EXHIBIT 13
1999 Annual Report to Shareholders
CORPORATE PROFILE Klamath First Bancorp, Inc. (Nasdaq: KFBI) is a unitary
savings and loan holding company, headquartered in Klamath Falls, Oregon. The
Company's subsidiary, Klamath First Federal Savings and Loan Association, has a
65 year history, dating back to 1934. The Company provides a diversified line of
loan and deposit services to individuals, families and small business owners.
The Company recognizes there is great value in serving both large and small
communities of Oregon, and will continue to serve these communities through its
traditional "hands on" personal banking style using conventional delivery
channels. The Company will also give customers a choice whether to use
alternative delivery channels such as ATMs, telephone banking, and Internet
banking. At year-end, Klamath First Bancorp, Inc. was operating from 35 offices
in 22 counties throughout Oregon.
1999 HIGHLIGHTS
Total assets, loans, deposits and earnings per share reach new Company highs.
Total assets reached high of $1,041.6 million.
Total net loans increased by 10.72% or $71.6 million.
Total deposits grew to $720.4 million.
Earnings per share reached new high of $1.21, a 15.24% increase over
prior year.
Completed 20% Modified Dutch Auction Tender Offer (stock buy back) in
January 1999.
Paid quarterly dividends totaling $.46 per share, 38.98% pay out ratio.
Added 2 new ATM locations.
Klamath First Financial Services began operations in July 1999, offering
investment services and retirement planning for customers throughout Oregon.
Went online with our informational web site, www.klamathfirstfederal.com in
September 1999. We are planning a fully transactional and bill paying site in
2000.
TABLE OF CONTENTS
Selected Consolidated Financial Data................................2-3
Directors and Officers................................................4
Letter to our Shareholders............................................5
Executive Officers....................................................8
Financials.........................................................9-40
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables set forth certain information concerning the consolidated
financial position and consolidated results of operations of Klamath First
Bancorp, Inc. (the "Company") at the dates and for the periods indicated. This
information does not purport to be complete and should be read in conjunction
with, and is qualified in its entirety by reference to, the Consolidated
Financial Statements and Notes thereto appearing elsewhere in this Annual
Report.
At September 30,
---------- ---------- ---------- ---------- ----------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
FINANCIAL CONDITION DATA (In thousands)
Assets ...................................... $1,041,641 $1,031,302 $ 980,078 $ 671,969 $ 647,840
Cash and cash equivalents ................... 24,523 66,985 32,043 16,180 175,994
Loans receivable, net ....................... 739,793 668,146 551,825 473,556 403,544
Investment securities held to maturity ...... 560 2,889 22,937 9,827 42,209
Investment securities available for sale .... 158,648 203,224 261,846 75,987 12,606
Mortgage-backed & related securities
held to maturity ............................ 2,601 3,662 5,447 6,783 --
Mortgage-backed & related securities
available for sale .......................... 72,695 43,336 64,869 74,109 --
Stock in FHLB of Seattle, at cost ........... 10,957 10,173 7,150 4,774 4,426
Advances from FHLB of Seattle ............... 197,000 167,000 129,000 90,000 20,000
Deposit liabilities ......................... 720,401 689,541 673,978 399,673 384,380
Shareholders' equity ........................ 109,585 145,081 144,462 153,411 164,685
Year Ended September 30,
---------- ---------- ---------- ---------- ----------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
SELECTED OPERATING DATA (In thousands)
Total interest income ....................... $ 71,691 $ 69,733 $ 54,167 $ 45,649 $ 35,107
Total interest expense ...................... 38,382 37,848 29,856 23,286 20,441
---------- ---------- ---------- ---------- ----------
Net interest income ......................... 33,309 31,885 24,311 22,363 14,666
Provision for loan losses ................... 932 674 370 120 120
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses ................... 32,377 31,211 23,941 22,243 14,546
Non-interest income ......................... 3,629 3,202 810 522 381
BIF/SAIF Assessment ......................... -- -- -- 2,473 --
Non-interest expense ........................ 21,186 19,523 11,764 9,769 6,004
---------- ---------- ---------- ---------- ----------
Earnings before income taxes 14,820 14,890 12,987 10,523 8,923
Provision for income taxes 5,665 5,339 4,429 4,413 3,349
---------- ---------- ---------- ---------- ----------
Net Earnings ................................ $ 9,155 $ 9,551 $ 8,558 $ 6,110 $ 5,574
========== ========== ========== ========== ==========
Basic earnings per share .................... $ 1.21 $ 1.05 $ 0.91 $ 0.56 N/A
========== ========== ========== ========== ==========
At or for the Year Ended September 30,
-------------------------------------------------------------
1999 1998 1997 1996 1995
--------- -------- ---------- -------- --------
KEY OPERATING RATIOS
Performance Ratios
Return on average assets
(net earnings divided by average assets) .... 0.88% 0.96% 1.14% 0.99% 1.19%
Return on average equity
(net earnings divided by average equity) .... 7.55% 6.52% 5.85% 3.69% 10.44%
Interest rate spread
(difference between average yield on
interest-earning assets and average cost of
interest-bearing liabilities 2.73% 2.57% 2.28% 2.22% 2.73%
Net interest margin (net interest income as a
percentage of average interest-earning assets) 3.37% 3.36% 3.32% 3.65% 3.24%
Average interest-earning assets to average
interest-bearing liabilities ................ 116.47% 119.84% 125.58% 137.78% 111.29%
Net interest income after provision for loan losses
to total non-interest expenses .............. 152.82% 159.87% 203.51% 181.69% 242.27%
Non-interest expense to average total assets 2.05% 1.96% 1.57% 1.99% 1.29%
Efficiency ratio (non-interest expense divided by
net interest income plus non-interest income) 57.36% 55.64% 46.83% 53.49% 39.90%
Dividend payout ratio (dividends declared per share
divided by net earnings per share) .......... 38.98% 34.50% 34.09% 44.64% --
Book value per share ........................ $ 15.52 $ 16.30 $ 15.64 $ 14.98 N/A
Asset Quality Ratios
Allowance for loan losses to total loans .... 0.32% 0.28% 0.22% 0.19% 0.19%
Non-performing assets to total assets ....... 0.46% 0.05% 0.03% 0.04% 0.12%
Non-performing loans to total loans, before
net items ................................... 0.43% 0.07% 0.04% 0.04% 0.18%
Capital Ratios
Equity to assets ratio ...................... 10.52% 14.07% 14.74% 22.83% 25.42%
Tangible capital ratio ...................... 8.91% 8.26% 11.06% 19.22% 18.57%
Core capital ratio .......................... 8.91% 8.26% 11.06% 19.22% 18.57%
Risk-based capital ratio .................... 17.41% 16.13% 23.12% 42.41% 36.87%
Other Data
Number of
Real estate loans outstanding ............... 9,297 9,155 8,393 7,704 7,110
Deposit accounts ............................ 85,112 82,585 82,032 38,651 38,260
Full service offices ........................ 34 34 32 7 7
KLAMATH FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION AND
KLAMATH FIRST BANCORP, INC. BOARD OF DIRECTORS
Bernard Z. Agrons Retired; Weyerhaeuser Company Vice President for the
Eastern Oregon Region until 1981; Former State
Representative in the Oregon State Legislature from
1983 to 1991
Timothy A. Bailey Senior Vice President - Klamath Operations for Regence
Blue Cross/Blue Shield, a health insurance company
James D. Bocchi Retired; President of Klamath First Federal Savings and
Loan Association from 1984 until June 1994
Gerald V. Brown President and Chief Executive Officer of Klamath First
Federal Savings and Loan Association since June 1994
William C. Dalton Retired; former owner of W. C. Dalton and Company,
farming
J. Gillis Hannigan Retired; Executive Vice President of Modoc Lumber in
Klamath Falls, Oregon, until January 1995
Rodney N. Murray Director and Chairman of the Board, owner and operator
of Rodney Murray Ranch, former owner and manager and
President of Klamath Falls Creamery, Inc., located in
Klamath Falls, Oregon
Dianne E. Spires, CPA Partner since 1986 with Rusth, Spires & Menefee, LLP,
a public accounting firm located in Klamath Falls and
Lakeview, Oregon
OFFICERS OF KLAMATH FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION
Gerald V. Brown* President and Chief Executive Officer
Robert A. Tucker* Senior Vice President - Chief Lending Officer
Marshall J. Alexander* Senior Vice President - Chief Financial Officer
Frank X. Hernandez* Senior Vice President - Chief Operating Officer
Robert L. Salley Vice President
Gerald A. Page Vice President
Carol Starkweather Assistant Vice President
Craig M. Moore Auditor/Corporate Counsel
Nora L. Boman Treasurer
and all branch managers
* Indicates an officer of Klamath First Bancorp, Inc.
Dear Shareholder,
When we started this fiscal year 1999, we initiated a major shareholder
enhancement called a "Modified Dutch Auction Tender Offer". We planned to buy
back 20% of our outstanding shares to improve earnings per share ("EPS") and
return on equity ("ROE"). This was just as successful as we had planned. We
ended the year with EPS of $1.21 as compared to $1.05 for fiscal 1998, a 15.24%
increase. Our ROE was 7.55% as compared to 6.52% the year before, a 15.80%
increase. It is interesting to note, however, that these enhancements were not
only because of the tender offer. We had an excellent earnings year. Our net
earnings were very good even though we took $39 million out of our earnings
stream to purchase the 1,984,090 shares. The $39 million, if invested at lower
yielding overnight funds rates averaging 5.06% for the last quarter, would have
represented $1.5 million greater interest income for the year. Our net earnings
for the year were $9.2 million as compared to $9.6 million the previous year. We
will continue to consider all shareholder and earnings enhancements that are
accretive to both EPS and ROE.
This year the Company formed Klamath First Financial Services, Inc. The new
subsidiary is offering general securities trading as well as financial and
retirement planning to customers of the Company and the public at large. The
primary area served at present is Klamath County, but we have plans in place to
expand with representatives in Jackson and Deschutes Counties.
We are striving to achieve an 8% to 10% asset growth this year. We plan to
accomplish this through new branches in growth areas such as Jackson and
Deschutes counties. We will also continue to look for acquisition opportunities
that fit into our corporate structure. We'll continue our primary business as a
thrift, with emphasis on one to four family lending, however, we plan to expand
our lending in multi-family residential lending and commercial real estate. We
also plan to emphasize our consumer and commercial lending by hiring commercial
loan officers for our high growth areas.
We currently offer a telephone banking voice response system which receives
over 20,000 calls per month. We opened our web site
(www.klamathfirstfederal.com) which at present is an informational site. We plan
on expanding this during the coming fiscal year to a full transactional site to
include bill paying. Although new technologies are, and will be, available to
our customers who choose to use them, we will continue to provide our
traditional "hands on" service at the teller windows.
Our deposits increased 4.5% last year when the thrift industry overall
showed a 2.4% loss from June of 1998 to June of 1999 according to the Office of
Thrift Supervision. We believe this gain is because of our friendly, courteous
personnel and their dedication to excellent customer service. We will continue
to offer the products and services our customers want. KFBI's mission statement
is clear: "The mission of KFBI is to be the preferred provider of financial
products and services. This will be accomplished within an atmosphere of
commitment to our shareholders, employees, customers and the communities we
serve."
With our large loan volume, $224.2 million in new loans, we entered the
secondary market and started selling loans to the Federal National Mortgage
Association ("Fannie Mae"). We sold our first loan to them in May of 1999, the
eighth month of our fiscal year. We started this program primarily to improve
fee income through the retained servicing rights and servicing fees. We plan to
retain servicing on all loans sold for fee income and to retain customer service
and relationships. From May through September this new activity generated
$72,000 in non-interest income. Total fees and service charges grew from $2.41
million in 1998 to $2.94 million in 1999, a 21.79% increase. We plan to continue
this program while retaining non-conforming and higher yielding loans in our
portfolio.
The big issue for all financial institutions this year has been the Year
2000 issue (Y2K) with the computer turn-over to that date. We have tested all
our critical systems with the computer date advanced to 2000. Every type of
transaction has been run and they all went through the system well. We also
developed a contingency plan in the event any of our branches have problems and
transactions must be run off-line. Each of our 34 branches were tested and they
all performed successfully. This is an issue that all financial institutions
have taken very seriously.
We are looking forward to another good year and we thank you, our
shareholders, employees and customers, for your support and assistance with our
goals.
/s/ Gerald V. Brown /s/ Rodney N. Murray
Gerald V. Brown Rodney N. Murray
President and Chief Executive Officer Chairman of the Board
OUR BUSINESS
LENDING
Klamath First Federal continues to strive to be a market leader in the real
estate lending market throughout Oregon. Our tradition of excellence started
more than 65 years ago when we were originally formed to meet the housing needs
of our customers. We continue that tradition today and have financed single and
multi-family homes throughout the state. Real estate loans remain the core
earning asset of the Company. This includes owner and non-owner occupied
residences, second home loans, construction loans, and our all-in-one
construction loan (both the construction and term financing in one package).
Multi-family homes have also been in our product line for many years. Today we
have expanded these products throughout the state. Our real estate lending
includes apartment buildings, manufactured home parks, commercial real estate
projects, such as motels, medical buildings, warehouses, resorts and office
complexes. When it comes to real estate lending, we do it all.
When we purchased the 25 branches of Wells Fargo a few years back, both the
customers and the Company went through some changes. In several of the
communities, we were the only financial institution in town and many of the
offices had not offered real estate loans, but they were familiar with offering
consumer and small business loans. Klamath First Federal has a profound
commitment to serving the financial needs of our communities. As a result,
training for both customers and staff about real estate lending was necessary in
addition to increasing staffing levels to originate consumer, commercial and
small business loans. Our product line in consumer loans now includes all of the
expected products from automobiles to recreational vehicles, secured and
unsecured. Our track record has been very good in both originations and credit
quality throughout our branch network.
Additionally, our branch network provides the opportunity to attract more small
business and commercial loans. Our plans for the next year and the future are to
further capitalize on our consumer and small business lending with the addition
of seasoned lending officers in several key branch locations in our more
populated market areas. Our "hands-on" approach to customer service continues to
attract customers who still want their bankers to be a part of their
communities.
Real estate lending will continue to be the Company's primary focus because we
are very successful and efficient in this product line. However, we will also
continue to expand and emphasize our diversified lending products in consumer,
commercial and small business lending.
DEPOSITS
Klamath First Federal offers our deposit customers an array of competitive terms
and rates to help meet their savings needs. These include the traditional
savings certificates ("CDs"), IRAs including SEPP, Keogh, Roth and Education,
statement savings and money market accounts with tiered rates based on account
balances. Throughout the year we have offered specials on CDs that have rates
superior to the competition and often have odd maturities that help offset
automatic rollovers of our current customers and tend to attract a higher degree
of new money.
The last few years we have been very successful in marketing our various
checking account products to both our personal and business customers. We have
a variety of checking account products from free checking to interest checking.
We intend to continue emphasizing checking accounts in our marketing efforts as
a source of lower cost funds as well as an anchor account from which to cross
sell other banking products and loans. This year we will introduce a club
account that offers customers various travel discounts, shopping discounts and
other add-on options that provide customers a variety of consumer friendly
products as well as a source for additional fee income for Klamath First
Federal. We are very encouraged by the potential of this account as a
value-added service for our growing customer base.
Our customers continue to benefit from technological advances which provide
economical and convenient choices for them to conduct their banking. We offer a
combined ATM, Check Guarantee and Debit Card to qualified customers. This allows
them access to their checking or savings balances 24 hours a day either through
ATMs or merchants with point-of-sale terminals. We offer combined statements
that itemize on one convenient monthly statement multiple account information
including checking, savings, time deposits, and mortgage, consumer or commercial
loans if the customer desires. Our automated 24-hour telephone banking system
allows customers to get instant up-to-date account information and perform
routine transfer and payment transactions real-time over the telephone.
Our various business accounts continue to grow and have new added options for
customer convenience. This past year we added an option allowing our business
customers to dial up their accounts and see their account activity directly by
use of a modem and personal computer. Customers with a high volume of account
activity find this service to be a great advantage over alternative choices.
Last, Klamath First Federal has moved into the Internet with our informational
web site www.klamathfirstfederal.com. The site will be updated with new features
as they are developed, including a bill paying feature as well as a fully
transactional site allowing such transactions as account inquiries, balance
transfers and making loan payments. The site currently has hot links to Nasdaq,
Klamath First Financial Services( see below) and Klamath First Bancorp, Inc. The
Bancorp's link will feature Company highlights, and recent news and earnings
releases. Our entry into the Internet will allow our customers to have one more
choice in how they do their banking with us and access their accounts.
INVESTMENT ALTERNATIVES
Consolidation of the financial marketplace continues to rapidly blur the line
between banks, stockbrokers, and insurance companies. The trend is clear, and
customers now expect to be able to have one-stop shopping for their financial
needs and retirement planning. With this is mind, Klamath First Federal formed a
new subsidiary, Klamath First Financial Services ("KFFS"), whose activities
include securities brokerage, insurance and related services to retail bank
customers. The subsidiary, through a third party-broker dealer, Fintegra
Financial Solutions ("Fintegra"), will offer common and preferred stocks,
corporate and municipal bonds, mutual funds, unit investment trusts, variable
and fixed annuities, and long term care insurance. Customers are able to access
their account histories on the Internet, use optional on-line trading, and have
access to market research using the technological advances that Fintegra
provides.
Wes Handley, Vice President and Program Manager of KFFS operates out of the main
office in Klamath Falls. He has been covering all of our branches throughout the
state on an appointment basis. This next year we plan to add additional licensed
investment professionals to cover our state-wide branch network. Additionally,
new accounts personnel are obtaining insurance licenses to offer annuity
products to appropriate customers. This subsidiary has the potential to help
increase our non-interest income, but more importantly, adds another
relationship and valued service for our growing customer base.
THE FUTURE
The Company looks forward to the rapidly changing future with great
anticipation. Our asset size, market capitalization, and current and future
branch locations allow us to capitalize on market synergies, economies of scale
and product diversification. We plan to add an experienced marketing and
training professional to our management staff this coming year. This new
position will develop marketing campaigns to inform present and potential
customers of our quality service and varied financial product lines, as well as
train and motivate branch staff to better market our products. We will continue
to look for opportunities to expand the franchise and our market reach through
acquisitions, strategic alliances, branching, and technology. Klamath First
Bancorp, Inc. and the financial industry have many challenges ahead of it.
Management will continue to meet these challenges and provide quality service
and financial products through a variety of delivery channels. This should
translate into a stronger financial institution creating good returns for our
shareholders.
CORPORATE EXECUTIVE OFFICERS
Corporate Executive Officer Profiles
Gerald V. Brown has been with Klamath First Federal since 1957. He began as a
teller, and, in his 42 years with Klamath First Federal, has progressed up
through the ranks to his current position as President and Chief Executive
Officer. Mr. Brown has served on the Board of Directors for Klamath First
Federal Savings & Loan Association since 1994.
Robert A. Tucker has been with Klamath First Federal Savings & Loan Association
since 1973. He is currently Senior Vice President and Chief Lending Officer
responsible for all lending functions of the Association. In his 26 years with
the Association, Mr. Tucker has served in various positions including Loan
Officer, Branch Manager, and Chief Operating Officer responsible for the
operations of the Association.
Frank X. Hernandez joined Klamath First Federal in 1991 as Human Resource
Manager after an 11 year career with Oregon's largest commercial bank where he
was a District Operations Officer and Branch Manager. He currently serves as
Senior Vice President and Chief Operating Officer responsible for all of the
Association's non-loan operations including deposit acquisition, information
systems and investor relations.
Marshall J. Alexander has been with Klamath First Federal Savings & Loan since
1986. He began as the Association's Controller, was promoted to Chief Financial
Officer in August 1994 and was named Senior Vice President and Chief Financial
Officer in November 1998. Mr. Alexander brought over ten years of financial
management experience in both regional banks and small community banks prior to
joining the Association. He is responsible for evaluating strategic shareholder
value enhancements, supervising the accounting department, and managing the
investments of the Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Special Note Regarding Forward-Looking Statements
Management's Discussion and Analysis of Financial Condition and Results of
Operations and other portions of this Annual Report contain certain
"forward-looking statements" concerning the future operations of Klamath First
Bancorp, Inc. Management desires to take advantage of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995 and is
including this statement for the express purpose of availing the Company of the
protections of such safe harbor with respect to all "forward-looking statements"
used in our Annual Report. We have used "forward-looking statements"
to describe future plans and strategies, including our expectations of the
Company's future financial results. Management's ability to predict results or
the effect of future plans or strategies is inherently uncertain. Factors which
could affect actual results include interest rate trends, the general economic
climate in the Company's market area and the country as a whole which could
affect the collectibility of loan balances, the ability to increase non-
interest income through expansion of new lines of business, the ability of the
Company to control costs and expenses, the ability of the Company to
successfully address year 2000 ("Y2K") issues, competitive products and pricing,
loan delinquency rates, and changes in federal and state regulation. These
factors should be considered in evaluating the "forward-looking statements," and
undue reliance should not be placed on such statements.
General
Klamath First Bancorp, Inc. (the "Company"), an Oregon corporation, is the
unitary savings and loan holding company for Klamath First Federal Savings and
Loan Association (the "Association").
The Association is a traditional, community-oriented, savings and loan
association that focuses on hands-on customer service within its primary market
area. Accordingly, the Association is primarily engaged in attracting deposits
from the general public through its offices and using those and other available
sources of funds to originate permanent residential one- to four-family real
estate loans within its market area and, to a lesser but growing extent,
commercial real estate and multi-family residential loans and loans to consumers
and small businesses.
The Company's profitability depends primarily on its net interest income,
which is the difference between interest and dividend income on interest-earning
assets, principally loans and investment securities, and interest expense on
interest-bearing deposits and borrowings. Because the Company is primarily
dependent on net interest income for its earnings, the focus of the Company's
planning is to devise and employ strategies that provide stable, positive
spreads between the yield on interest- earning assets and the cost of
interest-bearing liabilities in order to maximize the dollar amount of net
interest income. The Company's net earnings are dependent, to a lesser extent,
on the level of its non- interest income, such as service charges and other
fees, and the controlling of its non-interest expense, such as employee
compensation and benefits, occupancy and equipment expense, deposit insurance
premiums and miscellaneous other expenses, as well as federal and state income
taxes.
The Association is regulated by the Office of Thrift Supervision ("OTS")
and its deposits are insured up to applicable limits under the Savings
Association Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation
("FDIC").
The Association is a member of the Federal Home Loan Bank system. The
Association conducts its business through 34 office facilities and one loan
production office, with the main office located in Klamath Falls, Oregon. The
Association considers its primary market area to be the state of Oregon,
particularly the 22 counties in which the offices are located.
Federal Legislation
In Federal legislation enacted in 1996, the reserve method of accounting
for thrift bad debt reserves (including the percentage of taxable income method)
was repealed for tax years beginning after December 31, 1995. The resulting
change in accounting method triggers bad debt reserve recapture for post-1987
reserves over a six-year period, thereby generating an additional tax liability.
At September 30, 1999, the Association's post-1987 reserves amounted to $3.8
million. Pre-1988 reserves would only be subject to recapture if the institution
fails to qualify as a thrift. A special provision suspends recapture of
post-1987 reserves for up to two years if, during those years, the institution
satisfies a "residential loan requirement." Notwithstanding this special
provision, however, recapture was required to begin during the tax year ended
September 30, 1999.
Market Risk and Asset/Liability Management
The Company's financial performance is affected by the success of the fee
generating products it offers to its customers, the credit quality of its loans
and securities, and the extent to which its earnings are affected by changes in
interest rates. Credit risk is the risk that borrowers will become unable to
repay their debts. The Company utilizes no derivatives to mitigate its credit
risk, relying instead on strict underwriting standards, loan review, and an
adequate allowance for loan losses.
Interest rate risk is the risk of loss in principal value and risk of
earning less net interest income due to changes in interest rates. Put
simplistically, savings institutions solicit deposits and lend the funds they
receive to borrowers. The difference between the rate paid on deposits and the
rate received on loans is the interest rate spread. If the rates paid on
deposits change, or reprice, with the same timing and magnitude as the rates
change on the loans, there is perfect matching of interest rate changes and
thus, no change in interest rate spread and no interest rate risk. In actuality,
interest rates on deposits and other liabilities do not reprice at the same time
and/or with the same magnitude as those on loans, investments and other
interest-earning assets. For example, the Association primarily originates
fixed-rate residential loans for its portfolio. Because fixed-rate loans, by
definition, do not reprice until payoff and because the majority of residential
loans have terms of 15 to 30 years (with actual expected lives of seven to ten
years), the interest rate characteristics of the loan portfolio do not exactly
match the Company's liabilities, which consist of deposits with maturities
ranging up to ten years and borrowings which mature or reprice in five years or
less. When interest rates change, this mismatch creates changes in interest rate
spread that influence net interest income and result in interest rate risk.
Changes in interest rates also impact the fair value of the assets and
liabilities on the Company's balance sheet, expressed as changes in the net
portfolio value ("NPV"). NPV represents the market value of portfolio equity and
is equal to the market value of assets minus the market value of liabilities
plus or minus the estimated market value of off-balance-sheet instruments. For
example, the market value of investment securities and loans is impacted by
changes in interest rates. Fixed-rate loans and investments held in the
Company's portfolio increase in market value if interest rates decline.
Conversely, the market value of fixed-rate portfolio assets decrease in an
increasing interest rate environment. It is generally assumed that assets with
adjustable rates are less subject to market value changes due to interest rate
fluctuations based on the premise that their rates will adjust with the market.
In December 1998, the OTS issued Thrift Bulletin 13a ("TB 13a") containing
guidance on the management of interest rate risk and providing a description of
how the "Sensitivity to Market Risk" rating would be determined. Sensitivity to
Market Risk represents the "S" component of the CAMELS rating which is used by
regulators in their evaluation of financial institutions. The OTS has
established detailed minimum guidelines for two areas of interest rate risk
management. These guidelines establish minimum expectations for (1) the
establishment and maintenance of board-approved risk limits and (2) an
institution's ability to measure their interest rate risk exposure. Each
thrift's board of directors is responsible for establishing risk limits for the
institution. The interest rate risk limits are expected to include limits on the
change in NPV as well as limits on earnings sensitivity.
NPV limits include minimums for the NPV ratio which is calculated by
dividing the NPV by the present value of the institution's assets for a given
rate scenario. The board should specify the minimum NPV ratio it is willing to
allow under interest rate shifts of 100, 200, and 300 basis points up and down.
Both the NPV limits and the actual NPV forecast calculations play a role in
determining a thrift's Sensitivity to Market Risk. The prudence of the limits
and the compliance with board-prescribed limits are factors in the determination
of whether or not the institution's risk management is sufficient. In addition,
the NPV ratio permitted by the institution's policies under an adverse 200 basis
point rate shift scenario is combined with the institution's current interest
rate sensitivity to determine the institution's "Level of Interest Rate Risk."
The level of interest rate risk is then utilized in conjunction with an
assessment of the "Quality of Risk Management Practices" to determine the "S"
component of the CAMELS rating.
The Company's exposure to interest rate risk is reviewed on at least a
quarterly basis by the Board of Directors and the Asset Liability Management
Committee ("ALCO"), which includes senior management representatives. The ALCO
monitors and considers methods of managing interest rate risk by monitoring
changes in NPV, the NPV ratio, and net interest income under various interest
rate scenarios. The ALCO attempts to manage the various components of the
Company's balance sheet to minimize the impact of sudden and sustained changes
in interest rates on NPV and the NPV ratio. If potential changes to NPV and the
NPV ratio resulting from hypothetical interest rate swings are not within the
limits established by the Board, the Board may direct management to adjust its
asset and liability mix to bring interest rate risk within Board-approved
limits.
NPV is calculated based on the net present value of estimated cash flows
utilizing market prepayment assumptions and market rates of interest provided by
independent broker quotations and other public sources. Computation of
forecasted effects of hypothetical interest rate changes are based on numerous
assumptions, including relative levels of market interest rates, loan
prepayments, and deposit decay, and should not be relied upon as indicative of
actual future results. Further, the computations do not contemplate any actions
the ALCO could undertake in response to changes in interest rates.
The Association continues to originate primarily fixed-rate residential
loans. Some of these loans are sold to Fannie Mae with servicing retained while
others are held in its portfolio. In order to reduce the exposure to interest
rate fluctuations, the Company has developed strategies to manage its liquidity,
shorten the effective maturities and increase the repricing of certain
interest-earning assets, and increase the effective maturities of certain
interest-bearing liabilities. During the year ended September 30, 1999, the
Company took several actions to reduce interest rate risk. First, the Company
purchased a $10 million block of adjustable-rate single family mortgages, which
generally reprice in one year. The Company also purchased participations in
adjustable-rate multi-family and commercial real estate loans. Second, the
Company has focused its non-residential lending on adjustable or floating rate
and/or short-term loans. Third, the Company has focused its investment
activities on short- and medium-term securities, including adjustable-rate
mortgage-backed securities and collateralized mortgage obligations ("CMOs").
Fourth, the Company has attempted to maintain and increase its regular savings
and transaction deposit accounts, which are considered to be relatively
resistant to changes in interest rates. New deposit product offerings and
promotion of checking accounts provided significant progress in attaining this
goal. Fifth, the Company has utilized long-term borrowings and deposit marketing
programs to lengthen the term to repricing of its liabilities. During 1999
adjustable-rate borrowings from FHLB of Seattle were converted to longer term
fixed-rate borrowings. The Company will continue to explore opportunities in
these areas.
The Company's Board of Directors had established risk limits under the
previous OTS guidance. These limits have been revised and approved to bring them
into compliance with TB 13a. NPV values for the Association are regularly
calculated internally and by the OTS based on regulatory guidelines. The
following table presents the Association's projected change in NPV and the NPV
ratio for the various rate shock levels as of September 30, 1999 using the
internally generated calculations. The assets and liabilities at the parent
company level are not considered in the analysis. The exclusion of holding
company assets and liabilities does not have a significant effect on the
analysis of NPV sensitivity. All market rate sensitive instruments presented in
these tables are classified as either held to maturity or available for sale.
The Association has no trading securities.
PROJECTED CHANGES IN NET PORTFOLIO VALUE
as of September 30, 1999
Change in NPV Sensitivity
Interest Rates Ratio Measure
(Basis points)
200 basis point increase ........................ 6.53% (327)
100 basis point increase ........................ 8.21% (159)
Base Rate Scenario .............................. 9.80% --
100 basis point decline ......................... 11.14% 134
200 basis point decline ......................... 11.18% 138
The preceding table indicates that at September 30, 1999, in the event of a
sudden and sustained increase in prevailing market interest rates, the
Association's NPV and NPV ratio would be expected to decrease. At September 30,
1999, the Association's estimated changes in these measures were within the
targets established by the Board of Directors.
Certain shortcomings are inherent in the method of analysis presented in
the computation of NPV. Actual values may differ from those projections
presented should market conditions vary from assumptions used in the calculation
of NPV. Certain assets, such as adjustable-rate loans, have features which
restrict changes in interest rates on a short-term basis and over the life of
the assets. In addition, the proportion of adjustable-rate loans in the
Association's portfolio could decrease in future periods if market interest
rates remain at or decrease below current levels due to refinance activity.
Further, in the event of a change in interest rates, prepayment and early
withdrawal levels would likely deviate significantly from those assumed in the
NPV. Finally, the ability of many borrowers to repay their adjustable-rate
mortgage loans may decrease in the event of interest rate increases.
A conventional measure of interest rate sensitivity for savings
institutions is the calculation of interest rate "gap." This measure of interest
rate sensitivity is a measure of the difference between amounts of
interest-earning assets and interest-bearing liabilities which either reprice or
mature within a given period of time. The difference, or the interest rate
repricing "gap," provides an indication of the extent to which an institution's
interest rate spread will be affected by changes in interest rates. A gap is
considered positive when the amount of interest-rate sensitive assets exceed the
amount of interest- rate sensitive liabilities, and is considered negative when
the amount of interest-rate sensitive liabilities exceeds the amount of
interest-rate sensitive assets. Generally, during a period of rising interest
rates, a negative gap within shorter maturities would result in a decrease in
net interest income. Conversely, during a period of falling interest rates, a
negative gap within shorter maturities would result in an increase in net
interest income.
At September 30, 1999, the Association's one-year cumulative gap was a
negative 31.49% of total assets compared to a negative 32.19% of total assets at
September 30, 1998.
The following table sets forth certain historical information relating to the
Company's interest-earning assets and interest-bearing liabilities that are
estimated to mature or are scheduled to reprice within one year.
At September 30,
-----------------------------------------
1999 1998 1997
--------- -------- ----------
(In thousands)
Earning assets maturing
or repricing within one year .... $ 188,286 $ 220,952 $ 199,320
Interest-bearing liabilities
maturing or repricing
within one year ................. 516,161 552,929 524,942
Deficiency of earning assets
over interest-bearing liabilities
as a percent of total assets .... (31.49%) (32.19%) (33.22%)
Percent of assets to liabilities
maturing or repricing
within one year ................. 36.48% 39.96% 37.97%
INTEREST SENSITIVITY GAP ANALYSIS
The following table presents the difference between the Company's
interest-earning assets and interest-bearing liabilities within specified
maturities at September 30, 1999. This table does not necessarily indicate the
impact of general interest rate movements on the Company's net interest income
because the repricing of certain assets and liabilities is subject to
competitive and other limitations. As a result, certain assets and liabilities
indicated as maturing or otherwise repricing within a stated period may in fact
mature or reprice at different times and at different volumes.
ASSETS 3 Months > 3 Months > 6 Months > 1 to 3 > 3 to 5 > 5 to 10 > 10 to 20 > 20
or Less to 6 Months to 1 Year Years Years Years Years Years TOTAL
--------- ----------- ---------- --------- --------- --------- ---------- --------- --------
Permanent 1-4 Mortgages
Adjustable-rate ....... $ 11,519 $ 3,638 $ 9,261 $ 3,962 $ 5,108 $-- $-- $-- $ 33,488
Fixed-rate ............ 2,927 2,705 4,372 1,355 2,553 25,381 96,983 498,360 634,636
Other Mortgage Loans
Adjustable-rate ....... 2,494 3,176 8,606 6,321 7,411 -- -- -- 28,008
Fixed-rate ............ 195 224 845 5,657 7,131 9,522 6,514 4,198 34,286
Mortgage Backed and Related
Securities 48,780 946 10,696 1,879 4,969 2,469 4,018 1,919 75,676
Non-Real Estate Loans
Adjustable-rate ....... 6,896 469 1,262 186 -- -- -- -- 8,813
Fixed-rate ............ 653 303 547 1,106 3,197 838 1,078 -- 7,722
Investment Securities ... 39,186 -- 28,586 74,025 10,471 2,235 20,289 1,237 176,029
-------- -------- -------- -------- ------- ------- -------- -------- --------
Total Rate Sensitive
Assets $112,650 $ 11,461 $ 64,175 $ 94,491 $40,840 $40,445 $128,882 $505,714 $998,658
======== ======== ======== ======== ======= ======= ======== ======== ========
LIABILITIES
Deposits-Fixed Maturity $ 97,557 $ 80,259 $ 88,208 $ 67,166 $ 37,459 $20,703 $ 594 $ 140 $392,086
Deposits-Interest Bearing 5,741 5,250 9,200 24,034 11,771 9,409 1,844 54 67,303
Deposits-Money Market 47,440 31,865 35,945 29,870 2,442 1,132 208 -- 148,902
Deposits-Passbook and
Statement Savings 5,100 4,664 8,173 21,351 10,457 8,359 1,638 48 59,790
Other Interest-Bearing
Liabilities 71,759 25,000 -- 100,000 10,000 -- -- -- 206,759
-------- -------- -------- -------- -------- ------- -------- -------- --------
Total Rate Sensitive
Liabilities $227,597 $147,038 $141,526 $242,421 $ 72,129 $39,603 $ 4,284 $ 242 $874,840
======== ======== ======== ======== ======== ======= ======== ======== ========
Interest Rate
Sensitivity Gap ($114,947) ($135,577) ($77,351) ($147,930) ($31,289) $ 842 $124,598 $505,472 $123,818
Cumulative Interest Rate
Sensitivity Gap ($114,947) ($250,524) ($327,875) ($475,805) ($507,094) ($506,252) ($381,654) $123,818
Sensitivity Gap to
Total Assets -11.04% -13.02% -7.43% -14.20% -3.00% 0.08% 11.96% 48.53%
Cumulative Interest Rate
Sensitivity Gap
to Total Assets -11.04% -24.06% -31.49% -45.69% -48.69% -48.61% -36.65% 11.88%
Liquidity and Capital Resources
The Company generates cash through operating activities, primarily as a
result of net income. The adjustments to reconcile net income to net cash
provided by operations during the periods presented consisted primarily of the
provision for loan losses, depreciation and amortization, stock-based
compensation expense, amortization of deferred loan origination fees, increases
or decreases in various escrow accounts and increases or decreases in other
assets and liabilities. During the fiscal year ended September 30, 1997, there
was a major one-time adjustment to cash resulting from the Wells Fargo branch
acquisition which contributed approximately $220.9 million in cash. The primary
investing activity of the Association is lending, which is funded with cash
provided from operations and financing activities, as well as proceeds from
amortization and prepayments on existing loans and mortgage backed and related
securities. For additional information about cash flows from operating,
financing, and investing activities, see the Consolidated Statements of Cash
Flows included in the Consolidated Financial Statements.
The Association is required under applicable federal regulations to
maintain specified levels of "liquid" investments in qualifying types of U.S.
government, federal agency and other investments having maturities of five years
or less. Current OTS regulations require that a savings association maintain
liquid assets of not less than 4.00% of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less. At
September 30, 1999, the Association's regulatory liquidity, as measured for
regulatory purposes, was 22.38%. The Company has borrowing agreements with banks
that can be used if funds are needed. (See Notes 9 and 10 to the Consolidated
Financial Statements.)
OTS capital regulations require the Association to have: (i) tangible
capital equal to 1.5% of adjusted total assets, (ii) core capital equal to 3.0%
of adjusted total assets, and (iii) total risk-based capital equal to 8.0% of
risk-weighted assets. At September 30, 1999, the Association was in compliance
with all regulatory capital requirements effective as of such date, with
tangible, core and risk-based capital of 8.9%, 8.9% and 17.4%, respectively.
(See Note 18 to Consolidated Financial Statements.)
Year 2000 Readiness
The Company has taken all possible steps to ensure computer systems and
infrastructure are ready for the Year 2000. The following information explains
the process that the Company used to achieve Year 2000 readiness.
Background. As with other organizations, some of the data processing programs
used by the Company were originally designed to recognize calendar years by
their last two digits. Calculations performed using these truncated fields may
not work properly with dates beyond 1999. Correct processing of date oriented
information is critical to the operation of all financial institutions because
computer systems track deposit account and loan balances, record transaction
activity in accounts, and calculate interest amounts, among other activities.
Failure of these processes could severely hinder the ability to continue
operations and provide customer service. Because of the critical nature of the
issue, the Company established a committee early in 1997 to address "Year 2000"
issues. The committee, consisting of executive management, technical staff, and
a full-time project manager, chose to use the OTS Year 2000 checklist as a guide
for Year 2000 preparation. The committee also used a Year 2000 Testing Guide and
Contingency Guide provided by Alex Information Systems, Inc. to complement the
OTS checklist.
Process. The Federal Financial Institutions Examination Council ("FFIEC") issued
guidelines for Year 2000 project management by financial institutions, which
were followed by the Company. These guidelines identified the following five
steps for Year 2000 conversion programs:
Awareness Phase - Define the Year 2000 problem and establish a Year 2000
program team and overall strategy. This step was completed by the Company
as of September 30, 1997.
Assessment Phase - Assess the size and complexity of the problem and detail
the magnitude of effort necessary to address Year 2000 issues, including
hardware, software, networks, automated teller machines, etc. This step was
approximately 100% complete by June 30, 1999 and assessment will be ongoing
until the Year 2000.
Renovation Phase - This phase includes hardware and software upgrades and
system replacements. This step was 100% complete for in-house systems at
December 31, 1998. This phase also encompasses ongoing discussions with and
monitoring of outside servicers and third-party software providers.
Validation/Testing Phase - This process includes testing of hardware and
software components. Testing is completed by performing extensive tests
with the computer dates changed to January 1, 2, and 3, 2000. Such testing
continued through September 30, 1999, with the most critical functions
tested first. This allows time to correct any discovered deficiencies
before the end of 1999. In-house systems and third party service bureaus
are 100% tested as of September 30, 1999. The Company is either testing or
reviewing test documents of additional third party vendors that are deemed
critical to the operations of the Company. Overall, the validation phase is
considered 100% complete as of September 30, 1999.
Implementation Phase - Systems successfully tested will be designated as
Year 2000 compliant. For any system failing validation testing, the
business impact must be assessed and a contingency plan implemented. This
phase was completed as of June 30, 1999.
All personal computers ("PCs") and related software throughout the Company have
been inventoried and tested for Year 2000 capability. The Company used two
testing methods, BIOS and off line, for PC certification of Year 2000
compatibility. PCs were required to pass both tests to be considered ready for
Year 2000. As of September 30, 1998, all of the Company's PCs were Year 2000
compatible. The Company's Wide Area Network and various Local Area Networks were
also upgraded, tested, and determined to be Year 2000 prepared.
Data processing for the Company is provided by Fiserv, the nation's largest
third party service bureau serving financial institutions. Fiserv has stated
that all their processing was Year 2000 ready of as June 30, 1998. The Company
successfully performed test procedures for critical service bureau processes in
December 1998 and in April 1999.
Software purchased from a Fiserv affiliate is used for applications such as
accounts payable, fixed assets and investment portfolio accounting. The
investment portfolio accounting software was Year 2000 compatible as of
September 30, 1998. During the quarter ended March 31, 1999, the Company
converted the accounts payable and fixed asset applications to the Year 2000
ready software provided by the Fiserv affiliate.
Other third party vendors identified by the Company were monitored for Year 2000
readiness. Validation with critical vendors was 100% complete as of June 30,
1999.
Critical data processing applications, in addition to those provided by the
service bureau, have been identified. These include applications such as
electronic processing through the Federal Reserve Bank and ATM processing.
Testing with the Federal Reserve Bank has been successfully completed. All ATM
machines have been upgraded and are now ready for Year 2000.
Contingency plans were developed by the committee. The contingency plans address
actions to be taken to continue operations in the event of system failure due to
areas that cannot be tested in advance, such as power and telephone service,
which are vital to business continuation. Contingency planning was 100% complete
as of June 30, 1999. The Company continues to make last minute plans and to
prepare its staff for the rollover period of December 20, 1999 to January 7,
2000.
For many financial institutions, the Year 2000 readiness of borrowers to whom
the institution has commercial operating loans is a concern. Lack of Year 2000
preparedness could cause disruptions of borrowers' businesses significant enough
to compromise their ability to repay indebtedness. The Company's loans of this
type represent less than one half of one percent of the total loan portfolio,
and are not considered to represent a significant risk of loss.
To assist in understanding Year 2000 issues and to inform them of the Company's
preparation activities, brochures regarding Year 2000 preparedness have been
distributed to all customers. Another mailing was made during the quarter ending
September 30, 1999. In addition, the Company has published advertisements in
local newspapers and has placed "Year 2000" bulletin boards in all branches,
which contain current information on Year 2000 readiness for the Company and the
financial services industry.
Conclusion. The Company believes that the Year 2000 issue will not pose
significant operational problems and is not anticipated to be material to its
financial position or results of operations in any given year. As of September
30, 1999, the Company estimated that total Year 2000 implementation costs will
be approximately $200,000 and are expected to be expensed over a period of 18
months, affecting fiscal years 1998, 1999, and 2000. This estimate is based on
information available at September 30, 1999, and may be revised as additional
information and actual costs become available. During the years ended September
30, 1999 and 1998, $82,000 and $89,000 of Year 2000 expenses were incurred and
expensed, respectively.
Changes in Financial Condition
At September 30, 1999, the consolidated assets of the Company totaled $1.04
billion, an increase of $10.3 million, or 1.0%, from $1.03 billion at September
30, 1998. The increase in total assets was primarily a result of $71.6 million
growth in loans which offset the Company's repurchase of 20% of the outstanding
common stock in January 1999, which reduced cash and investments by $39.0
million.
Total cash and cash equivalents decreased $42.5 million, or 63.4%, from
$67.0 million at September 30, 1998 to $24.5 million at September 30, 1999. The
decrease is primarily the result of using cash to fund the stock repurchase in
January 1999.
Net loans receivable increased by $71.6 million, or 10.7%, to $739.8
million at September 30, 1999, compared to $668.1 million at September 30, 1998.
The increase was primarily the result of continued new loan demand exceeding
loan repayments, augmented by the Company's purchase of $5.1 million in higher
yielding loans on multi-family residential and commercial properties in Oregon
and $10.0 million in adjustable-rate one- to four- family mortgages during the
year ended September 30, 1999.
Investment securities decreased $46.9 million, or 22.8%, from $206.1
million at September 30, 1998 to $159.2 million at September 30, 1999. This
decrease was the result of scheduled maturities, primarily maturities of short
term commercial paper. The proceeds from these maturities were used to fund the
stock repurchase. During the year ended September 30, 1999, $16.4 million of
principal payments were received on mortgage backed and related securities
("MBS") and $9.5 million of MBS were sold, thus reducing the balance of MBS.
This reduction was more than offset by the purchase of $18.8 million in CMOs and
$36.7 million in other mortgage-backed securities, resulting in a net increase
in total MBS from $47.0 million at September 30, 1998 to $75.3 million at
September 30, 1999.
Real estate owned increased from zero at September 30, 1998 to $1.5 million
at September 30, 1999. This balance primarily relates to the foreclosure of a
motel with an estimated fair value of $1.4 million that was a participation loan
originated by another lender.
Deposit liabilities increased $30.9 million, or 4.5%, from $689.5 million
at September 30, 1998 to $720.4 million at September 30,1999. Management
attributes the increase to the maintaining of competitive rates in its market
areas as well as the use of an automated on-line personal computer-based system
to market deposits nationally. The increase in deposits has been experienced
throughout the network of 34 full service branches.
Advances from the FHLB of Seattle increased from $167.0 million at
September 30, 1998 to $197.0 million at September 30, 1999. The increase was
used to fund loan growth. During the quarter ended June 30, 1999, the Company
converted adjustable-rate FHLB borrowings to fixed-rate three- to five-year
maturity borrowings as a strategic move to manage interest rate risk. Short term
borrowings at September 30, 1998 consisted of $12.1 million in reverse
repurchase agreements. These agreements matured during the quarter ended March
31, 1999, and they were not renewed.
Total shareholders' equity decreased $35.5 million, or 24.5%, from $145.1
million at September 30, 1998 to $109.6 million at September 30, 1999. The
decrease is primarily attributable to $39.0 million paid out for the 20% stock
repurchase completed in January 1999. Equity was also decreased by a $4.6
million decrease in unrealized gains on securities available for sale during the
year ended September 30, 1999. These decreases were partially offset by $9.2
million in earnings for the year.
Asset Quality
Non-Performing Assets
At September 30, 1999, the ratio of non-performing assets (including
nonaccrual loans, accruing loans greater than 90 days delinquent, real estate
owned, and other repossessed assets) to total assets was .46% as compared to
.05% at September 30, 1999. The Association intends to maintain asset quality by
continuing its focus on one-to-four family lending. With the introduction of
other lending options such as commercial and multi-family real estate loans,
equity lines of credit, other consumer loan products, and commercial loans, the
Association has evaluated the trade off associated with planned loan growth and
the greater credit risk associated with such forms of lending.
Classified Assets
The Association has established a Classification of Assets Committee that
meets at least quarterly to approve and develop action plans to resolve the
problems associated with the assets. They also review recommendations for new
classifications and make any changes in present classifications, as well as
making recommendations for the adequacy of reserves.
In accordance with regulatory requirements, the Association reviews and
classifies on a regular basis, and as appropriate, its assets as "special
mention," "substandard," "doubtful," and "loss." All nonaccrual loans and
non-performing assets are included in classified assets.
The following table sets forth at the dates indicated the amounts of classified
assets:
At September 30,
---------------------------------
1999 1998 1997
--------- --------- ---------
(In thousands)
Loss .......... $ -- $ 3 $ --
Doubtful ...... -- -- --
Substandard ... 4,810 521 304
Special Mention 456 2,452 843
_________ _________ _________
$ 5,266 $ 2,976 $ 1,147
========= ========= =========
Allowance for Loan Losses
The Association has established a systematic methodology for determination
of provisions for loan losses. The methodology is set forth in a formal policy
and takes into consideration the need for a general valuation allowance as well
as specific allowances that are tied to individual loans. Provision for loan
losses is recorded based on the Association's evaluation of specific loans in
its portfolio, historical loan loss experience, the volume and type of lending,
geographic distribution of lending, general economic conditions, and the
existing level of the Association's allowance for loan losses.
The following table sets forth at the dates indicated the loan loss allowance
and charge-offs:
At September 30,
-----------------------------------------
1999 1998 1997
------- -------- ------
(In thousands)
General loan loss allowance $2,484 $1,947 $1,296
Specific loss allowance -- 3 --
Charge-offs 398 20 2
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1999
AND 1998
General
In September 1998, the Company's Board of Directors authorized the
repurchase of 20% of the Company's outstanding common stock via a "Modified
Dutch Auction Tender Offer" (the "Offer"). The transaction was completed in
January 1999. The Offer contributed to the 15.24% increase in earnings per share
from $1.05 for the year ended September 30, 1998 to $1.21 for the year ended
September 30, 1999. Similarly, the Company's return on average equity improved
by 15.80% from 6.52% for the year ended September 30, 1998 to 7.55% for the year
ended September 30, 1999.
Interest Income
The $39.1 million increase in average interest earning assets contributed
to an increase in interest income of $2.0 million or 2.8% from $69.7 million for
the year ended September 30, 1998 to $71.7 million for the year ended September
30, 1999. An increase in average loans receivable provided a net increase in
interest income that more than offset the decrease in interest income resulting
from completion of the Offer in January 1999 which reduced earning assets by
$39.0 million. The general interest rate environment during the year was one of
low but gradually increasing rates. During the year ended September 30, 1998,
interest rates were stable throughout most of the year, declining only in the
last quarter, from July through September. As a result, interest rates were
lower overall during fiscal 1999 than in 1998. This is reflected in the average
yield on interest-earning assets which decreased slightly from 7.34% for the
year ended September 30, 1998 to 7.25% for the year ended September 30, 1999.
An increase in loans receivable contributed to a $6.8 million increase in
interest income on loans. The increase in loans receivable was primarily a
result of the purchase of participation loans and loan originations exceeding
loan refinancing, which resulted in net loan growth of $71.6 million for 1999.
The increase in interest income on loans was partially offset by decreases
in interest income on investment securities, mortgage backed and related
securities and interest-earning deposits. Cash and investment securities were
liquidated to provide funds for completion of the Offer in January 1999. For
example the average balance of investments decreased by $49.3 million, or 21.1%,
for the year ended September 30, 1999 compared with the same period in 1998.
Interest Expense
Interest expense increased $533,255 due to increases in interest expense on
FHLB borrowings. Interest expense on deposits remained stable at $29.0 million
for the year ended September 30, 1999 compared to $28.9 million for the year
ended September 30, 1998.
Average deposits increased by $35.9 million for the year ended September
30, 1999 compared to the year ended September 30, 1998, but the average interest
paid on interest-bearing deposits decreased 24 basis points from 4.58% for the
year ended September 30, 1998 to 4.34% for the year ended September 30, 1999.
This decrease was a result of the lower interest rate scenario during the year.
Interest expense on FHLB borrowings increased $1.2 million due to increased
average borrowings of $32.7 million.
As noted previously, the general interest rate environment during the year
was one of low rates which gradually increased during the year. In this
environment, the Company improved its interest rate spread from 2.57% for the
year ended September 30, 1998 to 2.73% for the year ended September 30, 1999.
While yields on assets decreased by 9 basis points, cost of interest-bearing
liabilities decreased by 25 basis points, resulting in a greater spread for the
current year. Net interest margin (net interest income as a percent of average
interest-earning assets) remained constant comparing the fiscal year ended
September 30, 1999 to 1998. The increase in non-interest-bearing checking
deposits through checking account campaigns had a positive impact by reducing
overall cost of funds.
AVERAGE BALANCES, NET INTEREST INCOME and YIELDS EARNED and RATES PAID
The following table presents, for the periods indicated, information regarding
average balances of assets and liabilities, as well as the total dollar amounts
of interest income from average interest-earning assets and interest expense on
average interest-bearing liabilities, resultant yields, interest rate spread,
net interest margin and the ratio of average interest-earning assets to average
interest-bearing liabilities. Dividends received are included as interest
income. The table does not reflect any effect of income taxes. All average
balances are based on month-end balances. Nonaccrual loans are reflected as
carrying a zero yield.
Year Ended September 30,
------------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------- -------------------------------- -----------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
--------- ---------- ------ --------- ---------- ------ -------- -------- -------
INTEREST-EARNING ASSETS (In thousands)
Loans receivable ........ $ 721,658 $ 56,290 7.80% $614,457 $ 49,508 8.06% $515,555 $ 40,851 7.92%
Mortgage backed and
related securities 38,284 2,104 5.50% 61,000 3,680 6.03% 74,349 4,716 6.34%
Investment securities ... 184,428 10,847 5.88% 233,715 14,149 6.05% 112,319 6,847 6.10%
Federal funds sold ...... 18,555 914 4.93% 16,820 917 5.45% 17,533 931 5.31%
Interest earning deposits 15,801 751 4.75% 16,108 862 5.35% 6,132 327 5.32%
FHLB stock .............. 10,471 785 7.50% 7,983 617 7.73% 6,431 495 7.70%
---------- ---------- -------- ---------- --------- --------
Total interest-earning assets 989,197 71,691 7.25% 950,083 69,733 7.34% 732,319 54,167 7.40%
Non-interest-earning assets 45,314 ---------- 48,202 ---------- 16,527 --------
---------- ---------- --------
Total Assets ............ $1,034,511 $ 998,285 $748,846
========== ========== ========
INTEREST-BEARING LIABILITIES
Tax and insurance reserve $ 5,326 $ 110 2.07%$ 5,895 $ 145 2.47%$ 4,614 $ 137 2.97%
Passbook and statement
savings 61,674 1,326 2.15% 62,333 1,683 2.70% 40,281 1,271 3.15%
Interest-bearing checking 71,107 873 1.23% 73,806 1,089 1.48% 35,892 791 2.20%
Money market ............ 131,534 5,096 3.87% 110,650 4,275 3.86% 62,171 2,391 3.85%
Certificates of deposit . 402,809 21,679 5.38% 384,400 21,885 5.69% 312,511 18,012 5.76%
FHLB advances/Short term
borrowings 176,851 9,298 5.26% 155,712 8,771 5.63% 127,659 7,254 5.68%
---------- ---------- --------- --------- -------- --------
Total interest-bearing
liabilities 849,301 38,382 4.52% 792,796 37,848 4.77% 583,128 29,856 5.12%
Non-interest-bearing
liabilities 63,975 59,037 19,417
---------- ---------- ---------- ----------- --------- -------
Total liabilities ....... 913,276 851,833 602,545
Shareholders' equity .... 121,235 146,452 146,301
---------- ---------- --------
Total Liabilities and
Shareholders' Equity $1,034,511 $ 998,285 $748,846
========== ========== ========
Net interest income ..... $ 33,309 $ 31,885 $24,311
========== ========== =======
Interest rate spread .... 2.73% 2.57% 2.28%
======= ===== =====
Net interest margin ..... 3.37% 3.36% 3.32%
======= ===== ======
Average interest-earning assets to
average interest-bearing liabilities 116.47% 125.58% 137.78%
======= ======= =======
RATE VOLUME ANALYSIS
The following table sets forth the effects of changing rates and volumes on net
interest income of the Company. Information is provided with respect to (i)
effects on interest income attributable to changes in volume (changes in average
volume multiplied by prior rate); (ii) effects on interest income attributable
to changes in rate (changes in rate multiplied by prior average volume); and
(iii) changes in rate/volume (change in rate multiplied by change in average
volume.
For the Year Ended September 30,
-------------------------------------------------------------------------------------------
1998 VS 1999 Increase (Decrease) Due to 1997 VS 1998 Increase (Decrease) Due to
--------------------------------------------- ----------------------------------------
Net Increase Net Increase
Rate Volume Rate/Vol (Decrease) Rate Volume Rate/Vol (Decrease)
-------- -------- -------- ------------ ------- -------- -------- ------------
INTEREST EARNING ASSETS (In thousands)
Loans ............................... ($ 1,580) $ 8,637 ($ 275) $ 6,782 $ 688 $ 7,837 $ 132 $ 8,657
Mortgage backed and related
securities ..................... (328) (1,370) 122 (1,576) (231) (848) 43 (1,036)
Investment securities ............... (403) (2,984) 85 (3,302) (47) 7,400 (51) 7,302
Federal funds sold .................. (88) 95 (10) (3) 25 (37) (2) (14)
Interest bearing deposits ........... (96) (16) 1 (111) 1 533 1 535
FHLB stock .......................... (19) 192 (5) 168 2 120 -- 122
-------- -------- -------- -------- -------- -------- ------ --------
Total Interest-Earning Assets ($ 2,514) $ 4,554 ($ 82) $ 1,958 $ 438 $ 15,005 $ 123 $ 15,566
======== ======== ======== ======== ======== ======== ====== ========
INTEREST-BEARING LIABILITIES
Tax and insurance reserves .......... ($ 23) ($ 14) $ 2 ($ 35) ($ 24) $ 38 ($ 6) $ 8
Passbook and statement savings ...... (343) (18) 4 (357) (183) 696 (101) 412
Interest-bearing checking ........... (183) (40) 7 (216) (261) 836 (277) 298
Money market ........................ 12 807 2 821 11 1,864 9 1,884
Certificates of deposit ............. (1,197) 1,048 (57) (206) (220) 4,143 (50) 3,873
FHLB advances/Short term borrowings.. (584) 1,191 (80) 527 (63) 1,593 (13) 1,517
-------- -------- -------- -------- -------- -------- ------- --------
Total Interest-Bearing Liabilities ($ 2,318) $ 2,974 ($ 122) $ 534 ($ 740) $ 9,170 ($ 438) $ 7,992
======== ======== ======== ======== ======== ======== ======= ========
Increase in Net Interest Income...... $1,424 $ 7,574
======== ========
Provision for Loan Losses
The provision for loan losses was $932,000, recoveries were zero, and
charge offs were $398,052 during the year ended September 30, 1999 compared to a
provision of $674,000, with no recoveries, and charge offs of $20,774 during the
year ended September 30, 1998. Charge offs for the year ended September 30, 1999
primarily relate to the write-down of a $1.6 million commercial real estate
loan. The underlying property was acquired through foreclosure in September
1999.
As the Company has grown over the last twelve months, the composition of
the loan portfolio has changed, with relatively high levels of construction
loans and increases in commercial and consumer loans, which are considered to
have more associated risk than the Company's traditional portfolio of one- to
four-family residential mortgages. Because of the Company's history of
relatively low loan loss experience, it has historically maintained an allowance
for loan losses at a lower percentage of total loans as compared with other
institutions with higher risk loan portfolios and higher loss experience. The
increased provision for loan losses reflects such changes in the composition of
the loan portfolio, although the Company's recent experience has not indicated a
deterioration in loan quality. The balance of non-performing loans has increased
during the current fiscal year, primarily as a result of the addition of a $1.5
million land development loan. The Company is not anticipating any material loss
on this loan at this time. At September 30, 1998, the allowance for loan losses
was equal to 372.1% of non-performing assets compared to 51.64% at September 30,
1999. The decrease in the coverage ratio at year end 1999 was the result of an
increase in non-performing assets as a result of the aforementioned
nonperforming land development loan and foreclosure of a $1.6 million commercial
real estate property. The foreclosed real estate has been recorded at estimated
fair value of $1.4 million. The Company views these as isolated problem assets,
not a market or underwriting trend.
Non-Interest Income
Non-interest income increased $427,264, or 13.3%, to $3.6 million for the
year ended September 30, 1999 from $3.2 million for the year ended September 30,
1998. The increase was primarily attributable to increases in fee income related
to the increase in deposit accounts subject to service charges.
Non-Interest Expense
Non-interest expense increased $1.7 million, or 8.5%, from a total of $19.5
million for the prior year to $21.2 million for the year ended September 30,
1999. Compensation, employee benefits, and related expense increased $479,677,
or 5.0%, from $9.6 million for the year ended September 30, 1998 to $10.1
million for the same period of 1999. Occupancy expense increased from $2.1
million for the year ended September 30, 1998 to $2.2 million for the year ended
September 30, 1999. These modest increases are due to the addition of two
branches and expenditures on equipment related to preparing for the Year 2000.
Sale of mortgage backed and related securities and real estate owned resulted in
a loss of $137,140 during the year ended September 30, 1999 compared to zero in
the previous year. Other expense increased $1.0 million, from $4.9 million for
the year ended September 30, 1998 to $5.9 million for the current year. The
increase primarily resulted from recognition of $515,000 of losses in the third
quarter of this year related to the Wells Fargo branch integration. Management
believes this loss is an isolated item and does not anticipate additional
charges. The ratio of non-interest expense to average total assets was 2.05% and
1.96% for the years ended September 30, 1999 and 1998, respectively.
Income Taxes
The provision for income taxes was $5.7 million for the year ended
September 30, 1999, representing an effective tax rate of 38.2% compared with
$5.3 million for the year ended September 30, 1998 representing an effective tax
rate of 35.9%. The lower effective rate for 1998 reflects the impact of a one
year reduction in the state tax rate for Oregon. (See Note 11 to the
Consolidated Financial Statements.)
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1998
AND 1997
General
The acquisition of 25 branches from Wells Fargo Bank, N.A. late in the
fiscal year ended September 30, 1997 (the "Acquisition") had significant
positive impact on the operations of the Company. The overnight expansion from
eight branches to 33 and the resultant increase in deposits and number of
employees is reflected in increases in non-interest income and expenses.
Additionally, two branches were opened during fiscal year 1998, including a
branch that the Company constructed in Bend and a branch the Company purchased
from Key Bank in Jacksonville. The Company ended fiscal year 1998 with 34 full
service branches in operation and one loan production office.
With the Acquisition during the year ended September 30, 1997 and other
activities throughout 1998, net earnings increased $1.0 million, or 11.6%, from
$8.6 million for the year ended September 30, 1997, to $9.6 million for the year
ended September 30, 1998. Net interest income increased $7.6 million or 31.2%
from $24.3 million for the year ended September 30, 1997 to $31.9 million for
the year ended September 30, 1998. This increase was primarily attributable to
an increase in total average interest-earning assets from $732.3 million at
September 30, 1997 to $950.1 million at September 30, 1998. The increase in net
interest income was augmented by a significant increase in non-interest income
from $810,608 for the year ended September 30, 1997 to $3.2 million for the year
ended September 30, 1998. This increase was primarily attributable to an
increase in service fee income due to the addition of the 25 acquired branches
which contributed 42,000 additional deposit accounts.
Interest Income
The $217.8 million increase in average interest earning assets contributed
to an increase in interest income of $15.6 million, or 28.7%, from $54.1 million
for the year ended September 30, 1997 to $69.7 million for the year ended
September 30, 1998. A significant portion of the increase in average
interest-earning assets was the result of converting the cash obtained in the
Acquisition into investment securities. This in turn increased the proportion of
investment securities to total earning assets and decreased the proportion of
loans. In most cases, loans will generate higher average yields than
investments. As a result, although total interest income increased for the year,
the average yield on interest earning assets decreased slightly from 7.40% for
the year ended September 30, 1997 to 7.34% for the year ended September 30,
1998.
Of the $15.6 million increase in interest income, $8.7 million is
attributable to additional loan income due to an increase in loans receivable.
The increase in loans receivable was primarily a result of the purchase of
participation loans and loan originations exceeding loan refinancing, which
resulted in greater net loan growth for 1998.
The remaining increase in interest income of $6.9 million was a result of
investing the proceeds of the Acquisition in fixed-rate U.S. Government and
agency securities with maturities of less than five years, fixed and
adjustable-rate corporate securities and overnight funds. The average balance of
investments and mortgage-backed and related securities increased by $108.0
million, or 57.9%, for the year ended September 30, 1998 compared with the
comparable period in 1997.
Interest Expense
Interest expense increased $8.0 million due to increases in interest
expense on deposits and borrowings. Interest expense on deposits increased $6.5
million, or 28.8%, from $22.4 million for the year ended September 30, 1997 to
$28.9 million for the year ended September 30, 1998.
Average deposits increased by $180.3 million for the year ended September
30, 1998 compared to the year ended September 30, 1997, but the average interest
paid on interest-bearing deposits decreased 40 basis points from 4.98% for the
year ended September 30, 1997 to 4.58% for the year ended September 30, 1998.
This decrease was a result of the lower cost of deposits obtained in the
Acquisition and overall lower rates in 1998 over 1997. These lower cost deposits
were outstanding for the entire year ended September 30, 1998 but only two and a
half months during the prior year, thus having a greater impact on fiscal year
1998. Interest expense on FHLB borrowings increased $1.7 million due to
increased average borrowings of $30.3 million.
The general interest rate environment during the year was one of low rates
and a flat yield curve. Analysts reported that the largest 50 public banking
companies experienced a 20-basis-point compression in net interest margin for
the year ended September 30, 1998. In spite of this environment, the Company
improved its net interest margin from 3.32% for the fiscal year ended September
30, 1997 to 3.36% for the year ended September 30, 1998. This improvement was
related to the Company's success in converting proceeds from investment
securities into loans which yield a higher return than investment securities as
well as improving the mix of loans originated to include more higher yielding
loans than in the past. Interest rate spread also improved, from 2.28% for the
year ended September 30, 1997 to 2.57% for the current year. This improvement
was primarily the result of the lower cost transaction accounts obtained with
the Acquisition. The addition of non- interest-bearing checking deposits through
the Acquisition had the further positive impact of reducing overall cost of
funds.
Provision for Loan Losses
The provision for loan losses was $674,000, recoveries were zero, and
charge offs were $20,774 during the year ended September 30, 1998 compared to a
provision of $370,000 with no recoveries and charge offs of $1,369 during the
year ended September 30, 1997. The increase in the provision is a reflection of
the Company's approach of increasing the provision as loan volumes increase. At
September 30, 1998, the allowance for loan losses was equal to 372.1% of
non-performing assets compared to 510.2% at September 30, 1997. The decrease in
the coverage ratio at year end 1998 was the result of an increase in
non-performing assets as a result of foreclosure proceedings initiated against
five one- to four-family properties. The loan balances related to these
properties totaled $289,737 at September 30, 1998 compared to fair values of
$565,830.
Non-Interest Income
Non-interest income increased $2.4 million, or 295.1%, to $3.2 million for
the year ended September 30, 1998 from $811,000 for the year ended September 30,
1997. The increase was attributable to increases in fees and service charges
and other income, principally as a result of the increase in the number of
deposit accounts subject to service charges obtained in the Acquisition.
Non-Interest Expense
Non-interest expense increased $7.7 million, or 65.9%, for the year ended
September 30, 1998, from a total of $11.8 million for the prior year to $19.5
million for the year ended September 30, 1998. The increase in branches with the
Acquisition as well as the addition of two new branches impacted several
categories of non-interest expense. An increase in number of employees from 100
to 244 produced the $2.5 million increase in compensation and employee benefits.
Occupancy expense increased $1.2 million, or 127.4%, as expected with the
increase from seven branches to 34. Other items correlated to increased volume
and number of locations also increased as expected. For example, postage
increased by $400,759, or 221.3%; telephone increased by $171,570, or 147.7%;
check processing increased by $506,181, or 281.0%; and ATM expense increased
$218,004, or 145.1%.
The recording of core deposit intangible related to the Acquisition
resulted in $1.7 million in amortization expense for the year ended September
30, 1998 compared to $302,991 for the prior year. The ratio of non-interest
expense to average total assets was 1.96% and 1.57% for the years ended
September 30, 1998 and 1997, respectively.
Income Taxes
The provision for income taxes was $5.3 million for the year ended
September 30, 1998, representing an effective tax rate of 35.9% compared with
$4.4 million for the year ended September 30, 1997 representing an effective tax
rate of 34.1%. The effective rate for 1998 reflects the impact of a one year
reduction in the state tax rate for Oregon. The effective tax rate for 1997 was
lower than 1998 because the Company was able to recognize the tax benefit
related to the capital loss on sale of the U.S. Federal securities mutual bond
fund, thereby reducing tax expense for the year. At September 30, 1996, when the
capital loss was recognized for book purposes, a valuation allowance was created
to offset the deferred tax asset because the Company was not assured of being
able to realize a capital gain and the related tax benefit. During the year
ended September 30, 1997, the Company, through the sale of certain investments,
realized a capital gain for tax purposes that assures realization of the tax
benefit and thus reduced the valuation allowance to zero. (See Note 11 to the
Consolidated Financial Statements.)
COMMON STOCK INFORMATION
Since October 4, 1995, Klamath First Bancorp's common stock has traded on
the National Association of Security Dealers Automated Quotation ("Nasdaq")
National Market under the symbol "KFBI". As of September 30, 1999, there were
approximately 1,511 shareholders of record. This total does not reflect the
number of persons or entities who hold stock in nominee or "street" name through
various brokerage firms.
The high and low common stock prices by quarter were as follows:
Year Ended September 30,
________________________________________________
1999 1998
__________________ __________________
High Low High Low
______ ______ ______ ______
First quarter $19.38 $16.00 $24.25 $20.50
Second quarter 19.00 15.00 23.06 19.50
Third quarter 17.00 14.63 23.00 18.63
Fourth quarter 15.06 12.63 20.00 14.00
The cash dividends declared by quarter were as follows:
Year Ended September 30,
________________________
1999 1998
_________ _________
First quarter $0.095 $0.080
Second quarter 0.120 0.085
Third quarter 0.120 0.090
Fourth quarter 0.125 0.090
Any dividend payments by the Company are subject to the sole discretion of
the Board of Directors and depend primarily on the ability of the Association to
pay dividends to the Company. Under Federal regulations, the dollar amount of
dividends a federal savings association may pay depends on the association's
capital surplus position and recent net income. Generally, if an association
satisfies its regulatory capital requirements, it may make dividend payments up
to the limits prescribed in the OTS regulations. However, an institution that
has converted to the stock form of ownership may not declare or pay a dividend
on, or repurchase any of, its common stock if the effect thereof would cause the
regulatory capital of the institution to be reduced below the amount required
for the liquidation account which was established in accordance with OTS
regulations and the association's Plan of Conversion. In addition, earnings of
the association appropriated to bad debt reserves and deducted for federal
income tax purposes are not available for payment of cash dividends without
payment of taxes at the then current tax rate by the Association on the amount
removed from the reserves for such distributions. The Association does not
contemplate any distributions that would limit the Association's bad debt
deduction or create federal tax liabilities.
Independent Auditors' Report
Board of Directors
Klamath First Bancorp, Inc.
Klamath Falls, Oregon
We have audited the accompanying consolidated balance sheets of Klamath
First Bancorp, Inc. and Subsidiary (the "Company") as of September 30, 1999 and
1998, and the related consolidated statements of earnings, shareholders' equity,
and cash flows for each of the three years in the period ended September 30,
1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Klamath First Bancorp, Inc. and
Subsidiary as of September 30, 1999 and 1998 and the results of their operations
and their cash flows for each of the three years in the period ended September
30, 1999, in conformity with generally accepted accounting principles.
\s\ Deloitte & Touche LLP
Portland, Oregon
October 29, 1999
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30,
-----------------------------------
1999 1998
ASSETS ---------------- ---------------
Cash and due from banks ................................................. $ 21,123,217 $ 25,644,460
Interest bearing deposits with banks .................................... 1,231,516 11,496,026
Federal funds sold and securities purchased under agreements to resell .. 2,167,856 29,844,783
--------------- ---------------
Total cash and cash equivalents ...................................... 24,522,589 66,985,269
Investment securities available for sale, at fair value
(amortized cost: $161,112,272 and $199,251,123) ....................... 158,648,057 203,224,184
Investment securities held to maturity, at amortized cost (fair
value: $577,455 and $2,928,324) ....................................... 559,512 2,888,759
Mortgage backed and related securities available for sale, at fair
value (amortized cost: $73,075,553 and $42,741,863) ................... 72,695,555 43,335,857
Mortgage backed and related securities held to maturity, at amortized
cost (fair value: $2,596,408 and $3,696,444) .......................... 2,600,920 3,661,683
Loans receivable, net ................................................... 739,793,403 668,146,380
Real estate owned and repossessed assets ................................ 1,494,890 --
Premises and equipment, net ............................................. 11,581,923 12,347,467
Stock in Federal Home Loan Bank of Seattle, at cost ..................... 10,957,300 10,172,900
Accrued interest receivable ............................................. 7,153,818 7,471,717
Core deposit intangible ................................................. 9,778,341 11,431,018
Other assets ............................................................ 1,855,032 1,637,164
--------------- ---------------
Total assets ......................................................... $ 1,041,641,340 $ 1,031,302,398
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposit liabilities ................................................... $ 720,401,112 $ 689,541,345
Accrued interest on deposit liabilities ............................... 1,184,471 1,291,784
Advances from borrowers for taxes and insurance ....................... 9,758,627 9,420,791
Advances from Federal Home Loan Bank of Seattle ....................... 197,000,000 167,000,000
Short term borrowings ................................................. -- 12,112,500
Accrued interest on borrowings ........................................ 34,484 213,957
Pension liabilities ................................................... 833,644 779,392
Deferred federal and state income taxes ............................... 579,727 3,655,944
Other liabilities ..................................................... 2,263,812 2,205,730
--------------- ---------------
Total liabilities ................................................... 932,055,877 886,221,443
--------------- ---------------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value, 500,000 shares authorized; none issued -- --
Common stock, $.01 par value, 35,000,000 shares authorized,
September 30, 1999 - 7,908,377 issued, 7,062,092 outstanding
September 30, 1998 - 9,916,766 issued, 8,898,972 outstanding ......... 79,084 99,168
Additional paid-in capital ............................................ 43,794,535 82,486,183
Retained earnings-substantially restricted ............................ 76,866,452 71,051,445
Unearned shares issued to ESOP ........................................ (5,871,900) (6,850,550)
Unearned shares issued to MRDP ........................................ (3,519,296) (4,536,865)
Net unrealized gain (loss) on securities available for sale, net of tax (1,763,412) 2,831,574
--------------- ---------------
Total shareholders' equity .......................................... 109,585,463 145,080,955
--------------- ---------------
Total liabilities and shareholders' equity .......................... $ 1,041,641,340 $ 1,031,302,398
=============== ===============
See notes to consolidated financial statements.
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended September 30,
---------------------------------------
1999 1998 1997
----------- ----------- ------------
INTEREST INCOME
Loans receivable ........................................ $56,289,718 $49,508,126 $40,850,478
Mortgage backed and related securities .................. 2,103,881 3,679,740 4,716,184
Investment securities ................................... 11,631,439 14,766,471 7,342,604
Federal funds sold and securities purchased under
agreements to resell ................................. 914,584 916,847 930,980
Interest bearing deposits ............................... 751,218 862,086 326,521
----------- ----------- -----------
Total interest income ................................. 71,690,840 69,733,270 54,166,767
----------- ----------- -----------
INTEREST EXPENSE
Deposit liabilities ..................................... 28,974,568 28,931,749 22,464,345
Advances from FHLB of Seattle ........................... 9,121,190 7,921,570 6,270,615
Other ................................................... 285,848 995,032 1,120,858
----------- ----------- -----------
Total interest expense ................................ 38,381,606 37,848,351 29,855,818
----------- ----------- -----------
Net interest income ................................... 33,309,234 31,884,919 24,310,949
Provision for loan losses ................................. 932,000 674,000 370,000
----------- ----------- -----------
Net interest income after provision for
loan losses ......................................... 32,377,234 31,210,919 23,940,949
----------- ----------- -----------
NON-INTEREST INCOME
Fees and service charges ................................ 2,935,700 2,410,239 668,779
Gain on sale of investments ............................. 329,435 440,750 2,144
Gain on sale of real estate owned ....................... 29,266 -- 27,946
Other income ............................................ 335,217 351,365 111,739
----------- ----------- -----------
Total non-interest income ............................. 3,629,618 3,202,354 810,608
----------- ----------- -----------
NON-INTEREST EXPENSE
Compensation, employee benefits and related expense ..... 10,096,000 9,616,323 7,143,516
Occupancy expense ....................................... 2,221,900 2,091,830 919,880
Data processing expense ................................. 915,434 963,475 480,889
Insurance premium expense ............................... 295,950 289,592 376,029
Loss on sale of investments ............................. 112,255 -- 14,531
Loss on sale of real estate owned ....................... 24,885 -- --
Amortization of core deposit intangible ................. 1,652,677 1,652,677 302,991
Other expense ........................................... 5,867,155 4,908,907 2,526,519
----------- ----------- -----------
Total non-interest expense ............................ 21,186,256 19,522,804 11,764,355
----------- ----------- -----------
Earnings before income taxes .............................. 14,820,596 14,890,469 12,987,202
Provision for income taxes ................................ 5,665,403 5,339,432 4,429,452
----------- ----------- -----------
Net earnings .............................................. $ 9,155,193 $ 9,551,037 $ 8,557,750
=========== =========== ===========
Earnings per common share - basic ......................... $ 1.21 $ 1.05 $ 0.90
Earnings per common share - fully diluted ................. $ 1.18 $ 1.00 $ 0.88
Weighted average common shares outstanding - basic ........ 7,564,415 9,115,404 9,487,848
Weighted average common shares outstanding - with dilution 7,748,527 9,521,249 9,762,459
See notes to consolidated financial statements.
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Unearned Unearned Accumulated
Common Common Additional shares shares other Total
stock stock paid-in Retained issued issued comprehensive shareholders'
shares amount capital earnings to ESOP to MRDP income (loss) equity
----------- --------- ------------ ----------- ------------ ------------ ------------ -------------
Balance at
October 1, 1996 10,242,360 $116,124 $110,762,678 $59,082,479 ($8,807,850) ($6,694,470) ($1,047,987) $153,410,974
Cash dividends ..... -- -- -- (2,895,234) -- -- -- (2,895,234)
Stock repurchased
and retired.... (1,182,936) (11,829) (18,866,299) -- -- -- -- (18,878,128)
ESOP contribution .. 97,865 -- 705,260 -- 978,650 -- -- 1,683,910
MRDP contribution .. 78,293 -- -- -- -- 1,071,130 -- 1,071,130
---------- ------- ---------- ----------- ---------- --------- ---------- ------------
9,235,582 104,295 92,601,639 56,187,245 (7,829,200) (5,623,340) (1,047,987) 134,392,652
Comprehensive income
Net earnings ...... 8,557,750 8,557,750
Other comprehensive
income:
Unrealized gain on
securities, net of
tax and reclassifi-
cation adjustment (1) 1,512,041 1,512,041
------------
Total comprehensive
income 10,069,791
---------- ------- ---------- ----------- ---------- ---------- ---------- ------------
Balance at
September 30, 1997 9,235,582 104,295 92,601,639 64,744,995 (7,829,200) (5,623,340) 464,054 144,462,443
Cash dividends ..... -- -- -- (3,244,587) -- -- -- (3,244,587)
Stock repurchased
and retired....... (544,085) (5,440) (11,556,044) -- -- -- -- (11,561,484)
ESOP contribution .. 97,865 -- 1,029,866 -- 978,650 -- -- 2,008,516
MRDP contribution .. 78,293 -- -- -- -- 1,086,475 -- 1,086,475
Exercise of stock
options 31,317 313 410,722 -- -- -- -- 411,035
---------- ------- ---------- ----------- ---------- ---------- ---------- -----------
8,898,972 99,168 82,486,183 61,500,408 (6,850,550) (4,536,865) 464,054 133,162,398
Comprehensive income
Net earnings ...... 9,551,037 9,551,037
Other comprehensive
income:
Unrealized gain on
securities, net of
tax and reclassifi-
cation adjustment (2) 2,367,520 2,367,520
------------
Total comprehensive
income 11,918,557
---------- ------- ---------- ----------- ---------- ---------- ---------- ------------
Balance at
September 30, 1998 8,898,972 99,168 82,486,183 71,051,445 (6,850,550) (4,536,865) 2,831,574 145,080,955
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Continued)
Unearned Unearned Accumulated
Common Common Additional shares shares other Total
stock stock paid-in Retained issued issued comprehensive shareholders'
shares amount capital earnings to ESOP to MRDP income (loss) equity
----------- --------- ------------ ----------- ------------ ------------ ------------ -------------
Cash dividends ..... -- -- -- (3,340,186) -- -- -- (3,340,186)
Stock repurchased
and retired ...... (2,008,389) (20,084) (39,314,056) -- -- -- -- (39,334,140)
ESOP contribution .. 97,865 -- 602,287 -- 978,650 -- -- 1,580,937
MRDP contribution .. 73,644 -- 20,121 -- -- 1,017,569 -- 1,037,690
---------- ------- ---------- ----------- ---------- ---------- ---------- -----------
7,062,092 79,084 43,794,535 67,711,259 (5,871,900) (3,519,296) 2,831,574 105,025,256
Comprehensive income
Net earnings ...... 9,155,193 9,155,193
Other comprehensive income:
Unrealized loss on
securities, net of
tax and reclassifi-
cation adjustment (3) (4,594,986) (4,594,986)
------------
Total comprehensive
income 4,560,207
---------- ------- ---------- ----------- ---------- ---------- ---------- ------------
Balance at
September 30, 1999 7,062,092 $79,084 $43,794,535 $76,866,452 ($5,871,900) ($3,519,296) ($1,763,412) $109,585,463
========== ======= ========== =========== ========== ========== ========== ============
<FN>
(1) Net unrealized holding gain on securities of $1,476,538 (net of $461,062
tax expense) less reclassification adjustment for losses included in net
earnings of $35,503 (net of $21,760 tax benefit).
(2) Net unrealized holding gain on securities of $2,429,643 (net of $1,451,061
tax expense) less reclassification adjustment for gains included in net
earnings of $62,123 (net of $38,075 tax expense).
(3) Net unrealized holding loss on securities of $4,332,997 (net of $2,816,282
tax benefit) less reclassification adjustment for gains included in net
earnings of $261,989 (net of $160,574 tax expense).
</FN>
See notes to consolidated financial statements.
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended September 30,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings .......................................... $ 9,155,193 $ 9,551,037 $ 8,557,750
ADJUSTMENTS TO RECONCILE NET EARNINGS TO
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Depreciation and amortization ......................... 2,896,271 2,815,615 772,204
Provision for deferred taxes .......................... (259,935) 293,310 714,915
Provision for loan losses ............................. 932,000 674,000 370,000
Compensation expense related to ESOP benefit .......... 1,580,937 2,008,516 1,683,910
Compensation expense related to MRDP Trust ............ 1,037,690 1,086,475 1,071,130
Net amortization of premiums (discounts) paid on
investment and mortgage backed and related securities 134,979 21,994 102,626
Increase in deferred loan fees, net of amortization ... 405,237 1,258,655 912,445
Accretion of discounts on purchased loans ............. (37,456) 3,763 (325)
Net (gain) loss on sale of real estate owned and
premises and equipment .............................. (4,381) 3,196 (3,514)
Net (gain) loss on sale of investment and mortgage
backed and related securities ....................... (217,179) (440,750) 12,387
FHLB stock dividend ................................... (784,400) (617,000) (495,000)
Increase in core deposit intangible ................... -- -- (13,386,686)
CHANGES IN ASSETS AND LIABILITIES
Accrued interest receivable ........................... 317,899 154,447 (2,583,032)
Other assets .......................................... (377,868) (218,359) (1,625,538)
Accrued interest on deposit liabilities ............... (107,313) 76,039 503,337
Accrued interest on borrowings ........................ (179,473) (298,759) 189,553
Pension liabilities ................................... 54,252 52,252 59,052
Other liabilities ..................................... 264,936 131,341 (1,134,717)
----------- ----------- -----------
Net cash provided by (used in) operating activities ....... 14,811,389 16,555,772 (4,279,503)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of investment securities
held to maturity .................................... 82,455,000 20,150,000 48,680,000
Proceeds from maturity of investment securities
available for sale .................................. 48,572,000 104,180,000 19,009,324
Principal repayments received on mortgage
backed and related securities held to maturity ..... 1,044,871 1,755,918 1,313,309
Principal repayments received on mortgage
backed and related securities available for sale ... 15,311,695 24,664,174 18,923,262
Principal repayments received on loans ................ 159,160,842 122,009,359 56,879,728
Loan originations ..................................... (224,193,434) (232,474,655) (120,072,487)
Loans purchased ....................................... (15,500,495) (7,792,061) (15,648,275)
Loans sold ............................................ 5,584,065 -- --
Purchase of investment securities held
to maturity ......................................... (79,711,523) -- (61,722,409)
Purchase of investment securities available
for sale ............................................ (22,147,855) (60,366,913) (219,697,100)
Purchase of mortgage backed and related
securities available for sale ....................... (55,536,014) (13,202,490) (14,850,705)
Purchase of FHLB stock ................................ -- (2,405,500) (4,307,500)
Proceeds from sale of FHLB stock ...................... -- -- 2,425,900
Proceeds from sale of investment securities
available for sale .................................. 11,834,420 19,388,451 16,066,044
Proceeds from sale of mortgage backed and related
securities available for sale ....................... 9,454,776 9,656,938 5,743,267
Proceeds from sale of real estate owned and
premises and equipment .............................. 514,710 -- 86,159
Purchases of premises and equipment ................... (321,050) (1,682,477) (7,176,075)
----------- ----------- -----------
Net cash used in investing activities ..................... (63,477,992) (16,119,256) (274,347,558)
----------- ----------- -----------
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
Year Ended September 30,
----------------------------------------
1999 1998 1997
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in deposit liabilities,
net of withdrawals ................................... $30,859,767 $15,563,444 $274,304,721
Proceeds from FHLB advances ........................... 160,000,000 179,000,000 184,000,000
Repayments of FHLB advances ........................... (130,000,000) (141,000,000) (145,000,000)
Proceeds from short term borrowings ................... 8,595,000 88,343,199 84,750,150
Repayments of short term borrowings ................... (20,707,500) (93,308,199) (82,577,050)
Stock repurchase and retirement ...................... (39,334,140) (11,561,483) (18,878,128)
Proceeds from exercise of stock options ............... -- 411,035 --
Advances from borrowers for taxes and insurance ....... 337,836 505,305 1,084,359
Dividends paid ........................................ (3,547,040) (3,447,744) (3,193,428)
----------- ----------- -----------
Net cash provided by financing activities ................. 6,203,923 34,505,557 294,490,624
----------- ----------- -----------
Net (decrease) increase in cash and cash
equivalents ............................................. (42,462,680) 34,942,073 15,863,563
Cash and cash equivalents at beginning
of year ................................................. 66,985,269 32,043,196 16,179,633
----------- ----------- -----------
Cash and cash equivalents at end of year .................. $24,522,589 $66,985,269 $32,043,196
=========== =========== ===========
SUPPLEMENTAL SCHEDULE OF INTEREST AND
INCOME TAXES PAID
Interest paid ......................................... $38,668,392 $38,071,070 $29,162,927
Income taxes paid ..................................... 5,866,000 5,808,299 3,373,457
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES
Net unrealized gain (loss) on securities
available for sale .................................. ($4,594,986) $ 2,367,520 $ 1,512,041
Dividends declared and accrued in other
liabilities ......................................... 988,547 892,509 834,363
See notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Klamath First
Bancorp, Inc. (the "Company") and its wholly-owned subsidiary Klamath First
Federal Savings and Loan Association (the "Association"), including the
Association's subsidiary, Klamath First Financial Services. All intercompany
accounts and transactions have been eliminated in consolidation.
Nature of Operations
The Company provides banking and limited non-banking services to its
customers who are located throughout the state of Oregon, principally in rural
communities. These services primarily include attracting deposits from the
general public and using such funds, together with other borrowings, to invest
in various real estate loans, consumer and commercial loans, investment
securities and mortgage backed and related securities.
Use of Estimates in the Presentation of the Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make assumptions. These
assumptions result in estimates that affect the reported amounts of certain
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of related revenue
and expense during the reporting period. Actual results could differ from those
estimates.
Cash Equivalents
The Company considers cash and due from banks, interest bearing deposits
held at domestic banks, federal funds sold, and security resale agreements to be
cash and cash equivalents for purposes of the Consolidated Statements of Cash
Flows.
Investment Securities
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
115, Accounting for Certain Investments in Debt and Equity Securities,
investment securities held to maturity are stated at amortized cost only if the
Company has the positive intent and the ability to hold the securities to
maturity. Securities available for sale, including mutual funds, and trading
securities are stated at fair value. Unrealized gains and losses from available
for sale securities are excluded from earnings and reported (net of tax) as a
net amount in a separate component of shareholders' equity until realized.
Realized gains and losses on the sale of securities, recognized on a specific
identification basis, and valuation adjustments of trading account securities
are included in non-interest income or expense. Net unrealized gains or losses
on securities resulting from an other than temporary decline in the fair value
are recognized in earnings when incurred.
Stock Investments
The Company holds stock in the Federal Home Loan Bank of Seattle ("FHLB of
Seattle"). This investment is carried at the lower of cost or fair value.
Loans
Loans held for investment are stated at the principal amount outstanding,
net of deferred loan fees and unearned income. Loan origination fees, commitment
fees and certain direct loan origination costs are capitalized and recognized as
a yield adjustment over the lives of the loans using the level-yield method.
Unearned discounts are accreted to income over the average lives of the related
loans using the level yield method, adjusted for estimated prepayments.
Interest income is recorded as earned. Management ceases to accrue interest
income on any loan that becomes 90 days or more delinquent and reverses all
interest accrued up to that time. Thereafter, interest income is accrued only if
and when, in management's opinion, projected cash proceeds are deemed sufficient
to repay both principal and interest. All loans for which interest is not being
accrued are referred to as loans on nonaccrual status.
Allowance for Loan Losses
The allowance for loan losses is established to absorb known and inherent
losses in the loan portfolio. Allowances for losses on specific problem real
estate loans and real estate owned are charged to earnings when it is determined
that the value of these loans and properties, in the judgment of management, is
impaired. In addition to specific reserves, the Company also maintains general
provisions for loan losses based on evaluating known and inherent risks in the
loan portfolio, including management's continuing analysis of the factors
underlying the quality of the loan portfolio. These factors include changes in
the size and composition of the loan portfolio, actual loan loss experience,
current and anticipated economic conditions, detailed analysis of individual
loans for which full collectibility may not be assured, and determination of the
existence and realizable value of the collateral and guarantees securing the
loans. The reserve is an estimate based upon factors and trends identified by
management at the time financial statements are prepared. The ultimate recovery
of loans is susceptible to future market factors beyond the Company's control,
which may result in losses or recoveries differing significantly from those
provided in the consolidated financial statements. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's valuation allowances on loans and real estate
owned.
Delinquent interest on loans past due 90 days or more is charged off or an
allowance established by a charge to income equal to all interest previously
accrued. Interest is subsequently recognized only to the extent cash payments
are received until delinquent interest is paid in full and, in management's
judgment, the borrower's ability to make periodic interest and principal
payments is back to normal, in which case the loan is returned to accrual
status.
Real Estate Owned
Property acquired through foreclosure or deed in lieu of foreclosure is
carried at the lower of estimated fair value, less estimated costs to sell, or
the balance of the loan on the property at date of acquisition, not to exceed
net realizable value. Costs excluding interest, relating to the improvement of
property are capitalized, whereas those relating to holding the property are
charged to expense.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is generally computed on the straight-line basis over the estimated
useful lives of the various classes of assets from their respective dates of
acquisition. Estimated useful lives range up to 30 years for buildings, up to
the lease term for leasehold improvements, three years for automobiles, and
three to 15 years for furniture and equipment.
Mortgage Servicing
Fees earned for servicing loans are reported as income when the related
mortgage loan payments are collected. Loan servicing costs are charged to
expense as incurred.
Effective January 1, 1997, the Company adopted SFAS No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities.
SFAS No. 125 requires the Company to allocate the total cost of all mortgage
loans sold, whether originated or purchased, to the mortgage servicing rights
and the loans (without mortgage servicing rights) based on their relative fair
values if it is practicable to estimate those fair values.
Core Deposit Intangible
On July 18, 1997 the Company assumed $241.3 million of deposits from Wells
Fargo Bank, N.A. for a core deposit premium of $16.4 million. In conjunction
with the assumption of these deposits the Company also acquired 25 branch
facilities (24 owned and one leased) located throughout Oregon. In accordance
with generally accepted accounting principles for purchase transactions, the
assets acquired and liabilities assumed were recorded at fair value and the core
deposit premium was allocated to premises and equipment in the amount of $3.0
million and to core deposit intangible in the amount of $13.4 million. The
recorded core deposit intangible is being amortized to non-interest expense on a
straight-line basis over 8.1 years.
Income Taxes
The Company accounts for income taxes in accordance with the provisions of
SFAS No. 109, Accounting for Income Taxes, which requires the use of the asset
and liability method of accounting for income taxes. Under this method, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled.
Pension Cost
It is the Company's policy to fund retirement costs as they are accrued.
All such costs are computed on the basis of accepted actuarial methods.
Employee Stock Ownership Plan
The Company sponsors an Employee Stock Ownership Plan ("ESOP"). The ESOP is
accounted for in accordance with the American Institute of Certified Public
Accountants ("AICPA") Statement of Position 93-6, Employer's Accounting for
Employee Stock Ownership Plans. Accordingly, the shares held by the ESOP are
reported as unearned shares issued to the employee stock ownership plan in the
balance sheets. The plan authorizes release of the shares over a ten-year
period, of which six years are remaining. As shares are released from
collateral, compensation expense is recorded equal to the then current market
price of the shares, and the shares become outstanding for earnings per share
calculations.
Management Recognition and Development Plan
The Company sponsors a Management Recognition and Development Plan
("MRDP"). The MRDP is accounted for in accordance with SFAS No. 123, Accounting
for Stock-Based Compensation. The plan authorizes the grant of common stock
shares to certain officers and directors, which vest over a five-year period in
equal installments. The Company recognizes compensation expense in the amount of
the fair value of the common stock in accordance with the vesting schedule
during the years in which the shares are payable. When the MRDP awards are
allocated, the common stock shares become common stock equivalents for earnings
per share calculations.
Stock Based Compensation
The Company accounts for stock option grants using the intrinsic value
method as prescribed in Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. Under the
intrinsic value based method, compensation cost for stock options is measured as
the excess, if any, of the quoted market price of the stock at grant date over
the amount an employee must pay to acquire the stock. Stock options granted by
the Company have no intrinsic value at the grant date and, under APB No. 25,
there is no compensation expense to be recorded.
SFAS No. 123, Accounting for Stock-Based Compensation, encourages, but does
not require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The fair value approach measures compensation
costs based on factors such as the term of the option, the market price at grant
date, and the option exercise price, with expense recognized over the vesting
period. See Note 15 for the pro forma effect on net earnings and earnings per
share as if the fair value method had been used.
Recently Issued Accounting Pronouncements
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, was issued. SFAS No. 133 establishes the accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. If certain conditions are met, a derivative may
be specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized firm commitment, (b) a hedge of the exposure to variable
cash flows of a forecasted transaction, or (c) a hedge of the foreign currency
exposure of a net investment in a foreign operation, an unrecognized firm
commitment, an available-for-sale security, or a foreign-currency-denominated
forecasted transaction. The effective date of this Statement was deferred by the
issuance of SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133. This
Statement is now effective for fiscal years beginning after June 15, 2000.
The Company has determined that it currently has no instruments or contracts
that meet the scope of SFAS No. 133. Accordingly, the adoption of this Statement
in 2001 is not expected to have a material impact on the financial statements of
the Company.
(2) Cash and Due from Banks
The Company is required to maintain an average reserve balance with the Federal
Reserve Bank, or maintain such reserve balance in the form of cash. The amount
of this required reserve balance was approximately $3.0 million at September 30,
1999 and 1998, and was met by holding cash and maintaining an average balance
with the Federal Reserve Bank in excess of this amount.
(3) Investments and Mortgage-Backed Securities
Amortized cost and approximate fair value of securities available for sale
and held to maturity are summarized by type and maturity as follows:
September 30, 1999
--------------------------------------------------------
Amortized Gross Unrealized Fair
cost Gains Losses value
----------- ------------ ------------ ------------
Investment securities available for sale
U.S. Government obligations
Maturing within one year ........... $ 15,014,112 $ 18,266 $ 40,190 $ 14,992,188
Maturing after one year through
five years ........................ 59,212,960 88,398 333,544 58,967,814
State and municipal obligations
Maturing within one year ........... 572,115 4,223 -- 576,338
Maturing after one year through
five years ........................ 801,572 2,701 17,217 787,056
Maturing after five years through
ten years ......................... 198,414 -- 10,190 188,224
Maturing after ten years ........... 23,275,612 15,017 961,272 22,329,357
Corporate obligations
Maturing within one year ........... 21,053,101 36,346 171,277 20,918,170
Maturing after one year through
five years ........................ 21,159,327 -- 289,867 20,869,460
Maturing after ten years ........... 19,825,059 -- 805,609 19,019,450
------------ ------------ ------------ ------------
$161,112,272 $ 164,951 $ 2,629,166 $158,648,057
============ ============ ============ ============
September 30, 1998
--------------------------------------------------------
Amortized Gross Unrealized Fair
cost Gains Losses value
----------- ------------ ------------ ------------
Investment securities available for sale
U.S. Government obligations
Maturing within one year ........... $ 11,555,117 $ 95,853 $-- $ 11,650,970
Maturing after one year through
five years ........................ 91,064,477 2,738,617 -- 93,803,094
State and municipal obligations
Maturing after one year through
five years ........................ 890,782 21,258 -- 912,040
Maturing after ten years ........... 16,515,526 675,702 567 17,190,661
Corporate obligations
Maturing within one year ........... 14,518,739 34,576 -- 14,553,315
Maturing after one year through
five years ........................ 44,883,935 772,455 12,836 45,643,554
Maturing after ten years ........... 19,822,547 -- 351,997 19,470,550
------------ ------------ ------------ ------------
$199,251,123 $ 4,338,461 $ 365,400 $203,224,184
============ ============ ============ ============
September 30, 1999
--------------------------------------------------------
Amortized Gross Unrealized Fair
cost Gains Losses value
----------- ------------ ------------ ------------
Investment securities held to maturity
State and municipal obligations
Maturing within one year ........... $ 170,376 $ 438 $-- $ 170,814
Maturing after one year through
five years ........................ 389,136 17,505 -- 406,641
------------ ------------ ------------ ------------
$ 559,512 $ 17,943 $-- $ 577,455
============ ============ ============ ============
September 30, 1998
--------------------------------------------------------
Amortized Gross Unrealized Fair
cost Gains Losses value
---------- ---------- ---------- -------------
Investment securities held to maturity
State and municipal obligations
Maturing within one year ........... $ 210,837 $ 1,397 $-- $ 212,234
Maturing after one year through
five years ........................ 677,922 36,168 -- 714,090
Corporate obligations
Maturing within one year ........... 2,000,000 2,000 -- 2,002,000
------------ ------------ ------------ ------------
$ 2,888,759 $ 39,565 $-- $ 2,928,324
============ ============ ============ ============
MORTGAGE BACKED AND RELATED SECURITIES
September 30, 1999
--------------------------------------------------------
Amortized Gross Unrealized Fair
cost Gains Losses value
----------- ------------ ------------ ------------
Mortgage backed and related securities available for sale
FNMA maturing after five years
through ten years ................. $ 2,469,286 $-- $ 25,043 $ 2,444,243
CMO's maturing after one year
through five years ................. 4,969,296 -- 55,346 4,913,950
FNMA maturing after ten years ........ 21,849,523 116,867 228 21,966,162
FHLMC maturing after ten years ....... 18,375,619 26,201 31,314 18,370,506
GNMA maturing after ten years ........ 11,783,245 3,738 18,918 11,768,065
CMO's maturing after ten years ...... 13,628,584 -- 395,955 13,232,629
------------ ------------ ------------ ------------
$ 73,075,553 $ 146,806 $ 526,804 $ 72,695,555
============ ============ ============ ============
September 30, 1998
--------------------------------------------------------
Amortized Gross Unrealized Fair
cost Gains Losses value
----------- ------------ ------------ ------------
Mortgage backed and related securities available for sale
FNMA maturing after five years
through ten years ................. $ 4,045,247 $ 40,251 $-- $ 4,085,498
FNMA maturing after ten years ........ 8,820,853 89,676 11,334 8,899,195
FHLMC maturing after ten years ....... 14,722,039 438,394 1,941 15,158,492
GNMA maturing after ten years ........ 3,619,071 43,083 -- 3,662,154
SBA maturing after ten years ......... 11,534,653 1,780 5,915 11,530,518
------------ ------------ ------------ ------------
$ 42,741,863 $ 613,184 $ 19,190 $ 43,335,857
============ ============ ============ ============
September 30, 1999
--------------------------------------------------------
Amortized Gross Unrealized Fair
cost Gains Losses value
----------- ------------ ------------ ------------
Mortgage backed and related securities held to maturity
GNMA maturing after ten years ........ $ 2,600,920 $ 3,289 $ 7,801 $ 2,596,408
============ ============ ============ ============
September 30, 1998
--------------------------------------------------------
Amortized Gross Unrealized Fair
cost Gains Losses value
----------- ------------ ------------ ------------
Mortgage backed and related securities held to maturity
GNMA maturing after ten years ........ $ 3,661,683 $ 34,761 $-- $ 3,696,444
============ ============ ============ ============
Expected maturities of mortgage backed and related securities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
At September 30, 1999 and 1998, the Company pledged securities totaling
$35.6 million and $31.2 million, respectively, to secure certain public deposits
and for other purposes as required or permitted by law.
The Company has also pledged securities of zero and $12.0 million to secure
short term borrowings of reverse repurchase agreements at September 30, 1999 and
1998, respectively. (See Note 10.)
(4) Loans Receivable
September 30,
---------------------------
1999 1998
------------ ------------
Real estate loans
Permanent residential 1-4 family ..... $647,130,329 $577,321,223
Multi-family residential ............. 18,411,762 19,229,984
Construction ......................... 53,219,452 64,288,949
Commercial ........................... 37,078,809 29,457,284
Land ................................. 2,064,037 2,184,595
------------ ------------
Total real estate loans ........... 757,904,389 692,482,035
------------ ------------
Non-real estate loans
Savings account ...................... 1,800,234 1,990,776
Home improvement and home equity ..... 6,725,721 5,749,969
Other ................................ 8,010,808 4,480,064
------------ ------------
Total non-real estate loans ....... 16,536,763 12,220,809
------------ ------------
Total loans ....................... 774,441,152 704,702,844
Less
Undisbursed portion of loans ......... 24,176,425 26,986,869
Deferred loan fees ................... 7,987,699 7,619,918
Allowance for loan losses ............ 2,483,625 1,949,677
------------ ------------
$739,793,403 $668,146,380
============ ============
The weighted average interest rate on loans at September 30, 1999 and 1998
was 7.47% and 7.71%, respectively.
Included in loans receivable are $379,662 of loans held for sale. All these
loans are one- to four-family mortgage loans. In the aggregate there was no
lower of cost or market adjustment required; fair value approximates cost.
Loans to employees, officers, and directors totaled $10.9 million and $8.8
million at September 30, 1999 and 1998, respectively.
Activity in the allowance for loan losses is summarized as follows:
Year Ended September 30,
------------------------------------------
1999 1998 1997
----------- ------------ ------------
Balance, beginning of year ... $ 1,949,677 $ 1,296,451 $ 927,820
Charge offs .................. (398,052) (20,774) (1,369)
Additions .................... 932,000 674,000 370,000
----------- ----------- -----------
Balance, end of year ......... $ 2,483,625 $ 1,949,677 $ 1,296,451
=========== =========== ===========
(5) Premises and Equipment
Premises and equipment consist of the following:
September 30,
----------------------------
1999 1998
------------ ------------
Land ............................................. $ 2,476,807 $ 2,479,807
Office buildings and construction in progress..... 10,470,855 10,403,971
Furniture, fixtures and equipment ................ 4,464,622 4,211,886
Automobiles ...................................... 38,856 38,856
Less accumulated depreciation .................... (5,869,217) (4,787,053)
------------ ------------
$ 11,581,923 $ 12,347,467
============ ============
Depreciation expense was $1.1 million, $1.0 million, and $469,208 for the
years ended September 30, 1999, 1998, and 1997, respectively.
(6) Accrued Interest Receivable
The following is a summary of accrued interest receivable:
September 30,
---------------------------
1999 1998
------------ ------------
Loans receivable ....................... $ 4,335,013 $ 4,114,533
Mortgage backed and related securities . 478,635 424,458
Investment securities .................. 2,340,170 2,932,726
------------ ------------
$ 7,153,818 $ 7,471,717
============ ============
(7) Mortgage Servicing Rights
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balance of mortgage loans
serviced for others was $6.1 million and $724,559 at September 30, 1999 and
1998, respectively. During the year ended September 30, 1999 the Company
initiated a program to sell loans to the Federal National Mortgage Association
("Fannie Mae") which resulted in the significant increase in loans serviced for
others.
Capitalized mortgage servicing rights were $52,432 and zero at September
30, 1999 and 1998, respectively.
The changes in the balance of mortgage servicing rights were as follows:
Year Ended September 30,
----------------------------
1999 1998
------------ ------------
Balance, beginning of year ...................... $-- $--
Additions ....................................... 53,789 --
Amortization of mortgage servicing rights ....... (1,357) --
------------ ------------
Balance, end of year ............................ $ 52,432 $--
============ ============
(8) Deposit Liabilities
The following is a summary of deposit liabilities:
September 30,
-----------------------------------------------
1999 1998
----------------------- -----------------------
Amount Percent Amount Percent
------------ --------- ------------ --------
Checking accounts, non-interest
bearing ...................... $ 52,318,958 7.3% $ 47,547,651 6.9%
------------ ------- ------------ -------
Interest-bearing checking ..... 67,303,245 9.3 70,561,435 10.2
------------ ------- ------------ -------
Passbook and statement savings 59,790,124 8.3 61,413,910 8.9
------------ ------- ------------ -------
Money market deposits ......... 148,902,589 20.7 114,667,649 16.6
------------ ------- ------------ -------
Certificates of deposit
Less than 4% ................. 4,893,194 0.7 1,371,156 0.2
4.00% to 5.99% ............... 340,945,349 47.3 329,246,772 47.8
6.00% to 7.99% ............... 36,072,270 5.0 43,853,274 6.4
8.00% to 9.99% ............... 10,175,383 1.4 20,879,498 3.0
------------ ------- ------------ -------
392,086,196 54.4 395,350,700 57.4
------------ ------- ------------ -------
$720,401,112 100.0% $689,541,345 100.0%
============ ======= ============ =======
Following is a summary of interest expense on deposits:
Year Ended September 30,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
Interest-bearing checking ................................. $ 873,211 $ 1,088,777 $ 791,032
Passbook and statement savings ............................ 1,326,259 1,683,101 1,270,468
Money market .............................................. 5,096,134 4,275,419 2,391,245
Certificates of deposit ................................... 21,767,895 21,990,525 18,075,128
----------- ----------- -----------
29,063,499 29,037,822 22,527,873
Less early withdrawal
penalties ................................................ 88,931 106,073 63,528
----------- ----------- -----------
Net interest on deposits ................................ $28,974,568 $28,931,749 $22,464,345
=========== =========== ===========
At September 30, 1999, deposit maturities are as follows:
Within 1 year $594,338,934
1 year to 3 years 67,166,011
3 years to 5 years 37,459,409
Thereafter 21,436,758
------------
$720,401,112
============
Weighted average interest rates at September 30 are as follows:
1999 1998
---------- ----------
Interest-bearing checking .............. 1.14% 1.33%
Passbook and statement savings ......... 1.76% 2.44%
Money market ........................... 4.04% 3.92%
Certificates of deposit ................ 5.28% 5.81%
Weighted average rate for all deposits . 4.27% 4.66%
Deposits in excess of $100,000 totaled $149.9 million and $151.0 million at
September 30, 1999 and 1998, respectively. Deposits in excess of $100,000 may
not be insured by the Federal Deposit Insurance Corporation ("FDIC").
(9) Advances from FHLB
As a member of the FHLB of Seattle, the Association maintains a credit line
that is a percentage of its total regulatory assets, subject to
collateralization requirements. At September 30, 1999, the credit line was 30%
of total assets of the Association. Advances are collateralized in the
aggregate, as provided for in the Advances, Security and Deposit Agreements with
the FHLB of Seattle, by certain mortgages or deeds of trust, and securities of
the U.S. Government and agencies thereof. At September 30, 1999 the minimum book
value of eligible collateral for these borrowings was $216.2 million.
Scheduled maturities of advances from the FHLB were as follows:
September 30, 1999 September 30, 1998
------------------------------------------ ----------------------------------------------
Range of Weighted Range of Weighted
interest average interest average
Amount rates interest rate Amount rates interest rate
------------ ----------- -------------- ------------ ----------- -------------
Due within one year . $ -- -- -- $ 30,000,000 5.54%-5.56% 5.55%
After one but within
five years .......... 40,000,000 5.39%-5.70% 5.43% 55,000,000 5.39%-5.74% 5.56%
After five but within
ten years ........... 157,000,000 4.77%-5.87% 5.32% 82,000,000 4.77%-5.24% 4.96%
------------ -------------
$197,000,000 $ 167,000,000
============ =============
Financial data pertaining to the weighted average cost, the level of FHLB
advances and the related interest expense are as follows:
Year ended September 30,
-----------------------------------------
1999 1998 1997
------------- ------------ ------------
Weighted average interest rate at end of year ............. 5.34% 5.26% 5.62%
Weighted daily average interest rate
during the year ........................................... 5.25% 5.62% 5.66%
Daily average FHLB advances ............................... $173,739,726 $141,016,438 $110,736,986
Maximum FHLB advances at any month end .................... 197,000,000 167,000,000 151,000,000
Interest expense during the year .......................... 9,121,190 7,921,570 6,270,615
(10) Short Term Borrowings
Securities sold under agreements to repurchase at September 30, 1998
consisted of reverse repurchase agreements of $12.1 million. All these
agreements matured during the quarter ended March 31, 1999 and were not renewed.
The Company sold, under agreements to repurchase, specific securities of
the U.S. government and its agencies and other approved investments to a
broker-dealer. The securities underlying the agreement with the broker- dealer
were delivered to the dealer who arranged the transaction. Securities delivered
to broker-dealers may be loaned out in the ordinary course of operations.
Financial data pertaining to the weighted average cost, the level of securities
sold under agreements to repurchase, and the related interest expense are as
follows:
Year Ended September 30,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
Weighted average interest rate at end of year ............. -- 5.65% 5.75%
Weighted daily average interest rate
during the year ........................................... 5.72% 5.80% 5.82%
Daily average of securities sold
under agreements to repurchase ............................ $ 3,105,336 $14,669,203 $16,804,520
Maximum securities sold under
agreements to repurchase at any
month end ................................................. 8,095,000 17,077,500 19,117,500
Interest expense during the year .......................... 177,568 850,122 978,023
The Company had an unused line of credit totaling $15.0 million with U.S.
National Bank of Oregon at September 30, 1999 and 1998.
(11) Taxes on Income
The following is a summary of income tax expense:
Year Ended September 30,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
Current Taxes
Federal ................................................... $ 4,842,232 $ 4,771,653 $ 3,076,977
State ..................................................... 1,065,157 468,978 639,503
----------- ----------- -----------
Current tax provision ..................................... 5,907,389 5,240,631 3,716,480
----------- ----------- -----------
Deferred Taxes
Federal ................................................... (201,337) 82,204 648,092
State ..................................................... (40,649) 16,597 64,880
----------- ----------- -----------
Deferred tax provision (benefit) .......................... (241,986) 98,801 712,972
----------- ----------- -----------
Provision for income taxes ................................ $ 5,665,403 $ 5,339,432 $ 4,429,452
=========== =========== ===========
An analysis of income tax expense, setting forth the reasons for the variation
from the "expected" federal corporate income tax rate and the effective rate
provided, is as follows:
Year Ended September 30,
----------------------------------
1999 1998 1997
------ ----- -----
Federal income taxes computed at
statutory rate ............................................ 35.0% 35.0% 35.0%
Tax effect of:
State income taxes, net of Federal
income tax benefit ........................................ 4.5 2.1 4.4
Nondeductible ESOP compensation
expense ................................................... 1.4 2.4 5.4
Deductible MRDP compensation
expense ................................................... (0.1) (1.5) (2.2)
Interest income on municipal securities ................... (2.2) -- --
Elimination of valuation allowance ........................ -- (1.5) (12.6)
Other ..................................................... (0.4) (0.6) 4.1
------- ------ ------
Income tax expense included in the
consolidated statement of earnings ........................ 38.2% 35.9% 34.1%
====== ===== ====
Deferred income taxes at September 30, 1999 and 1998 reflect the impact of
"temporary differences" between amounts of assets and liabilities for financial
reporting purposes and such amounts as measured by tax laws.
The tax effects of temporary differences which give rise to a significant
portion of deferred tax assets and deferred tax liabilities are as follows:
September 30,
---------------------------
1999 1998
------------ ------------
DEFERRED TAX ASSETS
Allowance for losses on loans .................... $ 975,816 $ 761,440
Pension liability ................................ 327,539 306,462
Unearned ESOP shares ............................. 371,290 422,071
Unrealized loss on securities available for sale . 1,080,801 --
Core deposit premium ............................. 657,904 359,209
------------ ------------
Total gross deferred tax assets .................. 3,413,350 1,849,182
------------ ------------
DEFERRED TAX LIABILITIES
FHLB stock dividends ............................. 894,222 585,949
Deferred loan fees ............................... 1,262,694 919,314
Tax bad debt reserve in excess of base-
year reserve ..................................... 1,224,537 1,469,444
Unrealized gain on securities held for sale ...... -- 1,735,484
Other ............................................ 611,624 794,935
------------ ------------
Total gross deferred tax liabilities ............. 3,993,077 5,505,126
------------ ------------
Net deferred tax liability ....................... $ 579,727 $ 3,655,944
============ ============
At September 30, 1996 the Company created a valuation allowance of $648,837
to offset the deferred tax asset associated with the realized capital loss on
the U.S. Federal securities mutual bond fund because management was not assured
of being able to realize a capital gain and the related tax benefit. During the
year ended September 30, 1997, the Company, through sale of certain investments,
realized a capital gain for tax purposes that assured realization of the tax
benefit and thus reduced the valuation allowance to zero. There continues to be
no valuation allowance at September 30, 1999.
The Company has qualified under provisions of the Internal Revenue Code to
compute federal income taxes after deductions of additions to the bad debt
reserves. At September 30, 1999, the Company had a taxable temporary difference
of approximately $10.5 million that arose before 1988 (base-year amount). In
accordance with SFAS No. 109, a deferred tax liability has not been recognized
for the temporary difference. Management does not expect this temporary
difference to reverse in the foreseeable future.
(12) Commitments and Contingencies
In the ordinary course of business, the Company has various outstanding
commitments and contingencies that are not reflected in the accompanying
consolidated financial statements. In addition, the Company is a defendant in
certain claims and legal actions arising in the ordinary course of business. In
the opinion of management, after consultation with legal counsel, the ultimate
disposition of these matters is not expected to have a material adverse effect
on the consolidated financial condition of the Company.
(13) Shareholders' Equity
In September 1998, the Board of Directors authorized the repurchase of
approximately 20% of the Company's outstanding common stock. The repurchase was
completed through a "Modified Dutch Auction Tender." Under this procedure, the
Company's shareholders were given the opportunity to sell part or all of their
shares to the Company at a price of not less than $18.00 per share and not more
than $20.00 per share. Results of the offer were finalized on January 15, 1999
when the Company announced purchase of 1,984,090 shares at $19.50 per share.
This represents approximately 85.9% of the shares tendered at $19.50 per share
or below, and 64.7% of all shares tendered. The cost of the shares purchased was
approximately $39.3 million. The effect of the transaction is reflected in a
reduction in cash and investments and a reduction in equity.
The table below summarizes repurchases of the Company's common stock which
were approved by the Board of Directors and completed by management.
Number Average
Month Completed of Shares Price
- ---------------------------------------- --------- --------
September 1996 ......................... 620,655 $14.33
January 1997 ........................... 1,161,247 15.91
May 1998 ............................... 521,477 21.22
January 1999 ........................... 1,984,040 19.50
In 1999, 1998 and 1997, the vested portion of awarded MRDP shares were
released. Many of the recipients of this award had the Company withhold and
retire some of their shares to pay the associated taxes. This further reduced
the number of shares outstanding by 24,299, 22,608 and 21,689 shares,
respectively, and reduced equity by $353,407, $498,054 and $377,000,
respectively.
At the time of conversion, the Association established a liquidation
account in an amount equal to its retained earnings as of June 30, 1995, the
date of the latest statement of financial condition used in the final conversion
prospectus. The liquidation account will be maintained for the benefit of
eligible withdrawable account holders who have maintained their deposit accounts
in the Association after conversion. In the event of a complete liquidation of
the Association (and only in such an event), eligible depositors who have
continued to maintain accounts will be entitled to receive a distribution from
the liquidation account before any liquidation may be made with respect to
common stock. The Association may not declare or pay cash dividends if the
effect thereof would reduce its regulatory capital below the amount required for
the liquidation account.
The Company's Articles of Incorporation authorize the issuance of 500,000
shares of preferred stock, having a par value of $.01 per share, in series and
to fix and state the powers, designations, preferences and relative rights of
the shares of such series, and the qualifications, limitations and restrictions
thereof.
(14) Earnings Per Share
Earnings per share ("EPS") is computed in accordance with SFAS No. 128,
Earnings per Share, which was adopted by the Company as of December 31, 1997.
EPS for all prior periods have been restated to reflect the adoption. Shares
held by the Company's ESOP that are committed for release are considered
contingently issuable shares and are included in the computation of basic EPS.
Diluted EPS is computed using the treasury stock method, giving effect to
potential additional common shares that were outstanding during the period.
Potential dilutive common shares include shares awarded but not released under
the Company's MRDP, and stock options granted under the Stock Option Plan.
Following is a summary of the effect of dilutive securities on weighted average
number of shares (denominator) for the basic and diluted EPS calculations. There
are no resulting adjustments to net earnings.
Year Ended September 30,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
Weighted average common
shares outstanding - basic ................................ 7,564,415 9,115,404 9,487,848
----------- ----------- -----------
Effect of Dilutive Securities on Number of Shares:
MRDP shares ............................................... 23,923 64,188 45,824
Stock options ............................................. 160,189 341,657 228,787
----------- ----------- -----------
Total Dilutive Securities ................................. 184,112 405,845 274,611
----------- ----------- -----------
Weighted average common shares
outstanding - with dilution .............................. 7,748,527 9,521,249 9,762,459
=========== =========== ===========
(15) Employee Benefit Plans
Employee Retirement Plan
The Company is a member of a multiple-employer trusteed pension plan
("Plan") covering all employees with at least one year of service and pays
direct pensions to certain retired employees. Benefits are based on years of
service with the Company and salary excluding bonuses, fees, commissions, etc.
Participants are vested in their accrued benefits after five years of service.
Pension expense of $40,828, $180,000, and $170,613 was incurred during the years
ended September 30, 1999, 1998, and 1997, respectively. Separate actuarial
valuations, including computed value of vested benefits, are not made with
respect to each contributing employer, nor are the plan assets so segregated by
the trustee. The Plan had an over-funded accumulated benefit of approximately
$564.7 million at June 30, 1999.
Director Deferred Compensation Plan
The Company also has an unfunded supplemental benefits plan to provide
members of the Board of Directors with supplemental retirement benefits.
Supplemental benefits are based on monthly fees approved by the Compensation
Committee of the Board. Pension costs recognized for the years ended September
30, 1999, 1998, and 1997 were $71,052, $71,052, and $71,052, respectively. At
September 30, 1999 and 1998, the projected benefit obligation was $833,644 and
$779,392, respectively.
Management Recognition and Development Plan
In February 1996, the Board of Directors approved a MRDP for the benefit of
officers and non- employee directors which authorizes the grant of 489,325
common stock shares. The MRDP was approved by the Company's shareholders on
April 9, 1996. Those eligible to receive benefits under the MRDP are determined
by members of a committee appointed by the Board of Directors of the Company.
MRDP awards vest over a five-year period in equal installments beginning on
April 9, 1997 (the first anniversary of the effective date of the MRDP) or upon
the participant's death or disability. On April 9, 1996, 391,459 shares were
awarded to officers and directors. On November 19, 1997 a new award of 6,116
shares was made to a director. On January 4, 1999 a new award of 4,893 was made
to an officer. During 1998, 17,616 shares awarded under the plan were forfeited
upon resignation of an officer. The Company recognizes compensation expense in
accordance with the vesting schedule during the years in which the shares are
payable based on the fair value of the common stock on the grant date.
Compensation expense for the years ended September 30, 1999, 1998 and 1997 was
$1.0 million, $1.1 million and $1.1 million, respectively.
Stock Option Plan
In February 1996, the Board of Directors adopted a Stock Option Plan
("Stock Plan") for the benefit of certain employees and directors. The Stock
Plan was approved by the Company's shareholders on April 9, 1996. The maximum
number of common shares which may be issued under the Stock Plan is 1,223,313
shares with a maximum term of ten years for each option from the date of grant.
The initial awards were granted on April 9, 1996 at the fair value of the common
stock on that date ($13.125). All initial awards vest in equal installments over
a five year period from the grant date and expire during April 2006. Unvested
options become immediately exercisable in the event of death or disability.
Option activity under the Stock Plan is as follows:
Weighted
Number of Average
Shares Exercise Price
------------ --------------
Outstanding, October 1, 1996 ........... 971,308 $13.125
Granted ................................ -- --
Exercised .............................. -- --
Canceled ............................... -- --
----------
Outstanding, September 30, 1997 ........ 971,308 $13.125
Granted ................................ 23,243 $20.577
Exercised .............................. (31,317) $13.125
Canceled ............................... (46,976) $13.125
----------
Outstanding, September 30, 1998 ........ 916,258 $13.314
Granted ................................ -- --
Exercised .............................. -- --
Canceled ............................... -- --
----------
Outstanding, September 30, 1999 ........ 916,258 $13.314
========== =======
At September 30, 1999, 275,738 shares were available for future grants
under the Stock Plan.
Additional information regarding options outstanding as of September 30, 1999 is
as follows:
Weighted Avg.
Options Options Remaining
Exercise Price Outstanding Exercisable Contractual Life
- -------------- ----------- ----------- ----------------
$13.125 893,015 535,809 6.5
$20.577 23,243 4,649 8.1
----------- -----------
916,258 540,458
=========== ===========
Additional Stock Plan Information
As discussed in Note 1, the Company continues to account for its
stock-based awards using the intrinsic value method in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees and its related
interpretations. Accordingly, no compensation expense has been recognized in the
financial statements for employee stock arrangements.
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
disclosure of pro forma net income and earnings per share had the Company
adopted the fair value method as of the beginning of fiscal 1996. Under SFAS No.
123, the fair value of stock-based awards to employees is calculated through the
use of option pricing models, even though such models were developed to estimate
fair value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option awards.
These models also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the calculated
values.
The Company's calculations were made using the Black-Scholes option pricing
model with the following weighted average assumptions:
November 1997 April 1996
Grant Grant
------------- -----------
Risk free interest rates ............... 5.79% 6.33%
Expected dividend ...................... 1.75% 1.75%
Expected lives, in years ............... 7.5 7.5
Expected volatility .................... 23.24% 19.63%
The weighted average grant-date fair value of options granted during fiscal
years 1998 and 1996 were $6.65 and $4.12, respectively. The Company's
calculations are based on a multiple option valuation approach and forfeitures
are recognized as they occur. Had compensation cost for these awards been
determined under SFAS No. 123, the Company's net earnings and earnings per share
would have been reduced to the following pro forma amounts:
Year ended September 30,
-----------------------------------------
1999 1998 1997
---------- ---------- ----------
Net earnings:
As reported $9,155,193 $9,551,037 $8,557,750
Pro forma 8,642,299 9,040,753 8,063,929
Earnings per common share - basic
As reported $1.21 $1.05 $0.90
Pro forma $1.14 $0.99 $0.85
Earnings per common share - fully diluted
As reported $1.18 $1.00 $0.88
Pro forma $1.12 $0.95 $0.83
(16) Employee Stock Ownership Plan
As part of the stock conversion consummated on October 4, 1995, the Company
established an ESOP for all employees that are age 21 or older and have
completed two years of service with the Company. The ESOP borrowed $9,786,500
from the Company and used the funds to purchase 978,650 shares of the common
stock of the Company issued in the conversion which would be distributed over a
ten year period. The loan will be repaid principally from the Company's
discretionary contributions to the ESOP over a period of ten years. The loan had
an outstanding balance of $5.9 million and $6.9 million at September 30, 1999
and 1998, respectively, and an interest rate of 8.75%. The loan obligation of
the ESOP is considered unearned compensation and, as such, recorded as a
reduction of the Company's shareholders' equity. Both the loan obligation and
the unearned compensation are reduced by the amount of loan repayments made by
the ESOP. Shares purchased with the loan proceeds are held in a suspense account
for allocation among participants as the loan is repaid. Contributions to the
ESOP and shares released from the suspense account are allocated among
participants on the basis of compensation in the year of allocation. Benefits
are fully vested at all times under the ESOP. Forfeitures are reallocated to
remaining plan participants and may reduce the Company's contributions. Benefits
may be payable on retirement, death, disability, or separation from service.
Since the Company's annual contributions are discretionary, benefits payable
under the ESOP cannot be estimated. Compensation expense is recognized to the
extent of the fair value of shares committed to be released. The Company
recorded compensation expense under the ESOP of $1.6 million, $2.0 million, and
$1.7 million for the years ended September 30, 1999, 1998 and 1997,
respectively, and 97,865 shares were allocated among the participants in each of
those years.
(17) Fair Value of Financial Instruments
Financial instruments have been construed to generally mean cash or a
contract that implies an obligation to deliver cash or another financial
instrument to another entity.
September 30, 1999 September 30, 1998
--------------------------- ---------------------------
Carrying Fair Carrying Fair
amount value amount value
Financial Assets ------------ ------------ ------------ ------------
Cash and due from banks ............ $ 21,123,217 $ 21,123,217 $ 25,644,460 $ 25,644,460
Interest earning deposits with banks 1,231,516 1,231,516 11,496,026 11,496,026
Federal funds sold and
securities purchased under
agreements to resell ............... 2,167,856 2,167,856 29,844,783 29,844,783
Investment securities
available for sale ................. 158,648,057 158,648,057 203,224,184 203,224,184
Investment securities held
to maturity ........................ 559,512 577,455 2,888,759 2,928,324
Mortgage backed and related
securities available for sale ...... 72,695,555 72,695,555 43,335,857 43,335,857
Mortgage backed and related
securities held to maturity ........ 2,600,920 2,596,408 3,661,683 3,696,444
Loans receivable, net .............. 739,793,403 714,285,234 668,146,380 721,213,589
FHLB stock ......................... 10,957,300 10,957,300 10,172,900 10,172,900
Financial Liabilities
Deposit liabilities ................ 720,401,112 722,373,174 689,541,345 693,936,011
FHLB advances ...................... 197,000,000 192,637,192 167,000,000 166,432,152
Short term borrowings .............. -- -- 12,112,500 12,112,500
(18) Regulatory Capital Requirements
The Company is not subject to any regulatory capital requirements. The
Association, however, is subject to various regulatory capital requirements
administered by the Office of Thrift Supervision ("OTS"). Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary action by regulators that, if undertaken, could have a
direct material effect on the Association's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Association must meet specific capital guidelines that involve quantitative
measures of the Association's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Association's
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Association to maintain minimum amounts and ratios of total and Tier
I capital to risk-weighted assets, of Tier I capital to total assets, and
tangible capital to tangible assets (set forth in the table below). Management
believes that the Association meets all capital adequacy requirements to which
it is subject as of September 30, 1999.
As of September 30, 1999, the most recent notification from the OTS
categorized the Association as "well capitalized" under the regulatory framework
for prompt corrective action. To be categorized as "well-capitalized," the
Association must maintain minimum total risk-based, Tier I risk-based, and
tangible capital ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
At periodic intervals, the OTS and FDIC routinely examine the Association
as part of their legally prescribed oversight of the thrift industry. Based on
these examinations, the regulators can direct that the Association's financial
statements be adjusted in accordance with their findings. A future examination
by the OTS or the FDIC could include a review of certain transactions or other
amounts reported in the Association's 1999 financial statements. In view of the
uncertain regulatory environment in which the Association now operates, the
extent, if any, to which a forthcoming regulatory examination may ultimately
result in adjustments to the 1999 financial statements cannot be presently
determined.
Categorized as "Well
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
--------------------- -------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----- ----------- ----- ----------- -----
As of September 30, 1999
Total Capital: ........... $95,495,327 17.4% $42,888,616 8.0% $53,610,770 10.0%
(To Risk Weighted Assets)
Tier I Capital: .......... 93,011,702 17.0% N/A N/A 32,166,462 6.0%
(To Risk Weighted Assets)
Tier I Capital: .......... 93,011,702 8.9% 30,832,614 3.0% 51,387,690 5.0%
(To Total Assets)
Tangible Capital: ........ 93,011,702 8.9% 15,416,307 1.5% N/A N/A
(To Tangible Assets)
As of September 30, 1998
Total Capital: ........... $83,179,044 16.1% $41,257,520 8.0% $51,571,900 10.0%
(To Risk Weighted Assets)
Tier I Capital: .......... 81,232,367 15.8% N/A N/A 30,943,140 6.0%
(To Risk Weighted Assets)
Tier I Capital: .......... 81,232,367 8.3% 29,487,686 3.0% 49,146,143 5.0%
(To Total Assets)
Tangible Capital: ........ 81,232,367 8.3% 14,743,843 1.5% N/A N/A
(To Tangible Assets)
The following table is a reconciliation of the Association's capital, calculated
according to generally accepted accounting principles, to regulatory tangible
and risk-based capital:
September 30, 1999 September 30, 1998
------------------ ------------------
Association's equity $101,042,299 $95,448,624
Unrealized securities (gains) losses 1,747,744 (2,785,239)
Core deposit intangible (9,778,341) (11,431,018)
----------- -----------
Tangible capital 93,011,702 81,232,367
General valuation allowances 2,483,625 1,946,677
----------- -----------
Total capital $ 95,495,327 $83,179,044
========== ==========
(19) Financial Instruments with Off-Balance Sheet Risk and Concentrations of
Credit Risk
The Company is party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments generally include commitments to originate mortgage
and consumer loans. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the balance
sheet. The Company's maximum exposure to credit loss in the event of
nonperformance by the borrower is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments as
it does for on-balance sheet instruments. Commitments to extend credit are
conditional 45 day agreements to lend to a customer subject to the Company's
usual terms and conditions.
At September 30, 1999, loan commitments amounted to approximately $11.8
million comprised of $4.4 million in variable rate loans ranging from 5.50% to
10.50% and $7.4 million in fixed rate loans ranging from 6.75% to 10.50%. At
September 30, 1998 commitments amounted to approximately $31.2 million comprised
of $305,000 in variable rate loans ranging from 8.99% to 14.50% and $30.9
million in fixed rate loans ranging from 6.13% to 10.75%.
At September 30, 1999, the Company also had $2.0 million in commitments to
sell loans to FNMA.
The Company originates residential real estate loans and, to a lesser
extent, commercial and multi-family real estate, commercial business and
consumer loans. Over 79% of the mortgage loans in the Association's portfolio
are secured by properties located in Klamath, Jackson, and Deschutes counties in
Southern and Central Oregon. An economic downturn in these areas would likely
have a negative impact on the Company's results of operations depending on the
severity of the downturn.
(20) Parent Company Financial Information
Condensed financial information as of September 30, 1999 and 1998, and for
the years then ended, for Klamath First Bancorp, Inc. is presented and should be
read in conjunction with the consolidated financial statements and the notes
thereto:
BALANCE SHEETS
September 30,
------------------------------
1999 1998
------------- -------------
Cash and cash equivalents ........................ $ 5,844,155 $ 41,737,415
Investment and mortgage-backed securities ........ 2,762,506 20,003,078
Investment in wholly-owned subsidiary ............ 101,042,299 95,448,624
Other assets ..................................... 1,034,776 1,099,598
------------- -------------
Total assets ..................................... $ 110,683,736 $ 158,288,715
============= =============
Liabilities
Short-term borrowings ............................ $ -- $ 12,112,500
Other liabilities ................................ 1,098,273 1,095,260
------------- -------------
Total liabilities ................................ 1,098,273 13,207,760
------------- -------------
Shareholders' equity
Common stock ..................................... 79,084 99,168
Additional paid-in capital ....................... 43,794,535 82,486,183
Retained earnings ................................ 75,103,040 73,883,019
Unearned ESOP shares at cost ..................... (5,871,900) (6,850,550)
Unearned MRDP shares at cost ..................... (3,519,296) (4,536,865)
------------- -------------
Total shareholders' equity ....................... 109,585,463 145,080,955
------------- -------------
Total liabilities and shareholders' equity ....... $ 110,683,736 $ 158,288,715
============= =============
STATEMENTS OF EARNINGS
Year Ended September 30,
------------------------------
1999 1998
------------- -------------
Equity in undistributed income of subsidiary ..... $ 9,221,480 $ 9,259,035
Total interest income ............................ 1,675,756 2,995,169
Total interest expense ........................... 177,568 850,122
Non-interest income .............................. 77 --
Non-interest expense ............................. 1,631,674 1,674,321
------------- -------------
Earnings before income taxes ..................... 9,088,071 9,729,761
Provision (benefit) for income taxes ............. (67,122) 178,724
------------- -------------
Net earnings ..................................... $ 9,155,193 $ 9,551,037
============= =============
STATEMENTS OF CASH FLOWS
Year Ended September 30,
------------------------------
1999 1998
------------- -------------
Net cash flows from operating activities ......... $ 963,814 $ 34,654,657
------------- -------------
Cash flows from investing activities
Investment in subsidiary ......................... (302,892) (261,300)
Maturity of investment and mortgage-
backed securities ................................ 76,275,337 20,227,224
(Purchase) sale of investment and mortgage-
backed securities ................................ (58,814,489) (5,035,162)
------------- -------------
Net cash flows provided by investing activities .. 17,157,956 14,930,762
------------- -------------
Cash flows from financing activities
Cost of ESOP shares released ..................... 978,650 978,650
Proceeds from short-term borrowings .............. 8,095,000 72,503,199
Repayments of short-term borrowings .............. (20,207,500) (77,468,199)
Stock repurchase and retirement .................. (39,334,140) (11,561,483)
Proceeds from exercise of stock options .......... -- 411,035
Dividends paid ................................... (3,547,040) (3,447,740)
------------- -------------
Net cash flows used in financing activities ...... (54,015,030) (18,584,538)
------------- -------------
Net increase/(decrease) in cash and cash
equivalents ...................................... (35,893,260) 31,000,881
Cash and cash equivalents beginning of year ...... 41,737,415 10,736,534
------------- -------------
Cash and cash equivalents end of year ............ $ 5,844,155 $ 41,737,415
============= =============
Consolidated Supplemental Data
Selected Quarterly Financial Data
(unaudited)
Year Ended September 30, 1999
---------------------------------------------
December March June September
--------- --------- --------- ---------
(In thousands except per share data)
Total interest income ............................ $ 18,278 $ 17,686 $ 17,802 $ 17,925
Total interest expense ........................... 9,788 9,461 9,441 9,692
--------- --------- --------- ---------
Net interest income .............................. 8,490 8,225 8,361 8,233
Provision for loan losses ........................ 123 303 243 263
--------- --------- --------- ---------
Net interest income after provision .............. 8,367 7,922 8,118 7,970
Non-interest income .............................. 899 946 827 957
Non-interest expense ............................. 5,075 5,064 5,763 5,284
--------- --------- --------- ---------
Earnings before income taxes ..................... 4,191 3,804 3,182 3,643
Provision for income taxes ....................... 1,737 1,509 1,292 1,127
--------- --------- --------- ---------
Net earnings ..................................... $ 2,454 $ 2,295 $ 1,890 $ 2,516
========= ========= ========= =========
Net earnings per share - basic ................... $ 0.28 $ 0.32 $ 0.27 $ 0.36
========= ========= ========= =========
Net earnings per share - fully diluted ........... $ 0.27 $ 0.31 $ 0.26 $ 0.35
========= ========= ========= =========
Year Ended September 30, 1998
---------------------------------------------
December March June September
--------- --------- --------- ---------
(In thousands except per share data)
Total interest income ............................ $ 16,945 $ 17,180 $ 17,710 $ 17,898
Total interest expense ........................... 9,186 9,123 9,710 9,829
--------- --------- --------- ---------
Net interest income .............................. 7,759 8,057 8,000 8,069
Provision for loan losses ........................ 75 91 198 310
--------- --------- --------- ---------
Net interest income after provision .............. 7,684 7,966 7,802 7,759
Non-interest income .............................. 697 577 823 1,106
Non-interest expense ............................. 4,829 4,888 4,832 4,974
--------- --------- --------- ---------
Earnings before income taxes ..................... 3,552 3,655 3,793 3,891
Provision for income taxes ....................... 1,406 1,447 1,302 1,184
--------- --------- --------- ---------
Net earnings ..................................... $ 2,146 $ 2,208 $ 2,491 $ 2,707
========= ========= ========= =========
Net earnings per share - basic ................... $ 0.23 $ 0.24 $ 0.28 $ 0.31
========= ========= ========= =========
Net earnings per share - fully diluted ........... $ 0.22 $ 0.23 $ 0.26 $ 0.30
========= ========= ========= =========
Klamath First Bancorp, Inc.
Corporate Information
Corporate Special Counsel
Headquarters Breyer & Associates PC
540 Main Street 1100 New York Ave. N.W.
Klamath Falls, OR 97601 Suite 700 East
541-882-3444 Washington, DC 20005
www.klamathfirstfederal.com (202)737-7900
Independent Transfer Agent
Auditors Registrar & Transfer Co.
Deloitte & Touche LLP 10 Commerce Drive
3900 U.S. Bancorp Tower Cranford, NJ 07016-3572
111 SW Fifth Avenue (800) 866-1340
Portland, OR 97204-3698
503-222-1341
Corporate Counsel
Craig M. Moore
540 Main Street
Klamath Falls, OR 97601
541-882-3444
Common Stock
Traded over-the-counter/Nasdaq National Market
Nasdaq Symbol: KFBI
Form 10-K Information
A copy of the Form 10-K, as filed with the Securities and Exchange Commission,
will be furnished without charge to shareholders as of the record date for
voting at the annual meeting of shareholders upon written request to:
Marshall Alexander,
Senior Vice President - Chief Financial Officer
Klamath First Bancorp, Inc.
540 Main Street
Klamath Falls, OR 97601
Annual Meeting
The annual meeting of shareholders will be held Wednesday, January 26, 2000
beginning at 2:00 p.m., Pacific Time at:
The Shilo Inn
2500 Almond Street
Klamath Falls, OR 97601.
Shareholders of record as of the close of business on November 29, 1999 shall be
those entitled to notice of and to vote at the meeting.