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, 1996
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 3-1180440
- --------------------------------------------- -------------
(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, 1996, there were issued and outstanding 12,233,125
shares of the Registrant's Common Stock. Of that total, 978,650 shares are held
by the Employee Stock Ownership Plan, of which the total 978,650 shares were not
committed to be released, and 489,325 shares are held by the 1996 Management
Recognition and Development Plan Trust, of which the total 489,325 shares were
not committed to be released. The Registrant's voting common stock is traded
over-the-counter and is listed on the Nasdaq National Market under the symbol
"KFBI."
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Part I. Financial Information
- ------- ----------------------
Item 1. Financial Statements Page
----
Consolidated Statements of Financial Condition
(As of June 30, 1996 and September 30, 1995) 3
Consolidated Statements of Earnings (For the three
months and nine months ended June 30, 1996 and 1995) 4
Consolidated Statement of Stockholders' Equity
(For the year ended September 30, 1995 and for
the nine months ended June 30, 1996) 5
Consolidated Statements of Cash Flows (For the nine
months ended June 30, 1996 and 1995) 6 - 7
Notes to Consolidated Financial Statements 8 - 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11 - 16
Part II. Other Information
- -------- -------------------
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION AS OF JUNE 30, 1996 AND SEPTEMBER 30, 1995
(Unaudited)
ASSETS June 30, 1996 September 30, 1995
------------------ ----------------------
Cash on hand and in banks $2,650,728 $4,033,723
Interest bearing deposits -- 994,157
Federal funds sold 9,320,091 170,966,390
------------------ ------------------
Total cash and cash equivalents 11,970,819 175,994,270
Investment securities available for sale, at fair value 94,625,201 12,605,654
Investment securities held to maturity, at amortized cost (fair
value: $9,461,428 and $42,178,800 at June 30, 1996
and September 30, 1995, respectively) 9,855,102 42,209,497
Mortgage backed securities available for sale, at fair value 35,684,226 --
Mortgage backed securities held to maturity, at amortized cost (fair
value $6,869,963 at June 30, 1996 and $0.00 at September 30, 1995) 6,951,915 --
Loans receivable, net 455,544,520 403,543,725
Real estate owned -- 24,384
Premises and equipment, net 5,036,524 5,231,903
Stock in Federal Home Loan Bank of Seattle, at cost 4,679,700 4,425,900
Accrued interest receivable, net 5,105,076 3,431,594
Other assets 489,661 372,654
------------------ ------------------
Total assets $629,942,744 $647,839,581
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Savings deposits 393,982,253 384,379,531
Stock over subscription -- 65,685,300
Accrued interest on savings deposits 887,696 1,028,766
Advances from borrowers for taxes and insurance 5,513,528 7,966,422
Advances from Federal Home Loan Bank of Seattle 58,000,000 20,000,000
Short-term borrowings 7,033,900 --
Pension liability 710,546 616,035
Deferred federal and state income taxes 861,927 896,876
Other liabilities 1,148,413 2,581,586
------------------ ------------------
Total liabilities 468,138,263 483,154,516
------------------ ------------------
Stockholders' equity:
Preferred stock, $.01 par value, 500,000 shares authorized; none issued -- --
Common stock, $.01 par value, 35,000,000 shares authorized;
issued and outstanding 12,233,125 shares 122,331 122,331
Additional paid-in-capital 119,473,766 119,230,653
Retained earnings-substantially restricted 60,845,451 55,811,362
Unearned ESOP shares at cost (9,052,513) (9,786,500)
Unearned shares issued to MRDP Trust (6,694,470) --
Unrealized loss on securities available for sale, net of tax (2,890,084) (692,781)
------------------ ------------------
Total stockholders' equity 161,804,481 164,685,065
------------------ ------------------
Total Liabilities and Stockholders' Equity $629,942,744 $647,839,581
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
June 30, 1996 June 30, 1995 June 30, 1996 June 30, 1995
----------------------------------------------------------------------------------------
Interest income:
Loans receivable $8,952,474 $7,792,643 $25,856,624 $22,568,668
Mortgage backed securities 569,251 -- 1,299,762 --
Investment securities 1,788,728 1,015,633 4,969,983 3,145,644
Federal funds sold 114,039 109,895 1,136,710 267,020
Interest bearing deposits 19,583 26,931 237,650 107,596
------------------ ------------------ ------------------ ------------------
Total interest income 11,444,075 8,945,102 33,500,729 26,088,928
------------------ ------------------ ------------------ ------------------
Interest expense:
Savings deposits 5,051,671 4,845,801 15,171,896 13,966,969
FHLB advances 626,475 315,298 1,635,992 641,490
Other 102,404 46,354 165,275 111,249
------------------ ------------------ ------------------ ------------------
Total interest expense 5,780,550 5,207,453 16,973,163 14,719,708
------------------ ------------------ ------------------ ------------------
Net interest income 5,663,525 3,737,649 16,527,566 11,369,220
Provision for loan losses 30,000 30,000 90,000 90,000
------------------ ------------------ ------------------ ------------------
Net interest income after
provision for loan losses 5,633,525 3,707,649 16,437,566 11,279,220
------------------ ------------------ ------------------ ------------------
Non-interest income:
Fees and service charges 69,221 50,473 188,695 129,350
Gain on sale of real estate owned 10,872 20,541 10,872 73,081
Other income 15,440 14,059 73,238 52,143
------------------ ------------------ ------------------ ------------------
Total non-interest income 95,533 85,073 272,805 254,574
------------------ ------------------ ------------------ ------------------
Non-interest expense:
Compensation, employee benefits
and related expense 952,407 819,487 2,889,393 2,263,268
Occupancy expense 253,550 229,347 739,497 678,899
Data processing expense 80,487 76,847 261,625 240,852
Insurance premium expense 219,769 223,273 682,841 660,935
Loss on sale of real estate owned 1,581 4,767 6,271 4,767
Other expense 371,134 233,629 1,067,502 859,911
------------------ ------------------ ------------------ ------------------
Total non-interest expense 1,878,928 1,587,350 5,647,129 4,708,632
------------------ ------------------ ------------------ ------------------
Earnings before income taxes 3,850,130 2,205,372 11,063,242 6,825,162
Provision for income tax 1,438,339 832,836 4,003,346 2,627,836
------------------ ------------------ ------------------ ------------------
Net earnings $2,411,791 $1,372,536 $7,059,896 $4,197,326
============ ============ ============ ============
Earnings per common share (based on
weighted average shares outstanding) $.22 N/A $.63 N/A
Weighted average number of shares outstanding 10,867,241 N/A 11,125,868 N/A
The accompanying notes are an integral part of these consolidated financial statements.
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED SEPTEMBER 30, 1995 AND THE NINE MONTHS ENDED JUNE 30, 1996
(Unaudited)
Common Stock Common Stock Additional
---------------------------------- paid-in Retained
Shares Amount capital earnings
--------------------------------------------------------------------
Balance at September 30, 1994 -- $-- $-- $50,237,259
Issuance of common stock 12,233,125 122,331 119,230,653 --
Unrealized gain on investments
available for sale -- -- -- --
Net earnings -- -- -- 5,574,103
--------------------------------------------------------------------
Balance at September 30, 1995 12,233,125 122,331 119,230,653 55,811,362
Cash dividends -- -- -- (2,025,807)
ESOP contribution -- -- 243,113 --
Unrealized gain (loss) on
investments available for sale -- -- -- --
Unearned shares issued to MRDP Trust -- -- -- --
Net earnings -- -- -- 7,059,896
--------------------------------------------------------------------
Balance at June 30, 1996 12,233,125 $122,331 $119,473,766 $60,845,451
=========== =========== =========== ===========
Unearned Unrealized Unearned Total
ESOP shares gain (loss) shares issued stockholders'
at cost on securities to MRDP Trust equity
--------------------------------------------------------------------
Balance at September 30, 1994 $-- ($929,615) $-- $49,307,644
Issuance of common stock (9,786,500) -- -- $109,566,484
Unrealized gain on investments
available for sale -- 236,834 -- $236,834
Net earnings -- -- -- $5,574,103
--------------------------------------------------------------------
Balance at September 30, 1995 (9,786,500) (692,781) -- 164,685,065
Cash dividends -- -- -- ($2,025,807)
ESOP contribution 733,987 -- -- $977,100
Unrealized gain (loss) on
investments available for sale -- (2,197,303) -- ($2,197,303)
Unearned shares issued to MRDP Trust -- -- (6,694,470) ($6,694,470)
Net earnings -- -- -- $7,059,896
--------------------------------------------------------------------
Balance at June 30, 1996 ($9,052,513) ($2,890,084) ($6,694,470) $161,804,481
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 1996 AND 1995
(Unaudited)
Nine Months Ended Nine Months Ended
June 30, 1996 June 30, 1995
-------------------- --------------------
Cash flows from operating activities:
Net earnings $7,059,896 $4,197,236
---------------- ----------------
Adjustments to reconcile net earnings to net
cash used by operating activities:
Depreciation 310,428 257,424
Provision for loan losses 90,000 90,000
Amortization of net (discounts) premiums paid on securities 60,909 184,618
Increase in deferred fees 528,012 236,526
Increase in discounts, net of amortization 2,998 (7,008)
ESOP related compensation expense 977,099 --
(Gain) loss on sale of real estate owned (6,182) (17,835)
FHLB stock dividend (253,800) (192,900)
Changes in assets and liabilities:
Accrued interest receivable (1,673,482) (232,499)
Other assets (117,008) (443,752)
Accrued interest payable (141,070) 355,322
Advances from borrowers (2,452,894) (2,472,927)
Pension liability 94,511 98,718
Deferred taxes 481,804 583,037
Other liabilities (67,118,473) (384,721)
---------------- ----------------
Total adjustments (69,217,148) (1,945,997)
---------------- ----------------
Net cash used by operating activities (62,157,252) 2,251,239
---------------- ----------------
Cash flows from investing activities:
Maturity of investment securities held to maturity 69,552,392 7,000,000
Principal repayments received on investment securities 1,231,583 --
Principal repayments received on mortgage backed securities 6,150,407 --
Principal repayments received on loans 49,888,936 27,352,309
Loan originations (102,657,770) (52,697,773)
Purchase of investment securities (123,004,855) (1,892,018)
Purchase of mortgage backed securities (49,005,784) --
Proceeds from sale of real estate owned 177,595 253,544
Proceeds from sale of fixed assets 973 --
Additions to premises and equipment (116,022) (1,097,852)
---------------- ----------------
Net cash used in investing activities (147,782,545) (21,081,790)
---------------- ----------------
Cash flows from financing activities:
(Decrease) increase in savings deposits, net of withdrawals 9,602,722 (3,938,483)
Increase in FHLB advances 38,000,000 20,000,000
Increase in short term borrowings 7,033,900 --
Purchase stock for MRDP Trust (6,694,469) --
Dividends paid (1,294,266) --
---------------- ----------------
Net cash flows from financing activities 46,647,887 16,061,517
---------------- ----------------
Net decrease in cash and cash equivalents (163,291,910) (2,769,034)
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 1996 AND 1995
(Unaudited)
(continued)
Nine Months Ended Nine Months Ended
June 30, 1996 June 30, 1995
-------------------- --------------------
Cash flows from operating activities:
Cash and cash equivalents at beginning of year 175,994,270 19,557,018
---------------- ----------------
Cash and cash equivalents at end of period $12,702,360 $16,787,984
========== ==========
Supplemental schedule of interest and income taxes paid:
Interest paid 17,046,265 9,387,613
Income taxes paid 3,948,269 1,632,000
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
KLAMATH FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
In the opinion of Management, the accompanying unaudited consolidated statements
contain all adjustments (consisting of normal recurring accruals) necessary for
a fair presentation of Klamath First Bancorp, Inc.'s (the "Company") Financial
Condition as of June 30, 1996, and September 30, 1995 and the Results of
Operations for the three months ended June 30, 1996 and 1995 and for the nine
months ended June 30, 1996 and 1995, Consolidated Statement of Stockholders'
Equity for the year ended September 30, 1995 and for the nine months ended June
30, 1996 and the Statements of Cash Flows for the nine months ended June 30,
1996 and 1995. Certain information and note disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principals 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, 1996 are not necessarily indicative of the results which may be
expected for the entire fiscal year.
2. ALLOWANCE FOR LOAN LOSSES
The Company adopted Statement of Financial Accounting Standards No. 114, ("SFAS
No. 114"), "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures" as of October 1, 1995. SFAS No. 114 requires that impaired loans
be measured based on the present value of the expected cash flows discounted at
the loan's effective interest rate or the loan's market price, or the fair value
of the collateral if the loan is collateral dependent. SFAS No. 118 amends SFAS
No. 114 to allow a creditor to use existing methods for recognizing interest
income on impaired loans, in addition to outlining disclosure requirements.
The adoption of SFAS No. 114 and SFAS No. 118 did not result in additional
provisions for loan losses because the majority of impaired loan valuations
continue to be based on the fair value of collateral.
Activity in allowance for loan losses is summarized as follows:
Nine Months Ended Year Ended
June 30, 1996 September 30, 1995
------------------- ------------------
Balance, beginning of period $807,820 $754,803
Charge offs -- (66,983)
Additions 90,000 120,000
------------------- -------------------
Balance, end of period $897,820 $807,820
=================== ===================
3. INVESTMENT SECURITIES
On November 15, 1995, the Financial Accounting Standards Board ("FASB")
published implementation guidance on SFAS No. 115 "Accounting for Certain
Investments in Debt and Equity Securities", that allows a corporation a one time
reassessment of the appropriateness of the classification of its debt securities
under a special transition provision. Debt securities classified as "held to
maturity" are reported in financial statements at amortized cost while those
classified as "available for sale" are reported at fair value and unrealized
gains and losses on such securities are reported as a net amount in a separate
component of stockholders' equity. The net unrealized gain or loss on
securities classified as available for sale fluctuates based on several factors,
including market interest rates, prepayment rates and the portfolio amount. As
permitted by the implementation guidance, the Company transferred certain of its
debt securities from the held-to-maturity portfolio to the available-for-sale
portfolio. Total amortized cost of securities transferred and the related
unrealized gains at the date of transfer, December 19, 1995, totalled $28.8
million and $100,137, respectively.
During the first three quarters of the year, the Company purchased 30 year,
adjustable rate government agency mortgage backed securities ("MBS") that are
subject to prepayment and interest-rate risk similar to variable-rate loans.
MBS at June 30, 1996, had a quoted market value of $42.6 million. Expected
maturities on these MBS will differ from contract maturities because borrowers
may have the right to prepay obligations with or without prepayment penalties.
The amortized cost of investment securities available for sale was $98.4 million
and $12.2 million at June 30, 1996 and September 30, 1995, respectively. The
amortized cost of MBS was $35.8 million at June 30, 1996.
4. BORROWINGS
Borrowings at June 30, 1996 consisted of three short term advances totalling
$33.0 million and four long term advances totalling $25.0 million from the
Federal Home Loan Bank of Seattle ("FHLB"). The short term advances had
interest rates from 5.40% to 5.56%, which reprice quarterly based on the three
month London Interbank Offered Rate ("LIBOR") index. Three long term advances
for $5 million each had interest rates from 5.54% to 5.61% and reprice quarterly
based on the three month LIBOR index. The other long term advance for $10.0
million had an interest rate of 5.25% and reprices semi-annually based on the
six month LIBOR index. The advances are collateralized by certain residential
first mortgage loans, deposits with FHLB, and FHLB stock.
The Company also used three reverse repurchase agreements with a third party
lender to borrow $7.0 million during the quarter by pledging certain securities
with a face amount of $7.2 million. The three advances have an interest rate of
5.40% and mature in July 1996.
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, 1996:
<CAPTIONS>
-------------------- ------------------- --------------------
Tangible capital Core capital Risk-based capital
-------------------- ------------------- --------------------
Amount Percent Amount Percent Amount Percent
-------------------- ------------------- --------------------
GAAP capital $121,221,674 20.8 % $121,221,674 20.8 % $121,221,674 44.8 %
General loan valuation allowance -- -- -- -- 897,820 0.3
-------------------- ------------------- --------------------
Regulatory capital computed 121,221,674 20.8 121,221,674 20.8 122,119,494 45.1
Minimum capital requirement 8,758,285 1.5 17,516,569 3.0 21,579,752 8.0
-------------------- ------------------- --------------------
Regulatory capital excess $112,463,389 19.3 % $103,705,105 17.8 % $100,539,742 37.1 %
==================== =================== ====================
/TABLE
6. STOCKHOLDERS' EQUITY
Subsequent to the ratification of the adoption of the 1996 Management
Recognition and Development Plan ("MRDP") at the annual meeting on April 9,
1996, 489,325 shares of stock were purchased in the open market at a cost of
$6.7 million, to be held in trust for future allocation to management in
accordance with the terms of the MRDP Trust.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Klamath First Bancorp, Inc. (the "Company"), an Oregon corporation, became the
unitary savings and loan holding company for Klamath First Federal Savings and
Loan Association (the "Association") upon the Association's conversion from a
federally chartered mutual to a federally chartered stock savings and loan
association on October 4, 1995. At June 30, 1996, the Company had total
consolidated assets of $629.9 million and consolidated stockholders' equity of
$161.8 million. The Company is currently not engaged in any other 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 and its subsidiary.
The Association is a traditional, community-oriented, savings and loan
association that focuses on customer service within its primary market area.
Accordingly, the Association is primarily engaged in attracting deposits from
the general public through its offices and using those and other available
sources of funds to originate permanent residential one- to four-family real
estate loans within its market area and to a lesser extent on commercial
property and multi-family dwellings.
The Company's profitability depends primarily on its net interest income, which
is the difference between interest and dividend income on interest-earning
assets, principally loans and investment securities, and interest expense on
interest-bearing deposits and borrowings. Because the Company is primarily
dependent on net interest income for its earnings, the focus of the Company's
planning is to devise and employ strategies that provide stable, positive
spreads between the yield on interest-earning assets and the cost of interest-
bearing liabilities in order to maximize the dollar amount of net interest
income. The Company's net earnings are dependent, to a lesser extent, on the
level of its non-interest income, such as service charges and other fees, and
its non-interest expense, such as employee compensation and benefits, occupancy
and equipment expense, deposit insurance premiums and miscellaneous other
expenses, as well as federal and state income tax expense.
The Association is regulated by the Office of Thrift Supervision ("OTS") and its
deposits are insured up to applicable limits under the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC").
The Association is a member of the Federal Home Loan Bank of Seattle. The
Association conducts its business through eight office facilities, with the main
office located in Klamath Falls, Oregon. The Association considers its primary
market area to be the counties of Klamath, Deschutes and Jackson in Southern and
Central Oregon. The Association opened a new loan production office in the city
of Redmond, Deschutes County, Oregon in March 1996.
Recapitalization of SAIF and its Impact on SAIF Premiums
In August 1995, the FDIC substantially reduced deposit insurance premiums for
well-capitalized, well-managed financial institutions that are members of the
Bank Insurance Fund ("BIF"). Under the new assessment schedule, approximately
92% of the BIF members pay only the statutory minimum annual assessment of
$2,000. The reduction of BIF premiums went into effect in September 1995. With
respect to SAIF member institutions, the FDIC has retained the existing rate
schedule of 23 to 31 basis points. The Association is a member of SAIF rather
than BIF. SAIF premiums may not be reduced for several years because SAIF has
lower reserves than BIF and is responsible for more troubled financial
institutions. Deposit insurance premiums are often a significant component of
non-interest expense for insured depository institutions. The reduction in BIF
premiums may place the Association at a competitive disadvantage because BIF-
insured institutions (such as most commercial banks) may be able to offer more
attractive loan rates, deposit rates, or both. The magnitude of the competitive
advantage of BIF insured institutions due to a disparity in deposit insurance
premiums and its impact on the Association's results of operations cannot be
determined at this time.
Several legislative alternatives have been suggested by members of Congress
which include a merger of the funds and/or a payment by all SAIF-member
institutions, including the Association, of a one-time assessment to increase
SAIF's reserves to $1.25 per $100 of deposits. Such assessment is estimated to
be approximately 80 basis points on the amount of deposits held by a SAIF-member
institution at March 31, 1995. The payment of a one-time fee would have the
effect of immediately reducing the capital and earnings of SAIF member
institutions by the amount of the fee. Based on the Association's assessable
deposits of $376.4 million at March 31, 1995, a one-time assessment of 80 basis
points would equal approximately $3.0 million. This assessment, if it occurred,
would represent a decrease in book value per share of $.27 at June 30, 1996.
Management cannot predict whether any legislation, including legislation
imposing such a fee, will be enacted, or, if enacted, the amount of any one-time
fee or whether ongoing SAIF premiums will be reduced to a level equal to that of
BIF premiums.
Proposed Recapture of Bad Debt Reserves
Legislation passed by the U.S. Congress and awaiting the President's signature
would repeal the reserve method of accounting for thrift bad debt reserves
(including the percentage-of-taxable income method) for tax years beginning
after December 31, 1995. This would require the Association to account for bad
debts using the specific charge-off method. Under the proposed legislation, the
change in accounting method that eliminates the reserve method would trigger bad
debt reserve recapture for post-1987 excess reserves over a six-year period.
At June 30, 1996, the Association's post-1987 excess reserves amounted to $4.0
million. A special provision suspends recapture of post-1987 excess reserves for
up to two years if, during those two years, the institution satisfies a
"residential loan requirement." This requirement would be met if the principal
amount of the institution's residential loans exceeds a base year amount, which
is determined by reference to the average of the institution's loans during the
six taxable years ending before January 1, 1996. However, notwithstanding this
special provision, recapture would be required to begin no later than the first
taxable year beginning after December 31, 1997. Management cannot predict
whether the legislation providing for the recapture of bad debt reserves will be
signed into law.
Changes in Financial Condition
At June 30, 1996, the consolidated assets of the Company totalled $629.9
million, a decrease of $17.9 million or 2.76% from September 30, 1995. The
decrease in total assets was primarily a result of the refund of $65.7 million
to subscribers in the stock offering as a result of the oversubscription of the
stock offering. However, despite this $65.7 million decrease, an increase of
$47.8 million was achieved through an increase in loans and investments funded
by an additional $38.0 million advance from the FHLB of Seattle.
Net loans receivable increased by $52.0 million, or 12.89%, to $455.5 million
at June 30, 1996, compared to $403.5 at September 30, 1995. The increase was
primarily the result of an increase in loan demand due to lower interest rates,
which resulted in new loan originations for the nine months ended June 30, 1996
of $102.7 million.
Total cash and investments decreased $114.3 million, or 49.52%, from $230.8
million on September 30, 1995 to $116.4 on June 30, 1996. This decrease was
primarily a result of the refund of $65.7 million to subscribers in the stock
offering, the purchase of $49.0 million in adjustable rate mortgage backed
securities, the funding of the additional $102.7 million in loans mentioned
above, the payment of real estate taxes reserved on loans receivable of $8.2
million, an increase in savings deposits of $9.6 million. An additional FHLB of
Seattle advance of $38.0 million was used to fund the increase in loans
receivable and the purchase of investments. In addition, $7.0 million was
borrowed from a third party to fund the open market purchase of stock to be held
in the MRDP Trust.
The Financial Accounting and Standards Board allowed investors a one-time
opportunity to reclassify investments from "Held to Maturity" to "Available for
Sale" between November 15 and December 31, 1995. The Association took advantage
of this opportunity and reclassified $28.8 million of investments to "Available
for Sale." See Note 3.
The Company had not invested in MBS for several years, but as a result of the
offering proceeds and the Company's goal to improve interest rate risk, $49.0
million in adjustable rate mortgage backed securities guaranteed by various
government agencies were purchased during the three quarters ended June 30,
1996. Also during these periods $6.2 million of principal was repaid on MBS
which resulted in the balance of $42.8 million at June 30, 1996.
Savings deposits increased $9.6 million, or 2.50%, from $384.4 million at
September 30, 1995 to $394.0 million at June 30, 1996. This increase was the
result of accepting deposits from banks, thrifts and credits unions on a
national basis, and a decrease in deposits after the refund of over
subscriptions related to the stock conversion offering.
Advances from borrowers for taxes and insurance decreased $2.5 million from
September 30, 1995 to June 30, 1996, after paying $8.2 million in reserves for
the required real estate taxes due on the loan receivable portfolio, and $1.4
million in refunds for excess reserves collected during the past twelve months
and offset by the accrual of payments received on loans during the past nine
months.
Advances from the FHLB of Seattle increased $38.0 million, or 190.00%, from
$20.0 million at September 30, 1995 to $58.0 million at June 30, 1996. The
increase was used to fund the $102.7 million in net loans receivable and
purchase additional investments.
Short-term borrowings of $7.0 million were obtained by pledging certain
securities to a third party and the funds were used to purchase Company stock
in the open market totalling $6.7 million to fund the MRDP Trust.
Total stockholders' equity decreased $2.9 million, or 1.76%, from $164.7
million at September 30, 1995 to $161.8 million at June 30, 1996. This decrease
was primarily the result of a decrease in the market value of securities
available for sale of $2.2 million, the purchase of stock to fund the MRDP Trust
totalling $6.7 million, and dividends totalling $2.0 million, which were offset
by the $7.1 million in earnings during the nine month period of September 30,
1995 to June 30, 1996.
Results of Operation
Comparison of Nine Months Ended June 30, 1996 and 1995
General. Net income increased $2.9 million or 69.05%, from $4.2 million for
the nine months ended June 30, 1995 to $7.1 million for the nine months ended
June 30, 1996. This increase was primarily attributable to an increase of
$158.5 million in total average earning assets from average interest earning
assets of $446.0 million at June 30, 1995 to $604.5 million on June 30, 1996,
which was primarily the result of the additional capital raised by the stock
offering as well as normal growth. Interest rate spread decreased 81 basis
points, from 2.95% for the nine month period ending June 30, 1995 to 2.14% for
the nine month period ending June 30, 1996 due to an increase in interest rates
during the period, resulting in the Association's liabilities repricing upward
faster than its assets. Net interest margin increased 25 basis points from
3.40% for the nine month period ending June 30, 1995 to 3.65% for the nine month
period ending June 30, 1996, as a result of the higher average earnings asset
balances.
Interest Income. As mentioned above, the additional interest income generated
by the additional $158.5 million in average interest earning assets contributed
to an increase of $7.4 million in interest income for the nine months ended
June 30, 1996 compared to 1995. During the nine month period ended June 30,
1995, 86.51% of interest income was generated by the loans receivable compared
to 77.18% for the nine months ended June 30, 1996. In most cases, loans will
generate higher average yields than investments. As a result, the average yield
on interest earning assets decreased 41 basis points from 7.80% for the nine
months ended June 30, 1995 compared to 7.39% for the same period ended June 30,
1996. Of this increase, $3.3 million is attributable to additional loan income
due to an increase in loans receivable. The increase in loans receivable was
primarily a result of strong new purchase loan originations exceeding loan
refinancing which resulted in greater net loan growth for 1996.
The remaining increase of $4.1 million was a result of investing the proceeds
of the stock sale and borrowings in 30 year adjustable rate agency MBS, under
five year fixed rate agencies, fixed and adjustable corporate securities and
overnight funds. The average balance of investments increased by $104.1 million
for the nine months ended June 30, 1996 compared with the comparable period in
1995.
Interest Expense. Interest expense on savings deposits increased $1.2 million
for the nine months ended June 30, 1996 as compared to the comparable period in
1995. Total deposits increased by $7.7 million from June 30, 1995 to June 30,
1996, and the average interest paid on interest-bearing deposits increased 38
basis points from 4.88% for the nine months ended June 30, 1995 to 5.26% for
the same period ended June 30, 1996. This increase was a result of the
increased pricing competition in the Company's market area.
Provision for Loan Losses. The provision for loan losses was $90,000 during the
nine months ended June 30, 1996 compared to a $90,000 provision during the nine
months ended June 30, 1995. There were no charge offs during the nine months
ended June 30, 1996. Charge offs amounted to $57,000 for the nine months ended
June 30, 1995. At June 30, 1996, the allowance for loan losses was equal to
297.35% of non-performing assets compared to 106.60% at September 30, 1995. The
increase in the coverage ratio at June 30, 1996 was the result of a loan that
was brought current, which totaled $304,992 out of the total non-performing
loans of $758,000 at September 30, 1995.
Non-Interest Income. Non-interest income increased $18,231 or 7.16%, to
$272,805 for the nine months ended June 30, 1996 from $254,574 for the nine
months ended June 30, 1995. The increase was primarily attributable to
increased income from fees and service charges of $59,345 and other income of
$21,095. There has been limited real estate owned activity for the nine months
ended June 30, 1996, which has resulted in a decrease in gain on sale of real
estate owned of $52,209 compared to the same nine month period ending June 30,
1995.
Non-Interest Expense. Non-interest expense increased $938,497, or 19.93%, for
the nine months ended June 30, 1996, from $4.7 million for the comparable period
in 1995 to $5.6 million. Of this increase, $626,125 was attributable to an
increase in compensation and benefit expense in 1996, primarily reflecting the
accrual for ESOP contributions to be distributed at year end. The balance of
the increase was a result of a general increase in occupancy expense, data
processing expense, insurance premiums and other expenses. The ratio of non-
interest expense to average total assets was 1.36% and 1.22% for the nine months
ended June 30, 1995 and 1996, respectively.
Income Taxes. The provision for income taxes increased $1.4 million for the
nine months ended June 30, 1996 compared with the prior year, primarily as a
result of higher pretax earnings.
Comparison of Three Months Ended June 30, 1996 and 1995
General. Net earnings increased $1.0 million or 71.43%, from $1.4 million for
the three months ended June 30, 1995 to $2.4 million for the three months ended
June 30, 1996. This increase was primarily attributable to an increase of
$159.0 million in total average earning assets from $454.1 million for the
quarter ended June 30, 1995 to $613.1 million for the quarter ended June 30,
1996, which was primarily the result of the additional capital raised by the
stock conversion as well as normal growth. Interest rate spread decreased 42
basis points from 2.74% for the three month period ending June 30, 1995 to 2.32%
for the three month period ending June 30, 1996, due to a higher interest rate
environment during the three month period of 1996, resulting in the
Association's liabilities repricing upward faster than its assets. Net
interest margin increased 40 basis points from 3.29% for the three month period
ending June 30, 1995 to 3.69% for the three month period ending June 30, 1996,
as a result of the higher average earning asset balances.
Interest Income. As mentioned above, the additional interest income generated
by the additional $159.0 million in average interest earning assets contributed
to an increase of $2.5 million in interest income for the three months ended
June 30, 1996 compared to 1995. During the three month period ended June 30,
1995, 87.12% of interest income was generated by the loans receivable compared
to 78.23% for the three months ended June 30, 1996. In most cases, loans will
generate higher average yields than investments. As a result, the average yield
on interest earning assets decreased 41 basis points from 7.88% for the three
months ended June 30, 1995 compared to 7.47% for the same period ended June 30,
1996. Of this increase, $1.2 million is attributable to additional loan income
due to an increase in loans receivable. The increase in loans receivable was
primarily a result of strong new purchase loan originations as opposed to loan
refinancing which resulted in greater net loan growth for 1996.
The remaining increase of $1.3 million was a result of having invested the
proceeds of the stock sale in MBS and other investments. The average balance of
investments increased by $95.0 million for the quarter ended June 30, 1996
compared with the comparable period in 1995.
Interest Expense. Interest expense on savings deposits increased $205,870 for
the three months ended June 30, 1996 as compared to the comparable period in
1995. The average interest paid on interest-bearing deposits increased 15 basis
points from 5.03% for the three months ended June 30, 1995 to 5.18% for the
three months ended June 30, 1996, as a result of increasing deposit rates to
meet local competition.
Provision for Loan Losses. The provision for loan losses was $30,000 during
both the three months ended June 30, 1996 and 1995. There were no charge offs
during the three months ended June 30, 1996 and 1995.
Non-Interest Income. Non-interest income increased $10,460 or 12.3% to $95,533
for the three months ended June 30, 1996 from $85,073 for the three months ended
June 30, 1995. The increase was primarily attributable to increased income from
fees and service charges of $18,748, despite the decrease in gain on the sale of
real estate owned of $9,669.
Non-Interest Expense. Non-interest expense increased $291,578, or 18.37%, for
the three months ended June 30, 1996, from $1.6 million for the comparable
period in 1995 to $1.9 million. Of this increase, $132,920 was attributable to
an increase in compensation and benefit expense in 1996, primarily reflecting
the accrual for ESOP contributions to be distributed at year end. The balance
of the increase was a result of a general increase in occupancy expense and
other expenses. The ratio of non-interest expense to average total assets was
1.36% and 1.22% for the three months ended June 30, 1995 and 1996, respectively.
Income Taxes. The provision for income taxes increased $605,503 for the three
months ended June 30, 1996 compared with the prior year, primarily as a result
of higher pretax earnings.
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
The Company held an annual meeting on April 9, 1996. The entire slate of eight
directors was brought before the security holders for vote. The following eight
directors were nominated and elected for their respective terms: Timothy A.
Bailey (one-year term), James D. Bocchi (one-year term), William C. Dalton (one-
year term), Rodney N. Murray (two-year term), Bernard Z. Agrons (two-year term),
Gerald V. Brown (three-year term), J. Gillis Hannigan (three-year term) and
Adolph Zamsky (three-year term).
Two additional items were on the agenda of the annual meeting and brought to a
vote. A vote was asked for on the adoption of the Klamath First Bancorp, Inc.
1996 Stock Option Plan which was ratified with a vote of 6,868,729 in favor and
529,838 against, and a vote was asked for on the Klamath First Bancorp, Inc.
1996 Management Recognition and Development Plan which was ratified with a vote
of 6,664,143 in favor and 764,006 against.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
a) Not applicable.
b) A report on From 8-K dated April 11, 1996 was filed on
April 16, 1996 relating to the Company's announcement
of a 4% stock repurchase to fund its MRDP.
A report on Form 8-K dated May 21, 1996 was filed on
May 24, 1996, and an amended report on Form 8-KA dated
May 31, 1996 was filed on June 3, 1996 relating to the
Company's change in certifying accountants.
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 12, 1996 By: /s/ Gerald V. Brown
---------------------------
Gerald V. Brown, President
and Chief Executive Officer
Date: August 12, 1996 By: /s/ Marshall Jay Alexander
---------------------------
Marshall Jay Alexander, Vice
President and Chief FinanciaL Officer