SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1997
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) Identification 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 .
As of July 31, 1997, there were issued and outstanding 9,137,717 shares of
the Registrant's Common Stock. The Registrant's voting common stock is traded
over-the-counter and is listed on the Nasdaq National Market under the symbol
"KFBI."
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KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
TABLE OF CONTENTS
Part I. Financial Information
- ------- ----------------------
Item 1. Financial Statements Page
----
Consolidated Statements of Financial Condition
As of June 30, 1997 and September 30, 1996) 3
Consolidated Statements of Earnings (For the three months
and nine months ended June 30, 1997 and 1996) 4
Consolidated Statement of Shareholders' Equity
(For the year ended September 30, 1996 and for
the nine months ended June 30, 1997) 5
Consolidated Statements of Cash Flows (For the nine
months ended June 30, 1997 and 1996) 6 - 7
Notes to Consolidated Financial Statements 8 - 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 15
Part II. Other Information
- -------- -------------------
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
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<TABLE>
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF JUNE 30, 1997 AND SEPTEMBER 30, 1996
(Unaudited)
June 30, 1997 September 30, 1996
ASSETS ---------------------- ----------------------
<S> <C> <C>
Cash and due from banks ...................................................... $ 3,434,318 $ 6,841,554
Federal funds sold ........................................................... 10,285,686 9,338,079
------------- -------------
Total cash and cash equivalents ........................................... 13,720,004 16,179,633
Investment securities available for sale, at fair value ...................... 66,343,067 75,986,611
(amortized cost: $66,848,722 and $77,071,211)
Investment securities held to maturity, at amortized cost (fair
value: $19,685,340 and $9,860,165) ......................................... 19,701,594 9,827,193
Mortgage backed and related securities available for sale, at fair
value (amortized cost: $68,637,829 and $74,249,350) ........................ 69,321,749 74,109,321
Mortgage backed and related securities held to maturity, at amortized
cost (fair value: $5,988,492 and $6,736,007) ............................... 5,922,438 6,783,001
Loans receivable, net ........................................................ 531,461,310 473,555,988
Real estate owned ............................................................ -- 69,483
Premises and equipment, net .................................................. 5,329,795 4,964,262
Stock in Federal Home Loan Bank of Seattle, at cost .......................... 7,009,100 4,773,800
Accrued interest receivable, net ............................................. 5,589,171 5,037,285
Other assets ................................................................. 3,504,972 682,814
------------- -------------
Total assets .............................................................. $ 727,903,200 $ 671,969,391
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposit liabilities ........................................................ $ 418,205,145 $ 399,673,180
Accrued interest on savings deposits ....................................... 698,972 712,408
Advances from borrowers for taxes and insurance ............................ 6,160,806 7,831,127
Advances from Federal Home Loan Bank of Seattle ............................ 137,000,000 90,000,000
Short term borrowings ...................................................... 18,883,000 14,904,400
Accrued interest on borrowings ............................................. 695,255 323,163
Pension liability .......................................................... 769,599 668,088
Deferred federal and state income taxes .................................... 1,632,804 735,596
Other liabilities .......................................................... 1,576,967 3,710,455
------------- -------------
Total liabilities ........................................................ 585,622,548 518,558,417
------------- -------------
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value, 500,000 shares authorized; none issued .... -- --
Common stock, $.01 par value, 35,000,000 shares authorized, March 31, 1997 -
10,451,223 issued, 9,081,113 outstanding; September 30, 1996 - 11,612,470,
10,242,360 shares outstanding ............................................ 104,295 116,124
Additional paid-in-capital ................................................. 92,361,548 110,762,678
Retained earnings-substantially restricted ................................. 63,401,486 59,082,479
Unearned shares issued to ESOP ............................................. (8,073,862) (8,807,850)
Unearned shares issued to MRDP ............................................. (5,623,340) (6,694,470)
Net unrealized gain (loss) on securities available for sale ................ 110,525 (1,047,987)
------------- -------------
Total shareholders' equity ............................................... 142,280,652 153,410,974
------------- -------------
Total liabilities and shareholders' equity ............................... $ 727,903,200 $ 671,969,391
============= =============
See notes to consolidated financial statements
</TABLE>
3
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<TABLE>
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
-------------- -------------- -------------- --------------
INTEREST INCOME
<S> <C> <C> <C> <C>
Loans receivable $10,421,417 $8,952,474 $29,894,602 $25,856,624
Mortgage backed and related securities 1,163,693 569,251 3,558,732 1,299,762
Investment securities 1,318,728 1,788,728 3,984,913 4,969,983
Federal funds sold 158,120 114,039 606,464 1,136,710
Interest bearing deposits 19,251 19,583 48,663 237,650
-------------- -------------- -------------- --------------
Total interest income 13,081,209 11,444,075 38,093,374 33,500,729
-------------- -------------- -------------- --------------
INTEREST EXPENSE
Deposit liabilities 5,367,615 5,051,671 15,665,078 15,171,896
FHLB advances 1,629,471 626,475 4,569,220 1,635,992
Other 306,714 102,404 783,440 165,275
-------------- -------------- -------------- --------------
Total interest expense 7,303,800 5,780,550 21,017,738 16,973,163
-------------- -------------- -------------- --------------
Net interest income 5,777,409 5,663,525 17,075,636 16,527,566
Provision for loan losses 45,000 30,000 315,000 90,000
-------------- -------------- -------------- --------------
Net interest income after
provision for loan losses 5,732,409 5,633,525 16,760,636 16,437,566
-------------- -------------- -------------- --------------
NON-INTEREST INCOME
Fees and service charges 84,094 69,221 232,564 188,695
Gain on sale of investments -- -- 2,143 --
Gain on sale of real estate owned 0 10,872 27,946 10,872
Other income 19,030 15,440 54,717 73,238
-------------- -------------- -------------- --------------
Total non-interest income 103,124 95,533 317,370 272,805
-------------- -------------- -------------- --------------
NON-INTEREST EXPENSE
Compensation, employee benefits
and related expense 1,588,430 952,407 4,820,042 2,889,393
Occupancy expense 291,456 253,550 765,837 739,497
Data processing expense 87,226 80,487 303,237 261,625
Insurance premium expense 65,214 219,769 310,321 682,841
Loss on sale of investments -- -- 14,530 --
Loss on sale of real estate owned 0 1,581 -- 6,271
Other expense 411,334 371,134 1,275,993 1,067,502
-------------- -------------- -------------- --------------
Total non-interest expense 2,443,660 1,878,928 7,489,960 5,647,129
-------------- -------------- -------------- --------------
Earnings before income taxes 3,391,873 3,850,130 9,588,046 11,063,242
Provision for income tax 1,342,100 1,438,339 3,143,909 4,003,346
-------------- -------------- -------------- --------------
Net earnings $2,049,773 $2,411,791 $6,444,137 $7,059,896
============= ============= ============= =============
Earnings per common share (based on
weighted average shares outstanding) $0.22 $0.22 $0.68 $0.63
Weighted average number of
shares outstanding 9,464,496 10,867,241 9,536,833 11,125,868
See notes to consolidated financial statements.
</TABLE>
4
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<TABLE>
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED SEPTEMBER 30, 1996 AND THE NINE MONTHS ENDED JUNE 30, 1997
(Unaudited)
Additional Unearned Unrealized Unearned Total
Common Stock Common Stock paid-in Retained ESOP shares gain (loss) shares issued shareholders'
Shares Amount capital earnings at cost on securities to MRDP Trust equity
-------------- ------------ ------------ ------------ ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1995 12,233,125 $122,331 $119,230,653 $55,811,362 ($9,786,500) ($692,781) $-- $164,685,065
Cash dividends -- -- -- (2,838,680) -- -- -- (2,838,680)
Earned ESOP shares -- -- 417,652 -- 978,650 -- -- 1,396,302
Unrealized loss on
securities available
for sale -- -- -- -- -- (355,206) -- (355,206)
Unearned shares issued to
MRDP Trust -- -- -- -- -- -- (6,694,470) (6,694,470)
Stock retirement (620,655) (6,207) (8,885,627) -- -- -- -- (8,891,834)
Net earnings -- -- -- 6,109,797 -- -- -- 6,109,797
-------------- ------------ ------------ ------------ ------------ ------------- ------------- -------------
Balance at
September 30, 1996 11,612,470 $116,124 $110,762,678 $59,082,479 ($8,807,850) ($1,047,987) ($6,694,470)$153,410,974
Cash dividends -- -- -- (2,125,130) -- -- -- (2,125,130)
Unrealized gain on
securities available
for sale -- -- -- -- -- 1,158,512 -- 1,158,512
Stock retirement (1,182,936) (11,829) (18,866,299) -- -- -- -- (18,878,128)
ESOP contribution -- -- 465,169 -- 733,988 -- -- 1,199,157
MRDP contribution -- -- -- -- -- -- 1,071,130 1,071,130
Net earnings -- -- -- 6,444,137 -- -- -- 6,444,137
-------------- ------------ ------------ ------------ ------------ ------------- ------------- -------------
Balance at June 30, 1997 10,429,534 $104,295 $92,361,548 $63,401,486 ($8,073,862) $110,525 ($5,623,340)$142,280,652
============== ============ ============ ============ ============ ============= ============= ============
See notes to consolidated financial statements.
</TABLE>
5
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<TABLE>
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 1997 AND 1996
(Unaudited)
Nine Months Ended Nine Months Ended
June 30, 1997 June 30, 1996
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $6,444,137 $7,059,896
-------------- --------------
ADJUSTMENTS TO RECONCILE NET EARNINGS TO
NET CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation 276,792 310,428
Provision for loan losses 313,631 90,000
Compensation expense related to ESOP benefit 1,199,156 977,099
Compensation expense related to MRDP Trust 1,071,130 --
Net amortization of premiums (discounts) paid on
investment and mortgage backed and related securities 329,399 60,909
Increase in deferred loan fees, net of amortization 626,530 528,012
Accretion of discounts on purchased loans (244) 2,998
Net (gain) loss on sale of real estate owned and
premises and equipment (3,234) (6,182)
Net (gain) loss on sale of investment and mortgage
backed and related securities 12,387 --
FHLB stock dividend (353,700) (253,800)
CHANGES IN ASSETS AND LIABILITIES
Accrued interest receivable (551,886) (1,673,482)
Other assets (2,822,158) (117,008)
Accrued interest on deposit liabilities (13,436) (141,070)
Accrued interest on borrowings 372,092 --
Pension liabilities 101,511 94,511
Deferred federal and state income taxes 652,825 481,804
Other liabilities (1,849,030) (1,433,173)
-------------- --------------
Total adjustments (638,235) (1,078,954)
-------------- --------------
Net cash provided by operating activities 5,805,902 5,980,942
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of investment securities
held to maturity 31,949,466 70,783,975
Proceeds from maturity of investment securities
available for sale 2,000,000 --
Principal repayments received on mortgage
backed and related securities 15,276,575 6,150,407
Principal repayments received on loans 40,509,940 49,888,936
Loan originations (99,355,177) (102,657,770)
Purchase of investment securities held
to maturity (41,843,264) --
Purchase of investment securities available
for sale (7,862,997) (123,004,855)
Purchase of mortgage backed and related
securities held to maturity -- --
Purchase of mortgage backed and related
securities available for sale (14,850,705) (49,005,784)
Purchase of FHLB stock (4,307,500) --
Proceeds from sale of FHLB stock 2,425,900 --
Proceeds from sale of investment securities
available for sale 16,066,044 --
Proceeds from sale of mortgage backed and related
securities available for sale 5,743,267 --
Proceeds from sale of real estate owned and
premises and equipment 72,717 178,568
Purchases of premises and equipment (642,325) (116,022)
-------------- --------------
Net cash used in investing activities (54,818,059) (147,782,545)
</TABLE>
6
<PAGE>
<TABLE>
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 1997 AND 1996
(Unaudited)
(continued)
Nine Months Ended Nine Months Ended
June 30, 1997 June 30, 1996
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Increase/(decrease) in deposit
liabilities, net of withdrawals $18,531,965 $9,602,722
Proceeds from FHLB advances 157,000,000 38,000,000
Repayments of FHLB advances (110,000,000) --
Proceeds from short term borrowings 56,538,250 7,033,900
Repayments of short term borrowings (52,559,650) --
Repayment from stock over subscription -- (65,685,300)
Purchase stock for MRDP Trust -- (6,694,469)
Stock retirement (18,878,128) --
Advances from borrowers for tax and insurance (1,670,321) (2,452,894)
Dividends paid (2,409,588) (1,294,266)
-------------- --------------
Net cash provided by financing activities 46,552,528 (21,490,307)
-------------- --------------
Net (decrease) increase in cash and cash
equivalents (2,459,629) (163,291,910)
Cash and cash equivalents at beginning of year 16,179,633 175,994,270
-------------- --------------
Cash and cash equivalents at end of year $13,720,004 $12,702,360
============== ==============
SUPPLEMENTAL SCHEDULE OF INTEREST AND INCOME
TAXES PAID
Interest paid $20,659,080 $17,046,265
Income taxes paid 2,431,459 3,948,269
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES
Transfer of investment securities from held
to maturity to available for sale at
estimated fair market value $-- $27,171,074
Transfer of mortgage backed and related
securities from held to maturity to
available for sale at estimated fair
value -- 1,717,890
Net unrealized gain (loss) on securities
available for sale 1,158,512 (784,181)
Dividends declared and accrued in other
liabilities 783,842 795,153
See notes to consolidated financial statements.
</TABLE>
7
<PAGE>
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
In the opinion of Management, the accompanying unaudited consolidated statements
contain all adjustments necessary for a fair presentation of Klamath First
Bancorp, Inc.'s (the "Company") financial condition as of June 30, 1997, and
September 30, 1996, the results of operations for the three months ended June
30, 1997 and 1996 and for the nine months ended June 30, 1997 and 1996 and the
cash flows for the nine months ended June 30, 1997 and 1996. Certain information
and note disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.
It is suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K. The results of operations
for the three months and nine months ended June 30, 1997 are not necessarily
indicative of the results which may be expected for the entire fiscal year.
2. ALLOWANCE FOR LOAN LOSSES
June 30, 1997 September 30, 1996
-------------- ------------------
Balance, beginning of year $927,820 $807,820
Charge-offs (1,369) --
Additions 315,000 120,000
-------------- ------------------
Balance, end of period $1,241,451 $927,820
============== ==================
Additions to the allowance for loan losses were increased during the period
ended June 30, 1997 in response to the purchase of $9.3 million of loans secured
by multi-family residential property and $2.2 million of commercial real estate
loans which are higher yielding and have more associated risk than the Company's
traditional portfolio of one- to four-family residential mortgages. In addition,
the monthly contribution to loan loss allowance was increased from $10,000 to
$15,000 in response to greater loan volume in other than one-to four-family
residential loans. The allowance will continue to be analyzed as the Association
expands its lending products for the consumer and commercial markets.
3. ADVANCES FROM FEDERAL HOME LOAN BANK
Borrowings at June 30, 1997 consisted of ten short term advances totaling $87.0
million and five long term advances totaling $50.0 million from the Federal Home
Loan Bank of Seattle ("FHLB"). The advances are collateralized in aggregate by
certain mortgages or deeds of trust, securities of the U.S. Government and
agencies thereof and cash on deposit with the FHLB.
<TABLE>
June 30, 1997 September 30, 1996
-------------------------------------------- -------------------------------------------------
Range of Weighted Range of Weighted
interest average interest average
Amount rates interest rate Amount rates interest rate
-------------- -------------- --------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Due within one year $87,000,000 5.57%-5.84% 5.75% $65,000,000 5.40%-5.64% 5.53%
After two but within
five years 50,000,000 5.39%-5.87% 5.57% 25,000,000 5.53%-5.74% 5.66%
-------------- --------------
$137,000,000 $90,000,000
============== ==============
</TABLE>
8
<PAGE>
4. SHORT TERM BORROWINGS
Securities sold under agreements to repurchase totaled $18.9 million with
interest rates from 5.65% to 5.80%. All of the agreements are due within 90
days.
5. REGULATORY CAPITAL
The following table illustrates the compliance by Klamath First Federal Savings
and Loan Association (the "Association") with currently applicable regulatory
capital requirements at June 30, 1997:
<TABLE>
Categorized as "Well
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
-------------- ------- -------------- ------- -------------- -------
Amount Ratio Amount Ratio Amount Ratio
As of June 30, 1997
<S> <C> <C> <C> <C> <C> <C>
Total Capital: 116,225,237 35.3% 26,325,744 8.0% 32,907,180 10.0%
(To Risk Weighted Assets)
Tier I Capital: 114,983,786 34.9% N/A 19,744,308 6.0%
(To Risk Weighted Assets)
Tier I Capital: 114,983,786 16.8% 20,527,142 3.0% 34,211,903 5.0%
(To Total Assets)
Tangible Capital: 114,983,786 16.8% 10,263,571 1.5% N/A
(To Total Assets)
</TABLE>
6. SHAREHOLDERS' EQUITY
During the quarter ended December 31, 1996, the Company received approval from
the Office of Thrift Supervision to repurchase 10% of its outstanding shares.
This repurchase was begun on December 31, 1996, with the repurchase of 240,000
shares. The remaining 921,247 shares were repurchased in January 1997. The
shares were repurchased at an average price of $15.93. On April 9, 1997, 21,689
shares were repurchased at $17.37 per share related to release of shares for
MRDP awards.
7. EARNINGS PER SHARE
Earnings per share is computed using the weighted average number of common and
common equivalent shares outstanding during the period. Common stock equivalents
include shares held by the Company's Employee Stock Ownership Plan ("ESOP") that
are committed for release, shares awarded but not released under the Company's
Management Recognition and Development Plan ("MRDP"), and stock options granted
under the Stock Option Plan.
8. BRANCH ACQUISITION
On March 5, 1997, the Company entered into a definitive agreement to purchase 25
branches from Wells Fargo Bank, N.A. The transaction closed as scheduled on July
18, 1997. The transaction will be accounted for as a purchase under generally
accepted accounting principles. The purchase included assumption of
approximately $241.3 million in deposit liabilities and purchase of branch
facilities and other assets of approximately $6.3 million. The acquired branches
are located in rural Oregon communities, extending the Association's market to
33 branches in 22 counties throughout the state.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Safe Harbor Clause. This report contains certain "forward-looking statements."
The Company desires to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 and is including this statement
for the express purpose of availing itself of the protection of such safe harbor
with respect to all of such forward-looking statements. These forward-looking
statements, which are included in Management's Discussion and Analysis, describe
future plans or strategies and include the Company's expectations of future
financial results. The words "believe," "expect," "anticipate," "estimate,"
"project," and similar expressions identify forward-looking statements. The
Company's ability to predict results or the effect of future plans or strategies
is inherently uncertain. Factors which could affect actual results include
interest rate trends, the general economic climate in the Company's market area
and the country as a whole, loan delinquency rates, and changes in federal and
state regulation. These factors should be considered in evaluating the
forward-looking statements, and undue reliance should not be placed on such
statements.
General
The Company, an Oregon corporation, became the unitary savings and loan holding
company for the Association upon the Association's conversion from a federally
chartered mutual to a federally chartered stock savings and loan association
("Conversion") on October 4, 1995. At June 30, 1997, the Company had total
consolidated assets of $727.9 million and consolidated shareholders' equity of
$142.3 million. The Company is currently not engaged in any business activity
other than holding the stock of the Association. Accordingly, the information
set forth in this report, including financial statements and related data,
relates primarily to the Association.
As a traditional, community-oriented, savings and loan, the Association focuses
on customer service within its principal market area. The Association's primary
market activity is attracting deposits from the general public 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,
loans on commercial property and multi-family dwellings. To supplement internal
growth generated through its branch network, the Association has recently begun
purchasing Oregon-based commercial real estate and multi-family residential
loans from other Oregon financial institutions, as well as using mortgage
brokers to locate construction loans that meet our existing conservative
underwriting standards outside of the current branch market areas. While these
types of loans represent only 2.6% of net loans at June 30, 1997, they accounted
for 14.1% of loan production for the nine months ended June 30, 1997.
Net interest income, which is the difference between interest and dividend
income on interest-earning assets, primarily loans and investment securities,
and interest expense on interest-bearing deposits and borrowings, is the major
source of profit for the Company. Because the Company depends primarily on net
interest income for its earnings, the focus of the Company's management is to
create and implement strategies that will provide stable, positive spreads
between the yield on interest-earning assets and the cost of interest-bearing
liabilities. Such strategies include the Association's recent introduction of a
variable rate home equity lending program that will have an interest rate tied
to the Wall Street Journal published prime rate with an additional margin of
2.0%. To a lesser degree, the net earnings of the Company rely on the level of
its non-interest income. The Company is aggressively pursuing strategies to
improve its service charge and fee income, and control its non-interest expense,
which includes employee compensation and benefits, occupancy and equipment
expense, deposit insurance premiums and miscellaneous other expenses, as well as
federal and state income tax expense. The recent Wells Fargo branch acquisition
will contribute greatly to improvement of the Company's non-interest income by
providing a larger customer base to generate service charge and fee income.
10
<PAGE>
The Association is regulated by the Office of Thrift Supervision ("OTS") and its
deposits are insured up to applicable limits under the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC").
The Association is a member of the Federal Home Loan Bank of Seattle, conducting
its business through eight office facilities, with the main office located in
Klamath Falls, Oregon. The primary market areas of the Association are the
counties of Klamath, Jackson and Deschutes in Southern and Central Oregon.
Branch Acquisition
The Association completed the purchase of 25 branches in rural Oregon
communities from Wells Fargo Bank, N.A. on July 18, 1997, as scheduled. The
transaction included purchase of approximately $241.3 million in deposits and
purchase of branch facilities including buildings, improvements and furniture
and fixtures with a book value of $2.0 million. This acquisition expands the
Association's market area to include 33 branches in 22 Oregon counties. In
twelve of the locations, the newly acquired branch is the only financial
institution in the community. The acquired offices are located in communities
which are compatible with, and complement, the Association's current markets and
philosophy. While no loans were acquired in the transaction, the addition of
these branches creates new markets for the Association's lending products,
including the recently introduced consumer and commercial products.
The purchase price was based on 6.51% of average deposits at the branches during
the thirty days prior to closing, plus the book value of fixed assets. The
deposit premium totaled $16.4 million. In accordance with generally accepted
accounting principles, the fixed assets acquired will be recorded at fair value,
estimated to be approximately $4.9 million in excess of the book value/purchase
price. This increase in fixed asset value will be offset by a reduction in the
deposit premium recorded. Excess deposited funds have initially been invested in
Federal funds and securities with maturities under five years.
The purchase of deposit liabilities increased total Association deposits to
approximately $659.5 million and increased the number of deposit accounts from
40,000 to 82,000. Approximately 23,000 of the purchased accounts, $140.9
million, are demand deposits which carry a lower interest cost than the
Association's previous deposit mix. As a result the Association should
experience a reduction in cost of funds. With the increase in the Association's
deposits and assets as a result of the acquisition, total deposits and total
assets of the Company are expected to increase by approximately 60.0% and 34.5%,
respectively, and reduce the Company's tangible capital ratio from 17.92% to
approximately 12%.
Recently Issued Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." This Statement prescribes accounting and reporting standards for
all stock-based compensation plans, including employee stock options, restricted
stock and stock appreciation rights. The Statement defines a "fair value based
method" of accounting for employee stock options and encourages all entities to
adopt that method of accounting for all of their employee stock compensation
plans. However, it also allows an entity to continue to measure compensation for
those plans using the "intrinsic value based method" under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("Opinion No.
25").
Under the fair value based method, compensation cost is measured at the grant
date of the option based on the value of the award and is recognized over the
service period, which is usually the vesting period. Under the intrinsic value
based method, compensation cost is the excess, if any, of the quoted market
price of the stock at grant date or other measurement date over the amount an
employee must pay to acquire the stock. The stock options granted under the
Company's stock option plan have no intrinsic value at grant date, and under
Opinion No. 25 no compensation cost is recognized for them. Compensation cost is
recognized for other types of stock-based compensation plans under Opinion No.
25. Beginning in the fiscal year ending September 30, 1997, SFAS No. 123
requires that an employer's audited financial statements include certain
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disclosures about stock-based compensation arrangements regardless of the method
used to account for them. An employer that continues to apply the accounting
provisions of Opinion No. 25 will disclose pro forma amounts that reflect the
difference between compensation cost, if any, included in net income and the
related cost measured by the fair value based method, including tax effects,
that would have been recognized in the income statement if the fair value based
method had been used. The Company will continue to apply Opinion No. 25 in
accounting for stock-based compensation plans and will provide the disclosures
required by SFAS No. 123.
In June 1996, FASB issued SFAS No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities," which was amended by
SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125," issued in December 1996. These Statements provide accounting
and reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. The standards are based on consistent
application of a financial-components approach that focuses on control. Under
the approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. These Statements provide consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings.
The Company plans to implement SFAS No.125 in compliance with the effective
dates as amended by SFAS No. 127. The Company does not expect implementation to
have a material impact on its financial position or results of operations.
In February 1997, FASB issued SFAS No. 128, "Earnings per Share." This Statement
establishes standards for computing and presenting earnings per share (EPS),
simplifying the standards for computation of EPS and making them comparable to
international EPS standards. This Statement is effective for financial
statements issued for periods ending after December 15, 1997, and earlier
application is not permitted. Management has not evaluated the impact that
adoption of this Statement will have.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes requirements for disclosure of comprehensive income and
becomes effective for years beginning after December 15, 1997. Reclassification
of earlier financial statements for comparative purposes is required. In June
1997, the FASB also issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No.131 establishes standards for
disclosure about operating segments in annual financial statements and selected
information in interim financial reports. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. This statement supercedes SFAS No. 14, "Financial Reporting for
Segments of Business Enterprises." The new standard becomes effective for years
beginning after December 15, 1997, and requires that comparative information
from earlier periods be restated to conform to the requirements of this
standard. The adoption of these statements is not expected to be material to the
Company.
Changes in Financial Condition
At June 30, 1997, the consolidated assets of the Company totaled $727.9 million,
an increase of $55.9 million, or 8.32%, from $672.0 million at September 30,
1996. The increase in total assets was a result of an increase in net loans
receivable of $57.9 million and a $2.2 million increase in FHLB stock. These
increases were offset by a net reduction in mortgage backed and related
securities of $5.7 million as sales and repayments of principal exceeded
purchases.
Net loans receivable increased by $57.9 million, or 12.23%, to $531.5 million at
June 30, 1997, compared to $473.6 million at September 30, 1996. The increase
was primarily the result of continued new loan demand exceeding loan repayments,
augmented by the Company's purchase of $11.4 million in higher yielding loans on
multi-family residential and commercial properties in Oregon during 1997.
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Investment securities increased $230,857, or .27%, from $85.8 million at
September 30, 1996 to $86.0 million at June 30, 1997. This increase was the
combined result of $33.9 million in securities maturing during the period and
$16.1 million of securities that were sold, offset by the purchase of $49.7
million in securities.
During the nine months ended June 30, 1997, $15.3 million of principal payments
were received on mortgage backed and related securities ("MBS") and $5.7 million
in available for sale MBS were sold. In addition, $14.9 million in MBS were
purchased, which resulted in the balance of $75.2 million at June 30, 1997, a
decrease of $5.7 million, or 7.0%, from $80.9 million at September 30, 1996.
Deposit liabilities increased $18.5 million, or 4.6%, from $399.7 million at
September 30, 1996 to $418.2 million at June 30, 1997 Management attributes the
increase to the maintaining of competitive rates in our market areas as well as
the use of an automated on-line personal computer-based system to market
deposits nationally. Interest credited on accounts also contributed to the
increase.
Advances from borrowers for taxes and insurance decreased $1.6 million from
September 30, 1996 to June 30, 1997. The decrease is the combined result of
paying $9.5 million in reserves for the required real estate taxes due on the
Association's loan receivable portfolio and $300,000 in refunds due to decreased
real estate taxes due for the prior twelve months offset by the accrual of
payments received for taxes and insurance during the past nine months.
Advances from the FHLB of Seattle increased $47.0 million, or 52.2%, from $90.0
million at September 30, 1996 to $137.0 million at June 30, 1997. Of the
increase, $37 million was used to fund loan growth and $10 million was used to
purchase adjustable rate mortgage backed securities. The Company increased
borrowings in part to take advantage of a FHLB of Seattle special borrowing
offer which was at a rate lower than the normal market rate. This special
borrowing will be used to reduce other FHLB borrowings scheduled to mature
within the next 54 days. After the scheduled maturities are paid, total
borrowing will be reduced back to a $108 million level.
Total shareholders' equity decreased $11.1 million, or 7.3%, from $153.4 million
at September 30, 1996 to $142.3 million at June 30, 1997. This net decrease was
the combined result of the repurchase of 1,182,936 shares of stock for $18.9
million and the declaration of $2.1 million in dividends for the first three
quarters, partially offset by $6.4 million in earnings and $1.2 million in
unrealized gains on securities available for sale during the nine month period
from September 30, 1996 to June 30, 1997.
Results of Operations
Comparison of Nine Months Ended June 30, 1997 and 1996
General. Net interest income increased $548,070, or 3.3%, comparing the nine
month period ending June 30, 1997 to the same period ending June 30, 1996.
Interest income increased $4.6 million while interest expense increased by only
$4.0 million comparing the nine month period ended June 30, 1997 to the same
period ended June 30, 1996. Non-interest income also increased by $44,565, while
the provision for loan losses increased by $225,000, non-interest expense
increased by $1.9 million, and income taxes decreased by $859,437 comparing the
same two periods. This resulted in net income decreasing by $615,759, or 8.7%,
from $7.1 million for the nine months ended June 30, 1996 to $6.4 million for
the nine months ended June 30, 1997. The decrease in net income is primarily
attributed to employee benefits related to expenses of the MRDP which was not
being funded in the prior period and an increase in expense for the ESOP due to
the rising stock price.
Interest Income. The increase of $4.6 million in interest income was generated
by an additional $76.4 million in average interest earning assets for the nine
months ended June 30, 1997 compared to the same period in 1996. Balances
previously invested in federal funds sold have been redeployed to investments in
mortgage backed and related securities and loans receivable in the current year,
resulting in a $2.3 million increase in interest income on mortgage backed and
related securities and $4.0 million increase in income on loans receivable.
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These increases were partially offset by a $1.0 million decrease in income on
investment securities related to a decrease in the average balance of securities
in the portfolio.
The average yield on interest earning assets increased 7 basis points to 7.46%
for the nine months ended June 30, 1997 from 7.39% for the same period ended
June 30, 1996. This reflects the Company's continued effort to invest in loans
and investments with higher yields, without materially increasing credit risk.
Interest Expense. Interest expense increased $4.0 million for the nine months
ended June 30, 1997 as compared to the same period in 1996. Although total
deposits grew by $18.5 million comparing June 30, 1996 to 1997, the average
interest paid on interest-bearing deposits declined 11 basis points from 5.23%
for the nine months ended June 30, 1996 to 5.12% for the same period ended June
30, 1997. These factors combined to produce a $0.5 million increase in interest
on deposit liabilities. Average balances of FHLB advances increased $84.0
million comparing June 30, 1996 to 1997, resulting in a $2.9 million increase in
interest expense on FHLB advances for the nine months ended June 30, 1997 as
compared to the same period in 1996.
Provision for Loan Losses. The provision for loan losses was $315,000 and there
were charge offs of $1,369 during the nine months ended June 30, 1997 compared
to a $90,000 provision and no charge offs during the nine months ended June 30,
1996. The provision was increased during the quarter ended March 31, 1997 in
response to portfolio growth, the purchase of $6.0 million of higher-yielding
loans collateralized by multi-family residential property which have higher
associated risk than the existing portfolio of one- to four-family residential
mortgages, and in anticipation of further purchases of such loans. Based on the
Company's business strategies, management anticipates increasing the proportion
of the loan portfolio dedicated to these higher-yielding loans. At June 30,
1997, the allowance for loan losses was equal to 213.2% of non-performing loans
compared to 485.9% at September 30, 1996. The decrease in the coverage ratio at
June 30, 1997 was the result of an increase in non-performing loans from
$191,000 at September 30, 1996 to $582,000 at June 30, 1997. Non-performing
loans decreased during the third quarter, from $678,000 at March 31, 1997 to
$582,000 at June 30, 1997. Of the $582,000 non- performing loans at June 30,
1997, $298,000 relates to two loans to the same party in which the borrower has
substantial equity. One of these loans has been brought current subsequent to
June 30, 1997.
Non-Interest Income. Non-interest income increased $44,565, or 16.3%, to
$317,370 for the nine months ended June 30, 1997 from $272,805 for the nine
months ended June 30, 1996. The increase was attributable to increased fee
income as well as gains on sale of real estate owned and investments. Additional
fee income resulted from aggressive internal marketing efforts to improve fee
income from checking accounts, ATM's, and mortgage life insurance sales.
Non-Interest Expense. Non-interest expense increased $1.8 million, or 32.6%, to
$7.5 million for the nine months ended June 30, 1997, from $5.6 million for the
comparable period in 1996. Of this increase, $1.9 million was attributable to an
increase in compensation and benefit expense in 1997, reflecting addition of
staff in key areas in anticipation of the Wells Fargo acquisition and accruals
for Employee Stock Ownership Plan contributions and the Management Recognition
and Development Plan. The additional expense associated with benefit plans which
were not in place in the prior year will continue to impact prior period
comparisons for the remaining quarters of the year ended September 30, 1997.
Increases in other expense of $208,491 were offset by a $372,520 reduction in
deposit insurance premiums resulting from reduced assessment rates beginning
January 1, 1997 and further reduced by a credit for overpayment of premiums in
1996. The ratio of non-interest expense to average total assets was 1.4% and
1.2% for the nine months ended June 30, 1997 and 1996, respectively.
Income Taxes. The provision for income taxes decreased $859,437 for the nine
months ended June 30, 1997 compared with the same period ended June 30, 1996,
primarily as a result of recognition of the tax benefit related to the capital
loss on sale of the U.S. Federal securities mutual bond fund. At September 30,
1996, when the capital loss was recognized for book purposes, a valuation
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allowance was created to offset the deferred tax asset because the Company was
not assured of being able to realize a capital gain and the related tax benefit.
During the quarter ended March 31, 1997, the Company, through the sale of
certain investments, realized a capital gain for tax purposes that assures
realization of the tax benefit and thus reduced the valuation allowance to zero.
Comparison of Three Months Ended June 30, 1997 and 1996
General. Net income decreased $362,018, or 15.0%, from $2.4 million for the
three months ended June 30, 1996 to $2.0 million for the three months ended June
30, 1997. This decrease was primarily attributable to an increase in
non-interest expense related to employee benefit plans adopted at conversion
which was only partially offset by an increase in net interest income.
Interest Income. Additional interest income generated by the $83.9 million
increase in average interest earning assets contributed to an increase of $1.7
million in interest income for the three months ended June 30, 1997 compared to
1996. Of this increase, $0.6 million is attributable to increased interest
income on mortgage backed and related securities and $1.5 million to increased
income on loans receivable. These increases were offset by a decrease in
interest on investment securities of $0.5 million.
The average yield on interest earning assets increased 4 basis points to 7.51%
for the three months ended June 30, 1997 compared to 7.47% for the same period
ended June 30, 1996.
Interest Expense. Interest expense on deposit liabilities increased $315,944 for
the three months ended June 30, 1997 as compared to the same period in 1996.
Although average deposits increased by $25.6 million comparing June 30, 1996 to
1997, the average interest paid on interest-bearing deposits decreased 2 basis
points from 5.15% for the three months ended June 30, 1996 to 5.13% for the same
period ended June 30, 1997. The average balance of FHLB advances increased from
$52.2 million for the three months ended June 30, 1996 to $133.3 million for the
same period ended June 30, 1997 resulting in an increase in interest on FHLB
advances of $1.0 million for the three months ended June 30, 1997 compared with
the same period ended June 30, 1996.
Provision for Loan Losses. The provision for loan losses was $45,000 and there
were $1,369 of charge offs during the three months ended June 30, 1997 compared
to a $30,000 provision and no charge offs during the three months ended June 30,
1996. The provision was increased in response to portfolio growth.
Non-Interest Income. Non-interest income increased $7,591, or 8.0%, to $103,124
for the three months ended June 30, 1997 from $95,533 for the three months ended
June 30, 1996. The increase was primarily attributable to a $14,873 increase in
fee income partially offset by a decrease in gains on sales of real estate
owned. Additional fee income resulted from aggressive internal marketing efforts
to improve fee income from checking accounts, ATM's, and mortgage life insurance
sales.
Non-Interest Expense. Non-interest expense increased $564,732, or 30.1%, to $2.4
million for the three months ended June 30, 1997, from $1.9 million in the
comparable period in 1996. Of this increase, $636,023 was attributable to an
increase in compensation and benefit expense in 1997, reflecting addition of
staff in key areas prior to the Wells Fargo acquisition and accruals for
Employee Stock Ownership Plan contributions and the Management Recognition and
Development Plan. This increase was partially offset by a $154,255 reduction in
deposit insurance premiums resulting from reduced assessment rates beginning
January 1, 1997. The ratio of non-interest expense to average total assets was
1.4% and 1.2% for the three months ended June 30, 1997 and 1996, respectively.
Income Taxes. The provision for income taxes decreased $96,239 for the three
months ended June 30, 1997 compared with the prior year, primarily as a result
of lower income for the quarter.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in various claims and legal actions arising in
the normal course of business. Management believes that these
proceedings will not result in a material loss to the Company.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
a) Not applicable.
b) A report on Form 8-K dated July 18, 1997 was filed on August 1,,
1997 relating to the Company's completion of the purchase of 25 branch
offices in rural Oregon communities from Wells Fargo Bank, N.A.
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SIGNATURES
Pursuant to the requirements 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: August 13, 1997 By: /s/ Gerald V. Brown
---------------------------
Gerald V. Brown, President and
Chief Executive Officer
Date: August 13, 1997 By: /s/ Marshall Jay Alexander
---------------------------
Marshall Jay Alexander, Vice President
and Chief Financial Officer
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SIGNATURES
Pursuant to the requirements 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: August 13, 1997 By:
---------------------------
Gerald V. Brown, President and
Chief Executive Officer
Date: August 13, 1997 By:
---------------------------
Marshall Jay Alexander, Vice President
and Chief Financial Officer
15
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