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 December 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 January 31, 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."
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 December 31, 1997 and September 30, 1997) 3
Consolidated Statement of Earnings (For the three months
ended December 31, 1997 and 1996) 4
Consolidated Statement of Shareholders' Equity
(For the years ended September 30, 1997 and 1996 and for
the three months ended December 31, 1997) 5
Consolidated Statements of Cash Flows (For the three
months ended December 31, 1997 and 1996) 6 - 7
Notes to Consolidated Financial Statements 8 - 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11 - 14
Part II. Other Information
- -------- -------------------
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
2
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF DECEMBER 31, 1997 AND SEPTEMBER 30, 1997
(Unaudited)
December 31, 1997 September 30, 1997
ASSETS ----------------- ------------------
Cash and due from banks ...................................................... $ 25,571,068 $ 24,503,768
Interest earning deposits with banks ......................................... 1,662,270 1,431,087
Federal funds sold and securities purchased under agreements to resell ....... 12,979,830 6,108,341
------------- -------------
Total cash and cash equivalents ........................................... 40,213,168 32,043,196
Investment securities available for sale, at fair value ...................... 244,965,652 261,846,320
(amortized cost: $244,068,125 and $261,869,234)
Investment securities held to maturity, at amortized cost (fair .............. 3,041,547 22,937,314
value: $3,074,844 and $22,968,997)
Mortgage backed and related securities available for sale, at fair ........... 65,158,033 64,868,633
value (amortized cost: $64,721,147 and $64,097,246)
Mortgage backed and related securities held to maturity, at amortized ........ 5,043,070 5,446,957
cost (fair value: $5,089,073 and $5,518,648)
Loans receivable, net ........................................................ 573,334,473 551,463,590
Real estate owned ............................................................ -- --
Premises and equipment, net .................................................. 11,624,443 11,671,124
Stock in Federal Home Loan Bank of Seattle, at cost .......................... 7,294,500 7,150,400
Accrued interest receivable .................................................. 9,071,099 7,626,164
Core deposit intangible ...................................................... 12,670,526 13,083,695
Other assets ................................................................. 2,790,471 1,940,655
------------- -------------
Total assets .............................................................. $ 975,206,982 $ 980,078,048
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposit liabilities ........................................................ $ 678,794,058 $ 673,977,901
Accrued interest on deposits ............................................... 1,162,830 1,215,745
Advances from borrowers for taxes and insurance ............................ 775,284 8,915,486
Advances from Federal Home Loan Bank of Seattle ............................ 125,000,000 129,000,000
Short term borrowings ...................................................... 16,045,000 17,077,500
Accrued interest on borrowings ............................................. 328,280 512,716
Pension liabilities ........................................................ 757,789 727,140
Deferred federal and state income taxes .................................... 2,160,784 1,911,573
Other liabilities .......................................................... 3,176,332 2,277,544
------------- -------------
Total liabilities ........................................................ 828,200,357 835,615,605
------------- -------------
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value, 500,000 shares authorized; none issued .... -- --
Common stock, $.01 par value, 35,000,000 shares authorized, ................ 104,295 104,295
December 31, 1997 -- 10,429,534 issued, 9,235,582 outstanding;
September 30, 1997 -- 10,429,534 issued, 9,235,582 outstanding
Additional paid-in-capital ................................................. 92,892,950 92,601,639
Retained earnings-substantially restricted ................................. 66,119,346 64,744,995
Unearned shares issued to ESOP ............................................. (7,584,537) (7,829,200)
Unearned shares issued to MRDP ............................................. (5,352,769) (5,623,340)
Net unrealized gain on securities available for sale, net of tax ........... 827,340 464,054
------------- -------------
Total shareholders' equity ............................................... 147,006,625 144,462,443
------------- -------------
Total liabilities and shareholders' equity ............................... $ 975,206,982 $ 980,078,048
============= =============
<FN>
See notes to consolidated financial statements
</FN>
3
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Three Months Ended Three Months Ended
December 31, 1997 December 31, 1996
----------------- -----------------
INTEREST INCOME
Loans receivable ........................................................... $ 11,416,429 $ 9,606,330
Mortgage backed and related securities ..................................... 1,107,748 1,269,267
Investment securities ...................................................... 4,191,435 1,422,890
Federal funds sold and securities purchased under agreements to resell ..... 148,649 284,254
Interest earning deposits .................................................. 81,027 19,882
------------- -------------
Total interest income .................................................... 16,945,288 12,602,623
------------- -------------
INTEREST EXPENSE
Deposit liabilities ........................................................ 7,207,485 5,145,930
Advances from FHLB of Seattle .............................................. 1,689,424 1,541,397
Other ...................................................................... 289,429 228,742
------------- -------------
Total interest expense ................................................... 9,186,338 6,916,069
------------- -------------
Net interest income ...................................................... 7,758,950 5,686,554
Provision for loan losses .................................................... 75,000 30,000
------------- -------------
Net interest income after provision for .................................. 7,683,950 5,656,554
loan losses ------------- -------------
NON-INTEREST INCOME
Fees and service charges ................................................... 605,364 71,658
Gain on sale of investments ................................................ -- 2,143
Gain on sale of real estate owned .......................................... -- 26,297
Other income ............................................................... 91,303 12,412
------------- -------------
Total non-interest income ................................................ 696,667 112,510
------------- -------------
NON-INTEREST EXPENSE
Compensation, employee benefits and related expense ........................ 2,479,533 1,578,967
Occupancy expense .......................................................... 520,511 168,771
Data processing expense .................................................... 232,512 121,079
Insurance premium expense .................................................. 67,340 229,429
Loss on sale of investments ................................................ -- 14,530
Amortization of core deposit intangible .................................... 413,169 --
Other expense .............................................................. 1,115,411 491,159
------------- -------------
Total non-interest expense ............................................... 4,828,476 2,603,935
------------- -------------
Earnings before income taxes ................................................. 3,552,141 3,165,129
Provision for income tax ..................................................... 1,406,067 1,252,042
------------- -------------
Net earnings ................................................................. $ 2,146,074 $ 1,913,087
============= =============
Basic earnings per share ..................................................... $ 0.23 $ 0.19
Earnings per share - assuming full dilution .................................. $ 0.22 $ 0.18
Weighted average number of shares outstanding ................................ 9,235,582 10,239,751
Weighted average number of shares - assuming full dilution ................... 9,716,094 10,380,580
<FN>
See notes to consolidated financial statements.
</FN>
4
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1997 AND THE THREE MONTHS ENDED DECEMBER 31, 1997
(Unaudited)
Additional Unearned Unearned Unrealized Total
Common Stock Common Stock paid-in Retained ESOP shares shares issued gain (loss) shareholders'
Shares Amount capital earnings at cost to MRDP Trust on securities equity
---------- ----------- ------------- ------------ ----------- ------------- ------------- -------------
Balance at ......... 11,254,475 $ 122,331 $ 119,230,653 $ 55,811,362 $(9,786,500) $ -- $ (692,781) $ 164,685,065
October 1, 1995
Cash dividends ..... -- -- -- (2,838,680) -- -- -- (2,838,680)
ESOP contribution .. 97,865 -- 417,652 -- 978,650 -- -- 1,396,302
Unrealized loss .... -- -- -- -- -- -- (355,206) (355,206)
on securities
available for sale
Unearned shares .... (489,325) -- -- -- -- (6,694,470) -- (6,694,470)
issued to MRDP
Trust
Stock repurchased .. (620,655) (6,207) (8,885,627) -- -- -- -- (8,891,834)
and retired
Net earnings ....... -- -- -- 6,109,797 -- -- -- 6,109,797
----------- ----------- ------------- ------------ ----------- ------------- ------------ -------------
Balance at ......... 10,242,360 116,124 110,762,678 59,082,479 (8,807,850) (6,694,470) (1,047,987) 153,410,974
September 30, 1996
Cash dividends ..... -- -- -- (2,895,234) -- -- -- (2,895,234)
Unrealized gain .... -- -- -- -- -- -- 1,512,041 1,512,041
on securities
available for sale
Stock repurchased .. (1,182,936) (11,829) (18,866,299) -- -- -- -- (18,878,128)
and retired
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 ......... 9,235,582 104,295 92,601,639 64,744,995 (7,829,200) (5,623,340) 464,054 144,462,443
September 30, 1997
Cash dividends ..... -- -- -- (771,723) -- -- -- (771,723)
Unrealized gain .... -- -- -- -- -- -- 363,286 363,286
on securities
available for sale
ESOP contribution .. -- -- 291,311 -- 244,663 -- -- 535,974
MRDP contribution .. -- -- -- -- -- 270,571 -- 270,571
Net earnings ....... -- -- -- 2,146,074 -- -- -- 2,146,074
----------- ----------- ------------- ------------ ----------- ------------- ------------ -------------
Balance at ......... 9,235,582 $ 104,295 $ 92,892,950 $ 66,119,346 $(7,584,537) $ (5,352,769) $ 827,340 $ 147,006,625
December 31, 1997
=========== =========== ============= ============ =========== ============= ============ =============
<FN>
See notes to consolidated financial statements.
</FN>
5
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
(Unaudited)
Three Months Ended
December 31,
------------- -------------
1997 1996
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings ................................................................. $ 2,146,074 $ 1,913,087
------------- -------------
ADJUSTMENTS TO RECONCILE NET EARNINGS TO
NET CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization ................................................ 697,640 89,796
Provision for loan losses .................................................... 75,000 30,000
Compensation expense related to ESOP benefit ................................. 535,974 359,897
Compensation expense related to MRDP Trust ................................... 270,571 334,725
Net amortization of premiums (discounts) paid on ............................. (178,961) 118,893
investment and mortgage backed and related securities
Increase in deferred loan fees, net of amortization .......................... 283,958 155,724
Amortization of premiums (accretion of discounts) on purchased loans ......... 14,907 (81)
Net (gain) loss on sale of real estate owned and ............................. -- (3,234)
premises and equipment
FHLB stock dividend .......................................................... (144,100) (124,300)
CHANGES IN ASSETS AND LIABILITIES
Accrued interest receivable .................................................. (1,444,935) (364,002)
Other assets ................................................................. (889,816) 8,185
Accrued interest on savings deposits ......................................... (52,915) 43,416
Accrued interest on borrowings ............................................... (184,436) 167,002
Pension liabilities .......................................................... 30,649 33,837
Deferred federal and state income taxes ...................................... 26,551 1,109,631
Other liabilities ............................................................ 961,422 1,825,964
------------- -------------
Net cash provided by operating activities ................................................ 2,147,583 5,698,540
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of investment securities .............................. 20,000,000 28,949,466
held to maturity
Proceeds from maturity of investment securities .............................. 21,680,000 2,000,000
available for sale
Principal repayments received on mortgage .................................... 397,097 243,197
backed and related securities held to maturity
Principal repayments received on mortgage .................................... 4,367,763 4,397,787
backed and related securities available for sale
Principal repayments received on loans ....................................... 20,595,908 11,925,352
Loan originations ............................................................ (40,940,648) (27,146,345)
Loans purchased .............................................................. (1,900,000) --
Purchase of investment securities held ....................................... -- (28,930,495)
to maturity
Purchase of investment securities available .................................. (3,753,870) (3,413,607)
for sale
Purchase of mortgage backed and related ...................................... (5,035,162) (5,151,261)
securities available for sale
Purchase of FHLB stock ....................................................... -- (2,776,200)
Proceeds from sale of investment securities .................................. -- 16,080,419
available for sale
Proceeds from sale of mortgage backed and related ............................ -- 4,710,359
securities available for sale
Proceeds from sale of real estate owned and .................................. -- 72,717
premises and equipment
Purchases of premises and equipment .......................................... (197,791) (10,094)
------------- -------------
Net cash used in investing activities .................................................... 15,213,297 951,295
------------- -------------
6
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
(Unaudited)
(continued)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase/(decrease) in deposit liabilities, net of withdrawals ............... $ 4,816,157 $ 2,140,205
Proceeds from FHLB advances .................................................. 45,000,000 89,000,000
Repayments of FHLB advances .................................................. (49,000,000) (78,000,000)
Proceeds from short term borrowings .......................................... 25,485,000 8,059,000
Repayments of short term borrowings .......................................... (26,517,500) (14,965,900)
Stock retirement ............................................................. -- (3,735,000)
Advances from borrowers for tax and insurance ................................ (8,140,202) (7,439,181)
Dividends paid ............................................................... (834,363) (812,873)
------------- -------------
Net cash provided by financing activities ................................................ (9,190,908) (5,753,749)
------------- -------------
Net (decrease) increase in cash and cash equivalents ..................................... 8,169,972 896,086
Cash and cash equivalents at beginning of year ........................................... 32,043,196 16,179,633
------------- -------------
Cash and cash equivalents at end of quarter .............................................. $40,213,168 $17,075,719
============= =============
SUPPLEMENTAL SCHEDULE OF INTEREST AND INCOME
TAXES PAID
Interest paid ................................................................ $ 9,377,162 $ 6,705,650
Income taxes paid ............................................................ 415,000 5,000
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES
Net change in unrealized gain on securities available for sale ............... 363,286 965,230
<FN>
See notes to consolidated financial statements.
</FN>
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 December 31, 1997, and
September 30, 1997, the results of operations for the three months ended
December 31, 1997 and 1996 and the cash flows for the three months ended
December 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 ended December 31, 1997 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:
December 31, September 30,
1997 1997
------------- -------------
Balance, beginning of year ... $ 1,296,451 $ 927,820
Charge-offs .................. -- (1,369)
Additions .................... 75,000 370,000
------------- -------------
Balance, end of period ....... $ 1,371,451 $ 1,296,451
============= =============
3. ADVANCES FROM FEDERAL HOME LOAN BANK
Borrowings at December 31, 1997 consisted of seven short term advances totaling
$55.0 million and six long term advances totaling $70.0 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.
Scheduled maturities of advances from the FHLB were as follows:
December 31, 1997 September 30, 1997
------------------------------------------ -----------------------------------------
Range of Weighted Range of Weighted
interest average interest average
Amount rates interest rate Amount rates interest rate
----------- ---------- ------------- ----------- ---------- -------------
Due within one year ............. $55,000,000 5.65%-5.80% 5.74% $59,000,000 5.57%-6.70% 5.66%
After one but within ............ 70,000,000 5.39%-5.99% 5.67% 70,000,000 5.39%-5.84% 5.59%
five years
----------- -----------
$125,000,000 $129,000,000
=========== ============
4. SHORT TERM BORROWINGS
Securities sold under agreements to repurchase totaled $16.0 million with
interest rates of 5.75%. 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 December 31, 1997:
Categorized as "Well
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
--------------------- --------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ------ ------------ ------ -------------- ------
Total Capital: ............... $106,195,497 24.3% $ 34,908,952 8.0% $ 43,636,190 10.0%
(To Risk Weighted Assets)
Tier I Capital: .............. 104,824,046 24.0% N/A N/A 26,181,714 6.0%
(To Risk Weighted Assets)
Tier I Capital: .............. 104,824,046 11.4% 27,498,130 3.0% 45,830,218 5.0%
(To Total Assets)
Tangible Capital: ............ 104,824,046 11.4% 13,749,065 1.5% N/A N/A
(To Tangible Assets)
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. 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 reconciliation of the numerators and
denominators of the basic and diluted EPS calculations:
For the Quarter Ended December 31, 1997
---------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------- ---------
Basic EPS
Income available to .................... $2,146,074 9,235,582 $ 0.23
common stockholders =========
Effect of Dilutive Securities:
MRDP shares ............................ -- 76,473
ESOP shares ............................ -- 12,334
Stock options .......................... -- 391,705
------------ -------------
Diluted EPS:
Income available to common ............. $2,146,074 9,716,094 $ 0.22
stockholders + assumed
conversions
============ ============= =========
9
For the Quarter Ended December 31, 1996
---------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------- ---------
Basic EPS
Income available to .................... $1,913,087 10,239,751 $0.19
common stockholders =========
Effect of Dilutive Securities:
MRDP shares ............................ -- 23,495
ESOP shares ............................ -- 12,334
Stock options .......................... -- 105,000
------------ -------------
Diluted EPS:
Income available to common ............. $1,913,087 10,380,580 $0.18
stockholders + assumed
conversions
============ ============= =========
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.
10
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 December 31, 1997, the Company had total
consolidated assets of $975.2 million and consolidated shareholders' equity of
$147.0 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
construction 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 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.
11
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.
Year 2000 Compliance
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 and fixed assets. As with other organizations, the data
processing programs 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. The Company has established a
committee to address "Year 2000" issues related to data processing. The service
bureau has stated that all their processing will be Year 2000 compliant by the
end of 1998, including the application software used for fixed assets and
accounts payable. All personal computers ("PCs") and related software throughout
the Company have been inventoried and non-compliant PCs have been identified. As
of December 31, 1997, approximately 90% of the Company's PCs and software are
Year 2000 compliant. 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
primary market area to include 33 offices 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.
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
quarters ended December 31, 1997 and 1996, as discussed under non-interest
income and non-interest expense.
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.
12
Changes in Financial Condition
At December 31, 1997, the consolidated assets of the Company totaled $975.2
million, a decrease of $4.9 million, or 0.50%, from $980.1 million at September
30, 1997. The decrease in total assets was primarily the result of a $4.0
million reduction in FHLB borrowings.
Net loans receivable increased by $21.8 million, or 3.97%, to $573.3 million at
December 31, 1997, 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 $1.9 million in higher
yielding loans on multi-family residential and commercial properties in Oregon
during the quarter ended December 31, 1997.
Investment securities decreased $36.8 million, or 12.91%, from $284.8 million at
September 30, 1997 to $248.0 million at December 31, 1997. The decrease was
primarily the result of scheduled maturities of short term investments being
rolled into higher earning new loan production as part of the Company's ongoing
strategy to fund loan growth.
During the three months ended December 31, 1997, $4.8 million of principal
payments were received on mortgage backed and related securities ("MBS") and
$5.0 million in available for sale MBS were purchased, leaving the balance of
MBS consistent from September 30, 1997 to December 31, 1997.
Deposit liabilities increased $4.8 million, or 0.71%, from $674.0 million at
September 30, 1997 to $678.8 million at December 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. The increase in deposits has been experienced throughout the network
of 32 branches.
Advances from borrowers for taxes and insurance decreased $8.1 million from
September 30, 1997 to December 31, 1997. 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.
Advances from the FHLB of Seattle decreased $4.0 million, or 3.1%, from $129.0
million at September 30, 1997 to $125.0 million at December 31, 1997. Proceeds
from maturities of investment securities were used to reduce the borrowings.
Total shareholders' equity increased $2.5 million, or 1.8%, from $144.5 million
at September 30, 1997 to $147.0 million at December 31, 1997. This increase was
primarily the result of $2.1 million in earnings for the first quarter,
augmented by $363,286 in unrealized gains on securities available for sale
during the three month period from September 30, 1997 to December 31, 1997.
Results of Operations
Comparison of Three Months Ended December 31, 1997 and 1996
General. Net income increased $232,987, or 12.2%, from $1.9 million for the
three months ended December 31, 1996 to $2.1 million for the three months ended
December 31, 1997. This increase was primarily attributable to an increase in
net interest income and non-interest income partially offset by increases in
non-interest expense.
13
Interest Income. The $331.4 million increase in average interest earning assets
contributed to an increase in interest income of $4.3 million, or 34.1%, for the
three months ended December 31, 1997 compared to 1996. Of this increase, $1.8
million is attributable to additional loan income generated by an increase in
loans receivable. The remaining increase in interest income of $2.8 million was
a result of investing the $230 million proceeds of the acquisition in fixed rate
U.S. Government and agency securities with maturities of less than five years,
fixed and adjustable rate corporate securities, and overnight funds.
The $230 million increase in investments resulted in a decrease in the
proportion of total interest income generated by loans. Because loans generate
higher average yields than investments, the average yield on interest earning
assets decreased 13 basis points to 7.30% for the three months ended December
31, 1997 compared to 7.43% for the same period ended December 31, 1996.
Interest Expense. Interest expense on deposit liabilities increased $2.1 million
for the three months ended December 31, 1997 as compared to the same period in
1996. Although total deposits increased by $277.0 million comparing December 31,
1996 to 1997, the average interest paid on interest-bearing deposits decreased
55 basis points from 5.17% for the three months ended December 31, 1996 to 4.62%
for the same period ended December 31, 1997. 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 slightly from $109.9 million for the three months ended December 31,
1996 to $117.7 million for the same period ended December 31, 1997 resulting in
an increase in interest on FHLB advances of $148,027 for the three months ended
December 31, 1997 compared with the same period ended December 31, 1996.
Provision for Loan Losses. The provision for loan losses was $75,000 and there
were no charge offs during the three months ended December 31, 1997 compared to
a $30,000 provision and no charge offs during the three months ended December
31, 1996. The provision was increased in response to portfolio growth and
continuing 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 $584,157, or 519.2%, to
$696,667 for the three months ended December 31, 1997 from $112,510 for the
three months ended December 31, 1996. The increase was primarily attributable to
a $533,706 increase in fee income related to the increase in deposit accounts
subject to service charges.
Non-Interest Expense. Non-interest expense increased $2.2 million, or 85.4%, to
$4.8 million for the three months ended December 31, 1997, from $2.6 million in
the comparable period in 1996. Of this increase, $900,566 was attributable to an
increase in compensation and benefit expense in 1997, 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 $168,771 for the quarter ended December 31, 1996 to
$520,511 for the quarter ended December 31, 1997 due to the addition of the 25
acquired branches. These increases were partially offset by a $162,089 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
1.98% and 1.52% for the three months ended December 31, 1997 and 1996,
respectively.
Income Taxes. The provision for income taxes increased $154,025 for the three
months ended December 31, 1997 compared with the prior year, primarily as a
result of higher income for the quarter.
14
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
December 31, 1997.
15
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: February 13, 1998 By: /s/ Gerald V. Brown
------------------------------
Gerald V. Brown, President and
Chief Executive Officer
Date: February 13, 1998 By: /s/ Marshall Jay Alexander
------------------------------
Marshall Jay Alexander, Vice President
and Chief Financial Officer
16