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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-26556
KLAMATH FIRST BANCORP, INC.
(Exact name of registrant as specified in its charter)
Oregon 93-1180440
- -------------------------------------------- -----------------
State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification Number)
540 Main Street, Klamath Falls, Oregon 97601
- -------------------------------------------- -----------------
Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (541) 882-3444
-----------------
Securities registered pursuant to Section 12(b) of the Act: None
-----------------
Securities registered pursuant to
Section 12(g) of the Act: Common Stock, par value $.01 per share
--------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO .
As of April 30, 1997, there were issued and outstanding 9,081,113 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."
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, 1997 and September 30, 1996) 3
Consolidated Statements of Earnings (For the three months
and six months ended March 31, 1997 and 1996) 4
Consolidated Statement of Shareholders' Equity
(For the year ended September 30, 1996 and for
the six months ended March 31, 1997) 5
Consolidated Statements of Cash Flows (For the six
months ended March 31, 1997 and 1996) 6 - 7
Notes to Consolidated Financial Statements 8 - 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 15
Part II. Other Information
- -------- -------------------
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
2
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF MARCH 31, 1997 AND SEPTEMBER 30, 1996
(Unaudited)
March 31, 1997 September 30, 1996
ASSETS ------------------ ------------------
Cash and due from banks $3,049,566 $6,841,554
Federal funds sold 11,129,133 9,338,079
------------------ ------------------
Total cash and cash equivalents 14,178,699 16,179,633
Investment securities available for sale, at fair value 62,351,142 75,986,611
(amortized cost: $63,679,680 and $77,071,211)
Investment securities held to maturity, at amortized cost
(fair value: $9,794,754 and $9,860,165) 9,767,669 9,827,193
Mortgage backed and related securities available for sale, at
fair value (amortized cost: $64,441,655 and $74,249,350) 64,769,931 74,109,321
Mortgage backed and related securities held to maturity, at
amortized cost (fair value: $6,219,258 and $6,736,007) 6,211,074 6,783,001
Loans receivable, net 508,357,123 473,555,988
Real estate owned -- 69,483
Premises and equipment, net 5,266,552 4,964,262
Stock in Federal Home Loan Bank of Seattle, at cost 5,368,700 4,773,800
Accrued interest receivable, net 5,036,159 5,037,285
Other assets 2,523,423 682,814
------------------ ------------------
Total assets $683,830,472 $671,969,391
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposit liabilities $414,831,375 $399,673,180
Accrued interest on savings deposits 862,078 712,408
Advances from borrowers for taxes and insurance 3,222,140 7,831,127
Advances from Federal Home Loan Bank of Seattle 101,000,000 90,000,000
Short term borrowings 18,721,250 14,904,400
Accrued interest on borrowings 598,781 323,163
Pension liability 735,762 668,088
Deferred federal and state income taxes 1,043,357 735,596
Other liabilities 3,063,446 3,710,455
------------------ ------------------
Total liabilities 544,078,189 518,558,417
------------------ ------------------
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value, 500,000 shares authorized; -- --
none issued
Common stock, $.01 par value, 35,000,000 shares authorized,
March 31, 1997 - 10,451,223 issued, 9,081,113 outstanding;
September 30, 1996 - 11,612,470 issued,
10,242,360 shares outstanding 104,512 116,124
Additional paid-in-capital 92,541,983 110,762,678
Retained earnings-substantially restricted 62,069,497 59,082,479
Unearned shares issued to ESOP (8,318,525) (8,807,850)
Unearned shares issued to MRDP (6,025,022) (6,694,470)
Net unrealized loss on securities available for sale (620,162) (1,047,987)
------------------ ------------------
Total shareholders' equity 139,752,283 153,410,974
------------------ ------------------
Total liabilities and shareholders' equity $683,830,472 $671,969,391
================== ==================
See notes to consolidated financial statements.
3
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Three Months Ended Three Months Ended Six Months Ended Six Months Ended
March 31, March 31, March 31, March 31,
1997 1996 1997 1996
-------------- -------------- -------------- --------------
INTEREST INCOME
Loans receivable $9,866,855 $8,645,846 $19,473,185 $16,904,150
Mortgage backed and related securities 1,125,772 465,656 2,395,039 730,511
Investment securities 1,243,295 1,759,474 2,666,185 3,181,255
Federal funds sold 164,090 180,492 448,344 1,022,671
Interest bearing deposits 9,530 86,636 29,412 218,067
-------------- -------------- -------------- --------------
Total interest income 12,409,542 11,138,104 25,012,165 22,056,654
-------------- -------------- -------------- --------------
INTEREST EXPENSE
Deposit liabilities 5,151,533 5,024,369 10,297,463 10,120,225
FHLB advances 1,398,352 582,378 2,939,749 1,009,517
Other 247,984 18,759 476,726 62,871
-------------- -------------- -------------- --------------
Total interest expense 6,797,869 5,625,506 13,713,938 11,192,613
-------------- -------------- -------------- --------------
Net interest income 5,611,673 5,512,598 11,298,227 10,864,041
Provision for loan losses 240,000 30,000 270,000 60,000
-------------- -------------- -------------- --------------
Net interest income after provision for
loan losses 5,371,673 5,482,598 11,028,227 10,804,041
-------------- -------------- -------------- --------------
NON-INTEREST INCOME
Fees and service charges 76,812 58,601 148,470 119,474
Gain on sale of investments -- -- 2,143 --
Gain on sale of real estate owned 1,649 -- 27,946 --
Other income 23,275 39,201 35,687 57,798
-------------- -------------- -------------- --------------
Total non-interest income 101,736 97,802 214,246 177,272
-------------- -------------- -------------- --------------
NON-INTEREST EXPENSE
Compensation, employee benefits and 1,652,645 955,357 3,231,612 1,936,986
related expense
Occupancy expense 239,896 254,627 474,381 485,947
Data processing expense 94,932 89,706 216,011 181,138
Insurance premium expense 15,678 238,430 245,107 463,072
Loss on sale of investments -- -- 14,530 --
Loss on sale of real estate owned -- -- -- 4,690
Other expense 439,214 390,232 864,659 696,368
-------------- -------------- -------------- --------------
Total non-interest expense 2,442,365 1,928,352 5,046,300 3,768,201
-------------- -------------- -------------- --------------
Earnings before income taxes 3,031,044 3,652,048 6,196,173 7,213,112
Provision for income tax 549,767 1,245,082 1,801,809 2,565,007
-------------- -------------- -------------- --------------
Net earnings $2,481,277 $2,406,966 $4,394,364 $4,648,105
============== ============== ============== ==============
Earnings per common share (based on weighted
average shares outstanding) $.27 $.21 $.45 $.41
Weighted average number of shares outstanding 9,226,876 11,254,475 9,738,879 11,254,475
See notes to consolidated financial statements.
4
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED SEPTEMBER 30, 1996 AND THE SIX MONTHS ENDED MARCH 31, 1997
(Unaudited)
Additional Unearned Unrealized Unearned Total
Common Stock Common Stock paid-in Retained ESOP shares gain (loss) shares issued shareholders'
Shares Amount capital earnings at cost on securities to MRDP Trust equity
-------------- ------------- ------------ ------------ ------------- ------------- -------------- -------------
Balance at
October 1, 1995 12,233,125 $ 122,331 $119,230,653 $ 55,811,362 ($ 9,786,500) ($ 692,781) $-- $164,685,065
Cash dividends -- -- -- (2,838,680) -- -- -- (2,838,680)
Earned ESOP shares -- -- 417,652 -- 978,650 -- -- 1,396,302
Unrealized loss on
securities available
for sale -- -- -- -- -- (355,206) -- (355,206)
Unearned shares
issued to MRDP Trust -- -- -- -- -- -- (6,694,470) (6,694,470)
Stock retirement (620,655) (6,207) (8,885,627) -- -- -- -- (8,891,834)
Net earnings -- -- -- 6,109,797 -- -- -- 6,109,797
-------------- ------------- ------------ ------------ ------------- ------------- -------------- -------------
Balance at
September 30, 1996 11,612,470 $116,124 $110,762,678 $59,082,479 ($8,807,850) ($1,047,987) ($6,694,470) $153,410,974
Cash dividends -- -- -- (1,407,346) -- -- -- (1,407,346)
Unrealized gain
on securities
available for sale -- -- -- -- -- 427,825 -- 427,825
Stock retirement (1,161,247) (11,612) (18,489,667) -- -- -- -- (18,501,279)
ESOP contribution -- -- 268,972 -- 489,325 -- -- 758,297
MRDP contribution -- -- -- -- -- -- 669,448 669,448
Net earnings -- -- -- 4,394,364 -- -- -- 4,394,364
-------------- ------------- ------------ ------------ ------------- ------------- -------------- -------------
Balance at
March 31, 1997 10,451,223 $104,512 $92,541,983 $62,069,497 ($8,318,525) ($620,162) ($6,025,022) $139,752,283
============== ============= ============ ============ ============= ============== ============= =============
See notes to consolidated financial statements.
5
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 1997 AND 1996
(Unaudited)
Six Months Ended Six Months Ended
March 31, March 31,
1997 1996
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $4,394,364 $4,648,105
-------------- --------------
ADJUSTMENTS TO RECONCILE NET EARNINGS TO
NET CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation 179,994 206,616
Provision for loan losses 270,000 60,000
Compensation expense related to ESOP benefit 758,298 640,722
Compensation expense related to MRDP Trust 669,448 --
Net amortization of premiums (discounts) paid on
investment and mortgage backed and related securities 275,611 (53,854)
Increase in deferred loan fees, net of amortization 343,334 271,832
Accretion of discounts on purchased loans (163) (159)
Net (gain) loss on sale of real estate owned and
premises and equipment (3,234) 4,690
Net (gain) loss on sale of investment and mortgage
backed and related securities 12,387 --
FHLB stock dividend (244,600) (164,800)
CHANGES IN ASSETS AND LIABILITIES
Accrued interest receivable 1,126 (1,134,672)
Other assets (1,840,609) (487,442)
Accrued interest on deposit liabilities 149,670 (277,236)
Accrued interest on borrowings 275,618 --
Pension liabilities 67,674 60,674
Deferred federal and state income taxes 511,220 519,232
Other liabilities (1,707,253) (2,230,770)
-------------- --------------
Total adjustments (281,479) (2,585,167)
-------------- --------------
Net cash provided by operating activities 4,112,885 2,062,938
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of investment securities
held to maturity 28,949,466 66,082,000
Proceeds from maturity of investment securities
available for sale 2,000,000 --
Principal repayments received on mortgage
backed and related securities 10,588,829 3,182,619
Principal repayments received on loans 24,836,041 32,066,766
Loan originations (60,250,348) (62,235,350)
Purchase of investment securities held
to maturity (28,930,495) (14,741,331)
Purchase of investment securities available
for sale (3,413,607) (102,018,163)
Purchase of mortgage backed and related
securities held to maturity -- (2,581,632)
Purchase of mortgage backed and related
securities available for sale (5,151,261) (44,280,984)
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 20,667
Purchases of premises and equipment (482,284) (96,380)
-------------- --------------
Net cash used in investing activities (11,352,851) (124,601,788)
-------------- --------------
6
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 1997 AND 1996
(Unaudited)
(continued)
Six Months Ended Six Months Ended
March 31, March 31,
1997 1996
---------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase/(decrease) in deposit
liabilities, net of withdrawals $15,158,195 $5,815,494
Proceeds from FHLB advances 93,000,000 20,000,000
Repayments of FHLB advances (82,000,000) --
Proceeds from short term borrowings 26,780,250 --
Repayments of short term borrowings (22,963,400) --
Repayment from stock over subscription -- (65,685,300)
Stock retirement (18,501,280) --
Advances from borrowers for tax and insurance (4,608,987) (4,830,861)
Dividends paid (1,625,746) (611,655)
-------------- --------------
Net cash provided by financing activities 5,239,032 (45,312,322)
-------------- --------------
Net (decrease) increase in cash and cash
equivalents (2,000,934) (167,851,172)
Cash and cash equivalents at beginning
of quarter 16,179,633 175,994,270
Cash and cash equivalents at end of quarter $14,178,699 $8,143,098
============== ==============
SUPPLEMENTAL SCHEDULE OF INTEREST AND INCOME
TAXES PAID
Interest paid $13,288,649 $11,469,849
Income taxes paid 893,500 2,469,173
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES
Transfer of investment securities from held
to maturity to available for sale at
estimated fair market value $-- $27,171,074
Transfer of mortgage backed and related
securities from held to maturity to
available for sale at estimated fair
value -- 1,717,890
Net unrealized gain (loss) on securities
available for sale 427,825 (985,552)
Dividends declared and accrued in other
liabilities 783,842 795,153
See notes to consolidated financial statements.
7
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, 1997, and
September 30, 1996, the results of operations for the three months ended March
31, 1997 and 1996 and for the six months ended March 31, 1997 and 1996 and cash
flows for the six months ended March 31, 1997 and 1996. Certain information and
note disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.
It is suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K. The results of operations
for the three months and six months ended March 31, 1997 are not necessarily
indicative of the results which may be expected for the entire fiscal year.
2. ALLOWANCE FOR LOAN LOSSES
March 31, September 30,
1997 1996
-------------- --------------
Balance, beginning of year $927,820 $807,820
Charge-offs -- --
Additions 270,000 120,000
-------------- --------------
Balance, end of period $1,197,820 $927,820
============== ==============
Additions to the allowance for loan losses were increased during the period
ended March 31, 1997 in response to the purchase of $6.0 million of loans
secured by multi-family residential property which are higher yielding and more
risky than the Company's traditional portfolio of one- to four-family
residential mortgages.
3. ADVANCES FROM FEDERAL HOME LOAN BANK
Borrowings at March 31, 1997 consisted of eight short term advances totalling
$76.0 million and four long term advances totalling $25.0 million from the
Federal Home Loan Bank of Seattle ("FHLB"). The advances are collateralized in
aggregate by certain mortgages or deeds of trust, securities of the U.S.
Government and agencies thereof and cash on deposit with the FHLB.
March 31, 1997 September 30, 1996
------------ ----------- --------------- ----------- -------------- -------------
Range of Weighted Range of Weighted
interest average interest average
Amount rates interest rate Amount rates interest rate
------------ ----------- --------------- ----------- -------------- -------------
Due within one year $76,000,000 5.42%-5.78% 5.54% $65,000,000 5.40%-5.64% 5.53%
After two but within
four years 25,000,000 5.55%-5.61% 5.59% 25,000,000 5.53%-5.74% 5.66%
------------ -----------
$101,000,000 $90,000,000
============ ===========
4. SHORT TERM BORROWINGS
Securities sold under agreements to repurchase totalled $18.7 million with an
interest rate of 5.65%. All of the agreements are due within 90 days.
8
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, 1997:
Categorized as "Well
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
----------- ------ ----------------- ------ ----------------- ------
Amount Ratio Amount Ratio Amount Ratio
As of March 31, 1997:
Total Capital: 116,002,649 38.1% 24,333,320 8.0% 30,416,650 10.0%
(To Risk Weighted Assets)
Tier I Capital: 114,804,829 37.7% N/A 18,249,990 6.0%
(To Risk Weighted Assets)
Tier I Capital: 114,804,829 17.9% 19,224,309 3.0% 32,040,514 5.0%
(To Total Assets)
Tangible Capital: 114,804,829 17.9% 9,612,154 1.5% N/A
(To Total Assets)
6. SHAREHOLDERS' EQUITY
During the quarter ended December 31, 1996, the Company received approval from
the Office of Thrift Supervision to repurchase 10% of its outstanding shares.
This repurchase was begun on December 31, 1996, with the repurchase of 240,000
shares. The remaining 921,247 shares were repurchased in January 1997. The
shares were repurchased at an average price of $15.93.
7. EARNINGS PER SHARE
Earnings per share are computed based upon the weighted average number of shares
outstanding during the period. Shares held by the Company's Employee Stock
Ownership Plan ("ESOP") are considered outstanding only at such time as they are
committed for release. The Company's Management Recognition and Development Plan
("MRDP") shares are considered outstanding at such time as they are committed
for release. Weighted average shares outstanding for the six month period ending
March 31, 1997 and 1996 were 9,738,879 and 11,254,475, respectively.
8. BRANCH ACQUISITION
During the quarter ended March 31, 1997, the Company entered into a definitive
agreement to purchase 25 branches from Wells Fargo Bank, N.A. The transaction
includes purchase of deposits and branch facilities located in rural Oregon
communities and is scheduled to close by July 18, 1997, subject to regulatory
approval. The transaction will be accounted for as a purchase under generally
accepted accounting principles.
9
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, 1997, the Company had total
consolidated assets of $683.8 million and consolidated shareholders' equity of
$139.8 million. The Company is currently not engaged in any business activity
other than holding the stock of the Association. Accordingly, the information
set forth in this report, including financial statements and related data,
relates primarily to the Association.
As a traditional, community-oriented, savings and loan, the Association focuses
on customer service within its principal market area. The Association's primary
market activity is attracting deposits from the general public and using those
and other available sources of funds to originate permanent residential one- to
four-family real estate loans within its market area and, to a lesser extent,
loans on commercial property and multi-family dwellings. To supplement internal
growth generated through its branch network, the Association has recently begun
purchasing Oregon-based multi-family residential loans from other Oregon
financial institutions, as well as using mortgage brokers to locate construction
loans that meet our existing conservative underwriting standards outside of the
current branch market areas. While these types of loans represent only 1.4% of
net loans at March 31, 1997, they accounted for 11.9% of loan production for the
six months ended March 31, 1997.
Net interest income, which is the difference between interest and dividend
income on interest-earning assets, primarily loans and investment securities,
and interest expense on interest-bearing deposits and borrowings, is the major
source of profit for the Company. Because the Company depends primarily on net
interest income for its earnings, the focus of the Company's management is to
create and implement strategies that will provide stable, positive spreads
between the yield on interest-earning assets and the cost of interest-bearing
liabilities. Such strategies include the Association's recent introduction of a
variable rate home equity lending program that will have an interest rate tied
to the Wall Street Journal published prime rate with an additional margin of
2.0%. To a lesser degree, the net earnings of the Company rely on the level of
its non-interest income. The Company is aggressively pursuing strategies to
improve its service charge and fee income, and control its non-interest expense,
which includes employee compensation and benefits, occupancy and equipment
expense, deposit insurance premiums and miscellaneous other expenses, as well as
federal and state income tax expense.
The 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").
10
The Association is a member of the Federal Home Loan Bank of Seattle, conducting
its business through eight office facilities, with the main office located in
Klamath Falls, Oregon. The primary market areas of the Association are the
counties of Klamath, Jackson and Deschutes in Southern and Central Oregon.
Branch Acquisition
The Association has entered into a definitive agreement to purchase 25 branches
in rural Oregon communities from Wells Fargo Bank, N.A. The transaction includes
purchase of deposits and branch facilities and is expected to close by July 18,
1997, subject to regulatory approval. This acquisition will expand the
Association's market area to include 33 branches in 22 Oregon counties. The
acquired offices are located in communities which are compatible with, and
complement, the Association's current markets and philosophy.
The purchase price is based on 6.51% of average deposits at the branches during
the thirty days prior to closing, plus the book value of fixed assets. At this
time the exact deposit premium cannot be determined, however, deposits of the
subject branches totalled $250.4 million as of March 31, 1997. In accordance
with generally accepted accounting principles, the fixed assets acquired will be
recorded at fair value, estimated to be approximately $4.9 million in excess of
the book value/purchase price. This increase in fixed asset value will be offset
by a reduction in the deposit premium recorded. Excess deposited funds will
initially be invested in securities. With the increase in the Association's
deposits and assets as a result of the acquisition, total deposits and total
assets of the Company are expected to increase by approximately 60.3% and 36.6%,
respectively.
Recently Issued Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." This Statement prescribes accounting and reporting standards for
all stock-based compensation plans, including employee stock options, restricted
stock and stock appreciation rights. The Statement defines a "fair value based
method" of accounting for employee stock options and encourages all entities to
adopt that method of accounting for all of their employee stock compensation
plans. However, it also allows an entity to continue to measure compensation for
those plans using the "intrinsic value based method" under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("Opinion No.
25").
Under the fair value based method, compensation cost is measured at the grant
date of the option based on the value of the award and is recognized over the
service period, which is usually the vesting period. Under the intrinsic value
based method, compensation cost is the excess, if any, of the quoted market
price of the stock at grant date or other measurement date over the amount an
employee must pay to acquire the stock. The stock options granted under the
Company's stock option plan have no intrinsic value at grant date, and under
Opinion No. 25 no compensation cost is recognized for them. Compensation cost is
recognized for other types of stock-based compensation plans under Opinion No.
25. Beginning in the fiscal year ending September 30, 1997, SFAS No. 123
requires that an employer's audited financial statements include certain
disclosures about stock-based compensation arrangements regardless of the method
used to account for them. An employer that continues to apply the accounting
provisions of Opinion No. 25 will disclose pro forma amounts that reflect the
difference between compensation cost, if any, included in net income and the
related cost measured by the fair value based method, including tax effects,
that would have been recognized in the income statement if the fair value based
method had been used. The company will continue to apply Opinion No. 25 in
accounting for stock-based compensation plans and will provide the disclosures
required by SFAS No. 123.
In June 1996, FASB issued SFAS No. 125, "Accounting for Transfers and Servicing
of Financial Assets
11
and Extinguishments of Liabilities," which was amended by SFAS No. 127,
"Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125," issued in December 1996. These Statements provide accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities. The standards are based on consistent application of a
financial-components approach that focuses on control. Under the approach, after
a transfer of financial assets, an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred, derecognizes financial
assets when control has been surrendered, and derecognizes liabilities when
extinguished. These Statements provide consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings.
The Company plans to implement SFAS No.125 in compliance with the effective
dates as amended by SFAS No. 127. The Company does not expect implementation to
have a material impact on its financial position or results of operations.
In February 1997, FASB issued SFAS No. 128, "Earnings per Share." This Statement
establishes standards for computing and presenting earnings per share (EPS),
simplifying the standards for computation of earnings per share and making them
comparable to international EPS standards. This Statement is effective for
financial statements issued for periods ending after December 15, 1997, and
earlier application is not permitted. Management has not yet evaluated the
impact that adopton of this Statement will have.
Changes in Financial Condition
At March 31, 1997, the consolidated assets of the Company totalled $683.8
million, an increase of $11.8 million, or 1.77%, from $672.0 million at
September 30, 1996. The increase in total assets was a result of an increase in
net loans receivable of $34.8 million and a $594,900 increase in FHLB stock.
These increases were offset by sales and repayments of mortgage backed and
related securities of $9.9 million and sales and maturities of investment
securities of $13.7 million.
Net loans receivable increased by $34.8 million, or 7.35%, to $508.4 million at
March 31, 1997, compared to $473.6 million at September 30, 1996. The increase
was primarily the result of continued new loan demand exceeding loan repayments,
augmented by the Company's purchase of $6.0 million in higher yielding loans on
multi-family residential properties in Oregon during March 1997.
Investment securities decreased $13.7 million, or 16.0%, from $85.8 million at
September 30, 1996 to $72.1 million at March 31, 1997. This decrease was the
result of $30.9 million in securities maturing during the period and $16.1
million of securities that were sold. These decreases were offset by the
purchase of $32.3 million in securities. Per the Company's business plan,
proceeds from investment runoff have been used to fund loan growth.
During the six months ended March 31, 1997, $10.6 million of principal payments
were received on mortgage backed and related securities ("MBS") and $4.7 million
in available for sale MBS were sold. In addition, $5.2 million in MBS were
purchased, which resulted in the balance of $71.0 million at March 31, 1997, a
decrease of $9.9 million, or 12.3%, from $80.9 million at September 30, 1996.
Savings deposits increased $15.1 million, or 3.8%, from $399.7 million at
September 30, 1996 to $414.8 million at March 31, 1997 Management attributes the
increase to the maintaining of competitive rates in our market areas as well as
the use of an automated on-line personal computer-based system to market
deposits nationally. Interest credited on accounts also contributed to the
increase.
Advances from borrowers for taxes and insurance decreased $4.6 million from
September 30, 1996 to March 31, 1997. The decrease is the combined result of
paying $9.5 million in reserves for the required real estate taxes due on the
Association's loan receivable portfolio and $300,000 in refunds due to decreased
real estate taxes due for the prior twelve months offset by the accrual of
payments received for taxes and insurance during the past six months.
12
Advances from the FHLB of Seattle increased $11.0 million, or 12.2%, from $90.0
million at September 30, 1996 to $101.0 million at March 31, 1997. Six million
dollars of the increase was used to fund loan growth and $5.0 million was used
to purchase adjustable rate mortgage backed securities.
Total shareholders' equity decreased $13.7 million, or 8.9%, from $153.4 million
at September 30, 1996 to $139.8 million at March 31, 1997. This net decrease was
the combined result of the repurchase of 1,161,247 shares of stock for $18.5
million and the declaration of $1.4 million in dividends for the first two
quarters, partially offset by $4.4 million in earnings during the six month
period from September 30, 1996 to March 31, 1997.
Results of Operations
Comparison of Six Months Ended March 31, 1997 and 1996
General. Net interest income increased $434,186, or 4.0%, comparing the six
month period ending March 31, 1997 to the same period ending March 31, 1996.
Interest income increased $3.0 million while interest expense increased by only
$2.5 million comparing the six month period ended March 31, 1997 to the same
period ended March 31, 1996. Non-interest income also increased by $36,974,
while the provision for loan losses increased by $210,000, non-interest expense
increased by $1.3 million, and income taxes decreased by $763,198 comparing the
same two periods. This resulted in net income decreasing by $253,741, or 5.46%,
from $4.6 million for the six months ended March 31, 1996 to $4.4 million for
the six months ended March 31, 1997.
Interest Income. The increase of $3.0 million in interest income was generated
by an additional $73.1 million in average interest earning assets for the six
months ended March 31, 1997 compared to the same period in 1996. Balances
previously invested in federal funds sold have been redeployed to investments in
mortgage backed and related securities and loans receivable in the current year,
resulting in a $1.7 million increase in interest income on mortgage backed and
related securities and $2.6 million increase in income on loans receivable.
These increases were partially offset by a $515,070 decrease in income on
investment securities related to a decrease in the average balance of securities
held.
The average yield on interest earning assets increased 8 basis points to 7.44%
for the six months ended March 31, 1997 from 7.36% for the same period ended
March 31, 1996. This reflects the Company's continued effort to invest in loans
and investments with higher yields, without materially increasing risk.
Interest Expense. Interest expense on savings deposits increased $177,238 for
the six months ended March 31, 1997 as compared to the same period in 1996.
Although total deposits grew by $24.6 million comparing March 31, 1996 to 1997,
the average interest paid on interest-bearing deposits declined 15 basis points
from 5.27% for the six months ended March 31, 1996 to 5.12% for the same period
ended March 31, 1997.
Provision for Loan Losses. The provision for loan losses was $270,000 and there
were no charge offs during the six months ended March 31, 1997 compared to a
$60,000 provision and no charge offs during the six months ended March 31, 1996.
The provision was increased during the quarter ended March 31, 1997 in response
to portfolio growth and the purchase of $6.0 million of higher-yielding loans
collateralized by multi-family residential property which have higher associated
risk than the existing portfolio of one- to four-family residential mortgages.
Based on the Company's business strategies, management anticipates increasing
the proportion of the loan portfolio dedicated to these higher-yielding loans.
At March 31, 1997, the allowance for loan losses was equal to 176.7% of
non-performing loans compared to 485.9% at September 30, 1996. The decrease in
the coverage ratio at March 31, 1997 was the result of an increase in
non-performing loans from $191,000 at September 30, 1996 to $678,000 at March
31, 1997.
13
Non-Interest Income. Non-interest income increased $36,974, or 20.9%, to
$214,246 for the six months ended March 31, 1997 from $177,272 for the six
months ended March 31, 1996. The increase was attributable to increased fee
income as well as gains on sale of real estate owned and investments. Additional
fee income resulted from aggressive internal marketing efforts to improve fee
income from checking accounts, ATM's, and mortgage life insurance sales.
Non-Interest Expense. Non-interest expense increased $1.3 million, or 33.9%, to
$5.0 million for the six months ended March 31, 1997, from $3.8 million for the
comparable period in 1996. Of this increase, $1.3 million was attributable to an
increase in compensation and benefit expense in 1997, reflecting the accruals
for Employee Stock Ownership Plan contributions and the Management Recognition
and Development Plan. The additional expense associated with benefit plans which
were not in place in the prior year will continue to impact prior period
comparisons for the remaining quarters of the year ended September 30, 1997.
Increases in other expense of $168,291 were offset by a $217,965 reduction in
deposit insurance premiums resulting from reduced assessment rates beginning
January 1, 1997 and further reduced by a credit for overpayment of premiums in
1996. The ratio of non-interest expense to average total assets was 1.5% and
1.2% for the six months ended March 31, 1997 and 1996, respectively.
Income Taxes. The provision for income taxes decreased $763,198 for the six
months ended March 31, 1997 compared with the same period ended March 31, 1996,
primarily as a result of recognition of the tax benefit related to the capital
loss on sale of the U.S. Federal securities mutual bond fund. At September 30,
1996, when the capital loss was recognized for book purposes, a valuation
allowance was created to offset the deferred tax asset because the Company was
not assured of being able to realize a capital gain and the related tax benefit.
During the quarter ended March 31, 1997, the Company, through the sale of
certain investments, realized a capital gain for tax purposes that assures
realization of the tax benefit and thus reduced the valuation allowance to zero.
Comparison of Three Months Ended March 31, 1997 and 1996
General. Net income increased $74,311, or 3.1%, from $2.4 million for the three
months ended March 31, 1996 to $2.5 million for the three months ended March 31,
1997. This increase was attributable to an increase in net interest income and a
decrease in the provision for income taxes offset by increases in the provision
for loan losses and non-interest expense related to employee benefit plans
adopted at conversion.
Interest Income. Additional interest income generated by the $69.7 million
increase in average interest earning assets contributed to an increase of $1.3
million in interest income for the three months ended March 31, 1997 compared to
1996. Of this increase, $0.7 million is attributable to increased interest
income on mortgage backed and related securities and $1.2 million to increased
loans receivable. These increases were offset by a decrease in interest on
investment securities of $0.5 million.
The average yield on interest earning assets remained consistent at 7.45% for
the three months ended March 31, 1997 compared to 7.46% for the same period
ended March 31, 1996.
Interest Expense. Interest expense on savings deposits increased $127,164 for
the three months ended March 31, 1997 as compared to the same period in 1996.
Although average deposits increased by $20.4 million comparing March 31, 1996 to
1997, the average interest paid on interest-bearing deposits decreased 14 basis
points from 5.21% for the three months ended March 31, 1996 to 5.07% for the
same period ended March 31, 1997.
Provision for Loan Losses. The provision for loan losses was $240,000 and there
were not any charge offs during the three months ended March 31, 1997 compared
to a $30,000 provision and no charge offs during the three months ended March
31, 1996. The provision was increased during the quarter ended March 31, 1997 in
response to portfolio growth and the purchase of $6.0 million of higher-yielding
loans collateralized by multi-family residential property which have higher
associated risk than the existing portfolio of one- to four-family residential
mortgages.
14
Non-Interest Income. Non-interest income increased $3,934, or 4.0%, to $101,736
for the three months ended March 31, 1997 from $97,802 for the three months
ended March 31, 1996. The increase was primarily attributable to a $18,211
increase in fee income partially offset by a decrease in other income.
Additional fee income resulted from aggressive internal marketing efforts to
improve fee income from checking accounts, ATM's, and mortgage life insurance
sales.
Non-Interest Expense. Non-interest expense increased $514,013, or 26.7%, to $2.4
million for the three months ended March 31, 1997, from $1.9 million in the
comparable period in 1996. Of this increase, $697,288 was attributable to an
increase in compensation and benefit expense in 1997, primarily reflecting the
accruals for Employee Stock Ownership Plan contributions and the Management
Recognition and Development Plan. This increase was partially offset by a
$222,752 reduction in deposit insurance premiums resulting from reduced
assessment rates beginning January 1, 1997 and further reduced by a credit for
overpayment of premiums in 1996. The ratio of non-interest expense to average
total assets was 1.5% and 1.3% for the three months ended March 31, 1997 and
1996, respectively.
Income Taxes. The provision for income taxes decreased $695,315 for the three
months ended March 31, 1997 compared with the prior year, primarily as a result
of recognition of the tax benefit related to loss on sale of the U.S. Federal
securities mutual bond fund, as noted in the discussion of income taxes in the
six month comparison, above.
15
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 January 22, 1997. The election of
three directors was brought before the security holders for vote. The
following three directors were nominated and elected for three-year
terms:
Vote For Vote Withheld
___________ _________________
Timothy A. Bailey 9,866,231 12,783
James D. Bocchi 9,864,581 14,433
William C. Dalton 9,845,206 33,808
The following other directors continue in office for their respective
remaining terms: Rodney N. Murray (one-year term), Bernard Z. Agrons
(one-year term), Gerald V. Brown (two-year term), J. Gillis Hannigan
(two-year term), and Adolph Zamsky (two-year term).
No additional items were on the agenda of the annual meeting and no
items were brought to a vote during the meeting.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
a) Not applicable.
b) A report on Form 8-K dated March 5, 1997 was filed on March 19, 1997
relating to the Company's entrance into a definitive agreement with
Wells Fargo Bank, N.A. to purchase 25 branch offices in rural Oregon
communities.
16
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, 1997 By: /s/ Gerald V. Brown
------------------------------
Gerald V. Brown, President and
Chief Executive Officer
Date: May 14, 1997 By: /s/ Marshall Jay Alexander
-----------------------------------
Marshall Jay Alexander, Vice President
and Chief Financial Officer
17