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 March 31, 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) 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 April 21, 1998, there were issued 10,429,534 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."
<PAGE>
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 March 31, 1998 and September 30, 1997) 3
Consolidated Statements of Earnings (For the three months
and six months ended March 31, 1998 and 1997) 4
Consolidated Statement of Shareholders' Equity
(For the years ended September 30, 1997 and 1996 and for
the six months ended March 31, 1998) 5
Consolidated Statements of Cash Flows (For the six
months ended March 31, 1998 and 1997) 6 - 7
Notes to Consolidated Financial Statements 8 - 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11 - 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
2
<PAGE>
<TABLE>
<CAPTION>
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF MARCH 31, 1998 AND SEPTEMBER 30, 1997
(Unaudited)
March 31, 1998 September 30, 1997
ASSETS -------------- ------------------
<S> <C> <C>
Cash and due from banks .................................................. $ 20,277,001 $ 24,503,768
Interest earning deposits with banks ..................................... 3,528,842 1,431,087
Federal funds sold and securities purchased under agreements to resell ... 20,015,585 6,108,341
------------ ------------
Total cash and cash equivalents ....................................... 43,821,428 32,043,196
Investment securities available for sale, at fair value
(amortized cost: $229,962,044 and $261,869,234) ........................ 230,882,894 261,846,320
Investment securities held to maturity, at amortized cost (fair
value: $3,077,695 and $22,968,997) ..................................... 3,040,606 22,937,314
Mortgage backed and related securities available for sale, at fair
value (amortized cost: $65,354,606 and $64,097,246) .................... 65,835,322 64,868,633
Mortgage backed and related securities held to maturity, at amortized
cost (fair value: $4,671,473 and $5,518,648) ........................... 4,631,161 5,446,957
Loans receivable, net .................................................... 605,662,050 551,463,590
Real estate owned ........................................................ -- --
Premises and equipment, net .............................................. 11,741,097 11,671,124
Stock in Federal Home Loan Bank of Seattle, at cost ...................... 7,433,800 7,150,400
Accrued interest receivable .............................................. 7,318,615 7,626,164
Core deposit intangible .................................................. 12,257,356 13,083,695
Other assets ............................................................. 1,568,263 1,940,655
------------ ------------
Total assets .......................................................... $994,192,592 $980,078,048
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposit liabilities .................................................... $680,635,103 $673,977,901
Accrued interest on deposits ........................................... 1,092,917 1,215,745
Advances from borrowers for taxes and insurance ........................ 3,709,521 8,915,486
Advances from Federal Home Loan Bank of Seattle ........................ 139,500,000 129,000,000
Short term borrowings .................................................. 14,084,000 17,077,500
Accrued interest on borrowings ......................................... 275,757 512,716
Pension liabilities .................................................... 790,438 727,140
Deferred federal and state income taxes ................................ 2,093,883 1,911,573
Other liabilities ...................................................... 2,761,381 2,277,544
------------ ------------
Total liabilities .................................................... 844,943,000 835,615,605
------------ ------------
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, 1998 -- 10,429,534 issued, 9,235,582 outstanding;
September 30, 1997 -- 10,429,534 issued, 9,235,582 outstanding ....... 104,295 104,295
Additional paid-in-capital ............................................. 93,189,848 92,601,639
Retained earnings-substantially restricted ............................. 67,507,156 64,744,995
Unearned shares issued to ESOP ......................................... (7,339,875) (7,829,200)
Unearned shares issued to MRDP ......................................... (5,080,803) (5,623,340)
Net unrealized gain on securities available for sale, net of tax ....... 868,971 464,054
------------ ------------
Total shareholders' equity ........................................... 149,249,592 144,462,443
------------ ------------
Total liabilities and shareholders' equity ........................... $994,192,592 $980,078,048
============ ============
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
March 31, March 31, March 31, March 31,
1998 1997 1998 1997
-------------- -------------- -------------- --------------
INTEREST INCOME
<S> <C> <C> <C> <C>
Loans receivable ......................................... $ 12,062,942 $ 9,866,855 $ 23,479,371 $ 19,473,185
Mortgage backed and related securities ................... 1,080,062 1,125,772 2,187,810 2,395,039
Investment securities .................................... 3,704,876 1,243,295 7,896,311 2,666,185
Federal funds sold and securities purchased
under agreements to resell ............................ 191,311 164,090 339,960 448,344
Interest earning deposits ................................ 140,695 9,530 221,722 29,412
-------------- -------------- -------------- --------------
Total interest income .................................. 17,179,886 12,409,542 34,125,174 25,012,165
-------------- -------------- -------------- --------------
INTEREST EXPENSE
Deposit liabilities ...................................... 7,149,174 5,151,533 14,356,659 10,297,463
Advances from FHLB of Seattle ............................ 1,748,242 1,398,352 3,437,666 2,939,749
Other .................................................... 225,546 247,984 514,975 476,726
-------------- -------------- -------------- --------------
Total interest expense ................................. 9,122,962 6,797,869 18,309,300 13,713,938
-------------- -------------- -------------- --------------
Net interest income .................................... 8,056,924 5,611,673 15,815,874 11,298,227
Provision for loan losses .................................. 91,000 240,000 166,000 270,000
-------------- -------------- -------------- --------------
Net interest income after provision for
loan losses .......................................... 7,965,924 5,371,673 15,649,874 11,028,227
-------------- -------------- -------------- --------------
NON-INTEREST INCOME
Fees and service charges ................................. 550,136 76,812 1,155,500 148,470
Gain on sale of investments .............................. -- -- -- 2,143
Gain on sale of real estate owned ........................ -- 1,649 -- 27,946
Other income ............................................. 26,359 23,275 117,662 35,687
-------------- -------------- -------------- --------------
Total non-interest income .............................. 576,495 101,736 1,273,162 214,246
-------------- -------------- -------------- --------------
NON-INTEREST EXPENSE
Compensation, employee benefits and related expense ........ 2,417,806 1,652,645 4,897,339 3,231,612
Occupancy expense ........................................ 515,859 173,144 1,036,370 341,915
Data processing expense .................................. 241,186 94,932 473,698 216,011
Insurance premium expense ................................ 105,859 15,678 173,199 245,107
Loss on sale of investments .............................. -- -- -- 14,530
Amortization of core deposit intangible .................. 413,169 -- 826,338 --
Other expense ............................................ 1,194,041 505,966 2,309,452 997,125
-------------- -------------- -------------- --------------
Total non-interest expense ............................. 4,887,920 2,442,365 9,716,396 5,046,300
-------------- -------------- -------------- --------------
Earnings before income taxes ............................... 3,654,499 3,031,044 7,206,640 6,196,173
Provision for income tax ................................... 1,446,726 549,767 2,852,793 1,801,809
-------------- -------------- -------------- --------------
Net earnings ............................................... $ 2,207,773 $ 2,481,277 $ 4,353,847 $ 4,394,364
============== ============== ============== ==============
Basic earnings per share ................................... $ 0.24 $ 0.27 $ 0.47 $ 0.45
Earnings per share - assuming full dilution ................ $ 0.23 $ 0.26 $ 0.45 $ 0.44
Weighted average number of shares outstanding .............. 9,235,582 9,226,876 9,235,582 9,738,879
Weighted average number of shares - assuming full dilution.. 9,754,449 9,508,260 9,735,524 9,952,218
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1997 AND THE SIX MONTHS ENDED MARCH 31, 1998
(Unaudited)
Unearned Unearned Unrealized
Common Common Additional Unearned shares gain (loss) Total
Stock Stock paid-in Retained ESOP shares issued to on shareholders'
Shares Amount capital earnings at cost MRDP Trust securities equity
---------- -------- ------------ ----------- ----------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1995 .. 11,254,475 $122,331 $119,230,653 $55,811,362 $(9,786,500) $-- $(692,781) $164,685,065
Cash dividends .............. -- -- -- (2,838,680) -- -- -- (2,838,680)
ESOP contribution ........... 97,865 -- 417,652 -- 978,650 -- -- 1,396,302
Unrealized loss on securities
available for sale ........ -- -- -- -- -- -- (355,206) (355,206)
Unearned shares issued to MRDP
Trust ..................... (489,325) -- -- -- -- (6,694,470) -- (6,694,470)
Stock repurchased and retired (620,655) (6,207) (8,885,627) -- -- -- -- (8,891,834)
Net earnings ................ -- -- -- 6,109,797 -- -- -- 6,109,797
---------- ------- ----------- ---------- ---------- ---------- --------- -----------
Balance at September 30, 1996 10,242,360 116,124 110,762,678 59,082,479 (8,807,850) (6,694,470) (1,047,987) 153,410,974
Cash dividends .............. -- -- -- (2,895,234) -- -- -- (2,895,234)
Unrealized gain on securities
available for sale ........ -- -- -- -- -- -- 1,512,041 1,512,041
Stock repurchased and retired (1,182,936) (11,829) (18,866,299) -- -- -- -- (18,878,128)
ESOP contribution ........... 97,865 -- 705,260 -- 978,650 -- -- 1,683,910
MRDP contribution ........... 78,293 -- -- -- -- 1,071,130 -- 1,071,130
Net earnings ................ -- -- -- 8,557,750 -- -- -- 8,557,750
---------- ------- ----------- ---------- ---------- ---------- --------- -----------
Balance at September 30, 1997 9,235,582 104,295 92,601,639 64,744,995 (7,829,200) (5,623,340) 464,054 144,462,443
Cash dividends .............. -- -- -- (1,591,686) -- -- -- (1,591,686)
Unrealized gain on securities
available for sale ........ -- -- -- -- -- -- 404,917 404,917
ESOP contribution ........... -- -- 588,209 -- 489,325 -- -- 1,077,534
MRDP contribution ........... -- -- -- -- -- 542,537 -- 542,537
Net earnings ................ -- -- -- 4,353,847 -- -- -- 4,353,847
---------- ------- ----------- ---------- ---------- ---------- --------- -----------
Balance at March 31, 1998 ... 9,235,582 $104,295 $93,189,848 $67,507,156 $(7,339,875) $(5,080,803) $ 868,971 $149,249,592
========== ======= =========== ========== ========== ========== ========= ===========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
Six Months Ended Six Months Ended
March 31, March 31,
1998 1997
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings ......................................................... $ 4,353,847 $ 4,394,364
ADJUSTMENTS TO RECONCILE NET EARNINGS TO
NET CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization ........................................ 1,398,475 179,994
Provision for loan losses ............................................ 166,000 270,000
Compensation expense related to ESOP benefit ......................... 1,077,534 758,298
Compensation expense related to MRDP Trust ........................... 542,537 669,448
Net amortization of premiums (discounts) paid on
investment and mortgage backed and related securities .............. (200,526) 275,611
Increase in deferred loan fees, net of amortization .................. 568,818 343,334
Accretion of discounts on purchased loans ............................ 10,790 (163)
Net (gain) loss on sale of real estate owned and
premises and equipment ............................................. -- (3,234)
Net (gain) loss on sale of investment and mortgage
backed and related securities ...................................... -- 12,387
FHLB stock dividend .................................................. (283,400) (244,600)
CHANGES IN ASSETS AND LIABILITIES
Accrued interest receivable .......................................... 307,549 1,126
Other assets ......................................................... 292,392 (1,840,609)
Accrued interest on deposit liabilities .............................. (122,828) 149,670
Accrued interest on borrowings ....................................... (236,959) 275,618
Pension liabilities .................................................. 63,298 67,674
Deferred federal and state income taxes .............................. (65,865) 511,220
Other liabilities .................................................... 560,871 (1,707,253)
------------ ------------
Net cash provided by operating activities ................................ 8,432,533 4,112,885
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of investment securities
held to maturity ................................................... 20,000,000 28,949,466
Proceeds from maturity of investment securities
available for sale ................................................. 53,680,000 2,000,000
Principal repayments received on mortgage
backed and related securities held to maturity .................... 802,454 561,983
Principal repayments received on mortgage
backed and related securities available for sale .................. 8,691,824 10,026,846
Principal repayments received on loans ............................... 50,064,627 24,836,041
Loan originations .................................................... (101,113,902) (60,250,348)
Loans purchased ...................................................... (3,894,787) --
Purchase of investment securities held
to maturity ........................................................ -- (28,930,495)
Purchase of investment securities available
for sale ........................................................... (21,570,845) (3,413,607)
Purchase of mortgage backed and related
securities available for sale ...................................... (10,040,575) (5,151,261)
Purchase of FHLB stock ............................................... -- (2,776,200)
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 ...................................... -- 4,712,347
Proceeds from sale of real estate owned and
premises and equipment ............................................. -- 72,717
Purchases of premises and equipment .................................. (562,109) (482,284)
------------ ------------
Net cash used in investing activities .................................... (3,943,313) (11,352,851)
------------ ------------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
(Continued)
Six Months Ended Six Months Ended
March 31, March 31,
1998 1997
------------ -----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in deposit liabilities
deposits, net of withdrawals ........................................ $ 6,657,202 $ 15,158,195
Proceeds from FHLB advances .......................................... 79,000,000 93,000,000
Repayments of FHLB advances .......................................... (68,500,000) (82,000,000)
Proceeds from short term borrowings .................................. 54,104,000 26,780,250
Repayments of short term borrowings .................................. (57,097,500) (22,963,400)
Stock retirement ..................................................... -- (18,501,280)
Advances from borrowers for tax and insurance ........................ (5,205,965) (4,608,987)
Dividends paid ....................................................... (1,668,725) (1,625,746)
------------ ------------
Net cash provided by financing activities ................................ 7,289,012 5,239,032
------------ ------------
Net (decrease) increase in cash and cash
equivalents ............................................................ 11,778,232 (2,000,934)
Cash and cash equivalents at beginning
of period .............................................................. 32,043,196 16,179,633
------------ ------------
Cash and cash equivalents at end of period ............................... $ 43,821,428 $ 14,178,699
============ ============
SUPPLEMENTAL SCHEDULE OF INTEREST AND
INCOME
TAXES PAID
Interest paid ........................................................ $ 18,669,088 $ 13,288,649
Income taxes paid .................................................... 2,724,000 893,500
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES
Net unrealized gain on securities
available for sale ................................................. $ 404,917 $ 427,825
Dividends declared and accrued in other
liabilities ........................................................ 886,510 783,842
<FN>
See notes to consolidated financial statements
</FN>
</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 March 31, 1998, the
results of operations for the three and six months ended March 31, 1998 and
1997, and the cash flows for the six months ended March 31, 1998 and 1997.
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. These consolidated financial statements should 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 and six months ended March 31, 1998 are not necessarily indicative
of the results which may be expected for the entire fiscal year.
2. ALLOWANCE FOR LOAN LOSSES
Activity in allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
March 31, September 30,
1998 1997
<S> <C> <C>
Balance, beginning of year ............. $ 1,296,451 $ 927,820
Charge-offs ............................ -- (1,369)
Additions .............................. 166,000 370,000
----------- -----------
Balance, end of period ................. $ 1,462,451 $ 1,296,451
=========== ===========
</TABLE>
3. ADVANCES FROM FEDERAL HOME LOAN BANK
Borrowings at March 31, 1998 consisted of ten short term advances totaling $85.0
million and five long term advances totaling $54.5 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.
Scheduled maturities of advances from the FHLB were as follows:
<TABLE>
<CAPTION>
March 31, 1998 September 30, 1997
----------- ---------- ------------- ----------- ---------- -------------
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 .......... $54,500,000 5.53%-5.83% 5.64% $59,000,000 5.57%-6.70% 5.66%
After one but within
five years ................... 85,000,000 5.06%-5.74% 5.46% 70,000,000 5.39%-5.84% 5.59%
----------- -----------
$139,500,000 $129,000,000
=========== ===========
</TABLE>
8
<PAGE>
4. SHORT TERM BORROWINGS
Securities sold under agreements to repurchase totaled $14.1 million with an
interest rate of 5.70%. All of the agreements are due within 60 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 March 31, 1998:
<TABLE>
<CAPTION>
Categorized as "Well
For Capital Capitalized" Under
Adequacy Prompt Corrective
Actual Purposes Action Provision
---------- ----- ------------ ----- ------------ -----
Amount Ratio Amount Ratio Amount Ratio
As of March 31, 1998:
<S> <C> <C> <C> <C> <C> <C>
Total Capital: ........... $105,189,285 22.9% $ 36,808,088 8.0% $ 46,010,110 10.0%
(To Risk Weighted Assets)
Tier I Capital: .......... 103,726,834 22.5% N/A N/A 27,606,066 6.0%
(To Risk Weighted Assets)
Tier I Capital: .......... 103,726,834 11.1% 28,149,116 3.0% 46,915,193 5.0%
(To Total Assets)
Tangible Capital: ........ 103,726,834 11.1% 14,074,558 1.5% N/A N/A
(To Tangible Assets)
</TABLE>
6. EARNINGS PER SHARE
Earnings per share ("EPS") is computed in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share" which was adopted by
the Company as of December 31, 1997. EPS for all prior periods have been
restated to reflect the adoption. Diluted EPS is computed using the treasury
stock method, giving effect to potential additional common shares that were
outstanding during the period. Potential dilutive common shares include shares
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. Following is a summary of the effect of dilutive securities
on weighted average number of shares (denominator) for the basic and diluted EPS
calculations. There are no resulting adjustments to net earnings.
<TABLE>
<CAPTION>
For the Six Months Ended
March 31, 1998 March 31, 1997
--------------- ---------------
Effect of Dilutive Securities on Number of Shares
(Denominator):
<S> <C> <C>
MRDP shares ........................................... 80,652 40,660
ESOP shares ........................................... 24,399 24,399
Stock options ......................................... 394,891 148,280
--------------- ---------------
Total Dilutive Securities ............................. 499,942 213,339
=============== ===============
</TABLE>
<TABLE>
<CAPTION>
For the Three Months Ended
March 31, 1998 March 31, 1997
--------------- ---------------
Effect of Dilutive Securities on Number of Shares
(Denominator):
<S> <C> <C>
MRDP shares ........................................... 84,806 56,381
ESOP shares ........................................... 36,733 36,733
Stock options ......................................... 397,328 188,270
--------------- ---------------
Total Dilutive Securities ............................. 518,867 281,384
=============== ===============
</TABLE>
9
<PAGE>
7. 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 was 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. As a result of the
transaction, the Company recorded $13.4 million in core deposit intangible which
is being amortized over 8.1 years. The acquired branches are located in rural
Oregon communities, extending the Association's market to 33 offices in 22
counties throughout the state.
8. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("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 redefines how operating segments are determined and requires disclosure
of certain financial and descriptive information about the Company's operating
segments. 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.
9. SUBSEQUENT EVENT
On April 21, 1998, the Company announced a 5% stock repurchase program. The
repurchase program has received regulatory approval and allows for the purchase
of 521,477 of the Company's outstanding shares. The shares will be purchased at
prevailing market prices from time to time depending on market conditions. The
repurchase, which began after Friday, April 24, 1998, is anticipated to end by
September 30, 1998.
10
<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 March 31, 1998, the Company had total
consolidated assets of $994.2 million and consolidated shareholders' equity of
$149.2 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 also purchases
Oregon-based commercial real estate and multi-family residential loans from
other Oregon financial institutions, as well as using mortgage brokers to locate
mortgage loans that meet our existing conservative underwriting standards
outside of the current branch market areas.
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 introduction of a
variable rate home equity lending program that has an interest rate tied to the
Wall Street Journal published prime rate with an additional margin of 2.0% and
expansion of non-interest bearing checking accounts through the branch
acquisition and new deposit products. 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, core
deposit premium amortization, and miscellaneous other expenses, as well as
federal and state income tax expense. The Wells Fargo branch acquisition is
contributing to improvement of the Company's non-interest income by providing a
larger customer base to generate service charge and fee income.
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 thirty-three office facilities, with the main office
located in Klamath Falls, Oregon. The primary market areas of the Association
are the state of Oregon and adjoining areas of California and Washington.
11
<PAGE>
Year 2000 Compliance
As with other organizations, the data processing programs used by the Company
were originally designed to recognize calendar years by their last two digits.
Calculations performed using these truncated fields will not work properly with
dates beyond 1999. Early in 1997 the Company established a committee to address
"Year 2000" issues related to data processing. The committee has chosen to use
the Office of Thrift Supervision Year 2000 Checklist as a guide for Year 2000
preparation. The committee is also using a Year 2000 Internal Assessment
checklist provided by Sheshunoff Information Systems, Inc. to complement the OTS
checklist. Data processing for the Company is provided by a third party service
bureau. Software purchased from a service bureau affiliate is used for
applications such as accounts payable, investment portfolio accounting, and
fixed assets. The service bureau has stated that all their processing, including
application software used for fixed assets, accounts payable, and investment
portfolio accounting, will be Year 2000 capable by June 30,1998. Both the
Company and the service bureau will then commence testing procedures.
All personal computers ("PCs") and related software throughout the Company have
been inventoried and tested for Year 2000 capability. The company is using two
testing methods for certification of Year 2000 compatibility. PCs must pass both
tests to be considered ready for Year 2000. As of March 31, 1998, over 90% of
the Company's PCs and software are Year 2000 compatible. Those PCs identified as
non-Year 2000 compatible will be replaced by the end of 1998. The Company
believes that the Year 2000 issue will not pose significant operational problems
and is not anticipated to be material to its financial position or results of
operations in any given year.
Branch Acquisition
The Association completed the purchase of 25 branches in rural Oregon
communities from Wells Fargo Bank, N.A. on July 18, 1997. 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 expanded the Association's
market area to include 32 branches and one loan center 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 expanded consumer and commercial product offerings. Based on the
latest branch profitability analysis, all the branches are now profitable.
The purchase of deposit liabilities increased total Association deposits by
approximately $241.3 million and increased the number of deposit accounts from
40,000 to 82,000. Approximately 23,000 of the purchased accounts, $140.9
million, were demand deposits carrying a lower interest cost than the
Association's previous deposit mix. As a result the Association experienced a
reduction in cost of funds. The acquisition also resulted in the recording of
$13.4 million of core deposit intangible, which is being amortized over 8.1
years. The impact of the branch acquisition is evident in comparison of the
results of operations for the three and six months ended March 31, 1998 and
1997, as discussed under non-interest income and non-interest expense.
12
<PAGE>
Changes in Financial Condition
At March 31, 1998, the consolidated assets of the Company totaled $994.2
million, an increase of $14.1 million, or 1.44%, from $980.1 million at
September 30, 1997. The increase in total assets was primarily the result of
loan growth which was funded by maturities of investments and additional
borrowing from the FHLB of Seattle.
Net loans receivable increased by $54.2 million, or 9.83%, to $605.7 million at
March 31, 1998, compared to $551.5 million at September 30, 1997. The increase
was primarily the result of continued new loan demand exceeding loan repayments,
augmented by the Company's purchase of $5.1 million in higher yielding loans on
multi-family residential and commercial properties in Oregon during the six
months ended March 31, 1998.
Investment securities decreased $50.9 million, or 17.86%, from $284.8 million at
September 30, 1997 to $233.9 million at March 31, 1998. This decrease was the
result of scheduled maturities plus $40.2 million in securities called. A call
provision grants the issuer of a security the option of buying back all or part
of the issue prior to maturity.
During the six months ended March 31, 1998, $9.5 million of principal payments
were received on mortgage backed and related securities ("MBS") and $10.0
million in available for sale MBS were purchased, leaving the balance of MBS
consistent from September 30, 1997 to March 31, 1998.
Deposit liabilities increased $6.6 million, or 0.99%, from $674.0 million at
September 30, 1997 to $680.6 million at March 31, 1998. 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. The increase in deposits has been experienced throughout the network
of 32 branches.
Advances from borrowers for taxes and insurance decreased $5.2 million from
September 30, 1997 to March 31, 1998. The decrease is the result of using the
reserves to pay the required real estate taxes due on the Association's loan
receivable portfolio in December partially offset by collection of taxes from
borrowers.
Advances from the FHLB of Seattle increased $10.5 million, or 8.14%, from $129.0
million at September 30, 1997 to $139.5 million at March 31, 1998. Proceeds from
borrowings were used to fund loan originations.
Total shareholders' equity increased $4.7 million, or 3.31%, from $144.5 million
at September 30, 1997 to $149.2 million at March 31, 1998. This increase was the
combined result of $4.4 million in earnings for the year to date, augmented by
$405,917 in unrealized gains on securities available for sale during the six
month period from September 30, 1997 to March 31, 1998.
Results of Operations
Comparison of Six Months Ended March 31, 1998 and 1997
General. Income before taxes increased $1.0 million, or 16.3%, from $6.2 million
for the six months ended March 31, 1997 to $7.2 million for the same period
ended March 31, 1998. Due to an increase in the effective tax rate from 29.1%
for the six months ended March 31, 1997 to 39.6% for the six months ended March
31, 1998, net income remained consistent at $4.4 million for the comparable six
month periods. See further discussion under "Income Taxes." Increases in net
interest income and non-interest income were partially offset by increases in
non-interest expense.
13
<PAGE>
Interest Income. Additional interest income generated by the $256.3 million
increase in average interest earning assets contributed to an increase of $9.1
million in interest income for the six months ended March 31, 1998 compared to
1997. Of this increase, $5.2 million is attributable to increased interest
income on investment securities and $4.0 million to increased income on loans
receivable, partially offset by a decrease in interest income on mortgage backed
and related securities. The average yield on interest earning assets decreased 9
basis points to 7.35% for the six months ended March 31, 1998 compared to 7.44%
for the same period ended March 31, 1997. Average yield decreased because
investments, which have a lower yield than loans, represented a larger
proportion of earning assets for the six months ended March 31, 1998 than for
the same period ended March 31, 1997. Investments increased as a proportion of
earning assets after proceeds from the branch acquisition were invested in
securities until the funds can be rolled into loans. Changes in the yield curve
during the last year, which has shifted downward more than 100 basis points at
the long end and has flattened at the short end, also contributed to the
decrease in yield on earning assets. In spite of the lower yields experienced
for the period, interest rate spread (the difference between the rates earned on
interest earning assets and the rates paid on interest bearing liabilities)
improved from 2.22% to 2.58% and interest rate margin (net interest income
divided by average interest earning assets) improved from 3.36% to 3.40%
comparing the six month periods.
Interest Expense. Interest expense on deposit liabilities increased $4.0 million
for the six months ended March 31, 1998 compared to the same period in 1997 due
to deposit balances added through the branch acquisition. Although total
deposits increased by $265.8 million comparing March 31, 1997 to 1998, the
average interest paid on interest-bearing deposits decreased 56 basis points
from 5.10% for the six months ended March 31, 1997 to 4.54% for the same period
ended March 31, 1998. Both the increase in deposit balances and the decrease in
the rate paid on deposits are primarily a result of the deposits acquired with
the Wells Fargo branch acquisition which consisted of 17% non-interest bearing
deposit accounts. The average balance of FHLB advances increased from $105.5
million for the six months ended March 31, 1997 to $120.8 million for the same
period ended March 31, 1998 resulting in an increase in interest on FHLB
advances of $497,917 for the six months ended March 31, 1998 compared with the
same period ended March 31, 1997.
Provision for Loan Losses. The provision for loan losses was $166,000 and there
were no charge offs during the six months ended March 31, 1998 compared to a
$270,000 provision and no charge offs during the six months ended March 31,
1997. During the quarter ended March 31, 1997, the provision was increased in
response to portfolio growth and purchases of loans secured by multi-family
residential property and commercial real estate, which are considered to have
more associated risk than the Company's traditional portfolio of one- to
four-family residential mortgages. The Association continues to add to the
provision as the loan portfolio grows, but has experienced no increases in
delinquencies or problem loans.
Non-Interest Income. Non-interest income increased $1.1 million, or 494.3%, to
$1.3 million for the six months ended March 31, 1998 from $214,246 for the six
months ended March 31, 1997. The increase was attributable to increases in fee
income related to the increase in deposit accounts subject to service charges.
Non-Interest Expense. Non-interest expense increased $4.7 million, or 92.5%, to
$9.7 million for the six months ended March 31, 1998, from $5.0 million for the
comparable period in 1997. Of this increase, $1.7 million was attributable to an
increase in compensation and benefit expense in 1998, reflecting addition of
staff related to the Wells Fargo acquisition and an increase in compensation
expense for the ESOP due to increases in the average stock price. Occupancy
expense increased from $341,915 for the six months ended March 31, 1997 to
$1,036,370 for the six months ended March 31, 1998 due to the addition of the 25
acquired branches. The branch acquisition also impacted other expense which
increased $1.3 million for the six months ended March 31, 1998 from the same
period of 1997. Increases were primarily seen in postage and courier, telephone,
and supply expenses which were up $354,000 year to date. Expansion of checking
accounts and their related servicing, debit card service, and ATM machines and
card servicing resulted in a $473,000 increase in the related expenses which are
also included in other expense. These increases were partially offset by a
$71,908 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 1.99% and 1.48% for the six months ended March 31, 1998
and 1997, respectively.
Income Taxes. The provision for income taxes increased $1.1 million for the six
months ended March 31, 1998 compared with the prior year. During the quarter
ended March 31, 1997, the Company recognized a tax benefit of $648,837 related
to loss on sale of the U.S. federal securities bond fund in the fiscal year
ended September 30, 1996. Recognition of the benefit reduced the effective tax
rate for the six months ended March 31, 1997.
14
<PAGE>
Comparison of Three Months Ended March 31, 1998 and 1997
General. Earnings before taxes increased $623,455, or 20.6%, from $3.0 million
for the quarter ended March 31, 1997 to $3.7 million for this quarter 1998. Net
income decreased $273,504, or 11.0%, from $2.5 million for the three months
ended March 31, 1997 to $2.2 million for the three months ended March 31, 1998.
Increases in net interest income and non-interest income were partially offset
by increases in non-interest expense. These changes are all resultant from the
branch acquisition in July 1997 which doubled the number of employees and
tripled the number of branches for the Association. Also, net earnings for the
three months ended March 31, 1997 included a reduced income tax expense
reflecting the recognition of a one time tax benefit.
Interest Income. Additional interest income generated by the $263.2 million
increase in average interest earning assets contributed to an increase of $4.8
million in interest income for the three months ended March 31, 1998 compared to
1997. Of this increase, $2.5 million is attributable to increased interest
income on investment securities and $2.2 million to increased income on loans
receivable. The average yield on interest earning assets decreased 6 basis
points to 7.39% for the three months ended March 31, 1998 compared to 7.45% for
the same period ended March 31, 1997. Average yield decreased for the reasons
noted previously, because investments, which have a lower yield than loans,
represented a larger proportion of earning assets for the three months ended
March 31, 1998 than for the same period ended March 31, 1997 and overall yields
are lower due to the downward shift in the yield curve. In spite of the lower
yields experienced for the period, interest rate spread (the difference between
the rates earned on interest earning assets and the rates paid on interest
bearing liabilities) improved from 2.28% to 2.67% and interest rate margin (net
interest income divided by average interest earning assets) improved from 3.37%
to 3.47% comparing the three month periods.
Interest Expense. Interest expense on deposit liabilities increased $2.0 million
for the three months ended March 31, 1998 compared to the same period in 1997.
Although total deposits increased by $265.8 million comparing March 31, 1997 to
1998, the average interest paid on interest-bearing deposits decreased 54 basis
points from 5.07% for the three months ended March 31, 1997 to 4.53% for the
same period ended March 31, 1998. Both the increase in deposit balances and the
decrease in the rate paid on deposits are primarily a result of the deposits
acquired with the Wells Fargo branch acquisition which consisted of 17%
non-interest bearing deposit accounts. The average balance of FHLB advances
increased from $101.0 million for the three months ended March 31, 1997 to
$123.9 million for the same period ended March 31, 1998 resulting in an increase
in interest on FHLB advances of $349,890 for the three months ended March 31,
1998 compared with the same period ended March 31, 1997.
Provision for Loan Losses. The provision for loan losses was $91,000 and there
were no charge offs during the three months ended March 31, 1998 compared to a
$240,000 provision and no charge offs during the three months ended March 31,
1997. During the quarter ended March 31, 1997, the provision was increased in
response to portfolio growth and purchases of loans secured by multi-family
residential property and commercial real estate, which are considered to have
more associated risk than the Company's traditional portfolio of one- to
four-family residential mortgages.
Non-Interest Income. Non-interest income increased $474,759, or 466.7%, to
$576,495 for the three months ended March 31, 1998 from $101,736 for the three
months ended March 31, 1997. The increase was primarily attributable to a
$473,324 increase in fee income related to the increase in deposit accounts
subject to service charges.
Non-Interest Expense. Non-interest expense increased $2.5 million, or 100.1%, to
$4.9 million for the three months ended March 31, 1998, from $2.4 million for
the comparable period in 1997. Of this increase, $765,161 was attributable to an
increase in compensation and benefit expense in 1998, reflecting addition of
staff related to the Wells Fargo acquisition and an increase in compensation
expense for the ESOP due to increases in the average stock price. Occupancy
expense increased from $173,144 for the three months ended March 31, 1997 to
$515,859 for the three months ended March 31, 1998 due to the addition of the 25
acquired branches. Other expense increased $688,075 from $505,966 for the three
months ended March 31, 1997 to $1.2 million for the same period ended March 31,
1998. Again, the impact of the branch acquisition is apparent with postage and
courier, telephone, and supply expenses increasing $183,187 and expenses related
to ATMs, debit cards, and checking accounts increasing $211,448. The ratio of
non-interest expense to average total assets was 2.00% and 1.45% for the three
months ended March 31, 1998 and 1997, respectively.
Income Taxes. The provision for income taxes increased $896,959 for the three
months ended March 31, 1998 compared with the prior year. During the quarter
ended March 31, 1997, the Company recognized a tax benefit of $648,837 related
to loss on sale of the U.S. federal securities bond fund in the fiscal year
ended September 30, 1996. Recognition of the benefit reduced the effective tax
rate for the three months ended March 31, 1997.
15
<PAGE>
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) No Current Reports on Form 8-K were filed during the quarter ended
March 31, 1998.
16
<PAGE>
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: May 14, 1998 By: /s/ Gerald V. Brown
---------------------------
Gerald V. Brown, President and
Chief Executive Officer
Date: May 14, 1998 By: /s/ Marshall Jay Alexander
---------------------------
Marshall Jay Alexander, Vice President
and Chief Financial Officer
17
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SECOND
QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 20,277,001
<INT-BEARING-DEPOSITS> 3,528,842
<FED-FUNDS-SOLD> 20,015,585
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 296,718,216
<INVESTMENTS-CARRYING> 7,671,767
<INVESTMENTS-MARKET> 7,749,168
<LOANS> 605,662,050
<ALLOWANCE> 1,462,451
<TOTAL-ASSETS> 994,192,592
<DEPOSITS> 680,635,103
<SHORT-TERM> 68,584,000
<LIABILITIES-OTHER> 10,723,897
<LONG-TERM> 85,000,000
0
0
<COMMON> 104,295
<OTHER-SE> 149,145,297
<TOTAL-LIABILITIES-AND-EQUITY> 994,192,592
<INTEREST-LOAN> 23,479,371
<INTEREST-INVEST> 10,084,121
<INTEREST-OTHER> 561,682
<INTEREST-TOTAL> 34,125,174
<INTEREST-DEPOSIT> 14,356,659
<INTEREST-EXPENSE> 18,309,300
<INTEREST-INCOME-NET> 15,815,874
<LOAN-LOSSES> 166,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 9,716,396
<INCOME-PRETAX> 7,206,640
<INCOME-PRE-EXTRAORDINARY> 7,206,640
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,353,847
<EPS-PRIMARY> 0.47
<EPS-DILUTED> 0.45
<YIELD-ACTUAL> 3.40
<LOANS-NON> 195,096
<LOANS-PAST> 0
<LOANS-TROUBLED> 7,607
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,296,451
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,462,451
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,462,451
</TABLE>
