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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-26556
KLAMATH FIRST BANCORP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Oregon 93-1180440
- --------------------------------------------- ----------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) I.D. Number)
540 Main Street, Klamath Falls, Oregon 97601
- --------------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (541) 882-3444
--------------
Securities registered pursuant to Section 12(b) of the Act: None
--------
Securities registered pursuant
to Section 12(g) of the Act: Common Stock, par value $.01 per share
--------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
Indicate by check mark whether disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or other information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K.
YES X NO
As of December 15, 1998, there were issued and outstanding 9,916,766 shares
of the Registrant's common stock. The Registrant's voting stock is traded
over-the-counter and is listed on the Nasdaq National Market under the symbol
"KFBI." The aggregate market value of the voting stock held by nonaffiliates of
the Registrant, based on the closing sales price of the Registrant's common
stock as quoted on the Nasdaq National Market on December 15, 1998 of $18.38,
was $155,696,649.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Registrant's Annual Report to Shareholders for the Fiscal
Year Ended September 30, 1998 ("Annual Report") (Parts I and II).
2. Portions of Registrant's Definitive Proxy Statement for the 1999 Annual
Meeting of Shareholders (Part III).
PART I
Item 1. Business
General
Klamath First Bancorp, Inc. ("Company"), an Oregon corporation, was
organized on June 16, 1995 for the purpose of becoming the holding company for
Klamath First Federal Savings and Loan Association ("Association") upon the
Association's conversion from a federal mutual to a federal stock savings and
loan association ("Conversion"). The Conversion was completed on October 4,
1995. At September 30, 1998, the Company had total assets of $1.0 billion, total
deposits of $689.5 million and shareholders' equity of $145.1 million. All
references to the Company herein include the Association where applicable.
The Association was organized in 1934. The Association is regulated by the
Office of Thrift Supervision ("OTS") and its deposits are insured up to
applicable limits under the Savings Association Insurance Fund ("SAIF") of the
Federal Deposit Insurance Corporation ("FDIC"). The Association also is a member
of the Federal Home Loan Bank ("FHLB") System through the FHLB of Seattle.
In July 1997, the Association acquired 25 former First Interstate Bank
branches from Wells Fargo Bank, N.A. The new branches are located in rural
communities throughout Oregon, expanding and complementing the existing network
of branches. The acquisition was accounted for as a purchase and resulted in the
addition of approximately $241.3 million in deposits on the acquisition date of
July 18, 1997.
The Association is a traditional, community-oriented savings and loan
association that focuses on customer service within its primary market area.
Accordingly, the Association is primarily engaged in attracting deposits from
the general public through its offices and using those and other available
sources of funds to originate permanent residential one- to four-family real
estate loans within its market area and to a lesser extent on commercial
property and multi-family dwellings. At September 30, 1998, permanent
residential one- to four-family real estate loans totaled $577.5 million, or
81.95% of total loans. While the Association has historically emphasized fixed
rate mortgage lending, it has been diversifying its loan portfolio by focusing
on increasing the number of originations of commercial real estate loans,
multi-family residential loans, residential construction loans, small business
loans and non-mortgage consumer loans. A significant portion of these newer loan
products carry adjustable rates, higher yields, or shorter terms than the
traditional fixed rate mortgages. This lending strategy is designed to enhance
earnings, reduce interest rate risk, and provide a more complete range of
financial services to customers and the local communities served by the
Association. At September 30, 1998, the Association's total loan portfolio
consisted of 89.67% fixed rate and 10.33% adjustable rate loans, after loans in
process and non-performing loans.
Modified Dutch Auction Tender
In September 1998, the Board of Directors authorized the repurchase of up
to 1,983,353 shares of the Company's common stock, which represents
approximately 20% of its outstanding shares as of September 30, 1998. The
repurchase is being made through a "Modified Dutch Auction Tender." Under this
procedure, the Company's shareholders are 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. The Company expects to complete the
repurchase early in 1999.
Market Area
As a result of the branch acquisition in 1997, the Association's market
area expanded to include 33 locations in 22 of Oregon's 36 counties. Two new
branch locations were added in 1998. The Association's primary market area,
which encompasses the state of Oregon and some adjacent areas of California and
Washington, can be characterized as a predominantly rural area containing a
number of communities that are experiencing moderate to rapid population growth.
The favorable population growth in the market area, particularly in Southern
Oregon, has been supported in large part by the favorable climate, and by
favorable real estate values. The economy of the market area is still based
primarily on agriculture and lumber and wood products, but is experiencing
diversification into light manufacturing, health care and other services, and
other sectors. Tourism is a significant industry in many regions of the market
area including Central Oregon and the Southern Oregon coast.
1
Yields Earned and Rates Paid
The following table sets forth, for the periods and at the date indicated,
the weighted average yields earned on interest-earning assets, the weighted
average interest rates paid on interest-bearing liabilities, and the interest
rate spread between the weighted average yields earned and rates paid.
Years Ended
At September 30,
September 30, ------------------------------------
1998 1998 1997 1996
------------ ---- ---- ----
Weighted average yield:
Loans receivable ............................ 7.71% 8.06% 7.92% 8.00%
Mortgage backed and related securities ...... 6.26 6.03 6.34 6.00
Investment securities ....................... 6.01 6.05 6.10 6.12
Federal funds sold .......................... 5.70 5.45 5.31 7.09
Interest-earning deposits ................... 5.48 5.35 5.32 4.95
FHLB stock .................................. 7.50 7.73 7.70 7.64
Combined weighted average yield on
interest-bearing assets ....................... 7.22 7.34 7.40 7.45
---- ---- ---- ----
Weighted average rate paid on:
Tax and insurance reserve ................... 2.47 2.47 2.97 3.30
Passbook and statement savings .............. 2.44 2.70 3.15 2.87
Interest-bearing checking ................... 1.33 1.48 2.20 2.47
Money market ................................ 3.92 3.86 3.85 3.88
Certificates of deposit ..................... 5.81 5.69 5.76 5.94
FHLB advances/Short term borrowings ......... 5.29 5.63 5.68 5.60
Combined weighted average rate on
interest-bearing liabilities .................. 4.86 4.77 5.12 5.23
---- ---- ---- ----
Net interest spread ............................ 2.36% 2.57% 2.28% 2.22%
==== ==== ==== ====
Average Balances, Net Interest Income and Yields Earned and Rates Paid
Reference is made to the section entitled "Average Balances, Net Interest
Income and Yields Earned and Rates Paid" on page 16 of the 1998 Annual Report to
Stockholders ("Annual Report"), which section is incorporated herein by
reference.
Interest Sensitivity Gap Analysis
Reference is made to the section entitled "Interest Sensitivity Gap
Analysis" on page 12 of the Annual Report, which section is incorporated herein
by reference.
Rate/Volume Analysis
Reference is made to the section entitled "Rate/Volume Analysis" on page 17
of the Annual Report, which section is incorporated herein by reference.
2
Lending Activities
General. As a federally chartered savings and loan association, the
Association has authority to originate and purchase loans secured by real estate
located throughout the United States. Notwithstanding this nationwide lending
authority, over 86% of the mortgage loans in the Association's portfolio are
secured by properties located in Klamath, Jackson and Deschutes counties in
Southern and Central Oregon. With the expanded market area provided by the
branch acquisition in 1997, the Association anticipates its mortgage lending
will diversify throughout the state of Oregon. It is management's intention,
subject to market conditions, that the Association will remain a traditional
financial institution originating long-term mortgage loans for the purchase,
construction or refinance of one- to four-family residential real estate.
However, to enhance interest income and reduce interest rate risk, the
Association is placing increased emphasis on the origination or purchase of
adjustable rate loans secured by multi-family residential and commercial real
estate, the majority of which are located outside Klamath, Jackson, and
Deschutes counties.
Permanent residential one- to four-family mortgage loans amounted to $577.5
million, or 81.95%, of the Association's total loan portfolio before net items,
at September 30, 1998. The Association originates other loans secured by
multi-family residential and commercial real estate, construction and land
loans. Those loans amounted to $115.2 million, or 16.34%, of the total loan
portfolio, before net items, at September 30, 1998. Approximately 1.71%, or
$12.1 million, of the Association's total loan portfolio, before net items, as
of September 30, 1998 consisted of non-real estate loans.
Permissible loans-to-one borrower by the Association are generally limited
to 15% of unimpaired capital and surplus. The Association's loan-to-one borrower
limitation was $14.3 million at September 30, 1998. At September 30, 1998, the
Association had 25 borrowing relationships with outstanding balances in excess
of $1.0 million, the largest of which amounted to $4.8 million and consisted of
ten loans, all of which were secured by land development and single family
construction projects. All of these loans were performing in accordance with
their terms at September 30, 1998.
The Association has placed a growing emphasis on the origination of
adjustable rate loans in order to increase the interest rate sensitivity of its
loan portfolio. In the current interest rate environment, adjustable rate
mortgages (ARMs) are less attractive to borrowers than the low fixed rate
mortgages available. The Association has, however, been successful in expanding
the production of adjustable rate consumer loans and has purchased adjustable
rate multi-family residential and non-residential real estate loans. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Market Risk and Asset/Liability Management" and "INTEREST
SENSITIVITY GAP ANALYSIS" in the Annual Report. At September 30, 1998, $70.0
million, or 10.33% of loans in the Association's total loan portfolio, after
loans in process and non-performing loans, consisted of ARM loans.
3
Loan Portfolio Analysis. The following table sets forth the composition of
the loan portfolio by type of loan at the dates indicated.
At September 30,
----------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------ ---------------- ----------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
Real estate loans:
Permanent residential
one- to four-family .... $577,471 81.95% $498,595 86.47% $447,004 91.50% $381,683 91.68% $337,212 90.06%
Multi-family residential . 19,230 2.73 16,881 2.93 6,555 1.34 7,433 1.79 8,209 2.19
Construction ............. 64,289 9.12 30,487 5.29 14,276 2.92 9,807 2.36 12,625 3.37
Commercial ............... 29,457 4.18 22,639 3.93 15,645 3.20 13,984 3.36 13,425 3.58
Land ..................... 2,185 0.31 1,586 0.27 1,152 0.24 1,072 0.25 1,180 0.32
-------- ------ -------- ------ -------- ------ -------- ------ -------- -----
Total real estate loans .... 692,632 98.29 570,188 98.89 484,632 99.20 413,979 99.44 372,651 99.52
-------- ------ -------- ------ -------- ------ -------- ------ -------- -----
Non-real estate loans:
Savings accounts ......... 1,991 0.28 1,711 0.30 1,640 0.34 1,966 0.47 1,316 0.35
Home improvement and
home equity loans ..... 5,750 0.82 3,486 0.60 1,977 0.40 -- -- -- --
Other .................... 4,330 0.61 1,190 0.21 302 0.06 367 0.09 472 0.13
-------- ------ -------- ------ -------- ------ -------- ------ -------- -----
Total non-real estate loans 12,071 1.71 6,387 1.11 3,919 0.80 2,333 0.56 1,788 0.48
-------- ------ -------- ------ -------- ------ -------- ------ -------- -----
Total loans ............... 704,703 100.00% 576,575 100.00% 488,551 100.00% 416,312 100.00% 374,439 100.00%
====== ====== ====== ====== ======
Less:
Undisbursed portion of loans 26,987 17,096 8,622 7,203 9,310
Deferred loan fees ......... 7,620 6,358 5,445 4,757 4,252
Allowance for loan losses .. 1,950 1,296 928 808 755
-------- -------- -------- -------- -----
Net loans .................. $668,146 $551,825 $473,556 $403,544 $360,122
======== ======== ======== ======== ========
4
The following table sets forth the amount of fixed-rate and adjustable rate
loans, net of loans in process and non-performing loans, included in the total
loan portfolio at the dates indicated.
At September 30,
--------------------------------------------------
1998 1997
--------------------- ----------------------
Amount Percent Amount Percent
(Dollars in thousands)
Fixed rate ....................................$607,112 89.67% $491,703 87.98%
Adjustable-rate ................................ 69,958 10.33 67,189 12.02
-------- ------- -------- -------
Total ....................................$677,070 100.00% $558,892 100.00%
======== ======= ======== =======
Permanent Residential One- to Four-Family Mortgage Loans. The primary
lending activity of the Association is the origination of permanent residential
one- to four-family mortgage loans. Management believes that this policy of
focusing on single-family residential mortgage loans has been successful in
contributing to interest income while keeping delinquencies and losses to a
minimum. At September 30, 1998, $577.5 million, or 81.95%, of the Association's
total loan portfolio, before net items, consisted of permanent residential one-
to four-family mortgage loans. As of such date, the average balance of the
Association's permanent residential one- to four-family mortgage loans was
$67,439.
The Association presently originates both fixed-rate mortgage loans and ARM
loans secured by one- to four-family properties with terms of 15 to 30 years.
Historically, most of the loans originated by the Association have been fixed
rate loans secured by one- to four-family properties. At September 30, 1998,
$573.8 million, or 84.75% of the total loans after loans in process and
non-performing loans were fixed rate one- to four-family loans and $30.2
million, or 4.45%, were ARM loans. Borrower demand for ARM loans versus
fixed-rate mortgage loans is a function of the level of interest rates, the
expectations of changes in the level of interest rates and the difference
between the initial interest rates and fees charged for each type of loan. The
relative amount of fixed-rate mortgage loans and ARM loans that can be
originated at any time is largely determined by the demand for each in a
competitive environment.
The Association qualifies the ARM loan borrower based on the borrower's
ability to repay the loan using the fully indexed rate. As a result, the
Association believes that the potential for delinquencies and defaults on ARM
loans when rates adjust upwards is lessened.
The loan fees charged, interest rates and other provisions of the
Association's ARM loans are determined by the Association on the basis of its
own pricing criteria and competitive market conditions. At September 30, 1998,
the Association charged origination fees ranging from 1.00% to 1.75% on its ARM
loans.
In an attempt to increase adjustable rate mortgages in the loan portfolio,
the Association uses below market "teaser" rates which are competitive with
other institutions originating mortgages in the Association's primary market
area. Initially, ARM loans are priced at the competitive teaser rate and after
one year reprice at 2.875% over the One-Year Constant Maturity Treasury Bill
Index, with a maximum increase or decrease of 2.00% in any one year and 6.00%
over the life of the loan.
The retention of ARM loans in the Association's loan portfolio helps reduce
the Association's exposure to changes in interest rates. There are, however,
unquantifiable credit risks resulting from the potential of increased costs due
to changed rates to be paid by the customer. It is possible that, during periods
of rising interest rates, the risk of default on ARM loans may increase as a
result of repricing with increased costs to the borrower. Furthermore, the ARM
loans originated by the Association generally provide, as a marketing incentive,
for initial rates of interest below the rates which would apply were the
adjustment index used for pricing initially (discounting). These loans are
5
subject to increased risks of default or delinquency because of this. Another
consideration is that although ARM loans allow the Association to increase the
sensitivity of its asset base to changes in the interest rates, the extent of
this interest sensitivity is limited by the periodic and lifetime interest rate
adjustment limits. Because of these considerations, the Association has no
assurance that yields on ARM loans will be sufficient to offset increases in the
Association's cost of funds.
The loan-to-value ratio, maturity and other provisions of the loans made by
the Association generally have reflected the policy of making less than the
maximum loan permissible under applicable regulations, in accordance with sound
lending practices, market conditions and underwriting standards established by
the Association. The Association's lending policies on permanent residential
one- to four-family mortgage loans generally limit the maximum loan-to-value
ratio to 90% of the lesser of the appraised value or purchase price of the
property and generally all permanent residential one- to four-family mortgage
loans in excess of an 80% loan-to-value ratio require private mortgage
insurance. Programs for 95% and 97% loan-to-value are available for owner
occupied purchase transactions.
The Association also has a limited amount of non-owner-occupied permanent
residential one- to four-family mortgage loans in its portfolio. These loans are
underwritten using generally the same criteria as owner-occupied permanent
residential one- to four-family mortgage loans, except that the maximum
loan-to-value ratio is generally 75% of the lesser of the appraised value or
purchase price of the property and such loans are generally provided at an
interest rate higher than owner-occupied loans.
The Association offers fixed-rate, permanent residential one- to
four-family mortgage loans with terms of 15 to 30 years. Substantially all
permanent one- to four-family loans have original contractual terms to maturity
of 30 years. Such loans are amortized on a monthly basis with principal and
interest due each month and customarily include "due-on-sale" clauses. The
Association enforces due-on-sale clauses to the extent permitted under
applicable laws. Substantially all of the Association's mortgage loan portfolio
consists of conventional loans.
Historically, the Association has not originated significant amounts of
mortgage loans on second residences. However, with the branch offices in Bend
and the loan center in Redmond, near popular ski areas and other outdoor
activities, and the branches along the Southern Oregon coast, an increasingly
popular resort and vacation area, the Association believes that there is an
opportunity to engage in such lending within the parameters of its current
underwriting policies. At September 30, 1998, $3.7 million, or 0.52%, of the
Association's loan portfolio consisted of loans on second homes.
Commercial and Multi-Family Real Estate Loans. The Association has
historically engaged in a limited amount of multi-family and commercial real
estate lending. During 1997 and 1998, the Association purchased participations
in loans secured by multi-family and commercial real estate in order to increase
the balance of adjustable rate loans in the portfolio. See "-- Loan
Originations, Purchases, and Sales." At September 30, 1998, $19.2 million, or
2.73%, of the Association's total loan portfolio, before net items, consisted of
loans secured by existing multi-family residential real estate and $29.5
million, or 4.18%, of the Association's total loan portfolio, before net items,
consisted of loans secured by existing commercial real estate. The Association's
commercial and multi-family real estate loans include primarily loans secured by
office buildings, small shopping centers, churches, mini-storage warehouses and
apartment buildings. All of the Association's commercial and multi-family real
estate loans are secured by properties located in the Association's primary
market area. The average outstanding balance of commercial and multi-family real
estate loans was $229,657 at September 30, 1998, the largest of which was a $2.6
million land development loan secured by land and improvements. This loan has
performed in accordance with its terms since origination. Originations of
commercial real estate and multi-family residential real estate amounted to
3.20%, 4.87%, and 2.58% of the Association's total loan originations in the
fiscal years ended September 30, 1998, 1997, and 1996, respectively. The
Association also purchased $4.5 million in multi-family residential loan
participations and $179,000 in commercial real estate participations during the
year ended September 30, 1998.
6
The Association's commercial and multi-family loans generally have terms
which range up to 25 years and loan-to-value ratios of up to 75%. The
Association currently originates fixed and adjustable rate commercial and
multi-family real estate loans. Commercial real estate and multi-family
adjustable rate loans are priced to be competitive with other commercial lenders
in the Association's market area. A variety of terms are available to meet
specific commercial and multi-family residential financing needs. As of
September 30, 1998, $33.3 million, or 4.92%, after loans in process and
non-performing loans, of other mortgage loans, including commercial and
multi-family residential real estate loans, had adjustable rates of interest.
Multi-family residential and commercial real estate lending is generally
considered to involve a higher degree of risk than permanent residential one- to
four-family lending. Such lending typically involves large loan balances
concentrated in a single borrower or groups of related borrowers. In addition,
the payment experience on loans secured by income-producing properties is
typically dependent on the successful operation of the related real estate
project and thus may be subject to a greater extent to adverse conditions in the
real estate market or in the economy generally. The Association generally
attempts to mitigate the risks associated with multi-family commercial and
residential real estate lending by, among other things, lending on collateral
located in its market area and following strict underwriting standards. Loans
considered for purchase are subjected to the same underwriting standards as
those originated in-house.
Construction Loans. The Association makes construction loans primarily to
individuals for the construction of their single-family residences. The
Association also makes loans to builders for the construction of single-family
residences which are not presold at the time of origination ("speculative
loans"). Permanent construction loans generally begin to amortize as permanent
residential one- to four-family mortgage loans within one year of origination
unless extended. Speculative loans are scheduled to pay off in 12 to 18 months.
At September 30, 1998, construction loans amounted to $64.3 million (including
$28.4 million of speculative loans), or 9.12%, of the Association's total loan
portfolio before net items. Construction loans have rates and terms which
generally match the non-construction loans then offered by the Association,
except that during the construction phase, the borrower pays only interest on
the loan. The Association's construction loan agreements generally provide that
loan proceeds are disbursed in increments as construction progresses. The
Association periodically reviews the progress of the underlying construction
project through physical inspections. Construction loans are underwritten
pursuant to the same general guidelines used for originating permanent one- to
four-family loans. Construction lending is generally limited to the
Association's primary market area.
Construction financing is generally considered to involve a higher degree
of risk of loss than financing on improved, owner-occupied real estate because
of the uncertainties of construction, including the possibility of costs
exceeding the initial estimates and, in the case of speculative loans, the need
to obtain a purchaser. The Association has sought to minimize the risks
associated with permanent construction lending by limiting construction loans to
qualified owner-occupied borrowers with construction performed by qualified
state licensed builders located primarily in the Association's market area.
During 1997, the Association began originating construction loans in the
Portland, Oregon metropolitan area through mortgage brokers. These loans are
underwritten using the same standards as loans from the branch locations.
The Association's underwriting criteria are designed to evaluate and
minimize the risks of each construction loan. Interim construction loans are
qualified at permanent rates in order to ensure the capability of the borrower
to repay the loan.
Loan proceeds are disbursed only as construction progresses and inspections
warrant. These loans are underwritten to the same standards and to the same
terms and requirements as one- to four-family purchase mortgage loans, except
the loans provide for disbursement of funds during a construction period of up
to one year. During this period, the borrower is required to make monthly
payments of accrued interest on the outstanding loan balance. Disbursements
during the construction period are limited to no more than the percent of
completion. Up to 95%
7
loan-to-value upon completion of construction may be disbursed if private
mortgage insurance above 80% loan-to-value is in place.
Land Loans. The Association makes loans to individuals for the purpose of
acquiring land to build a permanent residence. These loans generally have terms
not exceeding 15 years and maximum loan-to-value ratios of 75%. As of September
30, 1998, $2.2 million, or 0.31%, of the Association's total loan portfolio
consisted of land loans.
Non-Real Estate Loans. Non-real estate lending has traditionally been a
small part of the Association's business. During 1997, the Association
introduced several new business and consumer loan products, including home
equity lines of credit, automobile and recreational vehicle loans, and personal
and business lines of credit, among others. Non-real estate loans generally have
shorter terms to maturity or repricing and higher interest rates than real
estate loans. As of September 30, 1998, $12.1 million, or 1.71%, of the
Association's total loan portfolio consisted of non-real estate loans. As of
that date, $2.0 million, or .28%, of total loans were secured by savings
accounts. At September 30, 1998, $1.8 million, or 0.25%, of non-real estate
loans consisted of Title I home improvement loans insured by the Federal Housing
Administration and most are secured by liens on the real property.
Loan Maturity and Repricing. The following table sets forth certain
information at September 30, 1998 regarding the dollar amount of total loans,
after loans in process and non-performing loans, maturing in the Association's
portfolio, based on the contractual terms to maturity. Demand loans, loans
having no stated schedule of repayments and no stated maturity, and overdrafts
are reported as due in one year or less.
After One Year
Within One Year Through 5 Years After 5 Years Total
--------------- --------------- ------------- ---------
(In thousands)
Permanent residential
one- to four-family:
Adjustable rate ........................... $28,754 $1,400 $-- $ 30,154
Fixed rate ................................ 15,860 4,064 553,900 573,824
Other mortgage loans:
Adjustable rate ........................... 23,109 10,183 -- 33,292
Fixed rate ................................ 4,142 8,573 15,006 27,721
Non-real estate loans:
Adjustable rate .......................... 6,365 147 -- 6,512
Fixed rate ............................... 2,461 1,343 1,763 5,567
------- ------- -------- --------
Total loans ............................. $80,691 $25,710 $570,669 $667,070
======= ======= ======== ========
Scheduled contractual amortization of loans does not reflect the actual
term of the Association's loan portfolio. The average life of loans is
substantially less than their contractual terms because of prepayments and
due-on-sale clauses, which gives the Association the right to declare a
conventional loan immediately due and payable in the event, among other things,
that the borrower sells the real property subject to the mortgage and the loan
is not repaid.
The dollar amount of all loans, net of loans in process and non-performing
loans, due one year after September 30, 1998, which have fixed interest rates
and have adjustable rates, was $584.6 million and $11.7 million, respectively.
Loan Commitments. The Association issues commitments for fixed and
adjustable rate loans conditioned upon the occurrence of certain events. Such
commitments are made on specified terms and conditions and are honored for up to
60 days from commitment. The Association had outstanding loan commitments of
approximately $31.2 million at September 30, 1998 consisting of $305,000 of
8
variable rate loans and $30.9 million of fixed rate loans. See Note 18 of Notes
to the Consolidated Financial Statements.
Loan Solicitation and Processing. The Association originates real estate
and other loans at each of its offices. Loan originations are obtained by a
variety of sources, including mortgage brokers, developers, builders, existing
customers, newspapers, radio, periodical advertising and walk-in customers,
although referrals from local realtors has been the primary source. Loan
applications are taken by lending personnel, and the loan processing department
obtains credit reports, appraisals and other documentation involved with a loan.
All of the Association's lending is subject to its written nondiscriminatory
underwriting standards, loan origination procedures and lending policies
prescribed by the Association's Board of Directors. Property valuations are
required on all real estate loans and are prepared by employees experienced in
the field of real estate or by independent appraisers approved by the
Association's Board of Directors. Additionally, all appraisals on loans in
excess of $250,000 must meet applicable regulatory standards.
The Association's loan approval process is intended to assess the
borrower's ability to repay the loan, the viability of the loan, the adequacy of
the value of the property that will secure the loan, the location of the real
estate, and, in the case of commercial and multi-family real estate loans, the
cash flow of the project and the quality of management involved with the
project. The Association generally requires title insurance on all loans and
also that borrowers provide evidence of fire and extended casualty insurance in
amounts and through insurers that are acceptable to the Association. A loan
application file is first reviewed by a loan officer of the Association and then
is submitted to the loan committee for underwriting and approval. The
Association generally originates loans for its own portfolio which has enabled
it to develop an expedited loan application and approval process which
management believes provides it with a competitive advantage in its primary
market area. The Association can make loan commitments, subject to property
valuation and possible other conditions of approval, in three to five days if
income and credit data of the borrower are readily available.
Loan Originations, Purchases and Sales. The Association has originated
substantially all of the loans in its portfolio and generally holds them until
maturity. During the year ended September 30, 1998, the Association originated
$232.5 million in total loans, compared to $120.1 million in the same period of
1997. The increase in loan originations was attributable to lower interest rates
and expansion of lending throughout the branch network and through mortgage
brokers.
Between 1989 and 1992, the Association purchased permanent residential one-
to four-family jumbo mortgage loans (i.e., loans with principal balances over
$203,150) on detached residences from various localities throughout the Western
United States, primarily Oregon, Washington, California and Arizona. At one time
the aggregate balance of such loans was approximately $64.6 million. At
September 30, 1998, the balance was $2.6 million. These loans were underwritten
on the same basis as permanent residential one- to four-family real estate loans
originated by the Association.
During 1997 and 1998, the Association purchased multi-family and commercial
real estate mortgage loans secured by properties within the Association's
primary market area. At September 30, 1998, the balance of such loans was $20.2
million. These loans were underwritten on the same basis as similar loans
originated by the Association.
9
The following table shows total loans originated, purchased and sold, loan
reductions and the net increase in the Association's loans during the periods
indicated.
Years Ended September 30,
-----------------------------------
1998 1997 1996
--------- --------- ---------
(In thousands)
Total net loans at beginning of period $ 551,825 $ 473,556 $ 403,544
Loans originated:
Real estate loans originated (1) .... 219,790 116,502 133,814
Real estate loans purchased ......... 7,792 15,648 --
Non-real estate loans originated .... 12,684 3,571 1,753
--------- --------- ---------
Total loans originated ............ 240,266 135,721 135,567
--------- --------- ---------
Loan reductions:
Principal paydowns .................. (122,029) (56,157) (64,530)
Loans sold .......................... -- -- --
Other reductions (2) ................ (1,916) (1,295) (1,025)
--------- --------- ---------
Total loan reductions ............ (123,945) (57,452) (65,555)
--------- --------- ---------
Total net loans at end of period ..... $ 668,146 $ 551,825 $ 473,556
========= ========= =========
(1) Includes decreases/increases from loans-in-process.
(2) Includes net reductions due to deferred loans fees, discounts net of
amortization, provision for loan loss and transfers to real estate
owned.
Loan Origination and Other Fees. In addition to interest earned on loans,
the Association receives loan origination fees or "points" for originating
loans. Loan points are a percentage of the principal amount of the real estate
loan and are charged to the borrower in connection with the origination of the
loan. The amount of points charged by the Association varies, though it
generally amounts to 1.00% to 1.75% on permanent loans and 2.00% on construction
loans.
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
91, which deals with the accounting for non-refundable fees and costs associated
with originating or acquiring loans, the Association's loan origination fees and
certain related direct loan origination costs are offset, and the resulting net
amount is deferred and amortized as income over the contractual life of the
related loans as an adjustment to the yield of such loans, or until the loan is
paid in full. At September 30, 1998, the Association had $7.6 million of net
loan fees which had been deferred and are being recognized as income over the
contractual maturities of the related loans.
10
Asset Quality
Delinquent Loans. The following table sets forth information concerning
delinquent loans at September 30, 1998, in dollar amount and as a percentage of
the Association's total loan portfolio. The amounts presented represent the
total outstanding principal balances of the related loans, rather than the
actual payment amounts which are past due.
Permanent
residential Non-real
1-4 family Estate Loans Total
--------------------- ------------------ --------------------
Amount Percentage Amount Percentage Amount Percentage
------ ---------- ------ ---------- ------ ----------
(Dollars in thousands)
Loans delinquent
for 90 days and more $513 0.07% $ 11 --% $524 0.07%
Delinquency Procedures. When a borrower fails to make a required payment on
a loan, the Association attempts to cure the delinquency by contacting the
borrower. In the case of loans past due, appropriate late notices are sent on
the fifth and fifteenth days after the due date. If the delinquency is not
cured, the borrower is contacted by telephone after the fifteenth day after the
payment is due.
For real estate loans, in the event a loan is past due for 45 days or more,
the Association will attempt to arrange an in-person interview with the borrower
to determine the nature of the delinquency; based upon the results of the
interview and its review of the loan status, the Association may negotiate a
repayment program with the borrower. If a loan remains past due at 60 days, the
Association performs an in-depth review of the loan status, the condition of the
property and the circumstances of the borrower. If appropriate, an alternative
payment plan is established. At 90 days past due, a letter prepared by the
Association's legal counsel is sent to the borrower describing the steps to be
taken to collect the loan, including acceptance of a voluntary deed-in-lieu of
foreclosure, and of the initiation of foreclosure proceedings. A decision as to
whether and when to initiate foreclosure proceedings is made by senior
management, with the assistance of legal counsel, at the direction of the Board
of Directors, based on such factors as the amount of the outstanding loan in
relation to the value of the property securing the original indebtedness, the
extent of the delinquency and the borrower's ability and willingness to
cooperate in curing the delinquency.
For consumer loans, at 60 days past due a letter demanding payment is sent
to the borrower. If the delinquency is not cured prior to becoming 90 days past
due, repossession procedures are implemented for collateralized loans. At 90
days past due, consumer loans are generally charged off.
Non-Performing Assets. The Association's non-performing assets consist of
non-accrual loans, accruing loans greater than 90 days delinquent, real estate
owned and other repossessed assets. All loans are reviewed on a regular basis
and are placed on a non-accrual status when, in the opinion of management, the
collection of additional interest is deemed insufficient to warrant further
accrual. Generally, the Association places all loans more than 90 days past due
on non-accrual status. Uncollectible interest on loans is charged-off or an
allowance for losses is established by a charge to earnings equal to all
interest previously accrued and interest is subsequently recognized only to the
extent cash payments are received until delinquent interest is paid in full and,
in management's judgment, the borrower's ability to make periodic interest and
principal payments is back to normal in which case the loan is returned to
accrual status.
Real estate acquired by foreclosure is classified as real estate owned
until such time as it is sold. See Note 1 of Notes to the Consolidated Financial
Statements. When such property is acquired, it is recorded at the lower of the
balance of the loan on the property at the date of acquisition (not to exceed
the net realizable value) or the estimated fair value. Costs, excluding
interest, relating to holding the property are expensed as incurred. Valuations
are periodically performed by management and an allowance for losses is
established by a charge to operations if the carrying value of the property
11
exceeds its estimated net realizable value. From time to time, the Association
also acquires personal property, generally mobile homes, which are classified as
other repossessed assets and are carried on the books at their estimated fair
market value and disposed of as soon as commercially reasonable.
As of September 30, 1998, the Association's total non-performing loans
amounted to $524,000, or 0.07% of total loans, before net items, compared with
$254,000, or 0.04% of total loans, before net items, at September 30, 1997. The
increase relates primarily to two loans secured by single family residences that
were 90 days past due at September 30, 1998. The appraised value of the
underlying collateral exceeds the loan balance and foreclosure proceedings have
been commenced related to these properties.
The following table sets forth the amounts and categories of the
Association's non-performing assets at the dates indicated. The Association had
no material troubled debt restructurings as defined by SFAS No. 15 at any of the
dates indicated.
At September 30,
-----------------------------------------
1998 1997 1996 1995 1994
------- ------ ------ ------ ------
(Dollars in thousands)
Non-accruing loans (1) .................. $ 524 $ 254 $191 $734 $183
Accruing loans greater than 90
days delinquent ....................... -- -- -- -- --
------- ------ ---- ---- ----
Total non-performing loans .......... 524 254 191 734 183
Real estate owned ....................... -- -- 69 24 59
Other repossessed assets ................ -- -- -- -- --
------- ------ ---- ---- ----
Total repossessed assets ............ -- -- 69 24 59
------- ------ ---- ---- ----
Total non-performing assets ......... $ 524 $ 254 $260 $758 $242
======= ====== ==== ==== ====
Total non-performing assets as a
percentage of total assets ............ 0.05% 0.03% 0.04% 0.12% 0.05%
======= ====== ==== ==== ====
Total non-performing loans as a
percentage of total loans,
before net items ...................... 0.07% 0.04% 0.04% 0.18% 0.05%
======= ====== ==== ==== ====
Allowance for loan losses as a
percentage of total non-performing
assets ................................ 372.14% 510.38% 356.92% 106.80% 311.98%
======= ====== ==== ==== ====
Allowance for loan losses as a percentage
of total non-performing loans ......... 372.14% 510.38% 485.86% 110.08% 412.57%
======= ====== ====== ====== ======
(1) Consists of permanent residential one- to four-family mortgage loans and
consumer loans.
For the year ended September 30, 1998, the amount of gross income that
would have been recorded in the period then ended if non-accrual loans and
troubled debt restructurings had been current according to their original terms,
and the amount of interest income on such loans that was included in net income
for each of such periods, were, in both cases, less than 1% of total interest
income.
Classified Assets. Federal regulations require that each insured savings
association classify its assets on a regular basis. In addition, in connection
with examinations of insured institutions, federal examiners have authority to
12
identify problem assets and, if appropriate, classify them. There are four
categories used to classify problem assets: "special mention", "substandard",
"doubtful", and "loss." Special mention assets are not considered classified
assets, but are assets of questionable quality that have potential or past
weaknesses that deserve management's close attention and monitoring. Substandard
assets have one or more defined weaknesses and are characterized by the distinct
possibility that the insured institution will sustain some loss if the
deficiencies are not corrected. Doubtful assets have the weaknesses of
substandard assets with the additional characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of loss. An
asset classified loss is considered uncollectible and of such little value that
continuance as an asset of the institution is not warranted. Special mention
assets and assets classified as substandard or doubtful require the institution
to establish general allowances for loan losses. If an asset or portion thereof
is classified loss, the insured institution must either establish specific
allowances for loan losses in the amount of 100% of the portion of the asset
classified loss or charge-off such amount. General loss allowances established
to cover possible losses related to special mention assets and assets classified
substandard or doubtful may be included in determining an institution's
regulatory capital, while specific valuation allowances for loan losses do not
qualify as regulatory capital. Federal examiners may disagree with an insured
institution's classifications and the amounts reserved.
As of September 30, 1998, total classified assets amounted to 0.05% of
total assets. At September 30, 1998 and 1997, the aggregate amounts of the
Association's classified and special mention assets, exclusive of amounts
classified loss and which have been fully reserved, were as follows:
At September 30,
------------------
1998 1997
------ ------
(In thousands)
Loss ................... $ -- $ --
Doubtful ............... -- --
Substandard assets ..... 521 304
Special mention ........ 2,452 843
General loss allowances 1,947 1,296
Specific loss allowances 3 --
Charge offs ............ 20 2
Allowance for Loan Losses. The allowance for loan losses is maintained at a
level considered adequate by management to provide for anticipated loan losses
based on management's assessment of various factors affecting the loan
portfolio, including a review of all loans for which full collectibility may not
be reasonably assured, an overall evaluation of the quality of the underlying
collateral, economic conditions, historical loan loss experience and other
factors that warrant recognition in providing for an adequate loan loss
allowance. While management believes it uses the best information available to
determine the allowance for loan losses, unforeseen market conditions could
result in adjustments to the allowance for loan losses and net earnings could be
significantly affected, if circumstances differ substantially from the
assumptions used in making the final determination. At September 30, 1998, the
Association had an allowance for loan losses of $2.0 million, which was equal to
372.14% of non-performing assets and 0.28% of total loans.
Provisions for loan losses are charged to earnings to bring the total
allowance for loan losses to a level deemed appropriate by management.
Management considers historical loan loss experience, the volume and type of
lending conducted by the Association, industry standards, the amount of
non-performing assets, general economic conditions (particularly as they relate
to the Association's market area), and other factors related to the
collectibility of the Association's loan portfolio in their determination of the
adequacy of the allowance and the provision. The provisions for loan losses
charged against income for the years ended September 30, 1998, 1997 and 1996
were
13
$674,000, $370,000, and $120,000, respectively. Management believes that the
amount maintained in the allowance will be adequate to absorb possible losses in
the portfolio.
The following table sets forth for the periods indicated information
regarding changes in the Association's allowance for loan losses. All
information is before net items.
Years Ended September 30,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(Dollars in thousands)
Total loans outstanding ................. $704,703 $576,575 $488,551 $416,312 $374,439
======== ======== ======== ======== ========
Average loans outstanding ............... $614,457 $515,555 $440,510 $381,689 $338,679
======== ======== ======== ======== ========
Allowance at beginning of period ........ $ 1,296 $ 928 $ 808 $755 $628
Charge-offs ............................. (20) (2) -- (67) (23)
Recoveries .............................. -- -- -- -- --
Provision for loan losses ............... 674 370 120 120 150
-------- ------- ------ ----- ----
Allowance at end of period .............. $ 1,950 $ 1,296 $ 928 $808 $755
======== ======= ====== ==== ====
Allowance for loan losses as a percentage
of total loans outstanding ............. 0.28% 0.22% 0.19% 0.19% 0.20%
======== ======= ====== ==== ====
Ratio of net charge-offs to average loans
outstanding during the period .......... --% --% --% 0.02% 0.01%
======== ======= ====== ==== ====
14
The following table sets forth the breakdown of the allowance for loan
losses by loan category and summarizes the percentage of total loans, before net
items, in each category to total loans, before net items, at the dates
indicated.
At September 30,
-----------------------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------------ ------------------------------------- ------------------------------------
Percent of Percent of Percent of
Amount Allowance in Percent of Amount Allowance in Percent of Amount Allowance in Percent of
of Category to Total Loans of Category to Total Loans of Category to Total Loans
Allowance Total Loans by Category Allowance Total Loans by Category Allowance Total Loans by Category
--------- ------------ ----------- --------- ------------ ----------- --------- ------------ -----------
(Dollars in thousands)
Permanent
residential
one- to
four-family .. $ 1,141 0.16% 81.95% $ 887 0.15% 86.51% $ 925 0.19% 91.50%
Multi-family
residential .. 124 0.02 2.73 121 0.02 2.93 -- -- 1.34
Construction ... 116 0.02 9.12 -- -- 5.31 -- -- 2.92
Commercial ..... 444 0.07 4.18 250 0.04 3.93 -- -- 3.20
Land ........... 29 -- 0.31 12 -- 0.27 -- -- 0.24
Non-real estate 96 0.01 1.71 26 0.01 1.05 3 -- 0.80
--------- ------ --------- ------ --------- -------
Total ....... $ 1,950 0.28% 100.00% $ 1,296 0.22% 100.00% $ 928 0.19% 100.00%
========= ====== ========= ====== ========= =======
At September 30,
-----------------------------------------------------------------------------
1995 1994
-------------------------------------- -------------------------------------
Percent of Percent of
Amount Allowance in Percent of Amount Allowance in Percent of
of Category to Total Loans of Category to Total Loans
Allowance Total Loans by Category Allowance Total Loans by Category
---------- ------------ ----------- --------- ------------ -----------
(Dollars in thousands)
Permanent
residential
one-to four-
family ... $ 807 0.19% 91.68% $ 713 0.19% 90.06%
Multi-family
residential .. -- -- 1.79 -- -- 2.19
Construction ... -- -- 2.36 -- -- 3.37
Commercial ..... -- -- 3.36 41 0.01 3.58
Land ........... -- -- 0.25 -- -- 0.32
Non-real estate 1 -- 0.56 1 -- 0.48
--------- ------ --------- ------
Total ....... $ 808 0.19% 100.00% $ 755 0.20% 100.00%
========= ====== ========= ======
15
Although the Association believes that it has established its allowance for
loan losses in accordance with generally accepted accounting principles
("GAAP"), there can be no assurance that regulators, in reviewing the
Association's loan portfolio, will not request the Association to significantly
increase its allowance for loan losses, thereby reducing the Association's net
worth and earnings. In addition, because future events affecting borrowers and
collateral cannot be predicted with certainty, there can be no assurance that
the existing allowance for loan losses is adequate or that substantial increases
will not be necessary should the quality of any loans deteriorate as a result of
the factors discussed above. Any material increase in the allowance may
adversely affect the Association's financial condition and results of operation.
Investment Activities
Federally chartered savings institutions have the authority to invest in
securities of various federal agencies, certain insured certificates of deposit
of banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in commercial paper,
investment grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally chartered savings institution is otherwise
authorized to make directly. OTS regulations restrict investments in corporate
debt securities of any one issuer in excess of 15% of the Association's
unimpaired capital and unimpaired surplus, as defined by federal regulations,
which totaled $95.4 million at September 30, 1998, plus an additional 10% if the
investments are fully secured by readily marketable collateral. See "REGULATION
- -- Federal Regulation of Savings Associations -- Loans to One Borrower" for a
discussion of additional restrictions on the Association's investment
activities.
The investment securities portfolio is managed in accordance with a written
investment policy adopted by the Board of Directors and administered by the
Investment Committee, which consists of the President and four Board members.
Generally, the investment policy is to invest funds among various categories of
investments and maturities based upon the need for liquidity, to achieve the
proper balance between its desire to minimize risk and maximize yield, and to
fulfill the asset/liability management policy. The President and the Chief
Financial Officer may independently invest up to 1.0% of total assets of the
Company within the parameters set forth in the Investment Policy, to be
subsequently reviewed with the Investment Committee at their next scheduled
meeting. Transactions or investments in any one security determined by type,
maturity and coupon in excess of $10.0 million or 1.0% of assets are not
permitted.
Investment securities held to maturity are carried at cost and adjusted for
amortization of premiums and accretion of discounts. As of September 30, 1998,
the investment securities portfolio held to maturity had $888,759 in tax-exempt
securities issued by states and municipalities and $2.0 million in investment
grade corporate obligations. Securities to be held for indefinite periods of
time and not intended to be held to maturity are classified as available for
sale and carried at fair value. Securities available for sale include securities
that management intends to use as part of its asset/liability management
strategy that may be sold in response to changes in interest rates or
significant prepayment risks or both. As of September 30, 1998, the portfolio of
securities available for sale consisted of $105.5 million in securities issued
by the U.S. Treasury and other federal government agencies, $18.1 million in tax
exempt securities issued by states and municipalities, and $79.7 million in
investment grade corporate investments.
On November 15, 1995, the Financial Accounting Standards Board published
implementation guidance on SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," that allowed a corporation to reassess the
appropriateness of the classification of its debt securities under a special
transition provision. Debt securities classified as "held to maturity" are
reported in financial statements at amortized cost while those classified as
"available for sale" are reported at fair value and unrealized gains and losses
on such securities are reported as a net amount in a separate component of
shareholders' equity. The net unrealized gain or loss on securities classified
as available for sale fluctuates based on several factors, including market
interest rates, prepayment rates and the portfolio amount. During the year ended
September 30, 1996, the Association reclassified and transferred $27.2 million
of its debt securities from the held-to-maturity portfolio to the
available-for-sale portfolio.
16
During the years ended September 30, 1998, 1997 and 1996, neither the
Company nor the Association held any off-balance sheet derivative financial
instruments in their investment portfolios to which the provisions of SFAS No.
119, "Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments," would apply.
The following tables set forth certain information relating to the
investment securities portfolio held to maturity and securities available for
sale at the dates indicated.
At September 30,
---------------------------------------------------------------
1998 1997 1996
------------------- ------------------- -------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- ----- --------- ------ --------- -----
(In thousands)
Held to maturity:
State and municipal obligations $ 889 $ 926 $ 1,042 $ 1,069 $ 1,227 $ 1,249
Corporate obligations ......... 2,000 2,002 21,895 21,900 8,600 8,611
Available for sale:
U.S. Federal securities
mutual bond fund ............. -- -- -- -- 12,080 12,080
U.S. Government obligations ... 102,620 105,454 185,861 185,601 59,717 58,624
State and municipal obligations 17,406 18,103 8,861 9,087 250 251
Corporate obligations ......... 79,225 79,667 67,147 67,158 5,024 5,032
-------- -------- -------- -------- -------- --------
Total ....................... $202,140 $206,152 $284,806 $284,815 $ 86,898 $ 85,847
======== ======== ======== ======== ======== ========
17
At September 30,
------------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- ---------------------
Amortized Percent of Amortized Percent of Amortized Percent of
Cost Portfolio Cost Portfolio Cost Portfolio
--------- ---------- --------- ---------- --------- ----------
(Dollars in thousands)
Held to maturity:
State and municipal obligations $ 889 0.44% $ 1,042 0.36% $ 1,227 1.41%
Corporate obligations ......... 2,000 0.99 21,895 7.69 8,600 9.90
Available for sale:
U.S. Federal securities
mutual bond fund ............. -- -- -- -- 12,080 13.90
U.S. Government obligations ... 102,620 50.77 185,861 65.26 59,717 68.72
State and municipal obligations 17,406 8.61 8,861 3.11 250 0.29
Corporate obligations ......... 79,225 39.19 67,147 23.58 5,024 5.78
-------- -------- -------- -------- -------- --------
Total ....................... $202,140 100.00% $284,806 100.00% $ 86,898 100.00%
======== ======== ======== ======== ======== ========
The following table sets forth the maturities and weighted average yields
of the debt securities in the investment portfolio at September 30, 1998.
One Year After One Through After Five Through After Ten
or Less Five Years Ten Years Years Total
------------------- ------------------- ------------------ --------------------- --------
Amount Yield Amount Yield Amount Yield Amount Yield
-------- ----- -------- ------- ------ ----- -------- ------
(Dollars in thousands)
Held to maturity:
State and municipal
obligations ...... $ 211 6.51% $ 678 6.62% $ -- -- $-- -- $ 889
Corporate obligations 2,000 5.89% -- -- -- -- -- -- 2,000
Available for sale:
U.S. Government
obligations ........ 11,555 5.84% 91,065 5.97% -- -- -- -- 102,620
State and municipal
obligations ........ -- -- 891 6.58% -- -- 16,515 7.62% 17,406
Corporate obligations 14,519 5.96% 44,884 6.09% -- -- 19,822 6.29% 79,225
-------- -------- -------- -------- --------
Total ............. $ 28,285 $137,518 $ -- $ 36,337 $202,140
======== ======== ======== ======== ========
At September 30, 1998 the Association did not hold any securities from a
single issuer, other than the U.S. Government, whose aggregate book value was in
excess of 10% of the Company's stockholders' equity, or $14.5 million.
Mortgage Backed and Related Securities
At September 30, 1998, the Company's net mortgage backed and related
securities totaled $47.0 million at fair value ($46.4 million at amortized cost)
and had a weighted average yield of 6.26%. At September 30, 1998, 92.21% of the
mortgage backed and related securities were adjustable rate securities.
18
Mortgage backed and related securities (which are also known as mortgage
participation certificates or pass-through certificates) typically represent a
participation interest in a pool of single-family or multi-family mortgages. The
principal and interest payments on these mortgages are passed from the mortgage
originators, through intermediaries (generally U.S. Government agencies and
government sponsored enterprises) that pool and resell the participation
interests in the form of securities, to investors such as the Company. Such U.S.
Government agencies and government sponsored enterprises, which guarantee the
payment of principal and interest to investors, primarily include the Federal
Home Loan Mortgage Corporation ("FHLMC"), Fannie Mae ("FNMA") (formerly the
Federal National Mortgage Association), the Government National Mortgage
Association ("GNMA") and the U.S. Small Business Administration ("SBA").
Mortgage backed and related securities typically are issued with stated
principal amounts, and the securities are backed by pools of mortgages that have
loans with interest rates that fall within a specific range and have varying
maturities. Mortgage backed and related securities generally yield less than the
loans that underlie such securities because of the cost of payment guarantees
and credit enhancements. In addition, mortgage backed and related securities are
usually more liquid than individual mortgage loans and may be used to
collateralize certain liabilities and obligations of the Company. These types of
securities also permit the Association to optimize its regulatory capital
because they have low risk weighting.
Expected maturities of mortgage backed and related securities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties. Prepayments
that are faster than anticipated may shorten the life of the security and may
result in a loss of any premiums paid and thereby reduce the net yield on such
securities. Although prepayments of underlying mortgages depend on many factors,
including the type of mortgages, the coupon rate, the age of mortgages, the
geographical location of the underlying real estate collateralizing the
mortgages and general levels of market interest rates, the difference between
the interest rates on the underlying mortgages and the prevailing mortgage
interest rates generally is the most significant determinant of the rate of
prepayments. During periods of declining mortgage interest rates, if the coupon
rate of the underlying mortgages exceeds the prevailing market interest rates
offered for mortgage loans, refinancing generally increases and accelerates the
prepayment of the underlying mortgages and the related security. Under such
circumstances, the Company may be subject to reinvestment risk because, to the
extent that the Company's mortgage backed securities amortize or prepay faster
than anticipated, the Company may not be able to reinvest the proceeds of such
repayments and prepayments at a comparable rate.
During the year ended September 30, 1996, the Company reclassified $1.7
million of mortgage backed and related securities from held to maturity to
available for sale at fair values, with an unrealized loss of $100,421,
consistent with the implementation guidance discussed under above "-- Investment
Activities."
19
The following tables set forth certain information relating to the mortgage
backed and related securities portfolio held to maturity and available for sale
at the dates indicated.
At September 30,
----------------------------------------------------------
1998 1997 1996
----------------- ------------------ -------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- ------ --------- ----- --------- -------
(In thousands)
Held to maturity:
GNMA ............ $ 3,662 $ 3,696 $ 5,447 $ 5,518 $ 6,783 $ 6,736
Available for sale:
FNMA ............ 12,866 12,985 12,775 12,897 15,905 15,959
FHLMC ........... 14,722 15,158 25,881 26,574 39,205 39,179
GNMA ............ 3,619 3,662 9,709 9,808 -- --
SBA ............. 11,535 11,531 15,732 15,590 19,139 18,971
------- ------- ------- ------- ------- -------
Total ......... $46,404 $47,032 $69,544 $70,387 $81,032 $80,845
======= ======= ======= ======= ======= =======
At September 30,
------------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- ----------------------
Amortized Percent of Amortized Percent of Amortized Percent of
Cost Portfolio Cost Portfolio Cost Portfolio
---------- ---------- --------- ---------- --------- -----------
(Dollars in thousands)
Held to maturity:
GNMA ............ $ 3,662 7.89% $ 5,447 7.83% $ 6,783 8.37%
Available for sale:
FNMA ............ 12,866 27.73 12,775 18.37 15,905 19.63
FHLMC ........... 14,722 31.72 25,881 37.22 39,205 48.38
GNMA ............ 3,619 7.80 9,709 13.96 -- --
SBA ............. 11,535 24.86 15,732 22.62 19,139 23.62
--------- --------- --------- --------- --------- ---------
Total ......... $ 46,404 100.00% $ 69,544 100.00% $ 81,032 100.00%
========= ========= ========= ========= ========= =========
Interest-Earning Deposits
The Company also had interest-earning deposits in the FHLB of Seattle
amounting to $12.1 million and $1.4 million at September 30, 1998 and 1997,
respectively.
Deposit Activities and Other Sources of Funds
General. Deposits are the primary source of the Association's funds for
lending and other investment purposes. In addition to deposits, the Association
derives funds from loan principal repayments. Loan repayments are a relatively
stable source of funds, while deposit inflows and outflows are significantly
influenced by general interest rates and money market conditions. Borrowings may
be used on a short-term basis to compensate for
20
reductions in the availability of funds from other sources. They may also be
used on a longer term basis for general business purposes.
Deposits. The Association's deposits are attracted principally from within
the Association's primary market area through the offering of a broad selection
of deposit instruments, including checking accounts, NOW accounts, money market
deposit accounts, passbook and statement savings accounts, and certificates of
deposit. Included among these deposit products are individual retirement account
("IRA") certificates of approximately $87.4 million at September 30, 1998.
Deposit account terms vary, with the principal differences being the minimum
balance required, the time period the funds must remain on deposit and the
interest rate.
Beginning in 1996, the Association began accepting deposits from outside
its primary market area through both private placements and brokered deposits if
the terms of the deposits fit the Association's specific needs and are at a rate
lower than the rates on similar maturity borrowings through the FHLB of Seattle.
At September 30, 1998, these deposits totaled $16.5 million, or 2.39% of total
deposits.
Interest rates paid, maturity terms, service fees and withdrawal penalties
are established by the Association on a periodic basis. Determination of rates
and terms are predicated on funds acquisition and liquidity requirements, rates
paid by competitors, growth goals and federal regulations.
In July 1997, the Association acquired 25 Wells Fargo Bank branches in
Oregon, adding $241.3 million in deposit accounts. In addition to the increase
from the acquisition, the Association experienced a net increase in deposits
(before interest credited) of $14.1 million for the year ended September 30,
1997 as customers deposited funds and new customers were added. The acquired
deposit base included a significant proportion of non-interest bearing checking
accounts, thereby reducing the cost of deposits. Concurrent with the
acquisition, the Association's deposit product offerings were expanded, allowing
customers to choose the accounts best suited to their needs, whether their focus
is low cost or additional services. For the year ended September 30, 1998, the
Association experienced a net decrease in deposits (before interest credited) of
$8.8 million as depositors withdrew funds to seek higher yielding alternative
investments. The Association has conducted a special certificate account
promotion and a checking account campaign in an effort to attract and retain
deposits. To offset the deposit outflow, the Association has relied on increased
borrowings from the FHLB of Seattle. See "-- Borrowings."
At September 30, 1998, certificate accounts maturing during the year ending
September 30, 1999 totaled $278.1 million. Based on historical experience, the
Association expects that a significant amount will be renewed with the
Association at maturity. In the event a significant amount of such accounts are
not renewed at maturity, the Association would not expect a resultant adverse
impact on operations and liquidity because of the Association's borrowing
capacity. See "-- Borrowings."
In the unlikely event the Association is liquidated, depositors will be
entitled to full payment of their deposit accounts prior to any payment being
made to the Company, which is the sole shareholder of the Association.
Substantially all of the Association's depositors are residents of the State of
Oregon.
21
The following table indicates the amount of certificate accounts with
balances of $100,000 or greater by time remaining until maturity as of September
30, 1998.
Certificate
Maturity Period Accounts
----------------------------- -----------
(In thousands)
Three months or less ......... $19,937
Over three through six months 22,107
Over six through twelve months 17,426
Over twelve months ........... 23,132
-------
Total .................... $82,602
=======
The following table sets forth the deposit balances in the various types of
savings accounts offered by the Association at the dates indicated.
At September 30,
-----------------------------------------------------------------------------------
1998 1997 1996
------------------------------ ----------------------------- ------------------
Percent Percent Percent
of Increase of Increase of
Amount Total (Decrease) Amount Total (Decrease) Amount Total
------ ----- ---------- ------ ----- ---------- ------ ------
(Dollars in thousands)
Certificates of deposit ...... $395,351 57.33% $ 19,748 $375,603 55.73% $ 86,415 $289,188 72.36%
-------- ------ -------- -------- ------ -------- -------- ------
Transaction accounts:
Non-interest checking ........ 47,547 6.90 (5,031) 52,578 7.80 52,417 161 0.04
Interest-bearing checking .... 70,561 10.23 (4,483) 75,044 11.14 50,762 24,282 6.08
Passbook and statement savings 61,414 8.91 (1,765) 63,179 9.37 29,468 33,711 8.43
Money market deposits ........ 114,668 16.63 7,094 107,574 15.96 55,243 52,331 13.09
-------- ------ -------- -------- ------ -------- -------- ------
Total transaction accounts ... 294,190 42.67 (4,185) 298,375 44.27 187,890 110,485 27.64
-------- ------ -------- -------- ------ -------- -------- ------
Total deposits ............... $689,541 100.00% $ 15,563 $673,978 100.00% $274,305 $399,673 100.00%
======== ====== ======== ======== ====== ======== ======== ======
The following table sets forth the deposit activities of the Association
for the periods indicated.
Years Ended September 30,
----------------------------------------
1998 1997 1996
----------- ----------- -----------
(In thousands)
Beginning balance ..................... $ 673,978 $ 399,673 $ 384,380
----------- ----------- -----------
Increase due to acquired deposits ..... -- 241,272 --
Net inflow (outflow) of deposits before
interest credited .................... (8,753) 14,077 (2,364)
Interest credited ..................... 24,316 18,956 17,657
----------- ----------- -----------
Net increase in deposits .............. 15,563 274,305 15,293
----------- ----------- -----------
Ending balance ........................ $ 689,541 $ 673,978 $ 399,673
=========== =========== ===========
22
Borrowings. Deposit liabilities are the primary source of funds for the
Association's lending and investment activities and for its general business
purposes. The Association may rely upon advances from the FHLB of Seattle,
reverse repurchase agreements and a bank line of credit to supplement its supply
of lendable funds and to meet deposit withdrawal requirements. The FHLB of
Seattle serves as the Association's primary borrowing source after deposits.
The FHLB of Seattle functions as a central reserve bank providing credit
for savings and loan associations and certain other member financial
institutions. As a member, the Association is required to own capital stock in
the FHLB of Seattle and is authorized to apply for advances on the security of
certain of its mortgage loans and other assets (principally securities which are
obligations of, or guaranteed by, the U.S. Government) provided certain
creditworthiness standards have been met. Advances are made pursuant to several
different credit programs. Each credit program has its own interest rate and
range of maturities. Depending on the program, limitations on the amount of
advances are based on the financial condition of the member institution and the
adequacy of collateral pledged to secure the credit. As a member of the FHLB,
the Association maintains a credit line that is a percentage of its regulatory
assets, subject to collateral requirements. At September 30, 1998, the credit
line was 30% of total assets of the Association. Advances are collateralized in
aggregate, as provided for in the Advances, Security and Deposit Agreements with
the FHLB, by certain mortgages or deeds of trust and securities of the U.S.
Government and agencies thereof.
During the year ended September 30, 1998 the Company sold under agreements
to repurchase specific securities of the U.S. Government and its agencies and
other approved investments to a broker-dealer. The securities underlying these
repurchase agreements were delivered to the broker-dealer who arranged the
transaction. Securities delivered to the broker-dealer may be loaned out in the
ordinary course of operations. All of the reverse repurchase agreements at
September 30, 1998 were due within 48 days and will be renewed subsequent to
year end.
The following table sets forth certain information regarding borrowings by
the Company and Association at the end of and during the periods indicated:
At September 30,
-------------------
1998 1997
------- ------
Weighted average rate paid on:
FHLB advances ............... 5.26% 5.62%
Reverse repurchase agreements 5.65 5.75
Years Ended
September 30,
--------------------------
1998 1997
------------ -----------
(Dollars in thousands)
Maximum amount outstanding at any month end:
FHLB advances ............. $ 167,000 $ 151,000
Reverse repurchase agreements 17,078 19,118
Approximate average balance:
FHLB advances ............. 141,016 110,737
Reverse repurchase agreements 14,669 16,804
Approximate weighted average rate paid on:
FHLB advances ............. 5.62% 5.66%
Reverse repurchase agreements 5.80 5.82
The Association also has an uncommitted line of credit of $15.0 million
with a commercial bank. At September 30, 1998, the Association had no borrowings
outstanding under this credit facility.
23
REGULATION OF THE ASSOCIATION
The Association is subject to extensive regulation, examination and
supervision by the OTS as its chartering agency, and the FDIC, as the insurer of
its deposits. The activities of federal savings institutions are governed by the
Home Owners' Loan Act, as amended (the "HOLA") and, in certain respects, the
Federal Deposit Insurance Act ("FDIA") and the regulations issued by the OTS and
the FDIC to implement these statutes. These laws and regulations delineate the
nature and extent of the activities in which federal savings associations may
engage. Lending activities and other investments must comply with various
statutory and regulatory capital requirements. In addition, the Association's
relationship with its depositors and borrowers is also regulated to a great
extent, especially in such matters as the ownership of deposit accounts and the
form and content of the Association's mortgage documents. The Association must
file reports with the OTS and the FDIC concerning its activities and financial
condition in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with, or acquisitions of, other financial
institutions. There are periodic examinations by the OTS and the FDIC to review
the Association's compliance with various regulatory requirements. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such policies, whether by the OTS, the FDIC or Congress, could have a
material adverse impact on the Company, the Association and their operations.
The Company, as a savings and loan holding company, is also required to file
certain reports with, and otherwise comply with the rules and regulations of,
the OTS.
Federal Regulation of Savings Associations
Office of Thrift Supervision. The OTS is an office in the Department of the
Treasury subject to the general oversight of the Secretary of the Treasury. The
OTS generally possesses the supervisory and regulatory duties and
responsibilities formerly vested in the Federal Home Loan Bank Board. Among
other functions, the OTS issues and enforces regulations affecting federally
insured savings associations and regularly examines these institutions.
Federal Home Loan Bank System. The FHLB System, consisting of 12 FHLBs, is
under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to supervise the FHLBs, to ensure that the
FHLBs carry out their housing finance mission, to ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets, and to
ensure that the FHLBs operate in a safe and sound manner.
The Association, as a member of the FHLB of Seattle, is required to acquire
and hold shares of capital stock in the FHLB of Seattle in an amount equal to
the greater of (i) 1.0% of the aggregate outstanding principal amount of
residential mortgage loans, home purchase contracts and similar obligations at
the beginning of each year, or (ii) 1/20 of its advances (borrowings) from the
FHLB of Seattle. The Association is in compliance with this requirement with an
investment in FHLB of Seattle stock of $10.2 million at September 30, 1998.
Among other benefits, the FHLB provides a central credit facility primarily
for member institutions. It is funded primarily from proceeds derived from the
sale of consolidated obligations of the FHLB System. It makes advances to
members in accordance with policies and procedures established by the FHFB and
the Board of Directors of the FHLB of Seattle.
Federal Deposit Insurance Corporation. The FDIC is an independent federal
agency that insures the deposits, up to prescribed statutory limits, of
depository institutions. The FDIC currently maintains two separate insurance
funds: the Bank Insurance Fund ("BIF") and the SAIF. As insurer of the
Association's deposits, the FDIC has examination, supervisory and enforcement
authority over the Association.
24
The majority of the Association's accounts are insured by the SAIF,
however, the $241.3 million of deposits acquired in July 1997 from Wells Fargo
Bank, N.A., a BIF-insured institution, will continue to be BIF-insured deposits
and will be assessed premiums based on the lower BIF rates. These deposits are
known as Oakar deposits, indicating that they are deposits held by a
SAIF-insured institution, but insured by the BIF. The FDIC insures deposits at
the Association to the maximum extent permitted by law. The Association
currently pays deposit insurance premiums to the FDIC based on a risk-based
assessment system established by the FDIC for all SAIF-member institutions.
Under applicable regulations, institutions are assigned to one of three capital
groups that are based solely on the level of an institution's capital -- "well
capitalized", "adequately capitalized", and "undercapitalized" -- which are
defined in the same manner as the regulations establishing the prompt corrective
action system, as discussed below. These three groups are then divided into
three subgroups which reflect varying levels of supervisory concern, from those
which are considered to be healthy to those which are considered to be of
substantial supervisory concern. The matrix so created results in nine
assessment risk classifications, with rates currently ranging from .23% for well
capitalized, financially sound institutions with only a few minor weaknesses to
.31% for undercapitalized institutions that pose a substantial risk of loss to
the SAIF unless effective corrective action is taken. The FDIC is authorized to
raise assessment rates under certain circumstances. The Association's
assessments expensed for the year ended September 30, 1998, totaled $289,592.
Until the second half of 1995, the same matrix applied to BIF-member
institutions. As a result of the BIF having reached its designated reserve
ratio, effective January 1, 1996, the FDIC substantially reduced deposit
insurance premiums for well-capitalized, well-managed financial institutions
that are members of the BIF. Under the new assessment schedule, rates were
reduced to a range of 0 to 27 basis points, with approximately 92% of BIF
members paying the statutory minimum annual assessment rate of $2,000. Pursuant
to the Deposit Insurance Fund Act ("DIF Act"), which was enacted on September
30, 1996, the FDIC imposed a special one-time assessment on each depository
institution with SAIF-assessable deposits so that the SAIF may achieve its
designated reserve ratio. The Association's assessment amounted to $2.5 million
and was assessed during the quarter ended September 30, 1996. Beginning January
1, 1997, the assessment schedule for SAIF members became the same as that for
BIF members. In addition, beginning January 1, 1997, SAIF members were charged
an assessment of 0.064% of SAIF-assessable deposits for the purpose of paying
interest on the obligations issued by the Financing Corporation ("FICO") in the
1980s to help fund the thrift industry cleanup. BIF-assessable deposits will be
charged an assessment to help pay interest on the FICO bonds at a rate of
approximately 0.013% until the earlier of December 31, 1999 or the date upon
which the last savings association ceases to exist, after which time the
assessment will be the same for all insured deposits.
The DIF Act provides for the merger of the BIF and the SAIF into the
Deposit Insurance Fund in 1999. The DIF contemplates the development of a common
charter for all federally chartered depository institutions and the abolition of
separate charters for national banks and federal savings associations. It is not
known what form the common charter may take and what effect, if any, the
adoption of a new charter would have on the operation of the Association.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, order or
any condition imposed by an agreement with the FDIC. It also may suspend deposit
insurance temporarily during the hearing process for the permanent termination
of insurance, if the institution has no tangible capital. If insurance of
accounts is terminated, the accounts at the institution at the time of
termination, less subsequent withdrawals, shall continue to be insured for a
period of six months to two years, as determined by the FDIC. Management is
aware of no existing circumstances that could result in termination of the
deposit insurance of the Association.
Liquidity Requirements. Under OTS regulations, each savings institution is
required to maintain an average daily balance of liquid assets (cash, certain
time deposits and savings accounts, bankers' acceptances, and specified U.S.
Government, state or federal agency obligations and certain other investments)
equal to a quarterly average of
25
not less than a specified percentage (currently 4.0%) of its net withdrawable
accounts plus short-term borrowings. The Association's liquidity ratio was
28.38% at September 30, 1998.
Prompt Corrective Action. Under the FDIA, each federal banking agency is
required to implement a system of prompt corrective action for institutions that
it regulates. The federal banking agencies have promulgated substantially
similar regulations to implement this system of prompt corrective action. Under
the regulations, an institution shall be deemed to be (i) "well capitalized" if
it has a total risk-based capital ratio of 10.0% or more, has a Tier I
risk-based capital ratio of 6.0% or more, has a leverage ratio of 5.0% or more
and is not subject to specified requirements to meet and maintain a specific
capital level for any capital measure; (ii) "adequately capitalized" if it has a
total risk-based capital ratio of 8.0% or more, a Tier I risk-based capital
ratio of 4.0% or more and a leverage ratio of 4.0% or more (3.0% under certain
circumstances) and does not meet the definition of "well capitalized;" (iii)
"undercapitalized" if it has a total risk-based capital ratio that is less than
8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a leverage
ratio that is less than 4.0% (3.0% under certain circumstances); (iv)
"significantly undercapitalized" if it has a total risk-based capital ratio that
is less than 6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a
leverage ratio that is less than 3.0%; and (v) "critically undercapitalized" if
it has a ratio of tangible equity to total assets that is equal to or less than
2.0%.
A federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized and
may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or has received
in its most recent examination, and has not corrected, a less than satisfactory
rating for asset quality, management, earnings or liquidity. (The OTS may not,
however, reclassify a significantly undercapitalized institution as critically
undercapitalized.)
An institution generally must file a written capital restoration plan that
meets specified requirements, as well as a performance guaranty by each company
that controls the institution, with the appropriate federal banking agency
within 45 days of the date that the institution receives notice or is deemed to
have notice that it is undercapitalized, significantly undercapitalized or
critically undercapitalized. Immediately upon becoming undercapitalized, an
institution shall become subject to various mandatory and discretionary
restrictions on its operations.
At September 30, 1998, the Association was categorized as "well
capitalized" under the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The federal banking regulatory agencies
have prescribed, by regulation, standards for all insured depository
institutions relating to: (i) internal controls, information systems and
internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv)
interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii)
earnings; and (viii) compensation, fees and benefits ("Guidelines"). The
Guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before capital becomes impaired. If the OTS determines that the Association
fails to meet any standard prescribed by the Guidelines, the OTS may require the
Association to submit an acceptable plan to achieve compliance with the
standard, as required by the FDIA. OTS regulations establish deadlines for the
submission and review of such safety and soundness compliance plans.
Qualified Thrift Lender Test. All savings associations are required to meet
a qualified thrift lender ("QTL") test to avoid certain restrictions on their
operations. A savings institution that fails to become or remain a QTL shall
either become a national bank or be subject to the following restrictions on its
operations: (i) the association may not make any new investment or engage in
activities that would not be permissible for national banks; (ii) the
association may not establish any new branch office where a national bank
located in the savings institution's home state would not be able to establish a
branch office; (iii) the association shall be ineligible to obtain new advances
26
from any FHLB; and (iv) the payment of dividends by the association shall be
subject to the rules regarding the statutory and regulatory dividend
restrictions applicable to national banks. Also, beginning three years after the
date on which the savings institution ceases to be a QTL, the savings
institution would be prohibited from retaining any investment or engaging in any
activity not permissible for a national bank and would be required to repay any
outstanding advances to any FHLB. In addition, within one year of the date on
which a savings association controlled by a company ceases to be a QTL, the
company must register as a bank holding company and become subject to the rules
applicable to such companies. A savings institution may requalify as a QTL if it
thereafter complies with the QTL test.
Currently, the QTL test requires that 65% of an institution's "portfolio
assets" (as defined) consist of certain housing and consumer-related assets on a
monthly average basis in nine out of every 12 months. Assets that qualify
without limit for inclusion as part of the 65% requirement are loans made to
purchase, refinance, construct, improve or repair domestic residential housing
and manufactured housing; home equity loans; mortgage backed securities (where
the mortgages are secured by domestic residential housing or manufactured
housing); FHLB stock; and direct or indirect obligations of the FDIC. In
addition, the following assets, among others, may be included in meeting the
test subject to an overall limit of 20% of the savings institution's portfolio
assets: 50% of residential mortgage loans originated and sold within 90 days of
origination; 100% of consumer and educational loans (limited to 10% of total
portfolio assets); and stock issued by the FHLMC or Fannie Mae. Portfolio assets
consist of total assets minus the sum of (i) goodwill and other intangible
assets, (ii) property used by the savings institution to conduct its business,
and (iii) liquid assets up to 20% of the institution's total assets. At
September 30, 1998, the qualified thrift investments of the Association were
approximately 85.93% of its portfolio assets.
Capital Requirements. Under OTS regulations a savings association must
satisfy three minimum capital requirements: core capital, tangible capital and
risk-based capital. Savings associations must meet all of the standards in order
to comply with the capital requirements.
OTS capital regulations establish a 3% core capital or leverage ratio
(defined as the ratio of core capital to adjusted total assets). Core capital is
defined to include common shareholders' equity, noncumulative perpetual
preferred stock and any related surplus, and minority interests in equity
accounts of consolidated subsidiaries, less (i) any intangible assets, except
for certain qualifying intangible assets; (ii) certain mortgage servicing
rights; and (iii) equity and debt investments in subsidiaries that are not
"includable subsidiaries," which are defined as subsidiaries engaged solely in
activities not impermissible for a national bank, engaged in activities
impermissible for a national bank but only as an agent for its customers, or
engaged solely in mortgage-banking activities. In calculating adjusted total
assets, adjustments are made to total assets to give effect to the exclusion of
certain assets from capital and to account appropriately for the investments in
and assets of both includable and nonincludable subsidiaries. Institutions that
fail to meet the core capital requirement would be required to file with the OTS
a capital plan that details the steps they will take to reach compliance. In
addition, the OTS's prompt corrective action regulation provides that a savings
institution that has a leverage ratio of less than 4% (3% for institutions
receiving the highest CAMELS examination rating) will be deemed to be
"undercapitalized" and may be subject to certain restrictions. See "-- Federal
Regulation of Savings Associations -- Prompt Corrective Action."
27
Savings associations also must maintain "tangible capital" not less than
1.5% of the Association's adjusted total assets. "Tangible capital" is defined,
generally, as core capital minus any "intangible assets" other than purchased
mortgage servicing rights.
Each savings institution must maintain total risk-based capital equal to at
least 8% of risk-weighted assets. Total risk-based capital consists of the sum
of core and supplementary capital, provided that supplementary capital cannot
exceed core capital, as previously defined. Supplementary capital includes (i)
permanent capital instruments such as cumulative perpetual preferred stock,
perpetual subordinated debt and mandatory convertible subordinated debt, (ii)
maturing capital instruments such as subordinated debt, intermediate-term
preferred stock and mandatory convertible subordinated debt, subject to an
amortization schedule, and (iii) general valuation loan and lease loss
allowances up to 1.25% of risk-weighted assets.
The risk-based capital regulation assigns each balance sheet asset held by
a savings institution to one of four risk categories based on the amount of
credit risk associated with that particular class of assets. Assets not included
for purposes of calculating capital are not included in calculating
risk-weighted assets. The categories range from 0% for cash and securities that
are backed by the full faith and credit of the U.S. Government to 100% for
repossessed assets or assets more than 90 days past due. Qualifying residential
mortgage loans (including multi-family mortgage loans) are assigned a 50% risk
weight. Consumer, commercial, home equity and residential construction loans are
assigned a 100% risk weight, as are nonqualifying residential mortgage loans and
that portion of land loans and nonresidential construction loans that do not
exceed 80% loan-to-value ratio. The book value of assets in each category is
multiplied by the weighting factor (from 0% to 100%) assigned to that category.
These products are then totaled to arrive at total risk-weighted assets.
Off-balance sheet items are included in risk-weighted assets by converting them
to an approximate balance sheet "credit equivalent amount" based on a conversion
schedule. These credit equivalent amounts are then assigned to risk categories
in the same manner as balance sheet assets and included in risk-weighted assets.
The following table presents the Association's capital levels at September
30, 1998.
To Be
Categorized as "Well
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
----------------------- ------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
-------------- ----- ---------- ----- ----------- -------
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 -- -- 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 -- --
(To Tangible Assets)
Limitations on Capital Distributions. OTS regulations impose uniform
limitations on the ability of all savings associations to engage in various
distributions of capital such as dividends, stock repurchases and cash-out
mergers. In addition, OTS regulations require the Association to give the OTS 30
days' advance notice of any proposed capital distributions, and the OTS has the
authority under its supervisory powers to prohibit the capital distributions.
The regulation utilizes a three-tiered approach which permits various levels of
distributions based primarily upon a savings association's capital level.
A Tier 1 savings association has capital in excess of its fully phased-in
capital requirement (both before and after the proposed capital distribution).
Tier 1 savings associations may make (without application but upon prior notice
to, and no objection made by, the OTS) capital distributions during a calendar
year up to 100% of its net income to date during the calendar year plus one-half
its surplus capital ratio (i.e., the amount of capital in excess of its fully
28
phased-in requirement) at the beginning of the calendar year or the amount
authorized for a Tier 2 association. Capital distributions in excess of such
amount require advance notice to the OTS. A Tier 2 savings association has
capital equal to or in excess of its minimum capital requirement but below its
fully phased-in capital requirement (both before and after the proposed capital
distribution). Such an association may make (without application) capital
distributions up to an amount equal to 75% of its net income during the previous
four quarters depending on how close the association is to meeting its fully
phased-in capital requirement. Capital distributions exceeding this amount
require prior OTS approval. Tier 3 associations are savings associations with
capital below the minimum capital requirement (either before or after the
proposed capital distribution). Tier 3 associations may not make any capital
distributions without prior approval from the OTS.
The Association is currently meeting the criteria to be designated a Tier 1
association and, consequently, could at its option (after prior notice to, and
no objection made by, the OTS) distribute up to 100% of its net income during
the calendar year plus 50% of its surplus capital ratio at the beginning of the
calendar year less any distributions previously paid during the year.
Loans to One Borrower. Under the HOLA, savings institutions are generally
subject to the national bank limit on loans to one borrower. Generally, this
limit is 15% of the Association's unimpaired capital and surplus, plus an
additional 10% of unimpaired capital and surplus, if such loan is secured by
readily-marketable collateral, which is defined to include certain financial
instruments and bullion. The OTS by regulation has amended the loans to one
borrower rule to permit savings associations meeting certain requirements,
including capital requirements, to extend loans to one borrower in additional
amounts under circumstances limited essentially to loans to develop or complete
residential housing units. At September 30, 1998, the Association's limit on
loans to one borrower was $14.3 million. At September 30, 1998, the
Association's largest aggregate amount of loans to one borrower was $4.8
million.
Activities of Associations and Their Subsidiaries. When a savings
association establishes or acquires a subsidiary or elects to conduct any new
activity through a subsidiary that the association controls, the savings
association must notify the FDIC and the OTS 30 days in advance and provide the
information each agency may, by regulation, require. Savings associations also
must conduct the activities of subsidiaries in accordance with existing
regulations and orders.
The OTS may determine that the continuation by a savings association of its
ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary. The FDIC
also may determine by regulation or order that any specific activity poses a
serious threat to the SAIF. If so, it may require that no SAIF member engage in
that activity directly.
Transactions with Affiliates. Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act ("Sections 23A and 23B")
relative to transactions with affiliates in the same manner and to the same
extent as if the savings association were a Federal Reserve member bank. A
savings and loan holding company, its subsidiaries and any other company under
common control are considered affiliates of the subsidiary savings association
under the HOLA. Generally, Sections 23A and 23B: (i) limit the extent to which
the insured association or its subsidiaries may engage in certain covered
transactions with an affiliate to an amount equal to 10% of such institution's
capital and surplus and place an aggregate limit on all such transactions with
affiliates to an amount equal to 20% of such capital and surplus, and (ii)
require that all such transactions be on terms substantially the same, or at
least as favorable to the institution or subsidiary, as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans, the
purchase of assets, the issuance of a guarantee and similar types of
transactions.
Three additional rules apply to savings associations: (i) a savings
association may not make any loan or other extension of credit to an affiliate
unless that affiliate is engaged only in activities permissible for bank holding
29
companies; (ii) a savings association may not purchase or invest in securities
issued by an affiliate (other than securities of a subsidiary); and (iii) the
OTS may, for reasons of safety and soundness, impose more stringent restrictions
on savings associations but may not exempt transactions from or otherwise
abridge Section 23A or 23B. Exemptions from Section 23A or 23B may be granted
only by the Federal Reserve Board, as is currently the case with respect to all
FDIC-insured banks. The Association has not been significantly affected by the
rules regarding transactions with affiliates.
The Association's authority to extend credit to executive officers,
directors and 10% shareholders, as well as entities controlled by such persons,
is currently governed by Sections 22(g) and 22(h) of the Federal Reserve Act,
and Regulation O thereunder. Among other things, these regulations require that
such loans be made on terms and conditions substantially the same as those
offered to unaffiliated individuals (unless the loan or extension of credit is
made under a benefit program generally available to all other employees and does
not give preference to any insider over any other employee) and not involve more
than the normal risk of repayment. Regulation O also places individual and
aggregate limits on the amount of loans the Association may make to such persons
based, in part, on the Association's capital position, and requires certain
board approval procedures to be followed. The OTS regulations, with certain
minor variances, apply Regulation O to savings institutions.
REGULATION OF THE COMPANY
General
The Company is a unitary savings and loan holding company within the
meaning of the HOLA. As such, it is registered with the OTS and is subject to
OTS regulations, examinations, supervision and reporting requirements. The
Company is also subject to the information, proxy solicitation, insider trading
restrictions, and other requirements of the Securities Exchange Act of 1934, as
amended.
Company Acquisitions
The HOLA and OTS regulations issued thereunder generally prohibit a savings
and loan holding company, without prior OTS approval, from acquiring more than
5% of the voting stock of any other savings association or savings and loan
holding company or controlling the assets thereof. They also prohibit, among
other things, any director or officer of a savings and loan holding company, or
any individual who owns or controls more than 25% of the voting shares of such
holding company, from acquiring control of any savings association not a
subsidiary of such savings and loan holding company, unless the acquisition is
approved by the OTS.
Holding Company Activities
As a unitary savings and loan holding company, the Company generally is not
subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan holding company. There generally are more restrictions on the
activities of a multiple savings and loan holding company than a unitary savings
and loan holding company. Specifically, if either federally insured subsidiary
savings association fails to meet the QTL test, the activities of the Company
and any of its subsidiaries (other than the Company or other federally insured
subsidiary savings associations) would thereafter be subject to further
restrictions. The HOLA provides that, among other things, no multiple savings
and loan holding company or subsidiary thereof which is not an insured
association shall commence or continue for more than two years after becoming a
multiple savings and loan association holding company or subsidiary thereof, any
business activity other than: (i) furnishing or performing management services
for a subsidiary insured institution, (ii) conducting an insurance agency or
escrow business, (iii) holding, managing, or liquidating assets owned by or
acquired from a subsidiary insured institution, (iv) holding or managing
properties used or occupied by a subsidiary insured institution, (v) acting as
trustee under deeds of trust, (vi) those activities previously directly
authorized by regulation as of March 5, 1987 to be engaged in by multiple
holding companies or (vii) those activities authorized by the Federal Reserve
30
Board as permissible for bank holding companies, unless the OTS by regulation,
prohibits or limits such activities for savings and loan holding companies.
Those activities described in (vii) above also must be approved by the OTS prior
to being engaged in by a multiple holding company.
Affiliate Restrictions
The affiliate restrictions contained in Sections 23A and 23B of the Federal
Reserve Act apply to all federally insured savings associations and any such
"affiliate." A savings and loan holding company, its subsidiaries and any other
company under common control are considered affiliates of the subsidiary savings
association under the HOLA. Generally, Sections 23A and 23B: (i) limit the
extent to which the insured association or its subsidiaries may engage in
certain covered transactions with an affiliate to an amount equal to 10% of such
institution's capital and surplus, and contain an aggregate limit on all such
transactions with all affiliates to an amount equal to 20% of such capital and
surplus, and (ii) require that all such transactions be on terms substantially
the same, or at least as favorable to the institution or subsidiary, as those
provided to a non-affiliate. The term "covered transaction" includes the making
of loans, purchase of assets, issuance of a guarantee and other similar types of
transactions. Also, a savings association may not make any loan to an affiliate
unless the affiliate is engaged only in activities permissible for bank holding
companies. Only the Federal Reserve may grant exemptions from the restrictions
of Sections 23A and 23B. The OTS, however, may impose more stringent
restrictions on savings associations for reasons of safety and soundness.
Qualified Thrift Lender Test
The HOLA requires any savings and loan holding company that controls a
savings association that fails the QTL test, as explained under "-- Qualified
Thrift Lender Test," must, within one year after the date on which the
association ceases to be a QTL, register as and be deemed a bank holding company
subject to all applicable laws and regulations.
TAXATION
Federal Taxation
General. The Company and the Association report their income on a fiscal
year basis using the accrual method of accounting and are subject to federal
income taxation in the same manner as other corporations, with some exceptions.
The following discussion of tax matters is intended only as a summary and does
not purport to be a comprehensive description of the tax rules applicable to the
Company and the Association.
Bad Debt Reserve. Historically, savings institutions such as the
Association which met certain definitional tests primarily related to their
assets and the nature of their business ("qualifying thrift") were permitted to
establish a reserve for bad debts and to make annual additions thereto, which
may have been deducted in arriving at their taxable income. The Association's
deductions with respect to "qualifying real property loans," which are generally
loans secured by certain interest in real property, were computed using an
amount based on the Association's actual taxable income, computed with certain
modifications and reduced by the amount of any permitted additions to the
non-qualifying reserve. Each year the Association selected the most favorable
way to calculate the deduction attributable to an addition to the tax bad debt
reserve.
The provisions repealing the current thrift bad debt rules were passed by
Congress as part of "The Small Business Job Protection Act of 1996." The new
rules eliminated the 8% of taxable income method for deducting additions to the
tax bad debt reserves for all thrifts for tax years beginning after December 31,
1995. These rules also require that all institutions recapture all or a portion
of their bad debt reserves added since the base year (last taxable year
beginning before January 1, 1988). The Association has previously recorded a
deferred tax liability equal to the bad debt recapture and as such the new rules
will have no effect on net income or federal income tax expense. For taxable
31
years beginning after December 31, 1995, the Association's bad debt deduction
will be determined on the basis of net charge-offs during the taxable year. The
new rules allow an institution to suspend bad debt reserve recapture for the
1996 and 1997 tax years if the institution's lending activity for those years is
equal to or greater than the institution's average mortgage lending activity for
the six taxable years preceding 1996 adjusted for inflation. For this purpose,
only home purchase or home improvement loans are included and the institution
can elect to have the tax years with the highest and lowest lending activity
removed from the average calculation. If an institution is permitted to postpone
the reserve recapture, it must begin its six year recapture no later than the
1998 tax year (fiscal year ending September 30, 1999 for the Company). The
unrecaptured base year reserves will not be subject to recapture as long as the
institution continues to carry on the business of banking. In addition, the
balance of the pre-1988 bad debt reserves continue to be subject to provisions
of present law referred to below that require recapture in the case of certain
excess distributions to shareholders.
Distributions. To the extent that the Association makes "nondividend
distributions" to the Company, such distributions will be considered to result
in distributions from the balance of its bad debt reserves as of December 31,
1987 (or a lesser amount if the Association's loan portfolio decreased since
December 31, 1987) and then from the supplemental reserve for losses on loans
("Excess Distributions"), and an amount based on the Excess Distributions will
be included in the Association's taxable income. Nondividend distributions
include distributions in excess of the Association's current and accumulated
earnings and profits, distributions in redemption of stock and distributions in
partial or complete liquidation. However, dividends paid out of the
Association's current or accumulated earnings and profits, as calculated for
federal income tax purposes, will not be considered to result in a distribution
from the Association's bad debt reserve. The amount of additional taxable income
created from an Excess Distribution is an amount that, when reduced by the tax
attributable to the income, is equal to the amount of the distribution. The
Association does not intend to pay dividends that would result in a recapture of
any portion of its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. The excess of the tax bad debt
reserve deduction using the percentage of taxable income method over the
deduction that would have been allowable under the experience method is treated
as a preference item for purposes of computing the AMTI. In addition, only 90%
of AMTI can be offset by net operating loss carryovers. AMTI is increased by an
amount equal to 75% of the amount by which the Association's adjusted current
earnings exceeds its AMTI (determined without regard to this preference and
prior to reduction for net operating losses). For taxable years beginning after
December 31, 1986, and before January 1, 1996, an environmental tax of 0.12% of
the excess of AMTI (with certain modification) over $2.0 million is imposed on
corporations, including the Association, whether or not an Alternative Minimum
Tax ("AMT") is paid.
Dividends-Received Deduction. The Company may exclude from its income 100%
of dividends received from the Association as a member of the same affiliated
group of corporations. The corporate dividends-received deduction is generally
70% in the case of dividends received from unaffiliated corporations with which
the Company and the Association will not file a consolidated tax return, except
that if the Company or the Association owns more than 20% of the stock of a
corporation distributing a dividend, then 80% of any dividends received may be
deducted.
Other Federal Tax Matters. There have not been any Internal Revenue Service
audits of the Company's or the Association's federal income tax returns during
the past five years.
Oregon Taxation
The Company and the Association are subject to an Oregon corporate excise
tax at a statutory rate of 6.6% (4.0% for the fiscal year ended September 30,
1998) of income. Neither the Company's nor the Association's state income tax
returns have been audited during the past five years.
32
Competition
The Association originates most of its loans to and accepts most of its
deposits from residents of its market area. The Association is the oldest
financial institution headquartered in Klamath Falls. The Association believes
that it is a major competitor in the markets in which it operates. Nonetheless,
the Association faces competition in attracting deposits and making real estate
loans from various financial institutions, including banks, savings associations
and mortgage brokers. In addition, the Association has faced additional
significant competition for investors' funds from short-term money market
securities and other corporate and government securities. The financial
institution industry in the Association's market area is characterized by a mix
of local independent financial institutions and offices of larger out-of-state
financial institutions, including several multi-national bank holding companies.
The ability of the Association to attract and retain savings deposits depends on
its ability to generally provide a rate of return and liquidity risk comparable
to that offered by competing investment opportunities. The Association competes
for loans principally through the interest rates and loan fees it charges and
the efficiency and quality of services it provides borrowers. Competition may
increase as restrictions on the interstate operations of financial institutions
continue to be reduced.
Personnel
As of September 30, 1998, the Association had 207 full-time and 72
part-time employees. The employees are not represented by a collective
bargaining unit. The Association believes its relationship with its employees is
good.
33
Executive Officers. The following table sets forth certain information
regarding the executive officers of the Company.
Name Age(1) Position
Gerald V. Brown ............. 62 President and Chief Executive Officer
Robert A. Tucker ............ 50 Senior Vice President and Chief Lending Officer/Secretary
Frank X. Hernandez .......... 43 Senior Vice President and Chief Operating Officer
Marshall J. Alexander ....... 48 Senior Vice President and Chief Financial Officer
- --------------
(1) At September 30, 1998.
Gerald V. Brown has been employed by the Association since 1957. He was
appointed a director and the President of the Association in June 1994 to
succeed the retiring President, James Bocchi. From 1982 until his appointment as
President, Mr. Brown served as Senior Vice President and Secretary, supervising
all loan activities of the Association.
Robert A. Tucker has been employed by the Association since 1973. He has
served as Senior Vice President since November 1989. He served as Chief
Operating Officer from March 1997 to June 1998 and has served as Chief Lending
Officer and Secretary since July 1998.
Frank X. Hernandez has been employed by the Association since 1991. He
served as Human Resources Officer until July 1998 when he was appointed Senior
Vice President and Chief Operating Officer.
Marshall J. Alexander has been employed by the Association since 1986. He
has served as Vice President and Chief Financial Officer since August 1994 and
was named a Senior Vice President in November 1998.
34
Item 2. Properties
The following table sets forth the location of the Association's offices
and other facilities used in operations as well as certain additional
information relating to these offices and facilities as of September 30, 1998.
Year Square
Description/Address Opened Leased/Owned Footage
- --------------------------------------- ------ ------------ -------
Main Office
540 Main Street ....................... 1939 Owned 25,660
Klamath Falls, Oregon
Branch Offices
2943 South Sixth Street ............... 1972 Owned 3,820
Klamath Falls, Oregon
2323 Dahlia Street .................... 1979 Owned 1,876
Klamath Falls, Oregon
512 Walker Avenue ..................... 1977 Owned 4,216
Ashland, Oregon
1420 East McAndrews Road .............. 1990 Owned 4,006
Medford, Oregon
61515 S. Highway 97 ................... 1993 Owned 5,415
Bend, Oregon
2300 Madison Street ................... 1995 Owned 5,000
Klamath Falls, Oregon
721 Chetco Avenue ..................... 1997 Owned 5,409
Brookings, Oregon
293 North Broadway .................... 1997 Owned 5,087
Burns, Oregon
111 West Main Street .................. 1997 Owned 1,958
Carlton, Oregon
103 South Main Street ................. 1997 Owned 2,235
Condon, Oregon
259 North Adams ....................... 1997 Owned 5,803
Coquille, Oregon
106 Southwest 1st Street .............. 1997 Owned 4,700
Enterprise, Oregon
555 1st Street ........................ 1997 Owned 1,844
Fossil, Oregon
35
Year Square
Description/Address Opened Leased/Owned Footage
- --------------------------------------- ------ ------------ -------
708 Garibaldi Avenue .................. 1997 Owned 1,400
Garibaldi, Oregon
29804 Ellensburg Avenue ............... 1997 Owned 3,136
Gold Beach, Oregon
111 North Main Street ................. 1997 Owned 4,586
Heppner, Oregon
810 South Highway 395 ................. 1997 Leased 6,000
Hermiston, Oregon
200 West Main Street .................. 1997 Owned 4,552
John Day, Oregon
1 South E Street ...................... 1997 Owned 5,714
Lakeview, Oregon
206 East Front Street ................. 1997 Owned 2,920
Merrill, Oregon
165 North 5th Street .................. 1997 Owned 2,370
Monroe, Oregon
217 Main Street ....................... 1997 Owned 6,067
Nyssa, Oregon
48257 East 1st Street ................. 1997 Owned 3,290
Oakridge, Oregon
227 West Main Street .................. 1997 Owned 2,182
Pilot Rock, Oregon
716 Northeast Highway 101 ............. 1997 Owned 2,337
Port Orford, Oregon
178 Northwest Front Street ............ 1997 Owned 2,353
Prairie City, Oregon
315 North Main Street ................. 1997 Owned 3,638
Riddle, Oregon
38770 North Main Street ............... 1997 Owned 2,997
Scio, Oregon
508 Main Street ....................... 1997 Owned 2,282
Moro, Oregon
144 South Main Street ................. 1997 Owned 2,146
Union, Oregon
36
Year Square
Description/Address Opened Leased/Owned Footage
- --------------------------------------- ------ ------------ -------
165 North Maple Street ................ 1997 Owned 2,192
Yamhill, Oregon
475 NE Windy Knolls Drive ............. 1998 Owned 3,120
Bend, Oregon
185 East California ................... 1998 Owned 2,116
Jacksonville, Oregon
Loan Center
585 SW 6th, Suite #2 .................. 1996 Leased 900
Redmond, Oregon
Loan Processing Center
600 Main Street ....................... 1998 Leased 2,800
Klamath Falls, Oregon
The net book value of the Association's investment in office, properties
and equipment totaled $12.3 million at September 30, 1998. See Note 6 of Notes
to the Consolidated Financial Statements in the Annual Report.
Item 3. Legal Proceedings
Periodically, there have been various claims and lawsuits involving the
Association, mainly as a defendant, such as claims to enforce liens,
condemnation proceedings on properties in which the Association holds security
interests, claims involving the making and servicing of real property loans and
other issues incident to the Association's business. The Association is not a
party to any pending legal proceedings that it believes would have a material
adverse effect on the financial condition or operations of the Association.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended September 30, 1998.
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
The information contained under the section captioned "Common Stock
Information" on page 20 of the Annual Report is incorporated herein by
reference.
Item 6. Selected Financial Data
The information contained under the section captioned "Selected
Consolidated Financial Data" on pages 1 and 2 of the Annual Report is
incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information contained in the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations" beginning on page
9 of the Annual Report is incorporated herein by reference. Disclosures
regarding Year 2000 Readiness are included in the above-referenced section of
the Annual Report.
37
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
The information contained in the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Market Risk and
Asset/Liability Management" beginning on page 9 of the Annual Report is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
(a) Financial Statements
Independent Auditors' Report*
Consolidated Balance Sheets as of September 30, 1998 and
1997*
Consolidated Statements of Earnings for the Years
Ended September 30, 1998, 1997 and 1996*
Consolidated Statements of Shareholders' Equity for the
Years Ended September 30, 1998, 1997 and 1996*
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1998, 1997 and 1996*
Notes to the Consolidated Financial Statements*
* Included in the Annual Report attached as Exhibit 13 hereto and
incorporated herein by reference. All schedules have been omitted as
the required information is either inapplicable or included in the
Consolidated Financial Statements or related Notes contained in the
Annual Report.
(b) Supplementary Data
The information contained in Note 20 of Notes to the Consolidated Financial
Statements included in the Annual Report is incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There have been no changes in or disagreements with Accountants on
accounting and financial disclosure during the year ended September 30, 1998.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information contained under the section captioned "Proposal I -
Election of Directors" contained in the Company's Proxy Statement, and "Part I
- -- Business -- Personnel -- Executive Officers" of this report, is incorporated
herein by reference. Reference is made to the cover page of this report for
information regarding compliance with Section 16(a) of the Exchange Act.
Item 11. Executive Compensation
The information contained under the sections captioned "Executive
Compensation", "Directors' Compensation" and "Benefits" under "Proposal I -
Election of Directors" in the Proxy Statement is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners
38
Information required by this item is incorporated herein by reference to
the section captioned "Security Ownership of Certain Beneficial Owners and
Management" of the Proxy Statement
(b) Security Ownership of Management
The information required by this item is incorporated herein by reference
to the sections captioned "Proposal I - Election of Directors" and
"Security Ownership of Certain Beneficial owners and Management" of the
Proxy Statement.
(c) Changes in Control
The Company is not aware of any arrangements, including any pledge by any
person of securities of the Company, the operation of which may at a
subsequent date result in a change in control of the Company.
The information required by this item is incorporated herein by reference
to the sections captioned "Proposal I - Election of Directors" and "Security
Ownership of Certain Beneficial Owners and Management" of the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information set forth under the section captioned "Proposal I -
Election of Directors - Certain Transactions with the Association" in the Proxy
Statement is incorporated herein by reference.
39
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Exhibits
3(a) Articles of Incorporation of the Registrant*
3(b) Bylaws of the Registrant*
10(a) Employment Agreement with Gerald V. Brown***
10(b) Employment Agreement with Marshall J. Alexander***
10(c) Employment Agreement with Robert A. Tucker***
10(d) Employment Agreement with Frank X. Hernandez
10(e) 1996 Stock Option Plan**
10(f) 1996 Management Recognition and Development Plan**
13 Annual Report to Shareholders
22 Subsidiaries of the Registrant
23 Consent of Deloitte & Touche LLP with respect to
financial statements of the Registrant
27 Financial Data Schedule
- -------------------
* Incorporated by reference to the Registrant's Registration Statement
on Form S-1, filed on June 19, 1995.
** Incorporated by reference to the Registrant's Definitive Proxy
Statement for the 1996 Annual Meeting of Shareholders.
*** Incorporated by reference to the Registrant's Annual Report on Form
10-K for the year ended September 30, 1995.
(b) Reports on Form 8-K
None.
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
KLAMATH FIRST BANCORP, INC.
Date: December 29, 1998 By: /s/ Gerald V. Brown
-----------------------------------
Gerald V. Brown
President and Chief Executive Officer
Pursuant to the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
/s/ Gerald V. Brown President, Chief December 29, 1998
- ----------------------------
Gerald V. Brown Executive Officer and
Director (Principal
Executive Officer)
/s/ Marshall J. Alexander Senior Vice President and December 29, 1998
- ---------------------------- Chief Financial Officer
Marshall J. ALexander (Principal Financial
and Accounting Officer)
/s/ Rodney N. Murray Chairman of the Board December 29, 1998
- ---------------------------- of Directors
Rodney N. Murray
/s/ Bernard Z. Agrons Director December 29, 1998
- ----------------------------
Bernard Z. Agrons
/s/ Timothy A. Bailey Director December 29, 1998
- ----------------------------
Timothy A. Bailey
/s/ James D. Bocchi Director December 29, 1998
- ---------------------------
James D. Bocchi
/s/ William C. Dalton Director December 29, 1998
- ---------------------------
William C. Dalton
/s/ J. Gillis Hannigan Director December 29, 1998
- ---------------------------
J. Gillis Hannigan
/s/ Dianne E. Spires Director December 29, 1998
- ---------------------------
Dianne E. Spires