EXHIBIT 13
1996 Annual Report to Shareholders
TABLE OF CONTENTS
-----------------
DIRECTORS AND OFFICERS............................... 3
SELECTED CONSOLIDATED FINANCIAL DATA................. 4-5
LETTER TO OUR SHAREHOLDERS........................... 6-7
EXECUTIVE OFFICERS................................... 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION..... 9-22
COMMON STOCK INFORMATION............................. 23
INDEPENDENT AUDITOR'S REPORT......................... 24-25
CONSOLIDATED BALANCE SHEETS.......................... 26-27
CONSOLIDATED STATEMENTS OF EARNINGS.................. 28-29
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY...... 30
CONSOLIDATED STATEMENTS OF CASH FLOWS................ 31-33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS........... 34-58
BRANCH OFFICERS AND CORPORATE INFORMATION............ 59-60
KLAMATH FIRST FEDERAL SAVINGS & LOAN ASSOCIATION AND KLAMATH FIRST BANCORP, INC.
BOARD OF DIRECTORS
James D. Bocchi, Retired; President of Klamath First Federal Savings and Loan
Association from 1984 until June 1994
J. Gillis Hannigan, Retired; Executive Vice President of Modoc Lumber in
Klamath Falls, Oregon, until January 1995
Adolph Zamsky, Retired; Certified Public Accountant in both Oregon and
California, working out of Klamath Falls, Oregon from 1945 to 1977
Rodney N. Murray, Director and Chairman of the Board, owner and operator of
Rodney Murray Ranch, former owner and manager and President of Klamath Falls
Creamery, Inc., located in Klamath Falls, Oregon
Gerald V. Brown, President and Chief Executive Officer of Klamath First Federal
Savings and Loan Association since June 1994
Timothy A. Bailey, President of Klamath Medical Service Bureau, a health
insurance company headquartered in Klamath Falls, Oregon
William C. Dalton, Employed by Malin Potato, Merrill, Oregon, potato buyer for
Klamath Potato Distributors from 1988 to 1992, and former owner of W.C. Dalton
and Company, farming
Bernard Z. Agrons, Retired; Weyerhaeuser Company Vice President for the Eastern
Oregon Region until 1981; Former State Representative in the Oregon State
Legislature from 1983 to 1991
KLAMATH FIRST FEDERAL SAVINGS & LOAN ASSOCIATION AND KLAMATH FIRST BANCORP, INC.
OFFICERS
Gerald V. Brown, President and Chief Executive Officer
Robert A. Tucker, Senior Vice President - Treasurer
George L. Hall, Senior Vice President - Secretary
Marshall J. Alexander, Vice President and Chief Financial Officer
Frank X. Hernandez, Human Resources Officer
Robert L. Salley, Vice President
Gerald A. Page, Vice President
Carol Starkweather, Assistant Vice President
Tina M. Douglas, Assistant CFO - Controller
Diane Davis, Branch Manager/Ashland
Phillip Waggoner, Branch Manager/Bend
Gale Ramey, Branch Manager/Campus
Tracie Chandler, Branch Manager/Madison
Richard Knight, Branch Manager/Medford
Ted Eslick, Loan Center Manager/Redmond
Donna Ross, Branch Manager/Shasta
3
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables set forth certain information concerning the consolidated financial position and consolidated
results of operations of Klamath First Bancorp, Inc. (the Company) at the dates and for the periods indicated. This
information does not purport to be complete and should be read in conjunction with, and is qualified in its
entirety by reference to, the Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Annual Report.
FINANCIAL CONDITION DATA At September 30,
----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(In thousands)
Assets ..................................................... $671,969 $647,840 $448,939 $403,879 $366,864
Cash and cash equivalents .................................. 16,180 175,994 19,557 23,480 36,177
Loans receivable, net ...................................... 473,556 403,544 360,122 310,668 289,222
Investment securities held to maturity ..................... 9,827 42,209 44,564 57,997 30,878
Investment securities available for sale ................... 75,987 12,606 12,224 -- --
Mortgage backed & related securities held to maturity ...... 6,783 -- -- -- --
Mortgage backed & related securities available for sale .... 74,109 -- -- -- --
Stock in FHLB of Seattle, at cost .......................... 4,774 4,426 4,156 3,804 3,289
Advances from FHLB of Seattle .............................. 90,000 20,000 -- -- --
Savings deposits ........................................... 399,673 384,380 389,751 349,952 320,430
Shareholders' equity ....................................... 153,411 164,685 49,308 44,949 37,792
SELECTED OPERATING DATA Year Ended September 30,
------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- ---------- --------- ---------- --------
(In thousands)
Total interest income ..................... $ 45,649 $ 35,107 $ 32,408 $ 31,091 $ 30,690
Total interest expense .................... 23,286 20,441 16,555 16,070 18,941
-------- ---------- --------- ---------- --------
Net interest income ....................... 22,363 14,666 15,853 15,021 11,749
Provision for loan losses ................. 120 120 150 120 120
-------- ---------- --------- ---------- --------
Net interest income after provision
for loan losses ........................... 22,243 14,546 15,703 14,901 11,629
Non-interest income ....................... 522 381 352 1,112 343
BIF/SAIF Assessment ....................... 2,473 - - - -
Non-interest expense ...................... 9,769 6,004 6,034 5,191 4,563
-------- ---------- --------- ---------- --------
Earnings before income taxes and
cumulative effect of a change in
accounting principle ...................... 10,523 8,923 10,021 10,822 7,409
Provision for income tax .................. 4,413 3,349 3,867 3,665 2,664
-------- ---------- --------- ---------- --------
Earnings before cumulative effect
of a change in accounting principle ....... 6,110 5,574 6,154 7,157 4,745
Cumulative effect at October 1,1993
of a change in accounting for
income taxes .............................. - - 866 - -
-------- ---------- --------- ---------- --------
Net Earnings .............................. $ 6,110 $ 5,574 $ 5,288 $ 7,157 $ 4,745
======== ========== ========= ========== ========
4
At or For the Year Ended September 30,
----------------------------------------------------------
KEY OPERATING RATIOS 1996 1995 1994 1993 1992
------ ------ ------ ------ ------
PERFORMANCE RATIOS
Return on average assets
(net income divided by average assets) ..................... 0.99% 1.19% 1.26% 1.88% 1.34%
Return on average equity
(net income divided by average equity) ..................... 3.69% 10.44% 10.93% 16.87% 13.11%
Interest rate spread (difference between average yield on
interest-earning assets and average cost of
interest-bearing liabilities) .............................. 2.22% 2.73% 3.40% 3.58% 2.91%
Net interest margin (net interest income as a percentage
of average interest-earning assets) ........................ 3.65% 3.24% 3.84% 4.04% 3.42%
Average interest-earning assets to average interest-bearing
liabilities ................................................ 137.78% 111.29% 111.13% 110.61% 109.16%
Net interest income after provision for loan losses to total
non-interest expenses ...................................... 181.69% 242.27% 260.24% 287.05% 254.85%
Non-interest expense to average total assets ............... 1.99% 1.29% 1.43% 1.36% 1.29%
Dividend payout ratio (dividends declared per share
divided by net income per share) ........................... 44.64% - - - -
ASSET QUALITY RATIOS
Allowance for loan losses to total loans at end of period .. 0.19% 0.19% 0.20% 0.20% 0.19%
Non-performing assets to total assets ...................... 0.04% 0.12% 0.05% 0.07% 0.46%
Non-performing loans to total loans, before net items ...... 0.04% 0.18% 0.05% 0.06% 0.45%
CAPITAL RATIOS
Equity to assets ........................................... 22.83% 25.42% 10.98% 11.13% 10.30%
Tangible capital ratio ..................................... 19.22% 18.57% 10.98% 11.13% 10.30%
Core capital ratio ......................................... 19.22% 18.57% 10.98% 11.13% 10.30%
Risk-based capital ratio ................................... 42.41% 36.87% 22.61% 23.15% 20.82%
OTHER DATA
NUMBER OF
Real estate loans outstanding .............................. 7,704 7,110 6,654 6,169 5,867
Deposit accounts ........................................... 38,651 38,260 35,205 33,147 31,945
Full service offices ....................................... 7 7 6 6 5
5
Dear Shareholder:
October 4, 1996 marked our first anniversary as a stock company. During this
past year we have been busy and, we believe, successful in implementing many of
the strategies to enhance shareholder value that we outlined at our first Annual
Shareholders' Meeting last April.
Growth in our core savings and loan business resulted in loan and deposit
growth and good earnings this past year. Fiscal 1996 net earnings were $6.1
million, which includes the effect of a $2.5 million one-time assessment
recorded on September 30, 1996 to recapitalize the Savings Association Insurance
Fund and also a loss-on-sale of $1.6 million on the Association's investment in
a U.S. federal securities mutual bond fund.
New loan originations were approximately $135.6 million, which resulted in
a 17.3% increase in our total loan portfolio. This was accomplished through
competitive loan pricing, aggressive marketing, excellent customer service and
the opening in March 1996 of a new lending office in Redmond, Oregon. The
Redmond office has shown good acceptance and we are excited about its prospects
in that fast growing community. By the new year we hope to add to our loan
product mix by introducing a new "Equity Credit Line."
Our deposit base increased $15.3 million or 4.0% during the year. We
introduced two new checking accounts this past year: a "Basic Checking" account
for customers who write a limited number of checks each month and a "Small
Business Checking" account to offer our small business customers an alternative
to the traditional commercial checking account.
In addition to taking measures aimed at increasing our core business of
deposit taking and residential mortgage lending, we have sought other means to
leverage our capital. We have aggressively used borrowed funds to purchase
investment securities with the aim of earning the difference between the cost of
the borrowings and the return earned on the investment securities. This is
commonly known as "wholesale leveraging." At September 30, 1996, we had $104.9
million in borrowed funds, of which $56.9 million was primarily used for
liquidity to fund loan growth and $48.0 million was used to purchase investment
securities. This strategy has been successful as evidenced by a 1.23% return on
assets on these activities. Subject to market conditions, we plan to continue
and expand this activity.
Another shareholder value enhancement strategy is our dividend policy.
Since becoming a stock company we have paid a dividend each quarter, increasing
from $0.05 per share in January to $0.065 in April to our currently announced
level of $0.07 per share.
Many of our shareholders are aware that several newly converted thrift
institutions have authorized special "return of capital" distributions, which
were entirely or substantially tax free. In each instance that we know of, the
institution never filed a consolidated tax return, which, under complex federal
income tax regulations, is a critical factor in determining whether a special
distribution will be taxable or not. After extensive analysis and discussions
with the Internal Revenue Service, we have concluded that, at this time, current
federal income tax regulations effectively preclude a tax-free "return of
capital" distribution to our shareholders. Nevertheless, the Board of Directors
will continue to assess the viability of all other shareholder enhancement
strategies that suggest a comparable long-term benefit to our shareholders.
Stock repurchases are another element of our shareholder value enhancement
strategy that we implemented last year. This past September we completed the
repurchase of 5.07% of our outstanding common shares by repurchasing 620,655
shares at an average price of $14.33 per share. These repurchases increased
earnings per share by $0.01 and return on equity by 17 basis points.
6
The final element of our shareholder value enhancement strategy that we
discussed at last year's Annual Meeting was the expansion of our franchise
through the acquisition of other institutions or their branches. We continue to
explore such expansion opportunities.
We appreciate your support. "We'd Be Honored" if you stopped by one of our
branches to say hello or call us if you have any questions.
Sincerely,
/s/ Gerald V. Brown
- --------------------
Gerald V. Brown,
President and Chief Executive Officer
/s/ Rodney N. Murray
- ---------------------
Rodney N. Murray,
Chairman of the Board
7
CORPORATE EXECUTIVE OFFICERS
George L. Hall has been with Klamath First Federal Savings and Loan Association
since 1988. He is Senior Vice President-Lending/Secretary responsible for all
lending activities of the Association. Mr. Hall brought over twelve years of
expertise in mortgage lending to Klamath First Federal. He has also served the
institution as a Loan Officer and Branch Manager.
Robert A. Tucker has been with Klamath First Federal Savings & Loan Association
since 1973. He is Senior Vice President-Operations/Treasurer responsible for all
operations of the Association. In his 23 years with Klamath First Federal, Mr.
Tucker has served as Loan Officer, Assistant Secretary, Branch Manager,
Assistant Vice President and Vice President.
Gerald V. Brown has been with Klamath First Federal since 1957. He began as a
teller, and, in his 39 years with Klamath First Federal, has progressed up
through the ranks to his current position as President and Chief Executive
Officer. Mr. Brown has served on the Board of Directors for Klamath First
Federal Savings & Loan Association since 1994.
Marshall J. Alexander has been with Klamath First Federal Savings & Loan
Association since 1986. He began as the Association's Controller, and became
Vice President and Chief Financial Officer in August of 1994. Mr. Alexander
brought over ten years experience in financial management to the Association. He
supervises the accounting department as well as manages the assets of the
Association.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Klamath First Bancorp, Inc. (the "Company"), an Oregon corporation, became
the unitary savings and loan holding company for Klamath First Federal Savings
and Loan Association (the "Association").
The Association is a traditional, community-oriented, savings and loan
association that focuses on customer service within its primary market area.
Accordingly, the Association is primarily engaged in attracting deposits from
the general public through its offices and using those and other available
sources of funds to originate permanent residential one- to four-family real
estate loans within its market area and to a lesser extent on commercial
property and multi-family dwellings.
The Company's profitability depends primarily on its net interest income,
which is the difference between interest and dividend income on interest-earning
assets, principally loans and investment securities, and interest expense on
interest-bearing deposits and borrowings. Because the Company is primarily
dependent on net interest income for its earnings, the focus of the Company's
planning is to devise and employ strategies that provide stable, positive
spreads between the yield on interest-earning assets and the cost of
interest-bearing liabilities in order to maximize the dollar amount of net
interest income. The Company's net earnings are dependent, to a lesser extent,
on the level of its non-interest income, such as service charges and other fees,
and its non-interest expense, such as employee compensation and benefits,
occupancy and equipment expense, deposit insurance premiums and miscellaneous
other expenses, as well as federal and state income tax expense.
The Association is regulated by the Office of Thrift Supervision ("OTS")
and its deposits are insured up to applicable limits under the Savings
Association Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation
("FDIC").
The Association is a member of the Federal Home Loan Bank system. The
Association conducts its business through seven office facilities, and one loan
production office, with the main office located in Klamath Falls, Oregon. The
Association considers its primary market area to be the counties of Klamath,
Deschutes and Jackson in Southern and Central Oregon.
9
FEDERAL LEGISLATION
On September 30, 1996, the President signed into law an omnibus
appropriations act (the "Act") that includes several changes that affect the
Association. The signed Act (i) recapitalizes the SAIF through a one-time
special assessment; (ii) provides for the conditional merger of the Bank
Insurance Fund ("BIF") and the SAIF as of January 1, 1999 into one Deposit
Insurance Fund ("DIF"), at which time banks and thrifts would pay the same
deposit insurance premiums; and (iii) grants financial institutions limited
regulatory relief.
With respect to the assessment to recapitalize SAIF, the Act requires
SAIF-insured institutions to recapitalize the SAIF through a one-time special
assessment of 65.7 basis points on the SAIF deposit assessment base, payable no
later than November 29, 1996. Based on the Association's assessment base of
$376.4 million at March 31, 1995, the date used in the Act, the one-time
assessment is $2.5 million and was accrued during the quarter ended September
30, 1996.
In separate legislation enacted this past year, the reserve method of
accounting for thrift and bad debt reserves (including the percentage of taxable
income method) was repealed for tax years beginning after December 31, 1995. The
resulting change in accounting method triggers bad debt reserve recapture for
post-1987 reserves over a six-year period, thereby generating an additional tax
liability. At September 30, 1996, the Association's post-1987 reserves amounted
to $3.8 million. Pre-1988 reserves would only be subject to recapture if the
institution fails to qualify as a thrift. A special provision suspends recapture
of post-1987 reserves for up to two years if, during those years, the
institution satisfies a "residential loan requirement." Notwithstanding this
special provision, however, recapture would be required to begin no later than
the first taxable year beginning after December 31, 1997.
(Graph in hardcopy report)
TOTAL ASSETS
(in thousands)
TOTAL
YEAR ASSETS
1996 $671,969
1995 647,840
1994 448,939
1993 403,879
1992 366,864
10
CHANGE IN INDEPENDENT AUDITORS
On May 21, 1996, the Company's Board of Directors, at the recommendation of
the Audit Committee, terminated the engagement of KPMG Peat Marwick LLP and
engaged Deloitte & Touche LLP, as the Company's auditors.
The report of KPMG Peat Marwick LLP on the Company's financial statements
for either of the last two fiscal years preceding the date of termination did
not contain an adverse opinion or a disclaimer of opinion and was not qualified
or modified as to uncertainty, audit scope, or accounting principles, except
that the report of KPMG Peat Marwick LLP dated November 3, 1995 with respect to
the Company's financial statements at September 30, 1994 and 1995 and for the
three years in the period ended September 30, 1995 disclosed that the Company
changed its method of accounting for certain investments in debt and equity
securities and its method of accounting for income taxes in fiscal 1994 to adopt
the provisions of Statement of Financial Accounting Standard ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", and SFAS No.
109, "Accounting for Income Taxes", respectively.
During the Company's two most recent fiscal years and subsequent interim
periods preceding the date of the termination of the engagement of KPMG Peat
Marwick LLP, the company was not in disagreement with KPMG Peat Marwick LLP on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreement, if not resolved
to the satisfaction of KPMG Peat Marwick LLP, would have caused KPMG Peat
Marwick LLP to make reference to the subject matter of the disagreement in
connection with its report.
The Company had not consulted with Deloitte & Touche LLP during its two
most recent fiscal years nor during any subsequent interim period prior to its
engagement regarding the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on the Company's financial statements.
ASSET AND LIABILITY MANAGEMENT AND INTEREST RATE RISK
The ability to maximize net interest income is largely dependent upon the
achievement of a positive interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Interest rate sensitivity is a
measure of the difference between amounts of interest-earning assets and
interest-bearing liabilities which either reprice or mature within a given
period of time. The difference, or the interest rate repricing "gap", provides
an indication of the extent to which an institution's interest rate spread will
be affected by changes in interest rates. A gap is considered positive when the
amount of interest-rate sensitive assets exceeds the amount of interest-rate
sensitive liabilities, and is considered negative when the amount of
interest-rate sensitive liabilities exceeds the amount of interest-rate
sensitive assets. Generally, during a period of rising interest rates, a
negative gap within shorter maturities would result in a decrease in net
interest income. Conversely, during a period of falling interest rates, a
negative gap within shorter maturities would result in an increase in net
interest income.
At September 30, 1996, the Association's one-year cumulative gap was a
negative 25.88% of total assets compared to a negative 1.07% of total assets at
September 30, 1995 and a negative 30.05% at September 30, 1994. The September
30, 1995 one-year cumulative gap was unusually low and was a substantial
improvement for the Company compared to prior years. This was a result of the
subscription funds from the initial stock offering being invested in overnight
funds, or for gap, the less than one-year repricing period. The cumulative
one-year gap has remained improved.
11
The Association continues to primarily originate fixed rate residential
loans for its portfolio. In an effort to reduce its exposure to interest rate
risk, the Association has: (i) purchased adjustable rate mortgage-backed
securities, (ii) placed greater emphasis on the origination of adjustable-rate
residential loans, and (iii) emphasized longer term fixed rate deposits. We will
continue to explore opportunities in these areas.
The following table sets forth certain historical information relating to the Company's
interest-earning assets and interest-bearing liabilities that are estimated to mature or
are scheduled to reprice within one year.
At September 30,
-----------------------------------------------
1996 1995 1994
-------- -------- -------
(In thousands)
Earning assets maturing or repricing
within one year ....................... $174,921 $253,115 $84,926
Interest-bearing liabilities
maturing or repricing within one
year .................................. 348,852 260,073 219,845
Deficiency of earning assets over
interest-bearing liabilities as a
percent of total assets ............... (25.88)% ( 1.07)% (30.05)%
Percent of assets to liabilities
maturing or repricing within one
year .................................. 50.14% 97.32% 38.63%
12
INTEREST SENSITIVITY GAP ANALYSIS
The following table presents the difference between the Company's interest-earning assets and interest-bearing liabilities within
specified maturities at September 30, 1996. This table does not necessarily indicate the impact of general interest rate movements
on the Company's net interest income because the repricing of certain assets and liabilities is subject to competitive and other
limitations. As a result, certain assets and liabilities indicated as maturing or otherwise repricing within a stated period may in
fact mature or reprice at different times and at different volumes.
Greater Greater Greater Greater Greater Greater Greater
than than than than than than than
3 Months 3 Months 6 Months 1 to 3 3 to 5 5 to 10 10 to 20 20
ASSETS or Less to 6 Months to 1 Year Years Years Years Years Years TOTAL
-------- ----------- ----------- ---------- ----------- ----------- --------- ---------- -----------
PERMANENT 1-4 MORTGAGES (In thousands)
Adjustable Rate ........ $ 18,946 $ 4,788 $17,415 $ 1,109 $ - $ - $ - $ - $ 42,258
Fixed Rate ............. 198 146 540 308 790 10,912 79,686 317,552 410,132
OTHER MORTGAGE LOANS
Adjustable Rate ........ 2,673 466 5,604 249 - - - - 8,992
Fixed Rate ............. - - 96 106 1,982 2,157 10,062 74 14,477
Mortgage Backed and
Related Securities ..... 48,520 16,259 16,253 - - - - - 81,032
Non-Real Estate Loans .. 451 337 371 494 342 583 1,341 - 3,919
Investment Securities .. 33,077 2,000 6,781 4,914 37,592 16,507 - - 100,871
-------- ----------- ----------- ---------- ----------- ----------- --------- ---------- -----------
Total Rate Sensitive
Assets ................. $103,865 $23,996 $47,060 $ 7,180 $40,706 $30,159 $91,089 $317,626 $ 661,681
======== =========== =========== ========== =========== =========== ========= ========== ===========
LIABILITIES
Deposits
- Fixed Maturity .. $52,085 $50,307 $74,463 $67,092 $20,736 $24,505 $ - $ - $ 289,188
Deposits - Now ......... 1,821 1,821 3,642 8,499 8,499 - - - 24,282
Deposits
- Money Market .... 13,607 14,129 14,129 10,466 - - - - 52,331
Deposits - Passbook .... 2,528 2,528 5,057 11,799 11,799 - - - 33,711
Other Interest
Bearing Liabilities .... 98,735 14,000 - - - - - - 112,735
-------- ----------- ----------- ---------- ----------- ----------- --------- ---------- -----------
Total Rate Sensitive
Liabilities ............ $168,776 $82,785 $97,291 $97,856 $41,034 $24,505 $ - $ - $ 512,247
======== =========== =========== ========== =========== =========== ========= ========== ===========
Interest Rate
Sensitivity Gap ........ $(64,911) $ (58,789) $ (50,231) $(90,676) $ (328) $ 5,654 $ 91,089 $317,626 $ 149,434
Cumulative Interest
Rate Sensitivity Gap ... $(64,911) $(123,700) $(173,931) $264,607) $(264,935) $(259,281) $(168,192) $149,434
Sensitivity Gap to
Total Assets ........... (9.66%) (8.75%) (7.48%) (13.49%) (0.05%) 0.84% 13.56% 47.27%
Cumulative Interest
Rate Sensitivity Gap
To Total Assets ........ (9.66%) (18.41%) (25.88%) (39.38%) (39.43%) (38.59%) (25.03%) 22.24%
13
Certain shortcomings are inherent in gap analysis that may result in an
institution with a nominally negative gap having interest rate behavior
associated with a positive gap. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may react
in different degrees to changes in market interest rates.
LIQUIDITY AND CAPITAL RESOURCES
The Company generates cash through operating activities, primarily as a
result of net income. The adjustments to reconcile net income to net cash
provided by operations during the periods presented consisted primarily of the
provision for loan losses, depreciation and amortization expense, amortization
of deferred loan origination fees, increases or decreases in various escrow
accounts and increases or decreases in other assets and liabilities. The primary
investing activity of the Association is lending, which is funded with cash
provided from operations and financing activities, as well as proceeds from
amortization and prepayments on existing loans and mortgage backed and related
securities and proceeds from maturities of other investment securities. For
additional information about cash flows from operating, financing and investing
activities, see the Consolidated Statements of Cash Flows included in the
Consolidated Financial Statements.
The Association is required under applicable federal regulations to
maintain specified levels of "liquid" investments in qualifying types of U.S.
Government, federal agency and other investments having maturities of five years
or less. Current OTS regulations require that a savings association maintain
liquid assets of not less than 5.00% of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less, of
which short-term liquid assets must consist of not less than 1.00%. At September
30, 1996, the Association's regulatory liquidity, as measured for regulatory
purposes, was 10.47%.
Under capital standards mandated by the Financial Institution Reform,
Recovery, and Enforcement Act, the Association must have: (i) tangible capital
equal to 1.5% of adjusted total assets, (ii) core capital equal to 3.0% of
adjusted total assets, and (iii) total risk-based capital equal to 8.0% of
risk-weighted assets. At September 30, 1996, the Association was in compliance
with all regulatory capital requirements effective as of such date, with
tangible, core and risk-based capital of 19.2%, 19.2% and 42.4%, respectively.
(See Note 15 To Consolidated Financial Statements).
ASSET QUALITY
NON-PERFORMING ASSETS
At September 30, 1996, the ratio of non-performing assets (including
non-accrual loans, accruing loans greater than 90 days delinquent, real estate
owned and other repossessed assets) to total assets was .04%. The Association
intends to seek to maintain asset quality by continuing its focus on one-to-four
family lending. However, in its efforts to expand and diversify its loan
portfolio, the Association intends to evaluate other available lending options
such as credit cards, equity lines of credit, and other consumer loan products.
In doing this, the Association will evaluate the trade off associated with
planned loan growth and the greater credit risk associated with such forms of
lending.
14
CLASSIFIED ASSETS
The Association has established a Classification of Assets Committee that
meets at least quarterly to approve and develop action plans to resolve the
problems associated with the assets, to review recommendations for new
classifications, and to make any changes in present classifications, as well as
making recommendations for the adequacy of reserves.
In accordance with regulatory requirements, the Association reviews and
classifies on a regular basis, and as appropriate, its assets as "special
mention", "substandard", "doubtful" and "loss". In 1996 the Classification of
Assets Committee changed its classification of asset categories to include the
more common classification category Special Mention. In the past the Association
included what normally was considered Special Mention in the Substandard
category. However, to conform to the more common practice, the assets previously
classified Substandard are now classified as either Special Mention or
Substandard per the category's definitions. All non-accrual loans and
non-performing assets are included in classified assets.
The following table sets forth at the dates indicated the amounts of classified
assets:
At September 30,
----------------------
1996 1995 1994
---- ----- -----
(In thousands)
Loss ................................... $ - $ - $ 33
Doubtful ............................... - - 59
Substandard ............................ 281 1,095 1,018
Special Mention ........................ 645 - -
---- ----- -----
$ 926 $1,095 $1,110
==== ===== =====
ALLOWANCE FOR LOAN LOSSES
The Association has established a systematic methodology for determination
of provisions for loan losses. The methodology is set forth in a formal policy
and takes into consideration the need for an overall general valuation allowance
as well as specific allowances that are tied to individual loans. Provision for
loan losses are recorded based on the Association's evaluation of specific loans
in its portfolio, historical loan loss experience, the volume and type of
lending, general economic conditions and the existing level of the Association's
allowance for loan losses.
15
The following table sets forth at the dates indicated the loan loss allowance
and charge-offs:
At September 30,
------------------
1996 1995 1994
---- ---- ----
(In thousands)
Loan loss allowance .................... $928 $808 $755
Charge-offs ............................ - 67 23
AVERAGE BALANCES, NET INTEREST INCOME AND YIELDS EARNED AND RATES PAID
The following table presents, for the periods indicated, information regarding average balances of assets and liabilities, as well
as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing
liabilities, resultant yields, interest rate spread, net interest margin and the ratio of average interest-earning assets to average
interest-bearing liabilities. Dividends received are included as interest income. The table does not reflect any effect of income
taxes. All average balances are based on month-end balances. Non-accrual loans are reflected as carrying a zero yield.
Years Ended September 30,
--------------------------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- ---------------------------- ----------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------- -------- ------ --------- --------- ------ -------- -------- ------
INTEREST-EARNING ASSETS
(In thousands)
Loans receivable ....... $440,510 $ 35,262 8.00% $381,689 $ 30,117 7.89% $338,679 $ 27,511 8.12%
Mortgage backed and
related securities ..... 52,275 3,005 5.75% - - - - -
Investment securities .. 87,929 5,514 6.27% 52,097 3,869 7.43% 56,995 4,041 7.09%
Federal funds sold ..... 23,011 1,259 5.47% 13,005 722 5.55% 9,359 320 3.42%
Interest bearing
deposit ................ 4,882 262 5.37% 2,454 130 5.30% 3,394 183 5.39%
FHLB Stock ............. 4,552 348 7.64% 3,935 270 6.86% 3,969 353 8.89%
-------- -------- --------- --------- -------- --------
Total interest-earning
assets ................. 613,159 45,650 7.45% 453,180 35,108 7.75% 412,396 32,408 7.86%
Non-interest-earning
assets ................. 2,130 13,661 8,216
-------- -------- --------- --------- -------- --------
Total Assets ........... $615,289 $466,841 $420,612
======== ========= ========
16
Years Ended September 30,
--------------------------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- ---------------------------- ----------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------- -------- ------ -------- --------- ------ -------- -------- ------
INTEREST-BEARING
LIABILITIES
Tax and insurance
reserve ................ $ 4,490 $ 148 3.30% $ 4,533 $ 180 3.97% $ 4,489 $ 184 4.10%
Passbook accounts ...... 34,198 983 2.87% 44,345 1,235 2.78% 44,237 1,183 2.67%
Now accounts ........... 22,064 546 2.47% 22,242 542 2.44% 21,654 558 2.58%
Money market accounts .. 50,308 1,950 3.88% 55,891 2,206 3.95% 65,944 2,193 3.33%
Certificate accounts ... 282,446 16,772 5.94% 264,873 15,327 5.79% 234,772 12,436 5.30%
FHLB advances/Short
term borrowings ........ 51,517 2,888 5.60% 15,305 950 6.21% - -
-------- -------- --------- --------- -------- --------
Total interest-bearing
liabilities ............ 445,023 23,287 5.23% 407,189 20,440 5.02% 371,096 16,554 4.46%
Non-interest-bearing
liabilities ............ 4,892 6,279 1,132
-------- -------- --------- --------- -------- --------
Total liabilities ...... 449,915 413,468 372,228
-------- --------- --------
Shareholders' equity 165,374 53,373 48,384
-------- --------- --------
Total liabilities
and shareholders'
equity ................. $615,289 $466,841 $420,612
======== ========= ========
Net interest income .... $ 22,363 $ 14,668 $15,854
======== ========= ========
Interest rate spread ... 2.22% 2.73% 3.40%
====== ======= ======
Net interest margin .... 3.65% 3.24% 3.84%
====== ======= ======
Average interest-earning
assets to average
interest-bearing
liabilities ............ 137.78% 111.29% 111.13%
====== ======= ======
17
RATE/VOLUME ANALYSIS
The following table sets forth the effects of changing rates and volumes on net interest income of the Company. Information is
provided with respect to (i) effects on interest income attributable to changes in volume (changes in average volume multiplied by
prior rate); (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior average volume);
and (iii) changes in rate/volume (change in rate multiplied by change in average volume).
For the Years Ended September 30, For the Years Ended September 30,
------------------------------------------------ ---------------------------------------------
1995 VS 1996 1995 VS 1994
------------------------------------------------ ---------------------------------------------
Increase (Decrease) Due To Increase (Decrease) Due To
Net Increase Net Increase
Rate Volume Rate/Vol (Decrease) Rate Volume Rate/Vol (Decrease)
-------- --------- --------- ------------ -------- -------- -------- -----------
(In thousands)
INTEREST EARNING ASSETS
Loans ..................... $ 420 $ 4,641 $ 85 $ 5,146 $ (788) $ 3,494 $ (100) $ 2,606
Mortgage backed and
related securities ........ - - 3,006 3,006 - - - -
Investment securities ..... (604) 2,662 (416) 1,642 191 (347) (16) (172)
Federal funds sold ........ (10) 555 (8) 537 199 125 78 402
Interest bearing
deposits .................. 2 129 2 133 (3) (51) 1 (53)
FHLB stock ................ 31 42 5 78 (81) (3) 1 (83)
-------- --------- --------- ------------ -------- -------- -------- -----------
Total Interest-Earning
Assets .................... $ (161) $ 8,029 $ 2,674 $ 10,542 $ (482) $ 3,218 $ (36) $ 2,700
======== ========= ========= ============ ======== ======== ======== ===========
INTEREST BEARING LIABILITIES
Tax and insurance reserves $ (30) $ (2) $ - $ (32) $ (6) $ 2 $ - $ (4)
Passbook accounts ......... 40 (282) (9) (251) 49 3 - 52
Now accounts .............. 7 (4) - 3 (30) 15 (1) (16)
Money market accounts ..... (39) (221) 4 (256) 409 (334) (62) 13
Certificate accounts ...... 397 1,017 32 1,446 1,150 1,594 147 2,891
FHLB advances/Short term
borrowings ................ (93) 2,249 (221) 1,935 - - 950 950
-------- --------- --------- ------------ -------- -------- -------- -----------
Total Interest-Bearing
Liabilities ............... $ 282 $ 2,757 $ (194) $ 2,845 $ 1,572 $ 1,280 $ 1,034 $ 3,886
======== ========= ========= ============ ======== ======== ======== ===========
Increase (Decrease) in Net
Interest Income ........... $ 7,697 $ (1,186)
============ ===========
18
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1995 AND 1996.
GENERAL
Net earnings increased $500,000 or 8.9% from $5.6 million for the year
ended September 30, 1995, to $6.1 million for the year ended September 30, 1996.
This increase was attributable to several factors. Net interest income increased
$7.7 million or 52.4% from $14.7 million for the year ended September 30, 1995
to $22.4 million for the year ended September 30, 1996. This increase was
primarily attributable to an increase in total average interest-earning assets
from $453.2 at September 30, 1995 to $613.2 at September 30, 1996. The increase
in net interest income was partially offset by an increase in non-interest
expense of $6.2 million or 103.3% from $6.0 million for the year ended September
30, 1995 to $12.2 million for the year ended September 30, 1996. This increase
is primarily attributable to a $1.7 million increase in compensation expense,
due largely to the Employee Stock Option Plan ("ESOP"), the $2.5 million
BIF/SAIF assessment, and the $1.6 million loss on sale of an investment
subsequent to year end.
INTEREST INCOME
Additional interest income generated by the $146.4 million increase in
average interest earning assets contributed to an increase of $10.5 million or
29.9% from $35.1 million for the year ended September 30, 1995 to $45.6 million
for the year ended September 30, 1996. Of this increase, $5.1 million is
attributable to additional loan income due to an increase in loans receivable.
The increase in loans receivable was primarily a result of strong new purchase
loan originations exceeding loan refinancing which resulted in greater net loan
growth for 1996.
The remaining increase of $5.4 million was a result of investing the
proceeds of the stock sale and borrowings in 30 year adjustable rate agency
mortgage backed securities ("MBS"), fixed rate U.S. agency securities with
maturities of less than five years, fixed and adjustable corporate securities
and overnight funds. The average balance of investments increased by $101.2
million for the year ended September 30, 1996 compared with the comparable
period in 1995.
INTEREST EXPENSE
Interest expense increased $2.8 million due to increases in deposits and
borrowings. Interest expense on deposits increased $1.0 million or 5.2% from
$19.3 million for the year ended September 30, 1995 to $20.3 million for the
year ended September 30, 1996. Total deposits increased by $15.3 million from
September 30, 1995 to September 30, 1996, and the average interest paid on
interest-bearing deposits increased 22 basis points from 4.99% for the year
ended September 30, 1995 to 5.21% for the year ended September 30, 1996. This
increase was a result of the increased pricing competition in the Company's
market area. Interest expense on borrowings increased $1.9 million due to
increased borrowings of $84.9 million. The Company will continue to rely on
borrowings to fund loan growth as long as we can borrow at lower rates for
comparable maturities than required to attract similar structured deposits.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $120,000 with no recoveries or charge
offs during the year ended September 30, 1996 compared to $120,000 and charge
offs of $67,000 during the year ended September 30, 1995, for a net increase in
provision for the year of $120,000. At September 30, 1996, the allowance for
loan losses was equal to 356.9% of non-performing assets compared to 106.6% at
September 30, 1995. The increase in the coverage ratio at year end 1996 was the
result of a decrease in non-accrual loans which were foreclosed and sold during
the year.
19
NON-INTEREST INCOME
Non-interest income increased $141,000 or 37.0% to $522,000 for the year
ended September 30, 1996 from $381,000 for the year ended September 30, 1995.
The increase was attributable to increases in fees and service charges and other
income, as a result of increased loan activity, ATM fees and service charges on
checking accounts.
NON-INTEREST EXPENSE
Non-interest expense increased $6.2 million, or 103.3%, for the year ended
September 30, 1996, from a total of $6.0 million for the prior year to $12.2
million for the year ended September 30, 1996. Of this increase, $2.5 million
was attributable to the BIF/SAIF special assessment, $1.6 million was
attributable to the loss on sale of an investment subsequent to year end, and
$1.7 million is attributable to an increase in compensation expense. Of the $1.7
million increase in compensation expense, $1.4 million is due to compensation
expense associated with the ESOP. The ratio of non-interest expense to average
total assets was 1.99% and 1.29% for the years ended September 30, 1996 and
1995, respectively.
INCOME TAXES
The provision for income taxes increased $1.0 million for the year ended
September 30, 1996 compared with the prior year, primarily as a result of higher
pretax earnings.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1994 AND 1995
GENERAL
Earnings decreased $580,000 or 9.4%, from $6.2 million for the year ended
September 30, 1994 to $5.6 million for the year ended September 30, 1995, before
the cumulative effect of a change in method of accounting for income taxes due
to the adoption of SFAS No. 109 on October 1, 1993. This decrease was mainly
attributable to a decrease in interest rate spread from 3.4% at September 30,
1994 to 2.7% at September 30, 1995 which resulted in net interest income
decreasing by $1.2 million, or 7.5%.
Net earnings increased $286,000, or 5.4%, from $5.3 million for the year
ended September 30, 1994 to $5.6 million for the year ended September 30, 1995
in the absence of the prior year's $866,000 cumulative effect of the change in
method of accounting for income taxes. The additional reasons for the changes in
net earnings are discussed more specifically below.
INTEREST INCOME
The additional interest income generated by the $43.0 million increase in
average balance of loans receivable in 1995 over the prior year slightly offset
the 23 basis point decrease in loan yield from the prior year to produce a $2.6
million increase in interest income from loans. The increase in loans receivable
was primarily a result of strong loan demand and less loan refinancing which
resulted in greater net loan growth for 1995 despite less loan production. The
decrease in loan yield was primarily a result of the refinancing to lower
yielding loans over the previous year while rates were still declining and
initiating an adjustable rate program this year emphasizing rates below market
rates (teaser rates) to generate adjustable rate loan volume.
20
The average balance of investment securities decreased by $4.9 million in
1995 compared with 1994. A 34 basis point increase in the yield on investment
securities from the prior year did not offset the decrease in volume, resulting
in a $172,000 decrease in interest income from investment securities. Interest
income on federal funds sold increased $401,845 in 1995 from 1994 as a result of
investing the proceeds of the stock sale during the subscription period.
Investment securities include an investment of $12.6 million in a U.S. Federal
securities mutual bond fund classified as available for sale. A decrease in
interest rates during 1995 resulted in increasing the carrying value of the U.S.
Federal securities mutual bond fund at September 30, 1995 by $382,000.
INTEREST EXPENSE
Savings deposit interest expense increased $2.9 million for the year ended
September 30, 1995 as compared to the comparable period in 1994. The increase
was attributable to a $20.8 million increase in the average balance of deposits
during this period, which can be primarily attributed to the increase in savings
account activity during the stock sale subscription period. The weighted average
rate paid on deposits increased 51 basis points from 4.46% during the year ended
September 30, 1994 to 4.97% during the year ended September 30, 1995. Average
FHLB advances outstanding during this period were $15.3 million with a weighted
average rate of 6.21%.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $120,000, recoveries were zero, and
charge offs were $67,000 during the year ended September 30, 1995 compared to
$150,000 and charge offs of $23,000 during the year ended September 30, 1994,
for a net increase in provision for the year of $53,000. At September 30, 1995,
the allowance for loan losses was equal to 106.60% of non-performing assets
compared to 311.98% at September 30, 1994. The decrease in the coverage ratio at
year end 1995 was the result of foreclosure proceedings initiated against two
properties, which totalled $445,343 of the total non-performing assets of
$758,000. No losses are expected on these loans as the loans are well secured
with an estimated value of $745,000, or an excess loan to value of $299,657.
NON-INTEREST INCOME
Non-interest income increased $29,000, or 8.2%, to $381,000 for the year
ended September 30, 1995 from $352,000 for the year ended September 30, 1994.
The increase was mainly attributable to increased income from the sale of real
estate owned.
NON-INTEREST EXPENSE
Non-interest expense decreased $30,000, or 0.5%, for the year ended
September 30, 1995, from a total of $6.03 million for the prior year to $6.00
million for the year ended September 30, 1995. Of this decrease, $200,000 was
attributable to a decrease in compensation and benefit expense in 1995,
primarily reflecting certain one-time increased bonus payments to employees and
increased fees paid to directors in the prior year. This was partially offset by
an increase in SAIF insurance premiums, primarily as a result of growth in
deposits, costs incident to greater loan volume and increased occupancy and
personnel expenses as a result of the new Klamath Falls, Oregon branch. The
ratio of non-interest expense to average total assets was 1.43% and 1.29% for
the years ended September 30, 1994 and 1995, respectively
21
INCOME TAXES
Effective October 1, 1993, the Association adopted SFAS No. 109 which
requires a change from the deferred method of accounting for income taxes of
Accounting Principles Board ("APB") No. 11 to the asset and liability method of
accounting for income taxes. The implementation of SFAS No. 109 decreased net
earnings by $866,000 for the year ended September 30, 1994.
The provision for income taxes decreased $517,000 for the year ended
September 30, 1995 compared with the prior year, primarily as a result of lower
pretax earnings.
(Graph in hardcopy report)
TOTAL NET EARNINGS
(in thousands)
NET
YEAR EARNINGS
1996 $6,110
1995 5,574
1994 5,288
1993 7,157
1992 4,745
22
COMMON STOCK INFORMATION
Since October 4, 1995, Klamath First Bancorp's common stock has traded on
the National Association of Security Dealers Automated Quotations ("NASDAQ")
National Market System under the symbol "KFBI". As of October 11, 1996, there
were approximately 4,400 shareholders of record or through nominee or street
name accounts with brokers.
The following represents reported high and low trading price and dividends
declared each respective quarter of fiscal 1996. Information as to market prices
for the Company's common stock is not presented for fiscal year 1995 because the
shares were not yet issued and outstanding.
DIVIDEND
FISCAL 1996 HIGH LOW DECLARED
------ ------- ----------
First Quarter ........... 13 3/4 12 1/16 $ 0.050
Second Quarter .......... 13 3/4 12 1/2 $ 0.065
Third Quarter ........... 14 5/8 13 $ 0.065
Fourth Quarter .......... 14 3/4 13 3/8 $ 0.070
Any dividend payments by the Company are subject to the sole discretion of
the Board of Directors and depend primarily on the ability of the Association to
pay dividends to the Company at least annually. Under Federal regulations, the
dollar amount of dividends a federal savings association may pay depends on the
Association's capital surplus position and recent net income. Generally, if an
association satisfies its regulatory capital requirements, it may make dividend
payments up to the limits prescribed in the OTS regulations. However,
institutions that have converted to the stock form of ownership may not declare
or pay a dividend on, or repurchase any of, its common stock if the effect
thereof would cause the regulatory capital of the institution to be reduced
below the amount required for the liquidation account which was established in
accordance with OTS regulations and the Association's Plan of Conversion. In
addition, earnings of the Association appropriated to bad debt reserves and
deducted for federal income tax purposes are not available for payment of cash
dividends without payment of taxes at the then current tax rate by the
Association on the amount removed from the reserves for such distributions. The
Association does not contemplate any distributions that would limit the
Association's bad debt deduction or create federal tax liabilities.
23
INDEPENDENT AUDITORS' REPORTS
Board of Directors
Klamath First Bancorp, Inc.
Klamath Falls, Oregon
We have audited the accompanying consolidated balance sheet of Klamath
First Bancorp, Inc. and subsidiary (the "Company") as of September 30, 1996, and
the related consolidated statement of earnings, shareholders' equity, and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Klamath First Bancorp, Inc. and
subsidiary as of September 30, 1996, and the results of their operations and
their cash flows for the year then ended, in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
- --------------------------
Deloitte & Touche LLP
Portland, Oregon
November 25, 1996
24
Board of Directors
Klamath First Bancorp, Inc.
Klamath Falls, Oregon
We have audited the accompanying consolidated balance sheet of Klamath
First Bancorp, Inc. and subsidiaries as of September 30, 1995, and the related
consolidated statements of earnings, stockholders' equity and cash flows for the
two years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Klamath
First Bancorp, Inc. and subsidiaries as of September 30, 1995 and the results of
their operations and their cash flows for the two years then ended in conformity
with generally accepted accounting principles.
As discussed in note 1 to the consolidated financial statements, the
Company changed its method of accounting for certain investments in debt and
equity securities and its method of accounting for income taxes in fiscal 1994
to adopt the provisions of Financial Accounting Standards Board's Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities", and SFAS No. 109, "Accounting for
Income Taxes", respectively.
/s/ KPMG Peat Marwick LLP
- --------------------------
KPMG Peat Marwick LLP
Portland, Oregon
November 3, 1995
25
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
September 30,
------------------------------
ASSETS 1996 1995
------------- -------------
Cash and due from banks ............................ $ 6,841,554 $ 4,033,723
Interest bearing deposits .......................... - 994,157
Federal funds sold ................................. 9,338,079 170,966,390
------------- -------------
Total cash and cash equivalents .................... 16,179,633 175,994,270
Investment securities available for sale,
at fair value (amortized cost:
$77,071,211 and $13,723,044) ....................... 75,986,611 12,605,654
Investment securities held to maturity,
at amortized cost (fair value:
$9,860,165 and $42,178,800) ........................ 9,827,193 42,209,497
Mortgage backed and related securities
available for sale, at fair value
(amortized cost: $74,249,350) ...................... 74,109,321 -
Mortgage backed and related securities
held to maturity, at amortized cost
(fair value: $6,736,007) ........................... 6,783,001 -
Loans receivable, net .............................. 473,555,988 403,543,725
Real estate owned .................................. 69,483 24,384
Premises and equipment, net ........................ 4,964,262 5,231,903
Stock in Federal Home Loan Bank of
Seattle, at cost ................................... 4,773,800 4,425,900
Accrued interest receivable, net ................... 5,037,285 3,431,594
Other assets ....................................... 682,814 372,654
------------- -------------
Total assets ....................................... $ 671,969,391 $ 647,839,581
============= =============
26
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30,
------------------------------
LIABILITIES 1996 1995
------------- -------------
Savings deposits ................................... $ 399,673,180 $ 384,379,531
Stock over subscription ............................ - 65,685,300
Accrued interest on savings deposits ............... 712,408 1,028,766
Advances from borrowers for taxes
and insurance ...................................... 7,831,127 7,966,422
Advances from Federal Home Loan Bank
of Seattle ......................................... 90,000,000 20,000,000
Short term borrowings .............................. 14,904,400 -
Accrued interest on borrowings ..................... 323,163 -
Pension liability .................................. 668,088 616,035
Deferred federal and state income taxes ............ 735,596 896,876
Other liabilities .................................. 3,710,455 2,581,586
------------- -------------
Total liabilities .................................. 518,558,417 483,154,516
------------- -------------
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value,
500,000 shares authorized; none issued - -
Common stock, $.01 par value,
35,000,000 shares authorized,
1996 - 11,612,470
issued, 10,242,360 outstanding;
1995 - issued and outstanding 12,233,125 shares .... 116,124 122,331
Additional paid-in capital ......................... 110,762,678 119,230,653
Retained earnings - substantially restricted ....... 59,082,479 55,811,362
Unearned shares issued to ESOP ..................... (8,807,850) (9,786,500)
Unearned shares issued to MRDP ..................... (6,694,470) -
Net unrealized loss on securities available for sale (1,047,987) (692,781)
------------- -------------
Total shareholders' equity ......................... 153,410,974 164,685,065
------------- -------------
Total liabilities and shareholders' equity ......... $ 671,969,391 $ 647,839,581
============= =============
See notes to consolidated financial statements.
27
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF EARNINGS
Years ended September 30,
---------------------------------------
INTEREST INCOME 1996 1995 1994
----------- ----------- -----------
Loans receivable ....................... $35,261,655 $30,116,911 $27,511,193
Mortgage backed and related securities . 3,004,823 - -
Investment securities .................. 5,862,520 4,138,524 4,393,812
Federal funds sold ..................... 1,258,614 721,940 320,095
Interest bearing deposits .............. 261,811 129,716 182,516
----------- ----------- -----------
Total interest income .................. 45,649,423 35,107,091 32,407,616
----------- ----------- -----------
INTEREST EXPENSE
Savings deposits ....................... 20,251,039 19,310,599 16,370,065
FHLB advances .......................... 2,689,790 949,059 -
Other .................................. 345,698 181,515 184,336
----------- ----------- -----------
Total interest expense ................. 23,362,896 20,441,173 16,554,401
----------- ----------- -----------
Net interest income .................... 23,286,527 14,665,918 15,853,215
Provision for loan losses .............. 120,000 120,000 150,000
----------- ----------- -----------
Net interest income after provision
for loan losses ........................ 22,242,896 14,545,918 15,703,215
----------- ----------- -----------
NON-INTEREST INCOME
Fees and service charges ............... 260,320 185,053 143,829
Gain on sale of real estate owned ...... 22,233 84,022 49,725
Other income ........................... 239,105 112,090 158,544
----------- ----------- -----------
Total non-interest income .............. 521,658 381,165 352,098
----------- ----------- -----------
NON-INTEREST EXPENSE
Compensation, employee benefits and
related expense ........................ 4,476,052 2,753,726 2,953,508
Occupancy expense ...................... 971,431 917,364 821,365
Data processing expense ................ 343,319 318,819 282,064
Insurance premium expense .............. 907,825 877,366 818,311
Special SAIF assessment ................ 2,472,954 - -
Loss on sale of real estate owned ...... 6,271 - -
Realized loss on U.S. Federal
securities mutual bond fund ............ 1,642,625 - -
Other expense .......................... 1,421,753 1,136,780 1,159,210
----------- ----------- -----------
Total non-interest expense ............. 12,242,230 6,004,055 6,034,458
----------- ----------- -----------
28
Years ended September 30,
---------------------------------------
INTEREST INCOME 1996 1995 1994
----------- ----------- -----------
Earnings before income taxes and
cumulative effect of a change
in accounting principle ................ 10,522,324 8,923,028 10,020,855
Provision for income tax ............... 4,412,527 3,348,925 3,866,001
----------- ----------- -----------
Net earnings before cumulative
effect of a change in accounting
principle .............................. 6,109,797 5,574,103 6,154,854
Cumulative effect at October 1, 1993
of a change in accounting
for income taxes ....................... - - 866,518
----------- ----------- -----------
Net earnings ........................... $ 6,109,797 $ 5,574,103 $ 5,288,336
=========== =========== ===========
Earnings per common share (based on
weighted average shares outstanding) ... $ .56 N/A N/A
Weighted average number of shares
outstanding ............................ 11,004,939 N/A N/A
See notes to consolidated financial statements.
29
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Additional Unearned Unrealized Unearned Total
Common Stock Common Stock paid-in Retained ESOP shares gain(loss) on shares issued shareholders'
Shares Amount capital earnings at cost securities to MRDP equity
------------ ------------ ------------- ------------ ------------ ------------- -------------- ---------------
Balance at
October 1, 1993 ..... $ - $ - $ - $44,948,923 $ - $ - $ - $ 44,948,923
Unrealized loss on
securities available
for sale ............ - - - - - (929,615) - (929,615)
Net earnings ........ - - - 5,288,336 - - - 5,288,336
------------ ------------ ------------- ------------ ------------ ------------- -------------- ---------------
Balance at
September 30, 1994 .. - - - 50,237,259 - (929,615) - 49,307,644
Issuance of common
stock ............... 12,233,125 122,331 119,230,653 - (9,786,500) - - 109,566,484
Unrealized gain on
securities avail-
able for sale ....... - - - - - 236,834 - 236,834
Net earnings ........ - - - 5,574,103 - - - 5,574,103
------------ ------------ ------------- ------------ ------------ ------------- -------------- ---------------
Balance at
September 30, 1995 .. 12,233,125 122,331 119,230,653 55,811,362 (9,786,500) (692,781) - 164,685,065
Cash dividends ...... - - - (2,838,680) - - - (2,838,680)
Earned ESOP shares .. - - 417,652 - 978,650 - - 1,396,302
Unrealized loss on
investments available
for sale ............ - - - - - (355,206) - (355,206)
Unearned shares issued
to MRDP Trust ....... - - - - - - (6,694,470) (6,694,470)
Stock retirement ..... (620,655) (6,207) (8,885,627) - - - - (8,891,834)
Net earnings ......... - - - 6,109,797 - - - 6,109,797
------------ ------------ ------------ ------------ ------------ ------------- -------------- ---------------
Balance at September
30, 1996 .............$11,612,470 $116,124 $110,762,678 $59,082,479 ($8,807,850) ($1,047,987) ($6,694,47) $153,410,974
============ ============ ============ ============ ============ ============= ============== ===============
See notes to consolidated financial statements.
30
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30,
-----------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES 1996 1995 1994
------------- ------------- -------------
Net earnings .......................................... $ 6,109,797 $ 5,574,103 $ 5,288,336
------------- ------------- -------------
ADJUSTMENTS TO RECONCILE NET EARNINGS
TO NET CASH PROVIDED BY OPERATING
ACTIVITIES
Depreciation ......................................... 403,074 360,069 317,589
Provision for loan losses ............................. 120,000 120,000 150,000
Compensation expense related to ESOP benefit .......... 1,396,302 - -
Net amortization of premiums paid
on investment and mortgage backed
and related securities ................................ 210,599 204,444 246,771
Realized loss on sale of U.S. Federal
securities mutual bond fund ........................... 1,642,625 - -
Increase in deferred loan fees, net of amortization ... 703,055 490,802 914,139
Accretion of discounts on purchased loans ............. (14,683) (7,239) (26,359)
Net gain on sale of real estate owned and premises and
equipment ............................................. (5,209) (33,544) (58,811)
FHLB stock dividends .................................. (347,900) (269,600) (352,600)
CHANGES IN ASSETS AND LIABILITIES
Accrued interest receivable ........................... (1,605,691) (160,744) (166,118)
Other assets .......................................... (310,160) 188,504 (23,691)
Accrued interest on savings deposits .................. (316,358) 630,370 (34,495)
Accrued interest on borrowings ........................ 323,163 - -
Pension liabilities ................................... 52,053 58,020 -
Deferred federal and state income taxes ............... (409,246) 746,966 532,517
Other liabilities ..................................... 315,996 (185,361) 478,936
------------- ------------- -------------
Total adjustments ..................................... 2,157,620 2,142,687 1,977,878
------------- ------------- -------------
Net cash provided by operating activities ............. 8,267,417 7,716,790 7,266,214
------------- ------------- -------------
31
Years ended September 30,
-----------------------------------------------
1996 1995 1994
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of investment securities held to
maturity .............................................. 69,552,392 7,006,177 -
Principal repayments received on mortgage backed and
related securities .................................... 12,083,872 - -
Principal repayments received on loans ................ 64,529,602 40,398,099 79,225,557
Loan originations ..................................... (135,566,747) (84,714,297) (130,024,113)
Purchase of investment securities held to maturity .... (42,971,553) (4,855,539) (537,478)
Purchase of investment securities available for sale .. (60,969,781) - -
Purchase of mortgage backed and related securities held
to maturity ........................................... (7,423,182) - -
Purchase of mortgage backed and related securities
available for sale .................................... (84,123,187) - -
Proceeds from sale of real estate owned and premises
and equipment ......................................... 177,595 359,033 406,417
Purchases of premises and equipment ................... (136,406) (1,167,757) (553,602)
------------- ------------- -------------
Net cash used in investing activities ................. (184,847,395) (42,974,284) (51,483,219)
------------- ------------- -------------
32
Years ended September 30,
-----------------------------------------------
1996 1995 1994
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase/(decrease) in savings deposits,
net of withdrawal ..................................... $ 15,293,649 $ (5,370,987) $ 39,798,168
Proceeds from FHLB advances ........................... 105,000,000 20,000,000 -
Repayments of FHLB advances ........................... (35,000,000) - -
Proceeds from short term borrowings ................... 21,938,300 - -
Repayments of short term borrowings ................... (7,033,900) - -
Proceeds from issuance of common stock ................ - 121,268,633 -
Proceeds from stock over subscription ................. - 65,685,300 -
Repayment from stock over subscription ................ (65,685,300) - -
Funding provided to ESOP for purchase of common
stock ................................................. - (9,786,500) -
Funding provided to MRDP Trust for purchase of common
stock ................................................. (6,694,470) - -
Stock retirement ...................................... (8,891,834) - -
Advances from borrowers for tax and insurance ......... (135,297) (101,700) 496,161
Dividends paid ........................................ (2,025,807) - -
------------- ------------- -------------
Net cash provided by financing activities ............. 16,765,341 191,694,746 40,294,329
------------- ------------- -------------
Net (decrease) increase in cash and cash equivalents .. (159,814,637) 156,437,252 (3,922,676)
Cash and cash equivalents at beginning of year ........ 175,994,270 19,557,018 23,479,694
------------- ------------- -------------
Cash and cash equivalents at end of year .............. $ 16,179,633 $ 175,994,270 $ 19,557,018
============= ============= ============
SUPPLEMENTAL SCHEDULE OF INTEREST AND INCOME TAXES PAID
Interest paid ......................................... $ 23,483,212 $ 19,810,803 $ 16,589,906
Income taxes paid ..................................... 4,555,053 2,570,000 4,020,000
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
Transfer of investment securities from held to
maturity to available for sale at estimated fair
market value .......................................... $ 27,171,074 $- $-
Transfer of mortgage backed and related securities
from held to maturity to available for sale at
estimated fair value................................... 1,717,890 - -
Net unrealized gain (loss) on securities available
for sale .............................................. (355,206) 236,834 (929,615)
Dividends declared and accrued in other liabilities ... 812,873 - -
See notes to consolidated financial statements.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1)Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Klamath First Bancorp, Inc. (the Company) and its wholly-owned subsidiary
Klamath First Federal Savings and Loan Association (the Association). The
Company became the holding company of the Association upon conversion of the
Association from a federally-chartered mutual savings and loan association to a
federally-chartered capital stock savings and loan association (Note 11). This
transaction has been accounted for in a manner similar to a "pooling of
interests" in accordance with APB Opinion No. 16, "Business Combinations."
The Company's consolidated financial statements also include the assets and
liabilities of First Service Corporation of Southern Oregon ("FSC") which was
wholly-owned by the Association. As of July 31, 1996, FSC was officially
liquidated into the Association. All significant intercompany balances and
transactions have been eliminated in consolidation for September 30, 1995.
Nature of Operations
The Company and subsidiary provide banking and limited nonbanking services
to its customers who are located principally in the Klamath, Jackson, and
Deschutes counties of Southern and Central Oregon. These services primarily
include attracting deposits from the general public and using such funds,
together with other borrowings, to invest in various real estate loans,
investment securities, and mortgage backed and related securities.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make assumptions that
result in estimates that affect the reported amounts of certain assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of related revenue and expense
during the reporting period. Actual results could differ from those estimates.
Investment Securities
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". Under this pronouncement, securities held to maturity are stated at
cost only if the Company has the positive intent and the ability to hold the
securities to maturity. Securities available for sale, including mutual funds,
and trading securities are stated at fair value. Realized gains and losses on
the sale of securities, recognized on a specific identification basis, and
valuation adjustments of trading account securities are included in non-interest
income or expense. Net unrealized gains or losses on securities available for
sale are included as a component of shareholders' equity, net of tax, until
realized. Unrealized losses on securities resulting from an other than temporary
decline in the fair value are recognized in earnings when incurred.
During December 1995, the Association reclassified $27,171,074 of
investment securities and $1,717,890 of mortgage backed and related securities
from held to maturity to available for sale at fair values, with unrealized
gains and losses of $200,508 and $100,421, respectively. The reclassification
was made in accordance with the Financial Accounting Standards Board ("FASB")
special report, "A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities", that permitted a one-time
reassessment of the appropriateness of the held to maturity classification,
without affecting the classification of the remaining securities held to
maturity.
Stock Investments
The Company held stock in the Federal Home Loan Bank ("FHLB") and U.S.
Federal securities mutual bond fund at September 30, 1996 and 1995. These
investments are carried at the lower of cost or fair value.
34
Provision for Loan Losses
Allowances for losses on specific problem real estate loans and real estate
owned are charged to earnings when it is determined that the value of these
loans and properties, in the judgment of management, is impaired. In addition to
specific reserves, the Company also maintains general provisions for loan losses
based on evaluating known and inherent risks in the loan portfolio, including
management's continuing analysis of the factors underlying the quality of the
loan portfolio. These factors include changes in the size and composition of the
loan portfolio, actual loan loss experience, current and anticipated economic
conditions, detailed analysis of individual loans for which full collectibility
may not be assured, and determination of the existence and realizable value of
the collateral and guarantees securing the loans. The reserve is an estimate
based upon factors and trends identified by management at the time financial
statements are prepared. The ultimate recovery of loans is susceptible to future
market factors beyond the Company's control, which may result in losses or
recoveries differing significantly from those provided in the consolidated
financial statements. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Company's valuation
allowances on loans and real estate owned.
Delinquent interest on loans past due 90 days or more is charged off or an
allowance established by a charge to income equal to all interest previously
accrued and interest is subsequently recognized only to the extent cash payments
are received until delinquent interest is paid in full and, in management's
judgment, the borrower's ability to make periodic interest and principal
payments is back to normal, in which case the loan is returned to accrual
status.
Effective October 1, 1995, the Company adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan", as amended by SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures." These
statements address the disclosure requirements and allocations of the allowance
for credit losses for certain impaired loans. A loan within the scope of these
statements is considered impaired when, based on current information and events,
it is probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement, including scheduled
interest payments.
When a loan has been identified as being impaired, the amount of the
impairment is measured by using discounted cash flows, except when it is
determined that the sole source of repayment for the loan is the operation or
liquidation of the underlying collateral. In such case, the current fair value
of the collateral, reduced by costs to sell, is used. When the measurement of
the impaired loan is less than the recorded investment in the loan (including
accrued interest, net deferred loan fees or costs, and unamortized premium or
discount), an impairment is recognized by creating or adjusting an allocation of
the allowance for credit losses. SFAS No. 114, as amended, does not change the
timing of charge-offs of loans to reflect the amount ultimately expected to be
collected. At September 30, 1996, the Company had no loans deemed to be impaired
as defined by SFAS 114.
Depreciation of Premises and Equipment
Premises and equipment are depreciated on the straight-line basis over the
estimated useful lives of the various classes of assets from their respective
dates of acquisition.
Taxes on Income
The Company has adopted SFAS No. 109, "Accounting for Income Taxes", which
caused a cumulative effect of $866,518 in the September 30, 1994 consolidated
statement of earnings. Under the asset and liability method of SFAS No. 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
Loan Origination Fees
Loan origination fees and direct costs are deferred and recognized over the
contractual lives of the related loans as an adjustment of the loans' yield
using the level-yield method.
35
Unearned Discounts
Loan discounts are accreted to income over the average lives of the related
loans using the level-yield interest method, adjusted for estimated prepayments.
Real Estate Owned
Property acquired by foreclosure or deed in lieu of foreclosure is carried
at the lower of estimated fair value, less estimated costs to sell, or the
balance of the loan on the property at date of acquisition, not to exceed net
realizable value. Costs, excluding interest, relating to the improvement of
property are capitalized, whereas those relating to holding the property are
charged to expense.
Pension Cost
It is Company policy to fund retirement costs accrued. All such costs are
computed on the basis of accepted actuarial methods.
Earnings Per Common Share
Earnings per common share is computed based on weighted average number of
shares of common stock and common stock equivalents assumed to be outstanding
during the period. Earnings per common share were not calculated for September
30, 1995, as no shares were outstanding during the year. (Note 11).
Cash Equivalents
Cash equivalents are considered to be cash held as demand deposits at
various banks and regulatory agencies. In the consolidated financial statements,
"cash and due from banks", "interest bearing cash deposits" and "Federal funds
sold" are considered to be cash equivalents.
(2) Cash and Due from Banks
The Company is required to maintain an average reserve balance with the
Federal Reserve Bank, or maintain such reserve balance in the form of cash. The
amount of this required reserve balance was approximately $475,000 and $469,000
at September 30, 1996 and 1995, respectively, and was met by holding cash and
maintaining an average balance with the Federal Reserve Bank in excess of this
amount.
36
(3)Investments and Mortgage Backed and Related Securities
Amortized cost and approximate fair value of securities available for sale
and held to maturity are summarized by type and maturity as follows:
September 30, 1996
----------------------------------------------
Cost Basis or Gross Unrealized Fair
Amortized Cost Gains Losses Value
-------------- ------ ---------- -----------
Investment securities available for sale
U.S. Federal securities
mutual bond fund ........................... $12,080,418 $ - $ - $12,080,418
U.S. GOVERNMENT OBLIGATIONS
Maturing after one year through five years . 43,720,065 - 875,092 42,844,973
Maturing after five years through ten years 15,996,758 - 217,858 15,778,900
STATE AND MUNICIPAL OBLIGATIONS
Maturing after one year through five years . 250,000 820 - 250,820
CORPORATE OBLIGATIONS
Maturing after one year through five years . 5,023,970 7,530 - 5,031,500
-------------- ------ ---------- -----------
$77,071,211 $8,350 $1,092,950 $75,986,611
============== ====== ========== ===========
On October 31, 1996 the Company sold its interest in the U.S. Federal securities
mutual bond in the amount of $12,080,418 resulting in a realized loss of $1,642,625. The
realized loss has been appropriately reflected in the consolidated financial statements
as of September 30, 1996.
September 30, 1996
--------------------------------------------
Amortized Gross Unrealized Fair
Cost Gains Losses Value
---------- -------- ---------- ---------
Investment securities held
to maturity:
STATE AND MUNICIPAL
OBLIGATIONS
Maturing within one year .................... $ 181,351 $ - $ 523 $ 180,828
Maturing after one year through five years .. 535,680 - 5,893 529,787
Maturing after five years through ten years . 510,388 28,262 - 538,650
CORPORATE OBLIGATIONS
Maturing within one year .................... 6,599,774 11,926 - 6,611,700
Maturing after one year through five years... 2,000,000 - 800 1,999,200
---------- -------- ---------- ---------
$9,827,193 $ 40,188 $ 7,216 $9,860,165
========== ========= ======= ==========
37
September 30, 1995
--------------------------------------------------------
Cost Basis Or Gross Unrealized Fair
Amortized Cost Gains Losses Value
-------------- ---------- ----------- ------------
Investment securities available for sale
U.S. Federal securities mutual bond fund ... $13,723,044 $- $ 1,117,390 $12,605,654
============== =========== =========== ===========
Investment securities held to maturity
U.S. GOVERNMENT OBLIGATIONS
Maturing after one year through five years . $13,079,782 $- $ 143,532 $12,936,250
Maturing after five years through ten years 13,996,443 62,597 - 14,059,040
Maturing after ten years ................... 1,885,225 - 7,282 1,877,943
STATE AND MUNICIPAL OBLIGATIONS
Maturing after five years through ten years 511,874 40,493 - 552,367
CORPORATE OBLIGATIONS
Maturing within one year ................... 6,032,223 21,097 - 6,053,320
Maturing after one year through five years . 6,703,950 - 4,070 6,699,880
-------------- ----------- ----------- ------------
$42,209,497 $ 124,187 $ 154,884 $42,178,800
============== =========== =========== ===========
September 30, 1996
--------------------------------------------------------
Gross Unrealized Fair
Amortized Cost Gains Losses Value
-------------- ---------- ----------- ------------
MORTGAGE BACKED AND RELATED SECURITIES
AVAILABLE FOR SALE
FNMA maturing after ten years .............. $15,905,450 $ 68,004 $ 14,292 $15,959,162
FHLMC maturing after ten years ............. 39,204,476 61,911 87,527 39,178,860
SBA maturing after ten years ............... 19,139,424 1,902 170,027 18,971,299
-------------- ---------- ----------- ------------
$74,249,350 $ 131,817 $ 271,846 $74,109,321
============== =========== =========== ===========
38
September 30, 1996
--------------------------------------------------------
Gross Unrealized Fair
Amortized Cost Gains Losses Value
-------------- ---------- ----------- ------------
MORTGAGE BACKED AND RELATED SECURITIES
HELD TO MATURITY
GNMA maturing after ten years .............. $ 6,783,001 $- $ 46,994 $ 6,736,007
============== ====== =========== ============
Expected maturities of mortgage backed and related securities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
The Company pledged investment securities of $10,146,000 and $8,990,000 to
secure public deposits at September 30, 1996 and 1995, respectively.
The Company has also pledged securities of $15,177,000 to secure short-term
borrowings of reverse repurchase agreements at September 30, 1996. (Note 9)
39
4) Loans Receivable
Loans receivable are summarized as follows:
September 30,
---------------------------
1996 1995
------------ ------------
REAL ESTATE LOANS
Permanent residential 1-4 family ............ $447,004,234 $381,683,453
Multi-family residential .................... 6,555,483 7,432,704
Construction ................................ 14,276,158 9,806,875
Commercial .................................. 15,644,797 13,984,331
Land ........................................ 1,151,573 1,072,019
------------ ------------
Total real estate loans ..................... 484,632,245 413,979,382
------------ ------------
NON-REAL ESTATE LOANS
Savings account ............................. 1,640,294 1,965,531
Home improvement ............................ 1,976,728 -
Other ....................................... 302,397 366,828
------------ ------------
Total non-real estate loans ................. 3,919,419 2,332,359
------------ ------------
Total loans ................................. 488,551,664 416,311,741
LESS
Undisbursed portion of loans ................ 8,622,476 7,203,187
Deferred loan fees .......................... 5,445,380 4,757,009
Allowance for loan losses ................... 927,820 807,820
------------ ------------
$473,555,988 $403,543,725
============ ============
The weighted average interest rate on loans at September 30, 1996 and
1995 was 7.74% and 7.73%, respectively.
The Company serviced loans owned by others of $1,240,003, $1,692,000,
and $1,981,000 at September 30, 1996, 1995 and 1994, respectively.
40
Activity in allowance for loan losses is summarized as follows:
Years ended September 30,
----------------------------------
1996 1995 1994
--------- --------- ---------
Balance, beginning of year .......... $ 807,820 $ 754,803 $ 627,550
Charge-offs ......................... - (66,983) (22,747)
Additions ........................... 120,000 120,000 150,000
--------- --------- ---------
Balance, end of year ................ $ 927,820 $ 807,820 $ 754,803
========= ========= =========
5) Premises and Equipment
Premises and equipment consist of the following:
September 30,
--------------------------
1996 1995
----------- -----------
Land ........................................ $ 1,056,269 $ 1,056,269
Office buildings and construction in progress 5,384,136 5,377,006
Furniture, fixtures and equipment ........... 1,874,784 1,746,527
Automobiles ................................. 36,226 36,226
Less accumulated depreciation ............... (3,387,153) (2,984,125)
----------- -----------
$ 4,964,262 $ 5,231,903
=========== ===========
(6) Accrued Interest Receivable
The following is a summary of accrued interest receivable:
September 30,
--------------------------
1996 1995
------------ -----------
Loans receivable ............................... $3,232,731 $2,774,153
Mortgage backed and related securities ......... 765,187 -
Investment securities .......................... 1,039,367 657,441
------------ -----------
$5,037,285 $3,431,594
============ ===========
41
(7) Savings Deposits
The following is a summary of savings deposits:
September 30,
------------------------------------------------------
1996 1995
Amount Percent Amount Percent
-------------- ------- ------------ -------
Non-interest checking ..................... $ 161,283 0.0% $ - -
-------------- ------- ------------ -------
NOW accounts, 2.53% and 2.50%, respectively 24,282,019 6.1 22,037,105 5.7
-------------- ------- ------------ -------
Passbook accounts, 3.05% to 3.30% and 3.00%
to 3.25%, respectively .................... 33,711,189 8.4 37,237,212 9.7
-------------- ------- ------------ -------
Money market deposit accounts, variable
rates of 2.53% to 4.55% and 2.50% to 4.64%,
respectively .............................. 52,330,731 13.1 48,011,632 12.5
-------------- ------- ------------ -------
CERTIFICATE ACCOUNTS
Less than 4% .............................. 1,633,300 0.4 1,943,080 0.5
4.00% to 5.99% ............................ 220,873,790 55.3 165,112,903 43.0
6.00% to 7.99% ............................ 44,574,877 11.2 83,008,401 21.6
8.00% to 9.99% ............................ 22,105,991 5.5 27,029,198 7.0
-------------- ------- ------------ -------
289,187,958 72.4 277,093,582 72.1
-------------- ------- ------------ -------
$ 399,673,180 100.0% $384,379,531 100.0%
============== ======= ============ =======
42
Following is a summary of interest expense on deposits:
Years ended September 30,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
NOW accounts ........................... $ 546,383 $ 542,169 $ 557,968
Passbook accounts ...................... 982,814 1,235,170 1,183,115
Money market deposit accounts .......... 1,950,419 2,206,038 2,193,356
Certificate accounts ................... 16,835,250 15,395,663 12,489,201
----------- ----------- -----------
20,314,866 19,379,040 16,423,640
Less early withdrawal penalties ........ 63,827 68,441 53,575
----------- ----------- -----------
Net interest on deposits ............... $20,251,039 $19,310,599 $16,370,065
=========== =========== ===========
The weighted average interest rate of savings deposits was 5.26% and 4.96% at
September 30, 1996 and 1995, respectively.
At September 30, 1996, deposit maturities were as follows:
Within 1 year ............................................ $212,876,848
1 year to 3 years ........................................ 74,462,772
3 years to 5 years ....................................... 67,092,484
Thereafter ............................................... 45,241,076
-----------
$399,673,180
============
Deposits in excess of $100,000 aggregated $64,936,532 and $67,387,146 at
September 30, 1996 and 1995, respectively. Deposits in excess of $100,000 are
not insured by the Federal Deposit Insurance Corporation ("FDIC").
43
(8) Advances from FHLB
As a member of the FHLB, the Association maintains a credit line that is a
percentage of their total regulatory assets, subject to collateralization
requirements. At September 30, 1996, the credit line was 30 percent of total
assets of the Association. Advances are collateralized in aggregate, as provided
for in the Advances, Security and Deposit Agreements with the FHLB, by certain
mortgages or deeds of trust, securities of the U.S. Government and agencies
thereof and cash on deposit with the FHLB. At September 30, 1996 the minimum
book value of eligible collateral pledged for these borrowings was $103,061,850.
Scheduled maturites of advances from the FHLB were as follows:
September 30,
-------------------------------------------------------------------------
1996 1995
Range of Range of
Amount Interest Rates Amount Interest Rates
----------- -------------- -------------- --------------
FHLB ADVANCES
Due within one year ......................... $65,000,000 5.40%-5.64% $20,000,000 5.94%
After three but within four years ........... 25,000,000 5.53%-5.74% - -
----------- --------------
$90,000,000 $20,000,000
=========== ==============
Financial data pertaining to the weighted average cost, the level of FHLB advances and the related interest expense
were as follows:
Year ended September 30,
----------------------------------
1996 1995 1994
----------- ----------- ----
Weighted average interest rate at end of year ............................. 5.50% 5.94% -
Weighted daily average interest rate during the year ...................... 5.60% 6.21% -
Daily average FHLB advances ............................................... $47,986,339 $15,304,932 $-
Maximum FHLB advances at any month end .................................... 90,000,000 22,000,000 -
Interest expense during the year .......................................... 2,689,790 949,059 -
44
(9) Short Term Borrowings
Securities sold under agreements to repurchase in 1996 consisted of the
following:
Reverse repurchase agreements $14,904,400
The Company sold, under agreements to repurchase, specific securities of
the U.S. government and its agencies and other approved investments to a
broker-dealer. The securities underlying the agreement with the broker-dealer
were delivered to the dealer who arranged the transaction. Securities delivered
to broker-dealers may be loaned out in the ordinary course of operations.
All of the reverse repurchase agreements were due within 30 days and were
renewed subsequent to year end with additional principal outstanding of
approximately $53,000 and an interest rate of 5.65%.
Financial data pertaining to the weighted average cost, the level of securities sold under
agreements to repurchase and the related interest expense were as follows:
Year ended September 30,
---------------------------
1996 1995 1994
------------ ------ ------
Weighted average interest rate at end of year ......................... 5.65% - -
Weighted daily average interest rate during the year .................. 5.55% - -
Daily average of securities sold under agreements to repurchase ....... $ 3,530,795 $ - $ -
Maximum securities sold under agreements to repurchase at any month end 14,904,000 - -
Interest expense during the year ...................................... 196,130 - -
The Company has an unused line of credit totaling $15.0 million with U.S. National Bank of Oregon at
September 30, 1996 and 1995.
45
(10) Taxes on Income
The following is a summary of income tax expense:
Years ended September 30,
----------------------------------------
1996 1995 1994
----------- ----------- -----------
CURRENT TAXES
Federal ................................... $ 4,384,720 $ 2,154,240 $ 3,302,357
State ..................................... 437,053 447,719 677,646
----------- ----------- -----------
Current tax provision ..................... 4,821,773 2,601,959 3,980,003
----------- ----------- -----------
DEFERRED TAXES
Federal ................................... (372,005) 618,488 (94,385)
State ..................................... (37,241) 128,478 (19,617)
----------- ----------- -----------
Deferred tax provision .................... (409,246) 746,966 (114,002)
----------- ----------- -----------
Provision for income taxes ................ $ 4,412,527 $ 3,348,925 $ 3,866,001
=========== =========== ===========
An analysis of income tax expense, setting forth the reasons for the variation
from the "expected" Federal corporate income tax rate of 34.0% and the effective
rate provided, is as follows:
Years ended September 30,
---------------------------
1996 1995 1994
------ ------ ------
Federal "expected" corporate income tax rate ........ 34.0% 34.0% 34.0%
State income taxes, net of Federal income tax benefit 2.2 4.4 4.4
Nondeductible ESOP compensation expense ............. 4.0 - -
Other ............................................... 1.7 (.9) .2
------ ------ ------
41.9% 37.5% 38.6%
====== ====== ======
46
Deferred income taxes for the years ended September 30, 1996 and 1995
reflect the impact of "temporary differences" between amounts of assets and
liabilities for financial reporting purposes and such amounts as measured by tax
laws.
The tax effects of temporary differences which give rise to a significant
portion of deferred tax assets and deferred tax liabilities are as follows:
September 30,
----------------------
1996 1995
--------- ----------
DEFERRED TAX ASSETS
Deferred loan fees ................................ $ 525,560 $1,157,492
Allowance for losses on loans ..................... 369,768 324,634
Unrealized loss on securities available for sale .. 176,643 424,608
Pension liability ................................. 263,893 237,173
SAIF special assessment ........................... 976,319 -
Unearned ESOP shares .............................. 129,076 -
Other ............................................. - 3,811
--------- ----------
Total gross deferred tax assets ................... 2,441,259 2,147,718
--------- ----------
DEFERRED TAX LIABILITIES
FHLB stock dividends .............................. 1,256,630 1,090,832
Tax bad debt reserve in excess of base-year reserve 1,472,206 1,472,206
Other ............................................. 448,019 481,556
--------- ----------
Total gross deferred tax liabilities .............. 3,176,855 3,044,594
--------- ----------
Net deferred tax liability ........................ $ 735,596 $ 896,876
========== ==========
The company has created a valuation allowance arising from the realized
loss on the U.S. Federal securities mutual bond fund of $648,837 offsetting a
deferred tax asset as of September 30, 1996 because management believes that it
is more likely than not that the tax asset will not be realized by available
carrybacks, offsetting future taxable income from reversing taxable temporary
differences, and anticipated future investment gains. There was no valuation
allowance at September 30, 1995.
The Company has qualified under provisions of the Internal Revenue Code to
compute federal income taxes after deductions of additions to the bad debt
reserves. At September 30, 1996, the Company had a taxable temporary difference
of approximately $10,486,000 that arose before 1988 (base-year amount). In
accordance with SFAS No. 109, a deferred tax liability of approximately
$3,824,000 has not been recognized for the temporary difference. Management does
not expect this temporary difference to reverse in the foreseeable future.
47
(11) Shareholders' Equity
The Company was incorporated under Oregon law in June 1995 to acquire and
hold all of the outstanding capital stock of the Association, as part of the
Association's conversion from a federally-chartered mutual savings and loan
association. In connection with the conversion, which was consummated on October
4, 1995, the Company issued and sold 12,233,125 shares of common stock (par
value of $.01 per share) at a price of $10.00 per share for net total proceeds
of $119,352,984 after conversion expenses of $2,978,266. The Company retained
one-half of the net proceeds and used the remaining net proceeds to purchase the
newly issued capital stock of the Association. The net conversion proceeds of
$119,352,984 and over subscription proceeds of $65,685,300 were held in
withdrawable accounts at the Association at September 30, 1995. Since, among
other things, all required regulatory approvals to consummate the conversion
were received prior to September 30, 1995, the conversion has been accounted for
as being effective as of September 30, 1995, with the net conversion offering
proceeds of $119,352,984 shown on the statement of shareholders' equity as
proceeds from the sale of common stock and stock oversubscription proceeds of
$65,685,300 recorded as a liability. The oversubscription proceeds were
refunded, with accrued interest, on October 4, 1995.
Subsequent to the ratification of the adoption of the 1996 Management
Recognition and Development Plan ("MRDP") at the annual meeting on April 9,
1996, 489,325 shares of stock were purchased in the open market at a cost of
$6.7 million, to be held in trust for future allocation to management in
accordance with the terms of the MRDP.
During September 1996, the Board of Directors approved and the Company
engaged in a stock repurchase program and retirement of 620,655 shares or 5.07%
of the common stock.
The Association may not declare or pay cash dividends if the effect thereof
would reduce its regulatory capital below the amount required for the
liquidation account discussed below.
At the time of conversion, the Association established a liquidation
account in an amount equal to its retained earnings as of June 30, 1995, the
date of the latest statement of financial condition used in the final conversion
prospectus. The liquidation account will be maintained for the benefit of
eligible withdrawable account holders who have maintained their deposit accounts
in the Association after conversion. In the event of a complete liquidation of
the Association (and only in such an event), eligible depositors who have
continued to maintain accounts will be entitled to receive a distribution from
the liquidation account before any liquidation may be made with respect to
common stock.
The Company's Articles of Incorporation authorize the issuance of 500,000
shares of preferred stock, having a par value of $.01 per share, in series and
to fix and state the powers, designations, preferences and relative rights of
the shares of such series, and the qualifications, limitations and restrictions
thereof.
(12) Employee Benefit Plans
Employee Retirement Plan
The Company is a member of a multiple-employer trusteed pension plan
("Plan") covering all employees with one year of service and pays direct
pensions to certain retired employees. Pension expense of $198,000, $185,000 and
$120,000 was incurred during the years ended September 30, 1996, 1995 and 1994,
respectively. Separate actuarial valuations, including computed value of vested
benefits, are not made with respect to each contributing employer, nor are the
plan assets so segregated by the trustee. The Plan had an over-funded
accumulated benefit of approximately $385 million at June 30, 1996.
Director Deferred Compensation Plan
The Company also has an unfunded supplemental benefits plan to provide
members of the Board of Directors with supplemental retirement benefits.
Supplemental benefits are based on monthly fees approved by the Compensation
Committee of the Board. Pension costs recognized for the years ended September
30, 1996, 1995 and 1994 were $71,053, $70,020 and $0 respectively. At September
30, 1996 and 1995, the projected benefit obligation was $668,088 and $616,035,
respectively.
48
Management Recognition and Development Plan ("MRDP")
In February 1996, the Board of Directors approved a MRDP plan for the
benefit of officers and non-employee directors which authorizes the grant of
489,325 common stock shares. The MRDP was approved by the Company's shareholders
on April 9, 1996. Those eligible to receive benefits under the MRDP plan are
determined by members of a committee appointed by the Board of Directors of the
Company. MRDP awards vest over a five-year period in equal installments
beginning on April 9, 1997 (the first anniversary of the effective date of the
MRDP) or upon the participant's death or disability. The Company will recognize
compensation expense in the amount of the fair value of the common stock in
accordance with the vesting schedule during the years in which the shares are
payable. There were no shares vested under the plan at September 30, 1996.
Accordingly, the Company recognized no compensation expense for the MRDP for the
year ended September 30, 1996.
Stock Option Plan
In February 1996, the Board of Directors adopted a Stock Option Plan
("Stock Plan") for the benefit of certain employees and directors. The Stock
Plan was approved by the Company's shareholders on April 9, 1996. The maximum
number of common shares which may be issued under the Stock Plan is 1,223,313
shares with a maximum term of ten years for each option from the date of grant.
The initial awards were granted on April 9, 1996 at the fair value of the common
stock on that date ($13.125). All initial awards vest in equal installments over
a five year period from the grant date and expire during April 2006. Unvested
options become immediately exercisable in the event of death or disability. No
options had vested or were exercised as of the year ended September 30, 1996.
(13) Employee Stock Ownership Plan ("ESOP")
As part of the conversion discussed in note 11, an ESOP was established for
all employees that are age 21 or older and have completed two years of service
with the Company. The ESOP borrowed $9,786,500 from the Company and used the
funds to purchase 978,650 shares of the common stock of the Company issued in
the conversion. The loan will be repaid principally from the Company's
discretionary contributions to the ESOP over a period of ten years. The loan had
an outstanding balance of $8,807,850 and $9,786,500 at September 30, 1996 and
1995, respectively, and an interest rate of 8.75%. The loan obligation of the
ESOP is considered unearned compensation and, as such, recorded as a reduction
of the Company's shareholders' equity. Both the loan obligation and the unearned
compensation are reduced by the amount of loan repayments made by the ESOP.
Shares purchased with the loan proceeds are held in a suspense account for
allocation among participants as the loan is repaid. Contributions to the ESOP
and shares released from the suspense account are allocated among participants
on the basis of compensation in the year of allocation. Benefits are fully
vested at all times under the ESOP. Forfeitures are reallocated to remaining
plan participants and may reduce the Company's contributions. Benefits may be
payable upon retirement, death, disability, or separation from service. Since
the Company's annual contributions are discretionary, benefits payable under the
ESOP cannot be estimated. Compensation expense is recognized to the extent of
the fair value of shares committed to be released. The Company recorded
compensation expense under the ESOP of $1.4 million and 97,865 shares were
allocated among the participants in 1996.
49
(14) Fair Value of Financial Instruments
Financial instruments have been construed to generally mean cash or a contract that implies an obligation to
deliver cash or another financial instrument to another entity. The estimated fair values of the Company's
financial instruments are as follows:
September 30, 1996 September 30, 1995
---------------------------------------------------------
Carrying Fair Carrying Fair
amount value amount value
------------ --------- ----------- -----------
FINANCIAL ASSETS
Cash and due from banks ................................ $ 6,841,554 $ 6,841,554 $ 5,027,880 $ 5,027,880
Federal funds sold ..................................... 9,338,079 9,338,079 170,966,390 170,966,390
Investment securities available for sale ............... 75,986,611 75,986,611 12,605,654 12,605,654
Investment securities held to maturity ................. 9,827,193 9,860,165 42,209,497 42,178,800
Mortgage backed and related securities available for
sale ................................................... 74,109,321 74,109,321 - -
Mortgage backed and related securities held to maturity 6,783,001 6,736,007 - -
Loans receivable, net .................................. 473,555,988 467,682,131 403,543,725 408,824,175
FHLB stock ............................................. 4,773,800 4,773,800 4,425,900 4,425,900
FINANCIAL LIABILITIES
Savings deposits ....................................... 399,673,180 402,769,799 384,379,531 389,681,552
FHLB advances .......................................... 90,000,000 89,974,165 20,000,000 19,997,055
Short term borrowings .................................. 14,904,400 14,904,400 - -
OFF BALANCE SHEET FINANCIAL INSTRUMENTS
Mortgage loan commitments .............................. 10,840,110 10,840,110 7,937,473 7,937,473
Financial assets and financial liabilities other than securities are not traded in active markets. The above
estimates of fair value require subjective judgments and are approximate. Changes in the following methodologies
and assumptions could significantly affect the estimates. These estimates may also vary significantly from the
amounts that could be realized in actual transactions.
Financial Assets
The estimated fair value approximates the book value of cash, interest bearing cash accounts, and federal
funds sold. For securities, the fair value is based on quoted market prices. The fair value of loans is estimated
by discounting future cash flows using current rates at which similar loans would be made. The fair value of FHLB
stock approximates the book value.
50
Financial Liabilities
The estimated fair value of savings deposits, FHLB advances, and short term
borrowings are estimated by discounting the future cash flows using current
rates at which similar deposits, FHLB advances and short term borrowings would
be made.
Off-Balance Sheet Financial Instruments
Off-balance sheet financial instruments are limited to commitments to
originate mortgage loans. Fair value considers the difference between current
levels of interest rates and committed rates. See note 16 to the consolidated
financial statements.
The Company did not hold any derivative financial instruments in its
investment portfolio at or during the years ended September 30, 1996, 1995, or
1994.
(15) Regulatory Capital Requirements
The Company is not subject to any regulatory capital requirements. The
Association however, is subject to various regulatory capital requirements
administered by the Office of Thrift Supervision ("OTS"). Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Association's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Association must meet specific capital guidelines that involve quantitative
measures of the Association's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Association's
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Association to maintain minimum amounts and ratios of total and Tier
I capital to risk-weighted assets, of Tier I capital to total assets, and
tangible capital to tangible assets (set forth in the table below). Management
believes that the Association meets all capital adequacy requirements to which
it is subject as of September 30, 1996.
As of September 30, 1996, the most recent notification from the OTS
categorized the Association as "well capitalized" under the regulatory framework
for prompt corrective action. To be categorized as "well capitalized", the
Association must maintain minimum total risk-based, Tier I risk-based, and Tier
I leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the institution's
category.
51
The Association's actual and required minimum capital ratios are presented in the following table:
As of September 30, 1996
-----------------------------------------------------------------------------------
To Be Categorized as
"Well Capitalized"
For Capital Under Prompt Corrective
Adequacy Purposes Action Provision
-------------------- ----------------------
Actual Amount Actual Ratio Amount Ratio Amount Ratio
------------- ------------ ------------ ----- ------------ -----
Total Capital: (to risk
weighted assets).............. $121,036,745 42.4% $ 22,832,496 8.0% $ 28,540,620 10.0%
Tier I Capital: (to risk
weighted assets).............. 120,108,925 42.1% N/A N/A 17,124,372 6.0%
Tier I Capital: (to total
assets)....................... 120,108,925 19.2% 18,746,701 3.0% 31,244,502 5.0%
Tangible Capital: (to
tangible assets).............. 120,108,925 19.2% 9,373,351 1.5% N/A N/A
As of September 30, 1995
-----------------------------------------------------------------------------------
To Be Categorized as
"Well Capitalized"
For Capital Under Prompt Corrective
Adequacy Purposes Action Provision
-------------------- ----------------------
Actual Amount Actual Ratio Amount Ratio Amount Ratio
------------- ------------ ------------ ----- ------------ -----
Total Capital: (to risk
weighted assets) ............. $116,279,395 36.9% $ 25,227,600 8.0% $ 31,534,500 10.0%
Tier I Capital: (to risk
weighted assets) ............. 115,471,575 36.6% N/A N/A 18,920,700 6.0%
Tier I Capital: (to total
assets) ...................... 115,471,575 18.6% 18,647,569 3.0% 31,079,281 5.0%
Tangible Capital: (to
tangible assets) ............. 115,471,575 18.6% 9,323,784 1.5% N/A N/A
(Graph in Hardcopy Report)
SHARHOLDERS'S EQUITY
(in thousands)
TOTAL
YEAR EQUITY
1996 $153,411
1995 164,685
1994 49,308
1993 44,949
1992 37,792
52
The following table is a reconciliation of the Association's capital, calculated
according to generally accepted accounting principles (GAAP), to regulatory
tangible and risked-based capital:
September 30, 1996 SHAREHOLDERS' EQUITY
------------
Association's Equity ....... $119,820,720 1996 153,411
Unrealized securities loss . 288,205 1995 164,685
------------
Tangible capital ........... $120,108,925 1994 49,308
General valuation allowances 927,820 1993 44,949
------------
Total capital .............. $121,036,745 1992 37,792
============
On August 23, 1993, the OTS issued a regulation which would add an interest
rate risk component to the risk-based capital standards (the "final IRR rule").
Institutions with a greater than normal interest rate risk exposure will be
required to take a deduction from the total capital available to meet their
risk-based capital requirement. That deduction is equal to one-half of the
difference between the institution's actual measured exposure and the normal
level of exposure as defined by the regulation. Although no such deduction was
required as a result of the Association's most recent regulatory examination, a
deduction may be required as a result of future examinations. The final IRR rule
has been postponed and it is not practicable to determine when it will become
effective.
At periodic intervals, the OTS and the Federal Deposit Insurance
Corporation ("FDIC") routinely examine the Association as part of their legally
prescribed oversight of the thrift industry. Based on these examinations, the
regulators can direct that the Association's financial statements be adjusted in
accordance with their findings. A future examination by the OTS or the FDIC
could include a review of certain transactions or other amounts reported in the
Association's 1996 financial statements. In view of the uncertain regulatory
environment in which the Association now operates, the extent, if any, to which
a forthcoming regulatory examination may ultimately result in adjustments to the
1996 financial statements cannot presently be determined.
On September 30, 1996, the United States Congress passed and the President
signed into law the omnibus appropriations package, including the Bank Insurance
Fund/Savings Association Insurance Fund ("BIF/SAIF") and Regulatory Burden
Relief packages. Included in this legislation is a requirement for SAIF-insured
institutions to recapitalize the SAIF insurance fund through a one-time special
assessment to be paid within 60 days of the first of the month following
enactment. The FDIC is charged with the ultimate responsibility of determining
the specific assessment amount which is 65.7 basis points of the March 31, 1995
SAIF deposit assessment base. As the Association is insured by the SAIF, this
assessment resulted in a pre-tax charge to non-interest expense for the quarter
ending September 30, 1996 of $2.5 million based on the March 31, 1995 SAIF
deposit assessment base of $376.4 million.
53
(16) Financial Instruments with Off-Balance Sheet Risk and Concentrations of
Credit Risk
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments generally include commitments to originate mortgage
loans. Those instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the balance sheet. The
Company's maximum exposure to credit loss in the event of nonperformance by the
borrower is represented by the contractual amount of those instruments. The
Company uses the same credit policies in making commitments as it does for
on-balance-sheet instruments. Commitments to extend credit are conditional 60
day agreements to lend to a customer subject to the Company's usual terms and
conditions.
At September 30, 1996, loan commitments amounted to approximately
$10,840,110, comprised of a $146,000 variable rate loan at 6.00%, and
$10,694,110 in fixed rate loans ranging from 7.00% to 10.875%. At September 30,
1995, loan commitments amounted to $7,967,473, comprised of a $31,000 variable
rate loan at 6.38%, and $7,936,473 in fixed rate loans ranging from 7.00% to
9.75%.
The Company originates residential real estate loans and, to a lesser
extent, commercial real estate and consumer loans. Over 95% of the mortgage
loans in the Association's portfolio are secured by properties located in
Klamath, Jackson and Deschutes counties in Southern and Central Oregon.
54
(17) Parent Company Financial Information
Condensed financial information as of September 30, 1996 and 1995, for Klamath
First Bancorp, Inc. is presented and should be read in conjunction with the
consolidated financial statements and the notes thereto:
At September 30,
------------------------------
Statement of Financial Condition 1996 1995
------------- -------------
ASSETS
Cash and cash equivalents ................ $ 4,819,110 $ 117,720,840
Investment and mortgage backed securities 43,726,942 -
Investment in wholly-owned subsidiary .... 119,820,720 114,778,794
Other assets ............................. 1,038,320 -
------------- -------------
Total assets ............................. $ 169,405,092 $ 232,499,634
============= =============
LIABILITIES
Short-term borrowings .................... $ 14,904,400 $-
Stock over subscription .................. - 65,685,300
Accrued conversion costs ................. - 1,915,649
Other liabilities ........................ 1,089,718 213,620
------------- -------------
Total liabilities ........................ 15,994,118 67,814,569
------------- -------------
SHAREHOLDERS' EQUITY
Common stock ............................. 116,124 122,331
Additional paid-in capital ............... 110,762,677 119,230,653
Retained earnings ........................ 58,034,493 55,118,581
Unearned ESOP shares at cost ............. (8,807,850) (9,786,500)
Unearned MRDP shares at cost ............. (6,694,470) -
------------- -------------
Total shareholder's equity ............... 153,410,974 164,685,065
------------- -------------
Total liabilities and shareholder's equity $ 169,405,092 $ 232,499,634
============= =============
For the year ended September 30,
--------------------------------
Statement of Earnings 1996 1995
---------- ----------
Equity in undistributed income of subsidiary ...... $4,045,267 $ --
Total interest income ............................. 3,115,776 229,899
Total interest expense ............................ 196,130 203,491
Non-interest income ............................... 857,843 --
Non-interest expense .............................. 484,778 --
---------- ----------
Earnings before income taxes ...................... 7,337,978 26,408
Provision for income tax .......................... 1,228,181 10,129
---------- ----------
Net earnings ...................................... $6,109,797 $ 16,279
========== ==========
55
For the Years Ended September 30,
-------------------------------
Statement of Cash Flows 1996 1995
-------------- ------------
Net cash flows from operating activities ................... $ (552,188) $ 229,899
-------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in subsidiary ................................... (176,157) (59,676,492)
Maturity of investment and mortgage backed securities ...... 27,734,452 -
Purchase of investment and mortgage backed securities ...... (72,168,427) -
-------------- ------------
Net cash flows from investing activities ................... (44,610,132) (59,676,492)
-------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock ......................... - 121,268,633
Proceeds from stock over subscription ...................... - 65,685,300
Repayments from stock over subscription .................... (65,685,300) -
Proceeds from ESOP loan repayment .......................... 653,601 -
Loan to ESOP ............................................... - (9,786,500)
Proceeds from short-term borrowings ........................ 21,938,300 -
Repayments of short-term borrowings ........................ (7,033,900) -
Purchase of stock for MRDP Trust ........................... (6,694,470) -
Stock retirement ........................................... (8,891,834) -
Dividends paid ............................................. (2,025,807) -
-------------- ------------
Net cash flows from financing activities ................... (67,739,410) 177,167,433
-------------- ------------
Net increase/(decrease) in cash and cash equivalents ....... (112,901,730) 117,720,840
Cash and cash equivalents beginning of year ................ 117,720,840 -
-------------- ------------
Cash and cash equivalents end of year ...................... $ 4,819,110 $117,720,840
============= ============
56
(18) Recently Issued Accounting Standards
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation", which applies to all transactions in which an entity acquires
goods or services by issuing equity instruments or by incurring liabilities
where the payment amounts are based on the entity's common stock price, except
for employee stock ownership plans (ESOP's). The SFAS covers transactions with
employees and non-employees and is applicable to both public and non-public
entities.
SFAS No. 123 requires that, except for transactions with employees that are
within the scope of APB Opinion No. 25, all transactions in which goods or
services are the consideration received for the issuance of equity instruments
are to be accounted for based on the fair value of the consideration received or
the fair value of the equity instrument issued, whichever is more reliably
measurable. However, it also allows an entity to continue to measure
compensation costs for those plans using the intrinsic value based method of
accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Entities electing to follow the accounting methods in Opinion No. 25
must make pro forma disclosures of net income and, if presented, earnings per
share, as if the fair value method of accounting defined in the statement had
been applied.
SFAS No. 123 will apply to the Company for the year ending September 30,
1997. The Company has not yet determined which method it will adopt.
In June 1996, FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". SFAS No. 125
is effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after December 31, 1996, and is to be applied
prospectively.
SFAS No. 125 provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. The standards
are based on consistent application of a financial-components approach that
focuses on control. Under the approach, after a transfer of financial assets, an
entity recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. SFAS No. 125
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings.
The Company plans to implement SFAS No. 125 on January 1, 1997 which
complies with the required date of implementation. The Company does not expect
implementation to have a material impact on the Company's financial position or
results of operations.
57
(19) Selected Quarterly Financial Data
(unaudited)
1996
------------------------------------------
December March June September
-------- ------- -------- ----------
(In thousands)
Total interest income ............. $ 10,919 $ 11,138 $ 11,444 $ 12,149
Total interest expense ............ 5,567 5,626 5,781 6,314
-------- ------- -------- ----------
Net interest income ............... 5,352 5,512 5,663 5,835
Provision for loan losses ......... 30 30 30 30
-------- ------- -------- ----------
Net interest income after provision 5,322 5,482 5,633 5,805
Non-interest income ............... 79 98 95 249
Non-interest expense .............. 1,840 1,928 1,879 6,595
-------- ------- -------- ----------
Earnings/(loss) before income taxes 3,561 3,652 3,849 (541)
Provision for income tax .......... 1,320 1,245 1,438 409
-------- ------- -------- ----------
Net earnings/(loss) ............... $ 2,241 $ 2,407 $ 2,411 $ (950)
======== ======== ======== =========
Net earnings/(loss) per share ..... $ .20 $ .21 $ .22 $ (.09)
======== ======== ======== =========
In the fourth quarter of 1996, the Company recorded a $2.5 million expense for
the special SAIF assessment and a realized loss on U.S. Federal securities
mutual bond fund of $1.6 million.
1995
--------------------------------------
December March June September
-------- ------ ------ ---------
(In thousands)
Total interest income ................ $8,541 $8,603 $8,945 $9,018
Total interest expense ............... 4,663 4,849 5,208 5,721
-------- ------ ------ ---------
Net interest income .................. 3,878 3,754 3,737 3,297
Provision for loan losses ............ - 60 30 30
-------- ------ ------ ---------
Net interest income after provision .. 3,878 3,694 3,707 3,267
Non-interest income .................. 77 92 81 131
Non-interest expense ................. 1,566 1,555 1,583 1,300
-------- ------ ------ ---------
Earnings before income taxes ......... 2,389 2,231 2,205 2,098
Provision for income tax ............. 898 897 833 721
-------- ------ ------ ---------
Net earnings ......................... $1,491 $1,334 $1,372 $1,377
======== ====== ====== =========
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Earnings per share were not calculated for September 30, 1995, as no shares were
outstanding during the year.
KLAMATH FIRST BANCORP INC. AND SUBSIDIARY
BRANCH OFFICES AND CORPORATE INFORMATION
Main Office
540 Main Street
Klamath Falls, OR 97601
Ashland Branch
512 Walker Ave.
Ashland, OR 97520
Bend Branch
61515 S. HWY 97
Bend, OR 97702
Campus Branch
2323 Dahlia Street
Klamath Falls, OR 97601
Madison Branch
2300 Madison
Klamath Falls, OR 97603
Medford Branch
1420 E. McAndrews Rd.
Medford, OR 97504
Redmond Loan Center
585 SW 6th Suite #2
Redmond, OR 97756
Shasta Branch
2943 South 6th Street
Klamath Falls, OR 97603
Corporate Headquarters
540 Main Street
Klamath Falls, Or 97601
(541) 882-3444
Independent Auditors
Deloitte & Touche LLP
3900 U.S. Bancorp Tower
111 SW Fifth Avenue
Portland, OR 97204-3698
(503) 222-1341
General Counsel
William L. Sisemore, AAL
540 Main Street
Klamath Falls, OR 97601
(541) 882-7139
59
Special Counsel
Breyer and Aguggia
1300 I Street, NW
Suite 470 East
Washington, DC 20005
(202) 737-7900
Transfer Agent
Registrar & Transfer Co.
10 Commerce Drive
Cranford, NJ 07016-3572
1-800-866-1340
Common Stock
Traded over-the-counter/National Market System
NASDAQ Symbol: KFBI
Form 10-K Information
Available without charge
to shareholders of record
upon written request to
Marshall Alexander,
Chief Financial Officer
Klamath First Bancorp, Inc.
540 Main Street
Klamath Falls, OR 97601
ANNUAL MEETING
The annual meeting of shareholders will be held Wednesday, January 22, 1997,
beginning at 2:00 p.m.,Pacific Time at:
The Shilo Inn
2500 Almond Street
Klamath Falls, OR 97601
Shareholders of record as of the close of business on November 22, 1996 shall be
those entitled to notice of and to vote at the meeting.
60