rates remain at or
decrease below current levels due to refinance activity. Further, in the event
of a change in interest rates, prepayment and early withdrawal levels would
likely deviate significantly from those assumed in the NPV. Finally, the ability
of many borrowers to repay their adjustable-rate mortgage loans may decrease in
the event of interest rate increases.
A conventional measure of interest rate sensitivity for savings institutions is
the calculation of interest rate "gap". This measure of interest rate
sensitivity is a measure of the difference between amounts of interest-earning
assets and interest-bearing liabilities which either reprice or mature within a
given period of time. The difference, or the interest rate repricing "gap",
provides an indication of the extent to which an institution's interest rate
spread will be affected by changes in interest rates. A gap is considered
positive when the amount of interest-rate sensitive assets exceed the amount of
interest-rate sensitive liabilities, and is considered negative when the amount
of interest-rate sensitive liabilities exceeds the amount of interest-rate
sensitive assets. Generally, during a period of rising interest rates, a
negative gap within shorter maturities would result in a decrease in net
interest income. Conversely, during a period of falling interest rates, a
negative gap within shorter maturities would result in an increase in net
interest income.
At September 30, 2002, the Association's one-year cumulative gap was a negative
20.61% of total assets compared to a negative 15.13% of total assets at
September 30, 2001. The increased negative balance is a result of balances held
in cash and short term investments on September 30, 2001 being reinvested during
2002 in investments and MBS with stated maturities greater than one year.
The following table sets forth certain historical information relating to the
Company's interest-earning assets and interest-bearing liabilities that are
estimated to mature or are scheduled to reprice within one year.
At September 30, 2002 2001 2000
- ----------------------------------------------------------------------
(In thousands)
Earning assets maturing
or repricing within one year..... $221,598 $318,777 $209,072
Interest-bearing liabilities
maturing or repricing within
one year......................... 533,486 541,016 291,681
Deficiency of earning assets
over interest-bearing liabilities
as a percent of total assets..... (20.61%) (15.13%) (8.31%)
Percent of assets to liabilities
maturing or repricing within
one year......................... 41.54% 58.92% 71.68%
The following table presents the difference between the Company's
interest-earning assets and interest-bearing liabilities within specified
maturities at September 30, 2002. This table does not necessarily indicate the
impact of general interest rate movements on the Company's net interest income
because the repricing of certain assets and liabilities is subject to
competitive and other limitations. As a result, certain assets and liabilities
indicated as maturing or otherwise repricing within a stated period may in fact
mature or reprice at different times and at different volumes.
3 Months > 3 Months > 6 Months > 1 to 3 > 3 to 5 > 5 to 10 > 10 to 20 > 20
or Less to 6 Months to 1 Year Years Years Years Years Years TOTAL
-------- ----------- ---------- -------- -------- --------- ---------- -------- ----------
ASSETS (In thousands)
Permanent 1-4 Mortgages:
- ----------------------------------------------------------------------------------------------------------------------------------
Adjustable-rate............ $2,123 $4,452 $12,541 $4,539 $4,717 $-- $-- $-- $28,372
Fixed-rate................. 312 92 449 308 1,318 13,828 52,436 242,684 311,427
Other Mortgage Loans:
Adjustable-rate............ 10,976 11,460 10,560 48,888 23,388 237 -- -- 105,509
Fixed-rate................. 219 191 199 1,309 3,207 11,361 5,397 5,627 27,510
Mortgage-Backed Securities. 25,287 1,291 1,576 46,341 85,819 163,176 170,356 146,458 640,304
Non-Real Estate Loans:
Adjustable-rate............ 60,455 2,137 1,965 5,834 3,117 20 49 -- 73,577
Fixed-rate................. 2,081 631 904 7,636 11,608 15,462 32,575 665 71,562
Investment Securities...... 40,792 16,813 14,092 30,108 -- 790 35,735 2,468 140,798
Other Interest-Bearing Assets -- -- -- -- -- 457 -- -- 457
- ----------------------------------------------------------------------------------------------------------------------------------
Total Rate Sensitive Assets $142,245 $37,067 $42,286 $144,963 $133,174 $205,331 $296,548 $397,902 $1,399,516
======== ======= ======= ======== ======== ======== ======== ======== ==========
LIABILITIES
- ----------------------------------------------------------------------------------------------------------------------------------
Deposits - Fixed Maturity.. $93,539 $77,690 $104,467 $114,477 $34,047 $32,081 $318 $100 $456,719
Deposits - Interest Bearing
Checking................... 5,145 5,145 10,290 13,153 11,227 36,313 28,496 16,098 125,867
Deposits - Money Market.... 17,144 17,144 34,288 81,901 54,424 52,639 72,544 562 330,646
Deposits - Passbook and
Statement Savings.......... 2,182 2,182 4,365 7,379 9,778 20,537 18,344 21,234 86,001
Other Interest Bearing
Liabilities............. 115,905 20,000 24,000 43,000 8,000 -- -- -- 210,905
- ----------------------------------------------------------------------------------------------------------------------------------
Total Rate Sensitive
Liabilities............. $233,915 $122,161 $177,410 $259,910 $117,476 $141,570 $119,702 $37,994 $1,210,138
======== ======== ======== ======== ======== ======== ======== ======= ==========
Interest Rate Sensitivity
Gap..................... ($91,670) ($85,094) ($135,124)($114,947) $15,698 $63,761 $176,846 $359,908 $189,378
Cumulative Interest Rate
Sensitivity Gap............ ($91,670) ($176,764) ($311,888)($426,835)($411,137) ($347,376) ($170,530) $189,378 --
Sensitivity Gap to Total
Assets.................. (6.06%) (5.62%) (8.93%) (7.59%) 1.04% 4.21% 11.68% 23.78% --
Cumulative Interest Rate
Sensitivity Gap to Total
Assets.................. (6.06%) (11.68%) (20.61%) (28.20%) (27.16%) (22.95%) (11.27%) 12.51% --
Liquidity and Capital Resources
The Company generates cash through operating activities, primarily as a result
of net income. The adjustments to reconcile net income to net cash provided by
operations during the years presented consists primarily of the provision for
loan losses, deferred income taxes, depreciation and amortization, stock-based
compensation expense, amortization of deferred loan origination fees, net gain
on the sale of investment and mortgage-backed securities, increases or decreases
in various escrow accounts and increases or decreases in other assets and
liabilities. The primary investing activity of the Association is lending, which
is funded with cash provided from operations and financing activities, as well
as proceeds from amortization and prepayments on existing loans and
mortgage-backed and related securities. For additional information about cash
flows from operating, financing, and investing activities, see the Consolidated
Statements of Cash Flows included in the Consolidated Financial Statements.
The Association is required under applicable federal regulations to maintain
specified levels of "liquid" investments in qualifying types of U.S. government,
federal agency and other investments having maturities of five years or less.
Current OTS regulations require that a savings association maintain liquid
assets of not less than 4.00% of its average daily balance of net withdrawable
deposit accounts and borrowings payable in one year or less. At September 30,
2002, the Association's liquidity, as measured for regulatory purposes, was
10.3%. The Company has borrowing agreements with banks that can be used if funds
are needed. (See Notes 10 and 11 to the Consolidated Financial Statements.)
OTS capital regulations require the Association to have: (i) tangible capital
equal to 1.5% of adjusted total assets, (ii) core capital equal to 4.0% of
adjusted total assets, and (iii) total risk-based capital equal to 8.0% of
risk-weighted assets. At September 30, 2002, the Association was in compliance
with all regulatory capital requirements effective as of such date, with
tangible, core and risk-based capital of 6.6%, 6.6% and 14.0%, respectively.
(See Note 20 to the Consolidated Financial Statements.)
Changes in Financial Condition
At September 30, 2002, the consolidated assets of the Company totaled $1.5
billion, consistent with $1.5 billion at September 30, 2001.
Total cash and cash equivalents decreased $72.6 million, or 61.32%, from $118.4
million at September 30, 2001 to $45.8 million at September 30, 2002. The
decrease is primarily the result of the cash from the branch purchase from
Washington Mutual Bank in September 2001 being held in federal funds at
September 30, 2001 while other appropriate investment alternatives were
researched. During 2002, the excess cash was invested as reflected in the
increase in mortgage-backed securities.
Net loans receivable decreased by $72.5 million, or 10.67%, to $607.5 million at
September 30, 2002, compared to $680.0 million at September 30, 2001. The
decrease is the result of increased prepayments on loans coupled with sale of
new one- to four- family loan production.
Investment securities decreased $35.3 million, or 22.78%, from $154.8 million at
September 30, 2001 to $119.5 million at September 30, 2002. This decrease was
the result of $41.9 million in purchases offset by $15.1 million in scheduled
maturities and the sale of $62.0 million of investment securities available for
sale. During the year ended September 30, 2002, $109.5 million of principal
payments were received on mortgage-backed and related securities ("MBS") and
$87.1 million were sold, thus reducing the balance of MBS. This reduction was
more than offset by the purchase of $419.4 million in MBS, resulting in a net
increase in total MBS from $423.3 million at September 30, 2001 to $650.8
million at September 30, 2002. The purchases of investment securities and MBS
were funded by cash obtained in the branch acquisition, maturities of
securities, funds generated by loan repayments, and borrowings.
Real estate owned and repossessed assets increased from $445,855 at September
30, 2001 to $758,663 at September 30, 2002. The balance at September 30, 2001
consists of single family residences. The balance at September 30, 2002
consisted primarily of four single family residences and one commercial
property.
Other assets decreased $5.6 million from $9.3 million at September 30, 2001 to
$3.7 million at September 30, 2002. The majority of the decrease resulted from
payment of a $4.1 million receivable from Washington Mutual Bank ("WAMU")
related to the final settlement for the branch acquisition, which was included
in the balance at September 30, 2001 and collected in October 2001.
Deposit liabilities decreased $10.8 million, or 0.94%, from $1.2 billion at
September 30, 2001 to $1.1 billion at September 30, 2002. The decrease is
primarily due to a reduction in time deposits as a result of a strategy to
reduce interest expense.
Advances from the FHLB of Seattle increased from $168.0 million at September 30,
2001 to $205.3 million at September 30, 2002.
Total shareholders' equity increased $5.8 million from $114.1 million at
September 30, 2001 to $119.9 million at September 30, 2002. The increase is the
combined effect of $4.8 million paid for stock repurchases and $3.3 million in
dividends paid on common shares offset by net earnings for the year and a $4.7
million increase in net unrealized gain on securities available for sale.
Asset Quality
Non-Performing Assets
At September 30, 2002, the ratio of non-performing assets (including nonaccrual
loans, accruing loans greater than 90 days delinquent, real estate owned, and
other repossessed assets) to total assets was 0.12%, compared to 0.05% at
September 30, 2001. The increase is due to an increase in the balance of
nonaccrual loans from $271,000 at September 30, 2001 to $1,091,000 at September
30, 2002 and a $312,808 increase in real estate owned and repossessed assets.
The Association intends to maintain asset quality by continuing its focus on
conscientious underwriting. With the expansion of other lending options such as
commercial and multi-family real estate loans, equity lines of credit, other
consumer loan products, and commercial loans, the Association has evaluated the
trade off associated with planned loan growth and the greater credit risk
associated with such forms of lending.
Classified Assets
The Association has established a Classification of Assets Committee that meets
at least quarterly to approve and develop action plans to resolve problems
associated with the assets. The Committee also reviews recommendations for new
classifications and makes any changes in present classifications, as well as
making recommendations for the adequacy of reserves.
In accordance with regulatory requirements, the Association reviews and
classifies on a regular basis its assets as "special mention", "substandard",
"doubtful", and "loss", as appropriate. All nonaccrual loans and non-performing
assets are included in classified assets.
Allowance for Loan Losses
The Association has established a systematic methodology for determination of
provisions for loan losses. The methodology is set forth in a formal policy and
takes into consideration the need for an overall general valuation allowance as
well as specific allowances that are tied to individual loans. Provision for
loan losses is recorded based on the Association's evaluation of specific loans
in its portfolio, historical loan loss experience, the volume and type of
lending, general economic conditions, and the existing level of the
Association's allowance for loan losses.
The following table sets forth at the dates indicated the loan loss allowance,
charge-offs, and recoveries:
At or For the Year Ended September 30, 2002 2001 2000
- --------------------------------------------------------------------------
(In thousands)
General loan loss allowance........... $7,376 $7,951 $4,062
Specific loss allowance............... -- -- 20
Charge-offs........................... 747 90 607
Recoveries............................ 16 42 441
Comparison of Operating Results for the Years Ended September 30, 2002 and 2001
General
The purchase of 13 branches from Washington Mutual Bank in September 2001 had
significant impact on the operations of the Company during fiscal 2002. The
transaction contributed significantly to loan and deposit balances, added 13
locations, and introduced 124 employees to the Klamath First family at year end
2001. Therefore, the income and expenses related to this significant change had
little effect on fiscal 2001, but had a dominant impact on fiscal 2002. The
influence of this change is evident in all categories of income and expenses
during the current fiscal year.
During fiscal 2002, the Company operated in an economy that experienced
declining interest rates and a relatively normal yield curve. Strategic
decisions to revise interest rates paid on deposits to lower interest expense
resulted in improvement in both interest rate spread and interest rate margin
over the previous year. Net earnings decreased by $782,226, or 10.3% from $7.6
million for the year ended September 30, 2001 to $6.8 million for the year ended
September 30, 2002. Net earnings for the year ended September 30, 2001 were
enhanced by gains on sale of securities totaling $5.4 million which were not
repeated to that extent for 2002.
Interest Income
Interest income increased $17.2 million, or 24.5%, from $70.1 million for the
year ended September 30, 2001 to $87.3 million for the year ended September 30,
2002. The general interest rate environment during the year had declining
interest rates but the branch acquisition in September 2001 included significant
commercial and consumer loan balances, increasing the earning assets, and also
providing loans with slightly higher yields. Rates on short term investments
such as federal funds and interest-earning deposits decreased sharply over the
year. The combined result of these changes is reflected in the average yield on
interest earning assets, which decreased from 6.99% for the year ended September
30, 2001 to 6.35% for the year ended September 30, 2002.
Average loans receivable increased $49.2 million and the yield on loans
increased 4 basis points, resulting in a $4.1 million increase in interest
income on loans. Purchases of MBS boosted interest income on MBS by $14.8
million. The average balance of investment securities increased $22.6 million,
or 17.5%, however the average rate decreased by 92 basis points, resulting in a
$131,061 decrease in interest income on investment securities compared with the
same period in 2001.
Interest Expense
Average deposits increased by $349.7 million for the year ended September 30,
2002 compared to the year ended September 30, 2001, due to the deposit balances
acquired in the WAMU branch transaction in September 2001. The average interest
paid on interest-bearing deposits decreased significantly, from 4.52% for the
year ended September 30, 2001 to 2.92% for the year ended September 30, 2002.
During the year ended September 30, 2002, the Company reduced interest rates
paid on deposit accounts as part of a strategic plan to improve profitability.
This strategic move is evidenced by the decrease in interest expense which was
coupled with a 52.1% increase in average deposit balances. As a result, interest
expense decreased $1.2 million, or 3.0%, comparing the year ended September 30,
2002 to 2001. Interest expense on deposits decreased $521,672 from $30.3 million
for the year ended September 30, 2001 to $29.8 million for the year ended
September 30, 2002.
Interest expense on FHLB borrowings decreased $457,332 due to decreased average
borrowings of $3.7 million which was partially offset by a 26 basis point
increase in the average rate paid.
As noted previously, the general interest rate environment during the year was
represented by declining rates. The impact of this environment is evident in the
decrease in interest rates on interest-earning assets from 6.99% for the year
ended September 30, 2001 to 6.35% for the year ended September 30, 2002.
Decreases were noted in yields for most categories of assets. However, due to
the strategic moves made by the Company in deposit pricing, overall rates on
interest-bearing liabilities decreased 150 basis points from 4.81% for the year
ended September 30, 2001 to 3.31% for the year ended September 30, 2002. As a
result, interest rate spread increased from 2.18% for the year ended September
30, 2001 to 3.04% for the year ended September 30, 2002. Net interest margin
(net interest income as a percent of average interest-earning assets) also
improved significantly, from 2.93% for the fiscal year ended September 30, 2001
to 3.48% for the year ended September 30, 2002.
Provision for Loan Losses
The provision for loan losses was $156,000, recoveries were $16,224, and charge
offs were $747,092 during the year ended September 30, 2002 compared to a
provision for loan losses of $387,000, with $42,406 of recoveries, and charge
offs of $90,173 during the year ended September 30, 2001. Charge offs during the
year ended September 30, 2002 related primarily to a land development loan and
various consumer loans. Charge offs during the year ended September 30, 2001
related primarily to construction loans from one borrower and various consumer
loans.
The provision for loan losses for the year ended September 30, 2002 was less
than for the previous year because the strategy to sell newly originated one- to
four-family loans in the secondary market meant that fewer loans were added to
the loan portfolio. The loans added in the branch acquisition were allocated
allowance as part of the purchase accounting and thus did not significantly
impact the provision for fiscal years 2002 and 2001.
The composition of the loan portfolio is monitored on a regular basis.
Significant increases in commercial and consumer loans, which are considered to
have more associated credit risk than the Company's traditional portfolio of
one- to four-family residential mortgages, are considered in the determination
of the appropriate level of allowance for loan losses. As part of the branch
acquisition, a loan loss allowance was allocated to the acquired loans. At
September 30, 2001, the allowance for loan losses was equal to 1,108.9% of
non-performing assets compared to 398.7% at September 30, 2002. The decrease in
the coverage ratio at year end 2002 was the result of an increase in
non-performing assets.
The following table presents, for the periods indicated, information regarding
average balances of assets and liabilities, as well as the total dollar amounts
of interest income from average interest-earning assets and interest expense on
average interest-bearing liabilities, resultant yields, interest rate spread,
net interest margin and the ratio of average interest-earning assets to average
interest-bearing liabilities. Dividends received are included as interest
income. The table does not reflect any effect of income taxes. Nonaccrual loans
are reflected as carrying a zero yield.
Year Ended September 30, 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
INTEREST-EARNING ASSETS (In thousands)
Loans receivable........... $660,246 $52,179 7.90% $611,095 $48,051 7.86% $747,842 $57,134 7.64%
Mortgage backed and
related securities......... 508,712 26,369 5.18% 192,976 11,611 6.02% 85,874 5,036 5.86%
Investment securities...... 151,749 7,159 4.72% 129,171 7,282 5.64% 145,504 8,737 6.00%
Federal funds sold......... 21,092 440 2.09% 38,686 1,599 4.13% 3,224 180 5.59%
Interest earning deposits.. 19,027 333 1.75% 18,930 768 4.06% 5,552 312 5.63%
FHLB stock................. 13,013 813 6.25% 12,175 822 6.75% 11,345 759 6.69%
--------- ------- --------- ------- ------- -------
Total interest-earning
assets..................1,373,839 87,293 6.35% 1,003,033 70,133 6.99% 999,341 72,158 7.22%
Non-interest-earning
assets.................. 114,405 44,817 40,566
--------- ------- --------- ------- ------- -------
Total Assets..............$1,488,244 $1,047,850 $1,039,907
========== ========== ==========
INTEREST-BEARING LIABILITIES
Tax and insurance reserve.. $2,316 $66 2.85% $2,952 $114 3.85% $4,401 $ 89 2.02%
Passbook and statement
savings................. 82,358 930 1.13% 47,278 1,067 2.26% 53,890 959 1.78%
Interest-bearing checking.. 122,610 907 0.74% 75,070 812 1.08% 69,831 779 1.12%
Money market............... 319,336 6,377 2.00% 164,523 6,332 3.85% 149,088 6,218 4.17%
Certificates of deposit.... 496,070 21,569 4.35% 383,796 22,093 5.76% 377,934 20,408 5.40%
FHLB advances/
Short term borrowings...... 170,037 9,682 5.69% 173,786 10,333 5.95% 208,508 12,303 5.90%
--------- ------ ------- ------ ------- ------
Total interest-bearing
liabilities.............1,192,727 39,531 3.31% 847,405 40,751 4.81% 863,652 40,756 4.72%
Non-interest-bearing
liabilities............. 180,765 86,406 65,762
--------- ------- --------- ------- ------- -------
Total liabilities..........1,373,492 933,811 929,414
Shareholders' equity....... 114,752 114,039 110,493
---------- ---------- ----------
Total Liabilities and
Shareholders' Equity......$1,488,244 $1,047,850 $1,039,907
========== ========== ==========
Net interest income........ $47,762 $29,382 $31,402
======= ======= =======
Interest rate spread....... 3.04% 2.18% 2.50%
==== ==== ====
Net interest margin........ 3.48% 2.93% 3.14%
==== ==== ====
Average interest-earning
assets to average
interest-bearing
liabilities............. 115.18% 118.37% 115.71%
====== ====== ======
Non-Interest Income
Non-interest income increased $1.6 million, or 14.5%, to $12.6 million for the
year ended September 30, 2002 from $11.0 million for the year ended September
30, 2001. During the year ended September 30, 2001, the Company realized $5.4
million in gains on sales of investments when it sold MBS resulting from
securitization of single family mortgage loans. This is compared to $1.7 million
in gain on sale of securities for the year ended September 30, 2002.
Disregarding the gains on sale of investments, non-interest income increased
93.4%, from $5.6 million for the year ended September 30, 2001 to $10.9 million
for the year ended September 30, 2002. The increase is the result of continued
improvement in fees and service charges due to more accounts and a revised fee
structure and a $502,860 increase in gain on sale of mortgage loans. Growth in
the activity in the Association's investment subsidiary, Klamath First Financial
Services, increased commission income by over $1.0 million.
Non-Interest Expense
Non-interest expense increased $21.5 million, or 74.7%, from a total of $28.7
million for the prior year to $50.2 million for the year ended September 30,
2002. The increase is primarily attributed to the expansion of the branch
network through the branch acquisition in September 2001 and addition of de novo
branches. Compensation, employee benefits, and related expense increased $7.7
million, or 53.1%, from $14.4 million for the year ended September 30, 2001 to
$22.1 million for the same period of 2002. Increases in compensation expense
arose from the addition of 124 employees as part of the WAMU branch acquisition
and other back office personnel added to handle the increased activity resulting
from a 48% increase in accounts, as well as personnel added at five de novo
branches opened during the year ended September 30, 2002. Other expense
increased $5.8 million, or 71.4%, from $8.2 million for the year ended September
30, 2001 to $14.0 million for the current year. Increases were noted as a result
of the branch acquisition, the opening of the second Medford, Oregon branch and
the opening of four new in-store branches. For example, postage and courier
expense increased $629,632, and supplies expense increased $411,765. Checking
department expense increased by $1.2 million and ATM expense increased by
$274,301, both due to the increase in number of locations and deposit accounts.
Advertising expense increased $294,808 due to the expansion of the branch
network. Professional service fees increased $131,468 with items relating to
recruitment of executives, training enhancements, and the hiring of a consulting
firm for a commercial loan project. The ratio of non-interest expense to average
total assets was 3.4% and 2.7% for the years ended September 30, 2002 and 2001,
respectively.
The following table sets forth the effects of changing rates and volumes on net
interest income of the Company. Information is provided with respect to (i)
effects on interest income attributable to changes in volume (changes in average
volume multiplied by prior rate); (ii) effects on interest income attributable
to changes in rate (changes in rate multiplied by prior average volume); and
(iii) changes in rate/volume (change in rate multiplied by change in average
volume).
For the Year Ended September 30 2001 vs. 2002 2000 vs. 2001
- -------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) Due To Increase (Decrease) Due To
Net Increase Net Increase
Rate Volume Rate/Vol (Decrease) Rate Volume Rate/Vol (Decrease)
- -------------------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS (in thousands)
Loans................................. $ 242 $3,864 $20 $4,126 $1,670 ($10,447) ($306) ($9,083)
Mortgage-backed and related securities (1,608) 18,997 (2,631) 14,758 131 6,281 163 6,575
Investment securities................. (1,187) 1,273 (208) (122) (534) (981) 60 (1,455)
Federal funds sold.................... (791) (727) 360 (1,158) (47) 1,982 (516) 1,419
Interest-bearing deposits............. (437) 4 (2) (435) (87) 752 (209) 456
FHLB stock............................ (61) 57 (4) (8) 7 56 -- 63
--------------------------------------------------------------------------------------
Total Interest-Earning Assets......... ($3,842) $23,468 ($2,465) $17,161 $1,140 ($2,357) ($808) ($2,025)
======= ======= ====== ======= ====== ====== ==== ======
INTEREST-BEARING LIABILITIES
Tax and insurance reserves............ ($29) ($24) $6 ($47) $81 ($29) ($27) $25
Savings............................... (532) 791 (395) (136) 257 (118) (31) 108
Interest-bearing checking............. (257) 514 (163) 94 (27) 59 1 33
Money market.......................... (3,047) 5,959 (2,867) 45 (479) 644 (51) 114
Certificates of deposit............... (5,406) 6,463 (1,581) (524) 1,347 317 21 1,685
FHLB advances/Short term borrowings... (437) (223) 9 (651) 96 (2,049) (17) (1,970)
-------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities.... ($9,708) $13,480 ($4,991) ($1,219) $1,275 ($1,176) ($104) ($5)
====== ======= ====== ====== ====== ====== ==== ==
Increase (Decrease) in Net Interest
Income............................... $18,380 ($2,020)
======= ======
Income Taxes
The provision for income taxes was $3.3 million for the year ended September 30,
2002, representing an effective tax rate of 32.4% compared with $3.7 million for
the year ended September 30, 2001 representing an effective tax rate of 32.9%.
The decrease in effective tax rate for 2002 is primarily due to an increase in
income on tax-exempt municipal securities. (See Note 12 to the Consolidated
Financial Statements.)
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND 2000
General
Significant transactions marked the year ended September 30, 2001, as the
Company positioned itself for growth in the future. Strategic decisions had a
mixed impact on earnings. The sale and securitization of $190.3 million in
fixed-rate single family mortgages left the Company holding the resulting MBS.
The timing of the securitization provided the opportunity to sell the MBS at a
gain totaling $5.4 million before tax. Ultimately, the transaction removed
$190.3 million in long term fixed-rate assets from the interest rate risk
profile and provided significant earnings. The other transaction that impacted
most aspects of the Company was the WAMU branch acquisition. As discussed above,
the transaction contributed significantly to loan and deposit balances, added 13
locations, and introduced 124 employees to the Klamath First family.
During fiscal 2001, the Company operated in an economy that experienced
declining interest rates and a gradual return to a more normal yield curve, in
contrast to the inverted yield curve at the end of the prior year wherein short
term rates were higher than long term rates. However, with the rapidly declining
rates and strategic decisions to make the balance sheet less liability
sensitive, interest rate spread continued to be squeezed. Net earnings increased
by $1.1 million, or 17.8% from $6.4 million for the year ended September 30,
2000 to $7.6 million for the year ended September 30, 2001, primarily as a
result of the gain on sale of securities.
Interest Income
Interest income decreased from $72.2 million for the year ended September 30,
2000 to $70.1 million for the year ended September 30, 2001. The general
interest rate environment during the year showed declining interest rates but
movement toward a more normal yield curve. Rates on short term investments such
as federal funds and interest-earning deposits decreased sharply over the year.
Of course, interest income was negatively impacted by the reduction in loan
balances with the securitization of loans in February 2001. The acquisition of
loans with the WAMU branches boosted the loan balances but only contributed to
interest income for part of one month. The combined result of these movements is
reflected in the average yield on interest earning assets which decreased from
7.22% for the year ended September 30, 2000 to 6.99% for the year ended
September 30, 2001.
While average loans receivable decreased $136.7 million, the yield on loans
increased 22 basis points, resulting in a $9.1 million decrease in interest
income on loans. Purchases of MBS boosted interest income on MBS by $6.6
million. This increase was offset by a $1.4 million decrease in interest income
on investment securities. The average balance of investments decreased by $16.3
million, or 11.2%, for the year ended September 30, 2001 compared with the same
period in 2000.
Interest Expense
Interest expense remained constant at $40.8 million. Interest expense on
deposits increased $1.9 million from $28.4 million for the year ended September
30, 2000 to $30.3 million for the year ended September 30, 2001.
Average deposits decreased by $19.9 million for the year ended September 30,
2001 compared to the year ended September 30, 2000 while the average interest
paid on interest-bearing deposits increased slightly from 4.34% for the year
ended September 30, 2000 to 4.52% for the year ended September 30, 2000.
Interest expense on FHLB borrowings decreased $2.1 million due to decreased
average borrowings of $34.7 million.
As noted previously, the general interest rate environment during fiscal 2001
was represented by a normalizing yield curve with much lower rates throughout
the curve and especially lower on the short maturities. The impact of this
environment is evident in the decrease in interest rate spread from 2.50% for
the year ended September 30, 2000 to 2.18% for the year ended September 30,
2001. While yields on assets decreased by 23 basis points, cost of interest
bearing liabilities increased by 18 basis points, resulting in a lower spread
for the current year. Net interest margin (net interest income as a percent of
average interest-earning assets) also decreased from 3.14% for the fiscal year
ended September 30, 2000 to 2.93% for the year ended September 30, 2001.
Provision for Loan Losses
The provision for loan losses was $387,000, recoveries were $42,406, and charge
offs were $90,173 during the year ended September 30, 2001 compared to a
provision for loan losses of $1.8 million, with $441,639 of recoveries, and
charge offs of $606,999 during the year ended September 30, 2000. Charge offs
during the year ended September 30, 2001 related primarily to construction loans
from one borrower and various consumer loans. Charge offs during the year ended
September 30, 2000 primarily related to write downs on commercial real estate.
The provision for loan losses for the year ended September 30, 2001 was lower
than for the previous year because the strategy to sell newly originated one- to
four-family loans in the secondary market meant that few loans were added to the
loan portfolio. The loans added in the branch acquisition were allocated
allowance as part of the purchase accounting and thus did not impact the
provision for the year.
During the year ended September 30, 2001, the composition of the loan portfolio
changed dramatically, with significant increases in commercial and consumer
loans, which are considered to have more associated credit risk than the
Company's traditional portfolio of one- to four-family residential mortgages. As
part of the branch acquisition, an appropriate loan loss allowance was allocated
to the acquired loans. At September 30, 2000, the allowance for loan losses was
equal to 251.5% of non-performing assets compared to 1,108.9% at September 30,
2001. The increase in the coverage ratio at year end 2001 was the result of a
decrease in non-performing assets and a higher allowance which incorporates the
risk factors associated with the significant increase in commercial and consumer
loans.
Non-Interest Income
Non-interest income increased $6.9 million, or 169.0%, to $11.0 million for the
year ended September 30, 2001 from $4.1 million for the year ended September 30,
2000. The Company realized $5.4 million in gains on sales of investments when it
sold MBS resulting from securitization of single family mortgage loans. However,
disregarding the gain on sale of investments, there remained a $1.6 million
increase in non-interest income from $4.1 million for the year ended September
30, 2000 to $5.6 million for the year ended September 30, 2001. The increase was
the result of continued improvement in fees and service charges and a $487,000
increase in gain on sales of mortgage loans.
Non-Interest Expense
Non-interest expense increased $4.9 million, or 20.8%, from a total of $23.8
million for the prior year to $28.7 million for the year ended September 30,
2001. Compensation, employee benefits, and related expense increased $2.6
million, or 21.4%, from $11.9 million for the year ended September 30, 2000 to
$14.4 million for the same period of 2001. Of this increase, $388,000 relates to
early retirement accruals associated with the termination of the defined-benefit
pension plan and retirement of five of the Company's long-time employees. Other
increases in compensation expense arose from the addition of 124 employees as
part of the WAMU branch acquisition and other back office personnel added to
handle the increased activity resulting from a 48% increase in accounts. Other
expense increased $1.5 million, or 21.7%, from $6.7 million for the year ended
September 30, 2000 to $8.2 million for the current year. Increases were noted as
a result of the branch acquisition, opening of the Redmond, Oregon branch and
opening of four new in-store branches. For example, postage and courier expense
increased $247,803, and supplies expense increased $114,937. Professional
service fees increased $118,174 with items relating to recruitment of executives
and training enhancements. Expense related to loan pools sold to FNMA totaled
$419,289 and is a new cost associated with the securitization of mortgage loans.
The ratio of non-interest expense to average total assets was 2.7% and 2.3% for
the years ended September 30, 2001 and 2000, respectively.
Income Taxes
The provision for income taxes was $3.7 million for the year ended September 30,
2001, representing an effective tax rate of 32.9% compared with $3.5 million for
the year ended September 30, 2000 representing an effective tax rate of 35.5%.
The decrease in effective tax rate for 2001 was primarily due to an increase in
income on tax-exempt municipal securities and the effect of $270,000 in tax
refunds received during this fiscal year related to amended tax returns for a
prior year. (See Note 12 to the Consolidated Financial Statements.)
COMMON STOCK INFORMATION
Since October 4, 1995, the Company's common stock has traded on The Nasdaq Stock
Market, Inc. under the symbol "KFBI". As of September 30, 2002, there were
approximately 1,256 shareholders of record. This total does not reflect the
number of persons or entities who hold stock in nominee or "street" name through
various brokerage firms.
The high and low common stock prices by quarter were as follows:
Year Ended September 30, 2002 2001
- ---------------------------------------------------------------------------
High Low High Low
- ---------------------------------------------------------------------------
First quarter............... $13.28 $12.40 $12.88 $11.50
Second quarter.............. 13.62 13.01 14.00 12.13
Third quarter............... 16.65 13.13 14.89 12.95
Fourth quarter.............. 16.19 14.00 15.20 12.70
The per share cash dividends declared by quarter were as follows:
Year Ended September 30, 2002 2001
- ---------------------------------------------------------------------------
First quarter............... $0.130 $0.130
Second quarter.............. 0.130 0.130
Third quarter............... 0.130 0.130
Fourth quarter.............. 0.130 0.130
Any dividend payments by the Company are subject to the sole discretion of the
Board of Directors and depend primarily on the ability of the Association to pay
dividends to the Company. Under Federal regulations, the dollar amount of
dividends a federal savings association may pay depends on the association's
capital surplus position and recent net income. Generally, if an association
satisfies its regulatory capital requirements, it may make dividend payments up
to the limits prescribed in the OTS regulations. However, an institution that
has converted to the stock form of ownership may not declare or pay a dividend
on, or repurchase any of, its common stock if the effect thereof would cause the
regulatory capital of the institution to be reduced below the amount required
for the liquidation account which was established in accordance with OTS
regulations and the association's Plan of Conversion. In addition, earnings of
the association appropriated to bad debt reserves and deducted for federal
income tax purposes are not available for payment of cash dividends without
payment of taxes at the then current tax rate by the association on the amount
removed from the reserves for such distributions. The Association does not
contemplate any distributions that would limit the Association's bad debt
deduction or create federal tax liabilities.
Board of Directors
Klamath First Bancorp, Inc.
Klamath Falls, Oregon
We have audited the accompanying consolidated balance sheets of Klamath First
Bancorp, Inc.and Subsidiaries (the "Company") as of September 30, 2002 and 2001,
and the related consolidated statements of earnings, shareholders' equity, and
cash flows for each of the three years in the period ended September 30, 2002.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits in accordance with
auditing standards generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion. In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of Klamath First Bancorp, Inc. and Subsidiaries
as of September 30, 2002 and 2001 and the results of their operations and their
cash flows for each of the three years in the period ended September 30, 2002,
in conformity with accounting principles generally accepted in the United States
of America.
/s/ Deloitte & Touche LLP
Portland, Oregon
November 1, 2002
Consolidated Balance Sheets Sept. 30, 2002 Sept. 30, 2001
- -----------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks ................................................. $ 38,444,500 $ 40,446,042
Interest bearing deposits with banks .................................... 5,762,373 3,791,252
Federal funds sold and securities purchased
under agreements to resell ........................................... 1,584,540 74,151,272
--------------- ---------------
Total cash and cash equivalents ......................................... 45,791,413 118,388,566
Investment securities available for sale, at fair value
(amortized cost: $119,940,845 and $154,190,612) ......................... 119,542,052 154,675,760
Investment securities held to maturity, at amortized cost
(fair value: $-- and $137,429) ........................................... -- 135,388
Mortgage-backed and related securities available for sale, at fair value
(amortized cost: $640,304,722 and $419,639,650) ......................... 650,796,164 421,637,670
Mortgage-backed and related securities held to maturity, at amortized cost
(fair value: $-- and $1,642,174) ......................................... -- 1,620,612
Loans receivable, net ................................................... 607,464,660 679,990,308
Real estate owned and repossessed assets ................................ 758,663 445,855
Premises and equipment, net ............................................. 23,410,847 16,911,912
Stock in Federal Home Loan Bank of Seattle, at cost ..................... 13,510,400 12,698,000
Accrued interest receivable ............................................. 8,177,014 8,657,586
Core deposit intangible and other intangible assets ..................... 40,298,989 44,088,926
Other assets ............................................................ 3,745,151 9,321,227
-------------- --------------
Total assets ............................................................ $1,513,495,353 $1,468,571,810
============== ==============
Liabilities and Shareholders' Equity
Liabilities
Deposit liabilities ..................................................... $1,142,005,997 $1,152,824,144
Accrued interest on deposit liabilities ................................. 721,810 1,574,606
Advances from borrowers for taxes and insurance ......................... 5,105,955 6,637,994
Advances from Federal Home Loan Bank of Seattle ......................... 205,250,000 168,000,000
Short term borrowings ................................................... 1,700,000 1,700,000
Accrued interest on borrowings .......................................... 820,975 801,743
Pension liabilities ..................................................... 842,272 942,148
Deferred federal and state income taxes ................................. 1,466,556 597,345
Other liabilities ....................................................... 8,438,245 6,799,241
-------------- --------------
Total liabilities ....................................................... 1,366,351,810 1,339,877,221
-------------- --------------
Mandatorily redeemable preferred securities ............................. 27,205,507 14,553,684
-------------- --------------
Commitments and contingent liabilities
Shareholders' Equity
Preferred stock, $.01 par value, 500,000 shares authorized; none issued. -- --
Common stock, $.01 par value, 35,000,000 shares authorized,
September 30, 2002 - 6,744,040 issued, 6,366,546 outstanding
September 30, 2001 - 7,060,667 issued, 6,561,461 outstanding ............ 67,440 70,607
Additional paid-in capital .............................................. 30,282,059 33,926,796
Retained earnings-substantially restricted .............................. 87,265,334 83,816,307
Unearned shares issued to ESOP .......................................... (2,935,130) (3,913,510)
Unearned shares issued to MRDP .......................................... (999,111) (1,298,859)
Accumulated other comprehensive income .................................. 6,257,444 1,539,564
--------------- --------------
Total shareholders' equity .............................................. 119,938,036 114,140,905
--------------- --------------
Total liabilities and shareholders' equity .............................. $1,513,495,353 $1,468,571,810
============== ==============
Consolidated Statements of Earnings - Year Ended Sept. 30 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------
Interest income
Loans receivable ................................................... $52,178,747 $48,051,228 $57,133,422
Mortgage-backed and related securities ............................. 26,368,930 11,611,184 5,035,957
Investment securities .............................................. 7,972,257 8,103,318 9,495,804
Federal funds sold and securities
purchased under agreements to resell ............................... 440,220 1,598,662 180,253
Interest bearing deposits .......................................... 333,019 768,192 312,293
----------- ---------- ----------
Total interest income .............................................. 87,293,173 70,132,584 72,157,729
----------- ---------- ----------
Interest expense
Deposit liabilities ................................................ 29,782,599 30,304,271 28,363,916
Advances from FHLB of Seattle ...................................... 9,608,659 10,065,991 12,184,341
Other .............................................................. 139,857 380,579 207,963
---------- ---------- ----------
Total interest expense ............................................. 39,531,115 40,750,841 40,756,220
---------- ---------- ----------
Net interest income ................................................ 47,762,058 29,381,743 31,401,509
Provision for loan losses .......................................... 156,000 387,000 1,764,000
---------- ---------- ----------
Net interest income after provision for loan losses ................ 47,606,058 28,994,743 29,637,509
---------- ---------- ----------
Non-interest income
Fees and service charges ........................................... 7,876,902 4,293,983 3,212,434
Gain on sale of investments ........................................ 1,707,172 5,374,723 6,836
Gain on sale of real estate owned .................................. 25,852 86,927 154,661
Gain on sale of loans .............................................. 1,076,745 573,885 86,826
Brokerage and annuity commissions .................................. 1,368,057 362,387 164,025
Other income ....................................................... 559,103 321,758 469,892
---------- ---------- ----------
Total non-interest income .......................................... 12,613,831 11,013,663 4,094,674
---------- ---------- ----------
Non-interest expense
Compensation, employee benefits and related expense................. 22,125,329 14,448,997 11,898,041
Occupancy expense .................................................. 4,811,472 2,858,504 2,413,316
Data processing expense ............................................ 1,499,490 1,007,040 913,531
Insurance premium expense .......................................... 181,449 133,407 186,557
Loss on sale of investments ........................................ 628,823 30,632 --
Loss on sale of real estate owned .................................. 771 39,911 7,863
Amortization of core deposit intangible ............................ 5,520,680 1,794,330 1,652,677
Mandatorily redeemable preferred securities expense ................ 1,423,774 252,367 --
Other expense ...................................................... 13,979,591 8,154,956 6,700,888
---------- ---------- ----------
Total non-interest expense ......................................... 50,171,379 28,720,144 23,772,873
---------- ---------- ----------
Earnings before income taxes ....................................... 10,048,510 11,288,262 9,959,310
Provision for income taxes ......................................... 3,259,734 3,717,260 3,533,158
---------- ---------- ----------
Net earnings ....................................................... $ 6,788,776 $ 7,571,002 $ 6,426,152
=========== =========== ===========
Earnings per common share - basic .................................. $ 1.06 $ 1.14 $ 0.94
Earnings per common share - fully diluted .......................... $ 1.05 $ 1.13 $ 0.94
Weighted average common shares outstanding - basic.................. 6,411,351 6,627,200 6,822,025
Weighted average common shares outstanding - with dilution......... 6,495,498 6,702,045 6,822,025
See notes to consolidated financial statements
Consolidated Statements of Shareholders' Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Unearned Unearned Accumulated
Common Common Additional shares shares Other Total
stock stock paid-in Retained issued issued comprehensive shareholders'
shares amount capital earnings to ESOP to MRDP income (loss) equity
---------- ------- ----------- ----------- ------------ ------------ ------------ -------------
Balance at
October 1, 1999 7,062,092 $79,084 $43,794,535 $76,866,452 ($5,871,900) ($3,519,296) ($1,763,412) $109,585,463
Cash dividends -- -- -- (3,579,349) -- -- -- (3,579,349)
Stock repurchased
and retired (542,151) (5,422) (6,249,273) -- -- -- -- (6,254,695)
ESOP contribution 97,865 -- 142,826 -- 978,650 -- -- 1,121,476
MRDP contribution 74,622 -- 13,708 -- -- 1,020,918 -- 1,034,626
- -----------------------------------------------------------------------------------------------------------------------------------
6,692,428 73,662 37,701,796 73,287,103 (4,893,250) (2,498,378) (1,763,412) 101,907,521
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income
Net earnings 6,426,152 6,426,152
Other comprehensive
income:
Unrealized gain on
securities, net of tax
and reclassification
adjustment1 390,888 390,888
- -----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 6,817,040
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at
September 30, 2000 6,692,428 73,662 37,701,796 79,713,255 (4,893,250) (2,498,378) (1,372,524) 108,724,561
- -----------------------------------------------------------------------------------------------------------------------------------
Cash dividends -- -- -- (3,467,950) -- -- -- (3,467,950)
Stock repurchased and
retired (550,221) (5,502) (7,393,921) -- -- -- -- (7,399,423)
ESOP contribution 97,974 -- 396,471 -- 979,740 -- -- 1,376,211
MRDP contribution 76,618 -- 13,708 -- -- 1,199,519 -- 1,213,227
Exercise of stock options 244,662 2,447 3,208,742 -- -- -- -- 3,211,189
- -----------------------------------------------------------------------------------------------------------------------------------
6,561,461 70,607 33,926,796 76,245,305 (3,913,510) (1,298,859) (1,372,524) 103,657,815
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income
Net earnings 7,571,002 7,571,002
Other comprehensive
income:
Unrealized gain on
securities, net of tax
and reclassification
adjustment2 2,912,088 2,912,088
- -----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 10,483,090
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at
September 30, 2001 6,561,461 70,607 33,926,796 83,816,307 (3,913,510) (1,298,859) 1,539,564 114,140,905
- -----------------------------------------------------------------------------------------------------------------------------------
Cash dividends -- -- -- (3,339,749) -- -- -- (3,339,749)
Stock repurchased and
retired (345,986) (3,460) (4,747,387) -- -- -- -- (4,750,847)
ESOP contribution 97,865 -- 410,593 -- 978,380 -- -- 1,388,973
MRDP contribution 23,847 -- 11,511 -- -- 299,748 -- 311,259
Exercise of stock options 29,359 293 369,295 -- -- -- -- 369,588
Tax benefit of stock options -- -- 311,251 -- -- -- -- 311,251
- -----------------------------------------------------------------------------------------------------------------------------------
6,366,546 67,440 30,282,059 80,476,558 (2,935,130) ( 999,111) 1,539,564 108,431,380
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income
Net earnings 6,788,776 6,788,776
Other comprehensive income:
Unrealized gain on
securities, net of tax
and reclassification
adjustment3 4,717,880 4,717,880
- -----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 11,506,656
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at
September 30, 2002 6,366,546 $67,440 $30,282,059 $87,265,334 ($2,935,130) ($999,111) $6,257,444 $119,938,036
========= ======= =========== =========== ========== ======== ========== ============
<FN>
1Net unrealized holding gain on securities of $440,870 (net of $270,211 tax expense) less reclassification adjustment for net gains
included in net earnings of $49,982 (net of $30,634 tax expense).
2Net unrealized holding gain on securities of $2,893,883 (net of $1,773,670 tax expense) less reclassification adjustment for net
losses included in net earnings of $18,205 (net of $11,158 tax benefit).
3Net unrealized holding gain on securities of $5,095,497 (net of $3,123,389 tax expense) less reclassification adjustment for net
gains included in net earnings of $377,617 (net of $231,443 tax expense).
See notes to consolidated financial statements.
</FN>
Consolidated Statements of Cash Flows - Year Ended Sept. 30, 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net earnings $6,788,776 $7,571,002 $6,426,152
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 7,715,652 3,161,017 2,927,853
Deferred income taxes (2,022,392) (956,590) (1,050,197)
Provision for loan losses 156,000 387,000 1,764,000
Provision for losses on real estate owned -- -- 120,000
Compensation expense related to ESOP benefit 1,388,973 1,376,211 1,121,476
Compensation expense related to MRDP Trust 311,259 1,213,227 1,034,626
Tax benefit associated with stock options 311,251 -- --
Net amortization of premiums paid on investment
and mortgage-backed and related securities 3,930,135 249,371 266,018
Decrease in deferred loan fees, net of amortization (688,264) (2,848,812) (547,429)
Net (gain) loss on sale of real estate owned and
premises and equipment (25,081) 39,452 (177,493)
Net gain on sale of investment and mortgage-backed
and related securities (1,078,350) (5,344,091) (6,836)
FHLB stock dividend (812,400) (821,500) (758,300)
Changes in assets and liabilities:
Accrued interest receivable 480,572 (2,225,513) 721,745
Other assets 3,685,333 (7,456,909) (329,286)
Accrued interest on deposit liabilities (852,796) 389,530 605
Accrued interest on borrowings 19,232 (55,420) 822,679
Pension liabilities (99,876) 54,252 54,252
Other liabilities 1,916,542 3,194,579 984,855
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 21,124,566 (2,073,194) 13,374,720
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of investment securities
held to maturity 135,000 130,000 290,000
Proceeds from maturity of investment securities
available for sale 15,000,000 33,425,000 33,360,000
Principal repayments received on mortgage-backed
and related securities held to maturity 1,238,278 531,435 434,252
Principal repayments received on mortgage-backed
and related securities available for sale 108,276,166 46,429,807 26,859,810
Principal repayments received on loans 286,803,701 145,496,311 99,031,327
Loan originations (281,665,175) (136,492,447) (97,246,615)
Loans purchased (1,683,363) -- (507,600)
Loans sold 68,661,105 30,708,858 6,315,261
Purchase of investment securities available for sale (41,854,162) (78,456,931) (1,110,000)
Purchase of mortgage-backed and related securities
available for sale (419,414,542) (383,198,597) (29,396,069)
Purchase of FHLB stock -- -- (160,900)
Proceeds from sale of investment securities
available for sale 61,977,158 10,367,746 10,051,563
Proceeds from sale of mortgage-backed
and related securities available for sale 87,131,357 187,991,361 --
Consolidated Statements of Cash Flows - Year Ended Sept. 30 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES (cont.)
Proceeds from sale of real estate owned and
premises and equipment $653,574 $1,261,175 $2,722,397
Investment in real estate owned -- (86,742) --
Purchases of premises and equipment (8,533,907) (5,392,241) (2,271,628)
Acquisitions, net of cash acquired -- 206,548,213 --
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (123,274,810) 59,262,948 48,371,798
------------ ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit liabilities (10,818,147) 33,986,127 (25,020,241)
Proceeds from FHLB advances 99,950,000 2,000,000 614,650,000
Repayments of FHLB advances (62,700,000) (7,000,000) (638,650,000)
Proceeds from short term borrowings 200,000 3,400,000 3,700,000
Repayments of short term borrowings (200,000) (4,700,000) (700,000)
Issuance of mandatorily redeemable preferred
securities 12,651,823 14,553,684 --
Stock repurchase and retirement (4,750,847) (7,399,423) (6,254,695)
Proceeds from exercise of stock options 369,588 3,211,189 --
Advances from borrowers for taxes and insurance (1,532,039) (3,015,382) (105,251)
Dividends paid (3,617,287) (3,783,983) (3,942,320)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 29,553,091 31,252,212 (56,322,507)
------------ ----------- ----------
Net (decrease) increase in cash and cash equivalents (72,597,153) 88,441,966 5,424,011
Cash and cash equivalents at beginning of year 118,388,566 29,946,600 24,522,589
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $45,791,413 $118,388,566 $29,946,600
============ =========== ==========
Supplemental schedule of interest and income taxes paid
Interest paid $40,364,979 $42,020,217 $39,932,938
Income taxes paid 2,795,000 3,930,000 4,745,000
Supplemental schedule of noncash investing
and financing activities
Net unrealized gain on securities available for sale $4,717,880 $2,912,088 $390,888
Dividends declared and accrued in other liabilities 883,136 934,233 957,609
Loans transferred to real estate owned 949,830 870,128 2,291,059
Write down of real estate owned -- -- 343,450
Loans securitized and recorded as mortgage-backed
securities available for sale -- 190,300,518 --
Mortgaged-backed securities held to maturity
transferred to available for sale, at fair value 376,335 -- --
[1] Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Klamath First
Bancorp, Inc. (the "Company") and its wholly-owned subsidiaries, Klamath Capital
Trust I, Klamath Capital Trust II and Klamath First Federal Savings and Loan
Association (the "Association"), including the Association's subsidiaries,
Klamath First Financial Services, Inc. and Pacific Cascades Financial, Inc. All
intercompany accounts and transactions have been eliminated in consolidation.
Certain prior year amounts have been reclassified to conform to current year
presentation.
Nature of Operations
The Company provides banking and limited non-banking services to its customers
who are located throughout the state of Oregon and in adjoining areas of
Washington state. These services primarily include attracting deposits from the
general public and using such funds, together with other borrowings, to invest
in various real estate loans, consumer and commercial loans, investment
securities and mortgage-backed and related securities.
Use of Estimates in the Presentation of the Financial Statements
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
assumptions. These assumptions result in estimates that affect the reported
amounts of certain assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of related revenue and expense during the reporting period. Actual results could
differ from those estimates.
Cash Equivalents
For purposes of the Consolidated Statements of Cash Flows, the Company considers
cash and due from banks, interest-bearing deposits held at domestic banks,
federal funds sold, and security resale agreements to be cash and cash
equivalents, all of which mature within 90 days.
Investment Securities
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
Accounting for Certain Investments in Debt and Equity Securities, investment
securities held to maturity are stated at amortized cost only if the Company has
the positive intent and the ability to hold the securities to maturity.
Securities available for sale, including mutual funds, and trading securities
are stated at fair value. Unrealized gains and losses from available for sale
securities are excluded from earnings and reported (net of tax) as a net amount
in a separate component of shareholders' equity until realized. Realized gains
and losses on the sale of securities, recognized on a specific identification
basis, and valuation adjustments of trading account securities are included in
non-interest income or expense. Net unrealized gains or losses on securities
resulting from an other than temporary decline in the fair value are recognized
in earnings when incurred.
Stock Investments
The Company holds stock in the Federal Home Loan Bank of Seattle ("FHLB of
Seattle"). This investment is carried at historical cost.
Loans
Loans held for investment are stated at the principal amount outstanding, net of
deferred loan fees and unearned income. Loan origination fees, commitment fees
and certain direct loan origination costs are capitalized and recognized as a
yield adjustment over the lives of the loans using the level-yield method.
Unearned discounts are accreted to income over the average lives of the related
loans using the level-yield method, adjusted for estimated prepayments.
Interest income is recorded as earned. Management ceases to accrue interest
income on any loan that becomes 90 days or more delinquent and reverses all
interest accrued up to that time. Thereafter, interest income is accrued only if
and when, in management's opinion, projected cash proceeds are deemed sufficient
to repay both principal and interest. All loans for which interest is not being
accrued are referred to as loans on non-accrual status.
Allowance for Loan Losses
The allowance for loan losses is established to absorb known and inherent losses
in the loan portfolio. Allowances for losses on specific problem real estate
loans are charged to earnings when it is determined that the value of these
loans is impaired. In addition to specific reserves, the Company also maintains
general provisions for loan losses based on evaluating known and inherent risks
in the loan portfolio, including management's continuing analysis of the factors
underlying the quality of the loan portfolio. These factors include changes in
the size and composition of the loan portfolio, actual loan loss experience,
current economic conditions, detailed analysis of individual loans for which
full collectibility may not be assured, and determination of the existence and
realizable value of the collateral and guarantees securing the loans. The
allowance is an estimate based upon factors and trends identified by management
at the time financial statements are prepared. The ultimate recovery of loans is
susceptible to future market factors beyond the Company's control, which may
result in losses or recoveries differing significantly from those provided in
the consolidated financial statements. In addition, various regulatory agencies,
as an integral part of their examination process, periodically review the
Company's allowance on loans.
Delinquent interest on loans past due 90 days or more is charged off or an
allowance established by a charge to income equal to all interest previously
accrued. Interest is subsequently recognized only to the extent cash payments
are received until delinquent interest is paid in full and, in management's
judgment, the borrower's ability to make periodic interest and principal
payments is back to normal, in which case the loan is returned to accrual
status.
Real Estate Owned and Repossessed Assets
Property acquired through foreclosure, repossession action, or deed in lieu of
foreclosure is carried at the lower of estimated fair value, less estimated
costs to sell, or the balance of the loan on the property at date of
acquisition, not to exceed net realizable value. Costs excluding interest,
relating to the improvement of property are capitalized, whereas those relating
to acquiring and holding the property are charged to expense.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is generally computed on the straight-line basis over the estimated
useful lives of the various classes of assets from their respective dates of
acquisition. Estimated useful lives range up to 30 years for buildings, up to
the lease term for leasehold improvements, three years for automobiles, and
three to 15 years for furniture and equipment.
Mortgage Servicing
Fees earned for servicing loans are reported as income when the related mortgage
loan payments are collected. Loan servicing costs are charged to expense as
incurred.
The Company accounts for mortgage servicing rights ("MSR") in accordance with
SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities. SFAS No. 140 requires the Company to allocate the
total cost of all mortgage loans sold, whether originated or purchased, to the
MSR and the loans (without MSR) based on their relative fair values if it is
practicable to estimate those fair values.
MSR are capitalized at their allocated carrying value and amortized in
proportion to, and over the period of, estimated future net servicing income.
The Company assesses impairment of the MSR based on the fair value of those
rights. For purposes of measuring impairment, the MSR are stratified based on
interest rate characteristics (fixed-rate and adjustable-rate), as well as by
coupon rate. In order to determine the fair value of the MSR, the Company uses a
model that estimates the present value of expected future cash flows.
Assumptions used in the model include market discount rates and anticipated
prepayment speeds. In addition, the Company uses market comparables for
estimates of the cost of servicing, inflation rates and ancillary income. An
impairment allowance of $180,739 was recorded at September 30, 2002. No
impairment allowance was considered necessary at September 30, 2001. Future
interest rate decreases could have a negative impact on the recorded MSR.
Intangible Assets
In conjunction with branch acquisitions, the Company has recorded intangible
assets, including core deposit intangible and other intangible assets. Core
deposit intangibles are amortized over the estimated average remaining life of
the deposit base acquired. Other intangible assets are amortized over a period
no greater than the estimated remaining life of the long term assets acquired.
At September 30, 2002, core deposit intangibles totaled $17.4 million and other
intangible assets totaled $22.9 million.
Because other intangible assets were recorded in conjunction with the purchase
of branches, they were accounted for in accordance with SFAS No. 72, Accounting
for Certain Acquisitions of Bank and Thrift Institutions. In October 2002, the
Financial Accounting Standards Board ("FASB") issued SFAS No. 147, Acquisitions
of Certain Financial Institutions, which requires such intangible assets to be
accounted for under the provisions of SFAS No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets. Under this guidance, other
intangible assets will be evaluated for impairment but will no longer be
amortized. The Company plans to adopt SFAS No. 147 as of October 1, 2002.
Income Taxes
The Company accounts for income taxes using the asset and liability method of
accounting for income taxes. Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled.
Employee Stock Ownership Plan
The Company sponsors an Employee Stock Ownership Plan ("ESOP"). The ESOP is
accounted for in accordance with the American Institute of Certified Public
Accountants ("AICPA") Statement of Position 93-6, Employer's Accounting for
Employee Stock Ownership Plans. Accordingly, the shares held by the ESOP are
reported as unearned shares issued to the employee stock ownership plan in the
balance sheets. The ESOP authorizes release of the shares over a ten-year
period, of which three years are remaining. As shares are released from
collateral, compensation expense is recorded equal to the then current market
price of the shares, and the shares become outstanding for earnings per share
calculations.
Management Recognition and Development Plan
The Company sponsors a Management Recognition and Development Plan ("MRDP"). The
MRDP is accounted for in accordance with SFAS No. 123, Accounting for
Stock-Based Compensation. The MRDP authorizes the grant of common stock shares
to certain officers and directors, which vest over a five-year period in equal
installments. The Company recognizes compensation expense in the amount of the
fair value of the common stock in accordance with the vesting schedule during
the years in which the shares are payable. When the MRDP awards are allocated,
the common stock shares become common stock equivalents for earnings per share
calculations. Compensation expense for the years ended September 30, 2002, 2001
and 2000 was $311,259, $1.2 million and $1.0 million, respectively.
Stock Based Compensation
The Company accounts for stock option grants using the intrinsic value method as
prescribed in Accounting Principles Board ("APB") Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. Under the intrinsic
value based method, compensation cost for stock options is measured as the
excess, if any, of the quoted market price of stock at grant date over the
amount an employee must pay to acquire the stock. Stock options granted by the
Company have no intrinsic value at the grant date and, under APB No. 25, there
is no compensation expense to be recorded.
SFAS No. 123, Accounting for Stock-Based Compensation, encourages, but does not
require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The fair value approach measures compensation
costs based on factors such as the term of the option, the market price at grant
date, and the option exercise price, with expense recognized over the vesting
period. See Note 17 for the pro forma effect on net earnings and earnings per
share as if the fair value method had been used.
Recently Issued Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets, which is effective October 1, 2002. SFAS No. 142 will require that
goodwill no longer be amortized and instead be tested for impairment at least
annually. In addition, the standard includes provisions for the accounting and
reporting of certain existing recognized intangibles and goodwill. Management is
currently evaluating the impact that SFAS No. 142 may have on its consolidated
financial statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment of
Disposal of Long-Lived Assets, which is effective October 1, 2002. This
statement supersedes SFAS No. 121 and the accounting and reporting provisions of
Accounting Principles Board Opinion No. 30 for the disposal of a segment of a
business. The Company is currently evaluating the impact that adoption of SFAS
No. 144 may have on the consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. The standard requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. SFAS No. 146 replaces
previous accounting guidance which was provided by EITF Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS
No. 146 is effective for exit or disposal activities initiated after December
31, 2002.
In October 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 147, Acquisitions of Certain Financial Institutions, which requires certain
intangible assets to be accounted for under the provisions of SFAS No. 141,
Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.
Under this guidance, other intangible assets will be evaluated for impairment
but will no longer be amortized. The Company plans to adopt SFAS No. 147 as of
October 1, 2002. Expense related to amortization of other intangibles totaled
$1.1 million for the year ended September 30, 2002. A similar expense will not
be recorded in fiscal year 2003.
(2) Acquisition
On September 7, 2001, the Company completed the acquisition of 13 branches from
Washington Mutual. These branches are located along the Oregon coast and in
northeastern Oregon, complementing and expanding the existing branch network.
The transaction, which was accounted for as a purchase in accordance with SFAS
No. 72, Accounting for Certain Acquisitions of Bank and Thrift Institutions,
included acquisition of $179.3 million in loans and assumption of $423.5 million
in deposit liabilities. The balance sheet at September 30, 2001 reflects
inclusion of all assets and liabilities related to the transaction. Income and
expense related to the transaction and operation of the branches for the period
from September 7, 2001 to September 30, 2001 are reflected in the statement of
earnings. As a result of this transaction, the Company recorded core deposit
intangible of $15.0 million which will be amortized over the estimated life of
the deposit base. The Company also recorded other intangible assets of $24.1
million related to the transaction.
(3) Cash and Due from Banks
The Company is required to maintain an average reserve balance with the Federal
Reserve Bank, or maintain such reserve balance in the form of cash. The amount
of this required reserve balance was approximately $4,024,000 and $766,000 at
September 30, 2002 and 2001, respectively, and was met by holding cash and
maintaining an average balance with the Federal Reserve Bank in excess of this
amount.
(4) Investments and Mortgage-backed Securities
Amortized cost and approximate fair value of securities available for sale and
held to maturity are summarized by type and maturity as follows:
INVESTMENT SECURITIES AVAILABLE-FOR-SALE
Amortized Gross Unrealized Fair
September 30, 2002 Cost Gains Losses Value
- --------------------------------------------------------------------------------------------
State and municipal obligations
Maturing within one year..........$ 100,000 $ 565 $ -- $ 100,565
Maturing after one year through
five years ...................... 485,300 12,929 -- 498,229
Maturing after five years through
ten years ....................... 790,110 56,682 -- 846,792
Maturing after ten years ......... 38,202,338 2,381,961 4,044 40,580,255
Corporate obligations
Maturing within one year ......... 17,890,090 -- 55,225 17,834,865
Maturing after one year through
five years ...................... 23,922,805 489,819 14,498 24,398,126
Maturing after ten years ......... 19,834,958 -- 2,644,508 17,190,450
Federal agency preferred stock
Maturing after ten years ........ 18,715,244 -- 622,474 18,092,770
------------ ---------- ------------ ------------
$119,940,845 $2,941,956 $ 3,340,749 $119,542,052
============ ========== ============ ============
INVESTMENT SECURITIES AVAILABLE-FOR-SALE
Amortized Gross Unrealized Fair
September 30, 2001 Cost Gains Losses Value
- -------------------------------------------------------------------------------------------
U.S. Government obligations
Maturing within one year $15,003,079 $435,049 $-- $15,438,128
through five years 15,200,000 251,500 -- 15,451,500
Maturing after five years
and through ten years 9,916,677 45,223 -- 9,961,900
State and municipal obligations
Maturing after one year
through five years 585,530 12,993 -- 598,523
Maturing after five years
through ten years 397,962 7,610 -- 405,572
Maturing after ten years 31,967,069 746,540 77,519 32,636,090
Corporate obligations
Maturing within one year 10,011,936 185,414 -- 10,197,350
Maturing after one year
through five years 35,562,330 942,817 -- 36,505,147
Maturing after ten years 19,830,093 -- 1,814,343 18,015,750
Federal agency preferred stock
Maturing after ten years 15,715,936 -- 250,136 15,465,800
- -------------------------------------------------------------------------------------------
$154,190,612 $2,627,146 $2,141,998 $154,675,760
============ ========== ========== =============
INVESTMENT SECURITIES HELD-TO-MATURITY
Amortized Gross Unrealized Fair
September 30, 2001 Cost Gains Losses Value
State and municipal obligations
- -------------------------------------------------------------------------------------------
Maturing within one year $135,388 $2,041 $ -- $137,429
============ ========== ========== =============
MORTGAGE-BACKED AND RELATED SECURITIES AVAILABLE-FOR-SALE
Amortized Gross Unrealized Fair
September 30, 2001 Cost Gains Losses Value
- -------------------------------------------------------------------------------------------
FNMA maturing after one year
through five years $2,944,195 $26,810 $ -- $2,971,005
CMO's maturing after one year
through five years 11,520,162 237,265 -- 11,757,427
FHLMC maturing after one year
through five years 12,634,495 231,613 -- 12,866,108
FNMA maturing after five years
through ten years 133,151,422 4,006,978 -- 137,158,400
CMO's maturing after five years
through ten years 7,182,143 83,445 -- 7,265,588
FNMA maturing after ten years 116,232,557 1,134,165 -- 117,366,722
FHLMC maturing after ten years 37,902,266 425,289 2,515 38,325,040
GNMA maturing after ten years 24,346,010 247,888 346 24,593,552
CMO's maturing after ten years 294,391,472 4,108,891 8,041 298,492,322
- -------------------------------------------------------------------------------------------
$640,304,722 $10,502,344 $10,902 $650,796,164
============ =========== ========= =============
MORTGAGE-BACKED AND RELATED SECURITIES AVAILABLE-FOR-SALE
Amortized Gross Unrealized Fair
September 30, 2001 Cost Gains Losses Value
- -------------------------------------------------------------------------------------------
FNMA maturing after one year
through five years $1,315,698 $27,973 $ -- $1,343,671
CMO's maturing after one year
through five years 25,958,997 174,744 -- 26,133,741
FHLMC maturing after one year
through five years 10,057,380 104,104 -- 10,161,484
FNMA maturing after five years
through ten years 10,057,489 165,138 -- 10,222,627
CMO's maturing after five years
through ten years 90,827,507 67,227 608,387 90,286,347
FNMA maturing after ten years 45,459,792 200,295 32,745 45,627,342
FHLMC maturing after ten years 9,480,629 155,121 197 9,635,553
GNMA maturing after ten years 6,816,570 160,234 -- 6,976,804
CMO's maturing after ten years 219,665,588 1,693,975 109,462 221,250,101
- -------------------------------------------------------------------------------------------
$419,639,650 $2,748,811 $750,791 $421,637,670
============ ========== ========= =============
MORTGAGE-BACKED AND RELATED SECURITIES HELD-TO-MATURITY
Amortized Gross Unrealized Fair
September 30, 2001 Cost Gains Losses Value
- -------------------------------------------------------------------------------------------
GNMA maturing after ten years $1,620,612 $21,562 $ -- $1,642,174
============ ========== ========= =============
Expected maturities of mortgage-backed and related securities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
At September 30, 2002 and 2001, the Company pledged securities totaling $40.5
million and $42.0 million, respectively, to secure certain public deposits and
for other purposes as required or permitted by law.
The Company has also pledged securities of zero and $1.5 million to secure short
term borrowings at September 30, 2002 and 2001, respectively. (See Note 11.)
[5] Loans receivable
September 30, 2002 2001
- -----------------------------------------------------------------
Real estate loans
Permanent residential 1-4 family $339,403,368 $421,499,010
Multi-family residential 21,595,322 23,257,194
Construction 15,223,441 21,673,519
Agricultural 4,888,861 4,218,263
Commercial 91,703,262 99,318,389
Land 4,164,394 3,696,487
- -----------------------------------------------------------------
Total real estate loans 476,978,648 573,662,862
----------- -----------
Non-real estate loans
Savings account 1,261,448 2,090,840
Home improvement and home equity 65,092,250 50,464,521
Other consumer 16,926,304 18,696,626
Commercial 62,102,347 56,098,520
- -----------------------------------------------------------------
Total non-real estate loans 145,382,349 127,350,507
----------- -----------
Total loans 622,360,997 701,013,369
Less
Undisbursed portion of loans 3,609,164 8,472,757
Deferred loan fees 3,911,361 4,599,624
Allowance for loan losses 7,375,812 7,950,680
- -----------------------------------------------------------------
$607,464,660 $679,990,308
============ =============
The weighted average interest rate on loans at September 30, 2002 and 2001 was
7.36% and 7.92%, respectively.
Included in loans receivable are $9.5 million and $77,500 of loans held for sale
at September 30, 2002 and 2001, respectively. All these loans are one- to
four-family mortgage loans. In the aggregate there was no lower of cost or
market adjustment required; fair value approximates cost.
Aggregate loans to officers and directors, all of which were current, consist of
the following (in thousands):
Year Ended September 30, 2002 2001 2000
- ------------------------------------------------------------------
Beginning balance $2,990 $2,089 $2,380
Originations 1,018 1,227 83
Principal repayments (788) (326) (374)
- ------------------------------------------------------------------
Ending balance $3,220 $2,990 $2,089
====== ====== ======
Activity in the allowance for loan losses is summarized as follows:
Year Ended September 30, 2002 2001 2000
- -------------------------------------------------------------------
Balance, beginning of year $7,950,680 $4,082,265 $2,483,625
Charge offs (747,092) (90,173) (606,999)
Recoveries 16,224 42,406 441,639
Additions 156,000 387,000 1,764,000
Acquisitions -- 3,761,024 --
Allowance reclassified with
loan securitization -- (231,842) --
- -------------------------------------------------------------------
Balance, end of year $7,375,812 $7,950,680 $4,082,265
========== ========== ===========
At September 30, 2002 and 2001, impaired loans totalled $200,000 and zero,
respectively. There were no specifically allocated loan loss reserves related to
these loans. The average investment in impaired loans for the years ended
September 30, 2002 and 2001 was $43,590 and $33,226, respectively.
[6] Premises and Equipment
Premises and equipment consist of the following:
September 30, 2002 2001
- ------------------------------------------------------------------
Land $ 4,872,673 $ 2,828,648
Office buildings and construction
in progress 17,766,655 13,022,085
Furniture, fixtures and equipment 9,559,681 8,021,564
Automobiles 20,928 38,856
Less accumulated depreciation (8,809,090) (6,999,241)
- ------------------------------------------------------------------
$23,410,847 $16,911,912
=========== ===========
<FN>
Depreciation expense was $2.0 million, $1.2 million, and $1.1 million for the
years ended September 30, 2002, 2001, and 2000, respectively.
</FN>
[7] Accrued Interest Receivable
The following is a summary of accrued interest receivable:
September 30, 2002 2001
- ------------------------------------------------------------------
Loans receivable $ 3,578,678 $ 4,557,093
Mortgage-backed and
related securities 3,028,121 2,212,276
Investment securities 1,570,154 1,881,592
Federal funds sold and securities
purchased under agreements
to resell 61 6,625
- ------------------------------------------------------------------
$ 8,177,014 $ 8,657,586
=========== ===========
[8] Mortgage Servicing Rights
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balance of mortgage loans
serviced for others was $140.3 million and $186.4 million at September 30, 2002
and 2001, respectively. The mortgage servicing rights are included in other
assets in the consolidated balance sheets.
During the quarter ended March 31, 2001, the Company sold $190.3 million in
seasoned fixed-rate single-family loans to FNMA. The mortgages were aggregated
into 14 pools and securitized with the resulting MBS being retained by the
Company and classified as available for sale. The loans were sold with servicing
retained by the Company.
The fair value of MSR was determined using a discounted cash flow model, which
incorporates the expected life of the loans, estimated costs to service the
loans, servicing fees to be received, and other factors. Mortgage servicing
rights for the loans securitized through FNMA were valued at $1.7 million. The
key assumptions used to initially value the MSR recorded in 2001 included a
constant prepayment rate ("CPR") of 20%, an average life of 6.3 years and a
discount rate of 10%. The Company pays a guarantee fee to FNMA as part of the
securitization and servicing of the loans, thus transferring all credit risk to
FNMA. The final resulting basis in the MBS recorded was $185.9 million. As of
September 30, 2001, all the resulting MBS were sold with a gain of $5.4 million.
The balance of the Company's originated MSR as of September 30, 2002, 2001 and
2000, and changes during the years then ended, were as follows:
Year Ended September 30, 2002 2001 2000
- ----------------------------------------------------------------------------
Balance, beginning of year $1,596,930 $95,420 $52,432
Additions for loans securitized -- 1,653,830 --
Additions for other loans sold -- 54,693 59,868
Amortization of servicing rights
for loans securitized (327,542) (167,857) --
Amortization of servicing rights
for other loans sold (52,989) (39,156) (16,880)
Valuation allowance (180,739) -- --
- ----------------------------------------------------------------------------
Balance, end of year $1,035,660 $1,596,930 $95,420
========== ========== =======
The changes in the Company's valuation allowance for impairment of MSR are as
follows for the years indicated:
Year Ended September 30, 2002 2001 2000
- --------------------------------------------------------------------------
Balance, beginning of year $ 0 $ -- $ --
Additions for impairment (180,739) -- --
- --------------------------------------------------------------------------
Balance, end of year ($180,739) $ -- $ --
========== ======= =======
The Company evaluates MSR for impairment by stratifying MSR based on the
predominant risk characteristics of the underlying financial assets. At
September 30, 2002 and 2001, the fair values of the Company's MSR were
$1,045,964 and $1,678,344, respectively, which were estimated using a discount
rate of 8.5% and Public Securities Association prepayment assumptions ("PSA")
ranging from 217 to 679 and 175 to 437, respectively.
At September 30, 2002, the key economic assumptions and the sensitivity of the
current value for purchased MSR to immediate 10% and 20% adverse changes in
those assumptions were as follows:
At September 30, 2002
- --------------------------------------------------------------
Fair value of capitalized MSR $1,045,964
PSA 217 to 679
Impact on fair value of
10% adverse change (55,655)
Impact on fair value of
20% adverse change (105,232)
Discount rate 8.5%
Impact on fair value of
10% adverse change (22,103)
Impact on fair value of
20% adverse change (43,263)
These sensitivities are hypothetical and should be used with caution. As the
amounts indicate, changes in fair value based on a change in assumptions
generally cannot be extrapolated because the relationship of the change in
assumptions to the change in fair value may not be linear. Also, in this table,
the effect of a variation in a particular assumption on the fair value of the
retained interest is calculated without changing any other assumption. In
reality, however, changes in one factor may result in changes in another, which
might magnify or counteract the sensitivities.
[9] Deposit Liabilities
The following is a summary of deposit liabilities:
September 30, 2002 2001
- -------------------------------------------------------------------------------------------
Amount Percent Amount Percent
- -------------------------------------------------------------------------------------------
Checking accounts, non-interest
bearing $142,772,746 12.5% $130,649,571 11.3%
-------------- ------ -------------- ------
Interest-bearing checking 125,866,951 11.0 116,755,784 10.1
-------------- ------ -------------- ------
Passbook and statement savings 86,000,755 7.5 77,646,048 6.7
-------------- ------ -------------- ------
Money market deposits 330,646,410 29.0 283,893,020 24.6
-------------- ------ -------------- ------
Certificates of deposit
Less than 4% 241,617,671 21.1 136,034,530 11.8
4.00% to 5.99% 110,380,428 9.7 209,800,703 18.2
6.00% to 7.99% 104,395,224 9.1 197,755,646 17.2
8.00% to 9.99% 325,812 0.1 288,842 0.1
- -------------------------------------------------------------------------------------------
456,719,135 40.0 543,879,721 47.3
- -------------------------------------------------------------------------------------------
$1,142,005,997 100.0% $1,152,824,144 100.0%
============== ====== ============== ======
The following is a summary of interest expense on deposits:
Year Ended September 30, 2002 2001 2000
- ---------------------------------------------------------------------------------
Interest-bearing checking $ 906,544 $ 812,210 $ 779,335
Passbook and statement savings 930,450 1,066,607 958,558
Money market 6,376,625 6,332,507 6,217,783
Certificates of deposit 21,691,878 22,199,640 20,575,944
- ---------------------------------------------------------------------------------
29,905,497 30,410,964 28,531,620
Less early withdrawal penalties 122,898 106,693 167,704
- ---------------------------------------------------------------------------------
Net interest on deposits $29,782,599 $30,304,271 $28,363,916
=========== =========== ===========
At September 30, 2002 maturities of certificates of deposits were as follows:
Within 1 year $275,696,478
1 year to 3 years 114,476,601
3 years to 5 years 34,046,546
Thereafter 32,499,510
- --------------------------------------------------------------
$456,719,135
============
Weighted average interest rates at September 30 were as follows: 2002 2001
- ---------------------------------------------------------------------------------------
Interest-bearing checking 0.44% 1.37%
Passbook and statement savings 0.75% 2.05%
Money market 1.44% 3.21%
Certificates of deposit 4.00% 5.32%
Weighted average rate
for all deposits 2.42% 4.03%
Deposits in excess of $100,000 totaled $297.8 million and $280.9 million at
September 30, 2002 and 2001, respectively. Customer deposits in excess of
$100,000 are not insured by the Federal Deposit Insurance Corporation ("FDIC").
[10] Advances from FHLB
As a member of the FHLB of Seattle, the Association maintains a credit line that
is a percentage of its total regulatory assets, subject to collateralization
requirements. At September 30, 2002, the credit line was 30 percent of total
assets of the Association. Advances are collateralized in the aggregate, as
provided for in the Advances, Security and Deposit Agreements with the FHLB of
Seattle, by certain mortgages or deeds of trust, and securities of the U.S.
Government and agencies thereof. At September 30, 2002 the minimum book value of
eligible collateral for these borrowings was $232.7 million.
Scheduled maturities of advances from the FHLB were as follows:
September 30, 2002 September 30, 2001
Range of Weighted Range of Weighted
interest average interest average
Amount rates interest rate Amount rates interest rate
- --------------------------------------------------------------------------------------------------------------------
Due within one year $31,250,000 1.91% - 2.20% 2.09% $10,000,000 3.60% 3.60%
After one but within
five years 16,000,000 2.48% - 3.58% 3.06% -- -- --
After five but within
ten years 158,000,000 4.77% - 7.05% 5.86% 158,000,000 4.77% - 7.05% 5.86%
- --------------------------------------------------------------------------------------------------------------------
$205,250,000 $168,000,000
============ ============
Financial data pertaining to the weighted average cost, the level of FHLB
advances and the related interest expense are as follows:
Year Ended September 30, 2002 2001 2000
- ------------------------------------------------------------------------------
Weighted average interest rate
at end of year 5.07% 5.73% 5.90%
Weighted daily average
interest rate during the year 5.71% 5.90% 5.88%
Daily average FHLB advances $168,332,740 $170,520,548 $207,218,306
Maximum FHLB advances
at any month end 205,250,000 173,000,000 230,000,000
Interest expense during the year 9,608,659 10,065,991 12,184,341
[11] Short Term Borrowings
The Company had short term borrowings of $1.7 million and $1.7 million at
September 30, 2002 and 2001, respectively. At September 30, 2002, the borrowings
consisted of one unsecured line of credit with Key Bank that was fully
disbursed. The interest rate of this line is the prime rate, which was 4.75% at
September 30, 2002. At September 30, 2001, the borrowings consisted of one
secured line of credit with Key Bank that was fully disbursed. This line carried
interest based on one-month LIBOR plus 1.95%, which was 5.58% at September 30,
2001. The Company also had an unused line of credit totaling $15.0 million with
U.S. National Bank of Oregon at September 30, 2002 and 2001. The Company is in
compliance with all debt covenants imposed by the lenders.
Financial data pertaining to the weighted average cost, the level of short term
borrowings and the related interest expense are as follows:
Year Ended September 30, 2002 2001 2000
- ---------------------------------------------------------------------------
Weighted average interest rate
at end of year 4.75% 5.58% 9.01%
Weighted daily average
interest rate during the year 4.32% 8.22% 9.34%
Daily average of
short term borrowings $1,704,521 $3,265,205 $1,289,617
Maximum short term borrowings
at any month end 1,700,000 6,400,000 3,000,000
Interest expense during the year 73,690 268,447 120,413
[12] Taxes on Income
The following is a summary of income tax expense (benefit):
Year Ended September 30, 2002 2001 2000
- ---------------------------------------------------------------------------
Current Taxes
Federal $4,306,047 $3,560,966 $3,735,797
State 978,105 835,250 847,558
- ---------------------------------------------------------------------------
Current tax provision 5,284,152 4,396,216 4,583,355
- ---------------------------------------------------------------------------
Deferred Taxes
Federal (1,684,353) (564,904) (873,784)
State (340,065) (114,052) (176,413)
- ---------------------------------------------------------------------------
Deferred tax benefit (2,024,418) (678,956) (1,050,197)
- ---------------------------------------------------------------------------
Provision for income taxes $3,259,734 $3,717,260 $3,533,158
========== ========== ==========
An analysis of income tax expense, setting forth the reasons for the variation
from the "expected" federal corporate income tax rate and the effective rate
provided, is as follows:
Year Ended September 30, 2002 2001 2000
- ---------------------------------------------------------------------------
Federal income taxes computed
at statutory rate 35.0% 35.0% 35.0%
Tax effect of:
State income taxes, net of
Federal income tax benefit 4.2 4.2 4.4
Nondeductible ESOP
compensation expense 1.8 1.1 0.5
Deductible MRDP
compensation expense -- -- 1.6
Interest income on
municipal securities (5.7) (4.1) (4.1)
Other (2.9) (3.3) (1.9)
- ---------------------------------------------------------------------------
Income tax expense included
in the statement of earnings 32.4% 32.9% 35.5%
===== ===== =====
Deferred income taxes at September 30, 2002 and 2001 reflect the impact of
"temporary differences" between amounts of assets and liabilities for financial
reporting purposes and such amounts as measured by tax laws.
The tax effects of temporary differences which give rise to a significant
portion of deferred tax assets and deferred tax liabilities are as follows:
September 30, 2002 2001
- --------------------------------------------------------------
Deferred Tax Assets
- --------------------------------------------------------------
Allowance for losses on loans $1,679,909 $1,908,133
Pension liability 330,929 370,170
Unearned ESOP shares 353,036 392,295
Core deposit premium 2,264,290 1,255,293
Basis difference in fixed assets 788,381 587,537
Other -- 25,870
- --------------------------------------------------------------
Total gross deferred
tax assets 5,416,545 4,539,298
- --------------------------------------------------------------
Deferred Tax Liabilities
- --------------------------------------------------------------
FHLB stock dividends 1,834,035 1,514,843
Capitalized loan servicing income 360,498 627,434
Capitalized conversion costs -- 306,687
Unrealized gain on securities
available for sale 3,135,399 647,859
Deferred loan fees 485,179 900,473
Branch acquisition costs 241,928 --
Tax bad debt reserve
in excess of base- year reserve 475,116 723,698
Other 350,946 415,649
- --------------------------------------------------------------
Total gross deferred tax liabilities 6,883,101 5,136,643
- --------------------------------------------------------------
Net deferred tax liability ($1,466,556) ($597,345)
============ ==========
The Company has qualified under provisions of the Internal Revenue Code to
compute federal income taxes after deductions of additions to the bad debt
reserves. At September 30, 2002, the Company had a taxable temporary difference
of approximately $10.5 million that arose before 1988 (base-year amount). In
accordance with SFAS No. 109, Accounting for Income Taxes, a deferred tax
liability has not been recognized for the temporary difference. Management does
not expect this temporary difference to reverse in the foreseeable future.
[13] Mandatorily Redeemable Preferred Securities
In July 2001, the Company issued $15 million of mandatorily redeemable preferred
securities through a subsidiary grantor trust. The Trust holds debt instruments
of the parent company purchased with the proceeds of the securities issuance.
The capital qualifying securities bear interest at a floating rate indexed to
six-month LIBOR and mature in July 2031. At September 30, 2002 and 2001, the
interest rate was 5.61% and 7.57%, respectively. The Company has the right to
redeem the securities after five years at a premium, and after ten years at par.
Certain changes in tax law or Office of Thrift Supervision regulations regarding
the treatment of the capital securities as core capital could result in early
redemption, at par, or a shortening in the maturity of the securities.
In April 2002, the Company issued $13 million of mandatorily redeemable
preferred securities through a subsidiary grantor trust. The Trust holds debt
instruments of the parent company purchased with the proceeds of the securities
issuance. The capital qualifying securities bear interest at a floating rate
indexed to six-month LIBOR and mature in April 2032. At September 30, 2002, the
interest rate was 6.02%. The Company has the right to redeem the securities at a
premium up to five years from issuance, and after five years at par. Certain
changes in tax law or Office of Thrift Supervision regulations regarding the
treatment of the capital securities as core capital could result in early
redemption, at par, or a shortening in the maturity of the securities.
(14) Commitments and Contingencies
In the ordinary course of business, the Company has various outstanding
commitments and contingencies that are not reflected in the accompanying
consolidated financial statements. In addition, the Company is a defendant in
certain claims and legal actions arising in the ordinary course of business. In
the opinion of management, after consultation with legal counsel, the ultimate
disposition of these matters is not expected to have a material adverse effect
on the consolidated financial condition, results of operations, or liquidity of
the Company.
The Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments generally include commitments to originate mortgage,
commercial and consumer loans. Those instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the balance sheet. The Company's maximum exposure to credit loss in the event of
nonperformance by the borrower is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments as
it does for on-balance sheet instruments. Commitments to extend credit are
conditional 45 day agreements to lend to a customer subject to the Company's
usual terms and conditions.
At September 30, 2002, loan commitments amounted to approximately $33.0 million
comprised of $12.9 million in variable rate loans ranging from 3.38% to 14.25%
and $20.1 million in fixed rate loans ranging from 3.75% to 10.75%. At September
30, 2002, the Company had $18.3 million in commitments to sell loans..
The Company originates residential real estate loans secured by residential,
multi-family and commercial properties as well as consumer and commercial
business loans. Substantially all of the Company's lending portfolio resides in
the state of Oregon. An economic downturn in this area would likely have a
negative impact on the Company's results of operations depending on the severity
of the downturn.
[15] Shareholders' Equity
The Company's Articles of Incorporation authorize the issuance of 500,000 shares
of preferred stock, having a par value of $.01 per share, in series and to fix
and state the powers, designations, preferences and relative rights of the
shares of such series, and the qualifications, limitations and restrictions
thereof.
[16] Earnings Per Share
Earnings per share ("EPS") is computed in accordance with SFAS No. 128, Earnings
per Share. Shares held by the Company's ESOP that are committed for release are
considered contingently issuable shares and are included in the computation of
basic EPS. Diluted EPS is computed using the treasury stock method, giving
effect to potential additional common shares that were outstanding during the
period. Potential dilutive common shares include shares awarded but not released
under the Company's MRDP, and stock options granted under the Stock Option Plan.
Following is a summary of the effect of dilutive securities on weighted average
number of shares (denominator) for the basic and diluted EPS calculations. There
are no resulting adjustments to net earnings.
For the Year Ended September 30, 2002 2001 2000
- -----------------------------------------------------------------------------------------
Weighted average common
shares outstanding - basic 6,411,351 6,627,200 6,822,025
- -----------------------------------------------------------------------------------------
Effect of Dilutive Securities on Number of Shares:
MRDP shares 8,108 9,252 --
Stock options 76,039 65,593 --
- -----------------------------------------------------------------------------------------
Total Dilutive Securities 84,147 74,845 --
- -----------------------------------------------------------------------------------------
Weighted average common shares
outstanding - with dilution 6,495,498 6,702,045 6,822,025
========= ========= =========
[17] Employee Benefit Plans Employee Retirement Plan As of September 30, 2001,
the Company terminated its participation in a multiple-employer trusteed pension
plan ("Plan") covering all employees with at least one year of service and which
paid direct pensions to certain retired employees. Benefits were based on years
of service with the Company and salary excluding bonuses, fees, and commissions.
Participants were vested in their accrued benefits after five years of service.
Pension expense of $452,592 and $367,916 was incurred during the years ended
September 30, 2001 and 2000, respectively. Separate actuarial valuations,
including computed value of vested benefits, were not made with respect to each
contributing employer, nor were the plan assets so segregated by the trustee. As
part of the termination of the plan, early retirement was offered to certain
long-time employees of the Company. The Company recorded expense of $378,887 in
the year ended September 30, 2001 related to these retirements.
Effective October 1, 2001, the Company implemented a 401(k) plan for all
employees. The Company will match 50% of the employee contributions up to a
maximum of 6% of the employee's compensation. Expense of $451,649 was recorded
in the year ended September 30, 2002 related to this plan.
Postretirement Benefit Plan
The Company has an unfunded postretirement benefit plan for certain retirees and
all currently active employees who retire with at least ten years of service.
The plan provides for payment of all or a portion of the Medicare Supplement
premium for qualified retirees and their spouses. This plan was revised
effective October 1, 2001 to limit benefits to those already retired and
discontinue the benefit for current employees. The table below reflects the
result of this change on the actuarial valuation of the plan.
Information related to the years ended September 30, 2002, 2001 and 2000 is
presented below.
Year Ended September 30, 2002 2001 2000
- -----------------------------------------------------------------------------
Change in benefit obligation
at beginning of year $401,461 $324,279 $193,861
Service cost -- 27,386 24,276
Interest cost 13,121 25,852 23,937
Actuarial changes (166,365) 35,109 92,453
Benefits paid (10,818) (11,165) (10,248)
- -----------------------------------------------------------------------------
Benefit obligation at end of year $237,399 $401,461 $324,279
======== ======== ========
Components of
net periodic benefit cost
- -----------------------------------------------------------------------------
Service cost $ -- $27,386 $24,276
Interest cost 13,121 25,852 23,937
Recognition of changes in
actuarial assumptions, prior
service cost, benefit changes,
and actuarial gains and losses -- 9,475 9,475
- -----------------------------------------------------------------------------
Net periodic benefit cost $13,121 $62,713 $57,688
======== ======== ========
For measurement of the net periodic cost of the post retirement benefit plan, a
5.0% annual increase in the medical care trend rate was assumed. The assumed
discount rate was 6.0% for 2002 and 7.5% for 2001 and 2000.
If the assumed medical trend rates were increased by 1%, the September 30, 2002
benefit obligation would increase from $237,399 to $268,479 and the net periodic
benefit cost for the year ended September 30, 2002 would increase from $13,121
to $31,080.
Director Deferred Compensation Plan
The Company also has an unfunded supplemental benefits plan to provide members
of the Board of Directors with supplemental retirement benefits. Supplemental
benefits are based on monthly fees approved by the Compensation Committee of the
Board. Pension costs recognized for the years ended September 30, 2002, 2001,
and 2000 were zero, $71,052 and $71,052, respectively. At September 30, 2002 and
2001, the projected benefit obligation was $516,170 and $942,148, respectively.
An actuarial valuation completed for the year ended September 30, 2002 showed a
lower projected benefit obligation due to fewer covered directors and shorter
expected benefit periods due to the increasing age of the directors covered
under the plan. The difference between the projected benefit obligation and the
amount recorded is being taken to income over five years which is the expected
remaining average service life of the participants.
Stock Option Plan
In February 1996, the Board of Directors adopted a Stock Option Plan ("Stock
Plan") for the benefit of certain employees and directors. The Stock Plan was
approved by the Company's shareholders on April 9, 1996. The maximum number of
common shares which may be issued under the Stock Plan is 1,223,313 shares with
a maximum term of ten years for each option from the date of grant. The initial
awards were granted on April 9, 1996 at the fair value of the common stock on
that date ($13.125). All initial awards vest in equal installments over a five
year period from the grant date and expire during April 2006. Unvested options
become immediately exercisable in the event of death or disability.
Option activity under the Stock Plan is as follows:
Weighted Number of Shares Average Exercise Price
- ----------------------------------------------------------------------
Outstanding, October 1, 1999 916,258 $13.314
- ----------------------------------------------------------------------
Granted -- --
Exercised -- --
Canceled -- --
- ----------------------------------------------------------------------
Outstanding, September 30, 2000 916,258 $13.314
- ----------------------------------------------------------------------
Granted 207,500 $12.412
Exercised (244,662) $13.125
Canceled -- --
- ----------------------------------------------------------------------
Outstanding, September 30, 2001 879,096 $13.154
- ----------------------------------------------------------------------
Granted 40,000 $12.900
Exercised (19,572) $13.125
Canceled (19,573) $13.125
- ----------------------------------------------------------------------
Outstanding, September 30, 2002 879,951 $13.144
======= =======
At September 30, 2002, 18,024 shares were available for future grants under the
Stock Plan.
Additional information regarding options outstanding as of September 30, 2002 is
as follows:
Range of Options Options Weighted Av. Remaining
Exercise Prices Outstanding Exercisable Contractual Life
- -------------------------------------------------------------------------------
$11.625-$13.144 207,500 77,500 8.3
$12.700-$13.100 40,000 10,000 9.3
$13.125 609,208 589,635 3.5
$20.577 23,243 18,594 5.1
- -------------------------------------------------------------------------------
879,951 695,729
======= =======
Additional Stock Plan Information
As discussed in Note 1, the Company continues to account for its stock-based
awards using the intrinsic value method in accordance with APB Opinion No. 25,
Accounting for Stock Issued to Employees, and its related interpretations.
Accordingly, no compensation expense has been recognized in the financial
statements for employee stock arrangements.
SFAS No. 123, Accounting for Stock-Based Compensation, requires the disclosure
of pro forma net income and earnings per share had the Company adopted the fair
value method as of the beginning of fiscal 1996. Under SFAS No. 123, the fair
value of stock-based awards to employees is calculated through the use of option
pricing models, even though such models were developed to estimate fair value of
freely tradable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option awards. These models also
require subjective assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the calculated values.
The weighted average grant-date fair value of options granted during fiscal
years 2002, 2001, 1998 and 1996 were $1.63, $2.03, $6.65 and $4.12,
respectively. The Company's calculations are based on a multiple option
valuation approach and forfeitures are recognized as they occur. Had
compensation cost for these awards been determined under SFAS No. 123, the
Company's net earnings and earnings per share would have been reduced to the
following pro forma amounts:
Year ended September 30, 2002 2001 2000
- -----------------------------------------------------------------------------
Net earnings:
- -----------------------------------------------------------------------------
As reported $6,788,776 $7,571,002 $6,426,152
- -----------------------------------------------------------------------------
Pro forma 6,662,157 7,457,552 5,885,826
Earnings per common share - basic:
- -----------------------------------------------------------------------------
As reported $1.06 $1.14 $0.94
- -----------------------------------------------------------------------------
Pro forma $1.04 $1.13 $0.86
Earnings per common share - fully diluted:
- -----------------------------------------------------------------------------
As reported $1.05 $1.13 $0.94
- -----------------------------------------------------------------------------
Pro forma $1.03 $1.11 $0.86
- -----------------------------------------------------------------------------
The Company's calculations were made using the Black-Scholes option pricing
model with the following weighted average assumptions:
2002 Grant 2001 Grant 1998 Grant 1996 Grant
- -------------------------------------------------------------------------------
Risk free interest rates 3.69% 5.09% 5.79% 6.33%
Expected dividend 4.03% 4.33% 1.75% 1.75%
Expected lives, in years 3.5 3.3 7.5 7.5
Expected volatility 20.29% 28.73% 23.24% 19.63%
[18] Employee Stock Ownership Plan
As part of the stock conversion consummated on October 4, 1995, the Company
established an ESOP for all employees that are age 21 or older and have
completed two years of service with the Company. The ESOP borrowed $9,786,500
from the Company and used the funds to purchase 978,650 shares of the common
stock of the Company issued in the conversion which would be distributed over a
ten year period. The loan will be repaid principally from the Company's
discretionary contributions to the ESOP over a period of ten years. The loan had
an outstanding balance of $2.9 million and $3.9 million at September 30, 2002
and 2001, respectively, and an interest rate of 8.75%. The loan obligation of
the ESOP is considered unearned compensation and, as such, recorded as a
reduction of the Company's shareholders' equity. Both the loan obligation and
the unearned compensation are reduced by the amount of loan repayments made by
the ESOP. Shares purchased with the loan proceeds are held in a suspense account
for allocation among participants as the loan is repaid.
Contributions to the ESOP and shares released from the suspense account are
allocated among participants on the basis of compensation in the year of
allocation. Benefits are fully vested at all times under the ESOP. Forfeitures
are reallocated to remaining plan participants and may reduce the Company's
contributions. Benefits may be payable on retirement, death, disability, or
separation from service. Since the Company's annual contributions are
discretionary, benefits payable under the ESOP cannot be estimated. Compensation
expense is recognized to the extent of the fair value of shares committed to be
released. The Company recorded compensation expense under the ESOP of $1.4
million, $1.4 million, and $1.1 million for the years ended September 30, 2002,
2001 and 2000, respectively, and approximately 98,000 shares were allocated
among the participants in each of those years.
[19] Fair Value of Financial Instruments
Financial instruments have been construed to generally mean cash or a contract
that implies an obligation to deliver cash or another financial instrument to
another entity.
September 30, 2002 September 30, 2001
Carrying Fair Carrying Fair
amount value amount value
Financial Assets:
- -------------------------------------------------------------------------------------------------
Cash and due from banks $38,444,500 $38,444,500 $40,446,042 $40,446,042
Interest earning deposits
with banks 5,762,373 5,762,373 3,791,252 3,791,252
Federal funds sold and securities
purchased under agreements
to resell 1,584,540 1,584,540 74,151,272 74,151,272
Investment securities available
for sale 119,542,052 119,542,052 154,675,760 154,675,760
Investment securities
held to maturity -- -- 135,388 137,429
Mortgage-backed and related
securities available for sale 650,796,164 650,796,164 421,637,670 421,637,670
Mortgage-backed and related
securities held to maturity -- -- 1,620,612 1,642,174
Loans receivable, net 607,464,660 649,490,130 679,990,308 708,259,917
FHLB stock 13,510,400 13,510,400 12,698,000 12,698,000
Mortgage servicing rights 1,035,660 1,045,964 1,596,931 1,678,344
Financial Liabilities:
Deposit liabilities 1,142,005,997 1,155,611,434 1,152,824,144 1,170,696,536
FHLB advances 205,250,000 218,125,349 168,000,000 172,328,142
Short term borrowings 1,700,000 1,700,000 1,700,000 1,700,000
Mandatorily redeemable
preferred securities 27,205,507 27,205,507 14,553,684 14,553,684
Fair value estimates, methods, and assumptions are set forth below:
Investments and Mortgage-Backed Securities - Fair values were based on quoted
market rates and dealer quotes.
Loans Receivable - Loans were priced using a discounted cash flow method. The
discount rate was the rate currently offered on similar products.
No adjustment was made to the entry-value interest rates for changes in credit
of performing loans for which there are not known credit concerns. Management
believes that the risk factor embedded in the entry-value interest rates, along
with the general reserves applicable to the loan portfolio for which there are
no known credit concerns, result in a fair valuation of such loans on an
entry-value basis.
Mortgage Servicing Rights - The fair value of MSRs is determined by estimating
the present value of expected future cash flows, using a discount rate that is
considered commensurate with the risks involved. The amounts and timing of the
cash flows are estimated after considering various economic factors including
prepayment speeds, delinquency and default assumptions.
Deposits - The fair value of deposits with no stated maturity such as
non-interest-bearing demand deposits, savings, NOW accounts and money market
accounts was equal to the amount payable on demand. The fair value of time
deposits with stated maturity was based on the discounted value of contractual
cash flows. The discount rate was estimated using rates currently available in
the local market.
Federal Home Loan Bank Advances - The fair value of FHLB advances was based on
the discounted cash flow method. The discount rate was estimated using rates
currently available from FHLB.
Other - The carrying value of other financial instruments was determined to be a
reasonable estimate of their fair value.
Limitations - The fair value estimates presented herein were based on pertinent
information available to management as of September 30, 2002 and 2001. Although
management was not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements on those dates and,
therefore, current estimates of fair value may differ significantly from the
amounts presented herein.
Fair value estimates were based on existing financial instruments without
attempting to estimate the value of anticipated future business. The fair value
has not been estimated for assets and liabilities that were not considered
financial instruments.
[20] Regulatory Capital Requirements
The Company is not subject to any regulatory capital requirements. The
Association, however, is subject to various regulatory capital requirements
administered by the Office of Thrift Supervision ("OTS"). Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary action by regulators that, if undertaken, could have a
direct material effect on the Association's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Association must meet specific capital guidelines that involve quantitative
measures of the Association's assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The Association's
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Association to maintain minimum amounts and ratios of total and Tier
I capital to risk-weighted assets, of Tier I capital to total assets, and
tangible capital to tangible assets (set forth in the table below). Management
believes that the Association meets all capital adequacy requirements to which
it is subject as of September 30, 2002.
As of September 30, 2002, the most recent notification from the OTS categorized
the Association as "well capitalized" under the regulatory framework for prompt
corrective action. To be categorized as "well-capitalized", the Association must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.
At periodic intervals, the OTS routinely examines the Association as part of its
legally prescribed oversight of the thrift industry. Based on these
examinations, the regulators can direct that the Association's financial
statements be adjusted in accordance with their findings. A future examination
by the OTS could include a review of certain transactions or other amounts
reported in the Association's 2002 financial statements. In view of the
uncertain regulatory environment in which the Association now operates, the
extent, if any, to which a forthcoming regulatory examination may ultimately
result in adjustments to the 2002 financial statements cannot be presently
determined.
The Association's actual and required minimum capital ratios are presented in
the following table:
Categorized as "Well
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
--------------------------- ------------------------- -----------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ------ ------------ ------ ------------ -------
As of September 30, 2002
Total Capital: $102,759,108 14.0% $58,696,528 8.0% $73,370,660 10.0%
(To Risk Weighted Assets)
Tier I Capital: 95,497,095 13.0% N/A N/A 44,022,396 6.0%
(To Risk Weighted Assets)
Tier I Capital: 95,497,095 6.6% 58,297,476 4.0% 72,871,846 5.0%
(To Total Assets)
Tangible Capital: 95,497,095 6.6% 21,861,554 1.5% N/A N/A
(To Tangible Assets)
As of September 30, 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Total Capital: $81,046,601 10.4% $62,600,992 8.0% $78,251,240 10.0%
(To Risk Weighted Assets)
Tier I Capital: 73,162,799 9.3% N/A N/A 46,950,744 6.0%
(To Risk Weighted Assets)
Tier I Capital: 73,162,799 5.2% 56,671,203 4.0% 70,839,004 5.0%
(To Total Assets)
Tangible Capital: 73,162,799 5.2% 21,251,701 1.5% N/A N/A
(To Tangible Assets)
The following table is a reconciliation of the Association's capital, calculated
according to generally accepted accounting principles, to regulatory tangible
and risk-based capital:
At September 30, 2002 2001
- ------------------------------------------------------------------
Association's equity $ 142,052,659 $ 118,772,559
Unrealized securities losses (6,256,575) (1,520,834)
Core deposit intangible (40,298,989) (44,088,926)
- ------------------------------------------------------------------
Tangible capital 95,497,095 73,162,799
General valuation allowances 7,262,013 7,883,802
- ------------------------------------------------------------------
Total capital $102,759,108 $81,046,601
============ ===========
[21] Parent Company Financial Information
Condensed financial information as of September 30, 2002 and 2001 and for each
of the three years in the period ended September 30, 2002, for Klamath First
Bancorp, Inc. is presented and should be read in conjunction with the
consolidated financial statements and the notes thereto:
BALANCE SHEETS
At September 30, 2002 2001
Assets:
- -------------------------------------------------------------------
Cash and cash equivalents $5,608,620 $5,637,989
Investment and mortgage-backed
securities 149,077 1,500,584
Investment in wholly-owned
subsidiary 142,052,659 118,772,559
Deferred tax asset 310,718 --
Other assets 2,157,987 5,269,368
- -------------------------------------------------------------------
Total assets $150,279,061 $131,180,500
============ ============
Liabilities:
- -------------------------------------------------------------------
Short-term borrowings $1,700,000 $1,700,000
Other liabilities 1,435,518 785,911
- -------------------------------------------------------------------
Total liabilities 3,135,518 2,485,911
- -------------------------------------------------------------------
Mandatorily redeemable
preferred securities 27,205,507 14,553,684
- -------------------------------------------------------------------
Shareholders' equity:
Common stock 67,440 70,607
Additional paid-in capital 30,282,059 33,926,796
Retained earnings 93,522,778 85,355,871
Unearned ESOP shares at cost (2,935,130) (3,913,510)
Unearned MRDP shares at cost (999,111) (1,298,859)
- -------------------------------------------------------------------
Total shareholders' equity 119,938,036 114,140,905
- -------------------------------------------------------------------
Total liabilities and
shareholders' equity $150,279,061 $131,180,500
============ ============
STATEMENTS OF EARNINGS
Year Ended September 30, 2002 2001 2000
- ----------------------------------------------------------------------------
Equity in undistributed
income of subsidiary $7,868,854 $8,271,234 $7,065,690
Total interest income 560,127 730,727 789,684
Total interest expense 74,650 268,185 120,412
Non-interest income 11,972 -- 203
Non-interest expense 2,315,762 1,641,346 1,746,138
- ----------------------------------------------------------------------------
Earnings before income taxes 6,050,541 7,092,430 5,989,027
Provision for income taxes (738,235) (478,572) (437,125)
- ----------------------------------------------------------------------------
Net earnings $6,788,776 $7,571,002 $6,426,152
========== ========== ==========
STATEMENTS OF CASH FLOWS
Year Ended September 30, 2002 2001 2000
- -------------------------------------------------------------------------------
Net cash flows from
operating activities $3,200,786 $8,229,769 $721,914
- -------------------------------------------------------------------------------
Cash flows from investing activities:
Investment in subsidiary (10,264,911) (10,306,546) (278,916)
Maturity of investment and
mortgage- backed securities 533,743 683,893 610,081
Purchase of investment and
mortgage-backed securities 782,597 -- --
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Net cash flows provided by
(used in) investing activities (8,948,571) (9,622,653) 331,165
---------- ---------- --------
Cash flows from financing activities:
Cost of ESOP shares released 978,380 979,740 978,650
Proceeds from
short-term borrowings 1,900,000 3,400,000 3,700,000
Repayments of
short-term borrowings (1,900,000) (4,700,000) (700,000)
Issuance of mandatorily
redeemable preferred securities 12,651,823 14,553,684 --
Stock repurchase and retirement (4,750,847) (7,399,423) (6,254,695)
Stock options exercised 369,588 3,211,189 --
Dividends paid (3,530,528) (3,746,304) (3,889,202)
- -------------------------------------------------------------------------------
Net cash flows provided by
(used in) financing activities 5,718,416 6,298,886 (6,165,247)
- -------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents (29,369) 4,906,002 (5,112,168)
Cash and cash equivalents
beginning of year 5,637,989 731,987 5,844,155
- -------------------------------------------------------------------------------
Cash and cash equivalents
end of year $5,608,620 $5,637,989 $731,987
========== ========== ========
Consolidated Supplemental Data
Selected Quarterly Financial Data (unaudited)
Year Ended September 30, 2002 December March June September
- ----------------------------------------------------------------------------------------
(In thousands, except per share data)
Total interest income $22,995 $21,922 $21,530 $20,846
Total interest expense 11,719 9,897 9,208 8,707
- ----------------------------------------------------------------------------------------
Net interest income 11,276 12,025 12,322 12,139
Provision for loan losses 153 3 -- --
- ----------------------------------------------------------------------------------------
Net interest income after provision 11,123 12,022 12,322 12,139
Non-interest income 2,282 2,921 3,054 4,356
Non-interest expense 12,129 12,396 12,404 13,241
- ----------------------------------------------------------------------------------------
Earnings before income taxes 1,276 2,547 2,972 3,254
Provision for income tax 454 876 1,044 886
- ----------------------------------------------------------------------------------------
Net earnings $ 822 $ 1,671 $ 1,928 $ 2,368
======= ======= ======= =======
Net earnings
per share - basic $ 0.13 $ 0.26 $ 0.30 $ 0.37
======= ======= ======= =======
Net earnings
per share - fully diluted $ 0.13 $ 0.26 $ 0.30 $ 0.36
======= ======= ======= =======
Year Ended September 30, 2001 December March June September
- ----------------------------------------------------------------------------------------
(In thousands, except per share data)
Total interest income $17,816 $17,450 $16,782 $18,085
Total interest expense 10,338 10,153 9,916 10,344
- ----------------------------------------------------------------------------------------
Net interest income 7,478 7,297 6,866 7,741
Provision for loan losses 228 153 3 3
------- ------- ------- -------
Net interest income after provision 7,250 7,144 6,863 7,738
Non-interest income 1,114 3,708 3,200 2,991
Non-interest expense 5,783 6,209 6,862 9,866
- ----------------------------------------------------------------------------------------
Earnings before income taxes 2,581 4,643 3,201 863
Provision for income tax 896 1,688 1,085 48
- ----------------------------------------------------------------------------------------
Net earnings $1,685 $2,955 $2,116 $815
====== ====== ====== ====
Net earnings
per share - basic $0.25 $0.45 $0.32 $0.12
====== ====== ====== =====
Net earnings
per share - fully diluted $0.25 $0.45 $0.31 $0.12
====== ====== ====== =====