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, 1999
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 28, 2000, there were issued 7,616,877 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 Balance Sheets
(As of December 31, 1999 and September 30, 1999) 3
Consolidated Statements of Earnings (For the three months
ended December 31, 1999 and 1998) 4
Consolidated Statements of Shareholders' Equity
(For the year ended September 30, 1999 and for
the three months ended December 31, 1999) 5
Consolidated Statements of Cash Flows (For the three
months ended December 31, 1999 and 1998) 6 - 7
Notes to Consolidated Financial Statements 8 - 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 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 BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND SEPTEMBER 30, 1999
(Unaudited)
December 31, 1999 September 30, 1999
ASSETS ----------------- ------------------
Cash and due from banks ................................................. $ 32,491,201 $ 21,123,217
Interest bearing deposits with banks .................................... 3,308,696 1,231,516
Federal funds sold and securities purchased under agreements to resell .. 5,591,210 2,167,856
--------------- ---------------
Total cash and cash equivalents ...................................... 41,391,107 24,522,589
Investment securities available for sale, at fair value
(amortized cost: $152,138,973 and $161,112,272) ....................... 148,456,387 158,648,057
Investment securities held to maturity, at amortized cost (fair
value: $571,778 and $577,455) ......................................... 559,054 559,512
Mortgage backed and related securities available for sale, at fair
value (amortized cost: $69,596,157 and $73,075,553) ................... 68,752,641 72,695,555
Mortgage backed and related securities held to maturity, at amortized
cost (fair value: $2,442,028 and $2,596,408) .......................... 2,457,098 2,600,920
Loans receivable, net ................................................... 740,517,583 739,793,403
Real estate owned and repossessed assets ................................ 1,259,450 1,494,890
Premises and equipment, net ............................................. 12,023,675 11,581,923
Stock in Federal Home Loan Bank of Seattle, at cost ..................... 11,157,500 10,957,300
Accrued interest receivable ............................................. 7,382,370 7,153,818
Core deposit intangible ................................................. 9,365,171 9,778,341
Other assets ............................................................ 1,551,127 1,855,032
--------------- ---------------
Total assets ......................................................... $ 1,044,873,163 $ 1,041,641,340
=============== ===============
Commitments and contingencies
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposit liabilities ................................................... $ 718,237,553 $ 720,401,112
Accrued interest on deposit liabilities ............................... 1,244,649 1,184,471
Advances from borrowers for taxes and insurance ....................... 664,476 9,758,627
Advances from Federal Home Loan Bank of Seattle ....................... 213,000,000 197,000,000
Accrued interest on borrowings ........................................ 929,411 34,484
Pension liabilities ................................................... 866,293 833,644
Deferred federal and state income taxes ............................... 210,013 579,727
Other liabilities ..................................................... 2,828,368 2,263,812
--------------- ---------------
Total liabilities ................................................... 937,980,763 932,055,877
--------------- ---------------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value, 500,000 shares authorized; none issued -- --
Common stock, $.01 par value, 35,000,000 shares authorized,
December 31, 1999 - 7,626,877 issued, 6,781,815 outstanding
September 30, 1999 - 7,908,377 issued, 7,062,092 outstanding ......... 76,269 79,084
Additional paid-in capital ............................................ 40,498,516 43,794,535
Retained earnings-substantially restricted ............................ 78,015,102 76,866,452
Unearned shares issued to ESOP ........................................ (5,627,238) (5,871,900)
Unearned shares issued to MRDP ........................................ (3,264,067) (3,519,296)
Net unrealized loss on securities available for sale, net of tax ...... (2,806,182) (1,763,412)
--------------- ---------------
Total shareholders' equity .......................................... 106,892,400 109,585,463
--------------- ---------------
Total liabilities and shareholders' equity ............................. $ 1,044,873,163 $ 1,041,641,340
=============== ===============
<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, December 31,
1999 1998
----------- -----------
INTEREST INCOME
Loans receivable ................................................................. $14,245,591 $13,839,389
Mortgage backed and related securities ........................................... 1,083,930 561,210
Investment securities ............................................................ 2,521,529 3,429,265
Federal funds sold and securities purchased under agreements to resell ........... 97,124 207,560
Interest bearing deposits ........................................................ 102,273 240,149
----------- -----------
Total interest income .......................................................... 18,050,447 18,277,573
----------- -----------
INTEREST EXPENSE
Deposit liabilities .............................................................. 7,023,403 7,418,560
Advances from FHLB of Seattle .................................................... 2,771,028 2,211,396
Other ............................................................................ 18,930 157,660
----------- -----------
Total interest expense ......................................................... 9,813,361 9,787,616
----------- -----------
Net interest income ............................................................ 8,237,086 8,489,957
Provision for loan losses .......................................................... 108,000 123,000
----------- -----------
Net interest income after provision for
loan losses .................................................................. 8,129,086 8,366,957
----------- -----------
NON-INTEREST INCOME
Fees and service charges ......................................................... 770,719 691,677
Gain on sale of investments ...................................................... 6,836 128,193
Gain on sale of real estate owned ................................................ 117,566 --
Other income ..................................................................... 137,255 79,550
----------- -----------
Total non-interest income ...................................................... 1,032,376 899,420
----------- -----------
NON-INTEREST EXPENSE
Compensation, employee benefits and related expense .............................. 2,747,612 2,413,886
Occupancy expense ................................................................ 551,520 559,105
Data processing expense .......................................................... 221,049 239,805
Insurance premium expense ........................................................ 75,829 69,975
Loss on sale of investments ...................................................... -- 112,256
Amortization of core deposit intangible .......................................... 413,169 413,169
Other expense .................................................................... 1,856,922 1,266,881
----------- -----------
Total non-interest expense ..................................................... 5,866,101 5,075,077
----------- -----------
Earnings before income taxes ....................................................... 3,295,361 4,191,300
Provision for income taxes ......................................................... 1,266,751 1,737,485
----------- -----------
Net earnings ....................................................................... $ 2,028,610 $ 2,453,815
=========== ===========
Earnings per common share - basic .................................................. $ 0.29 $ 0.28
Earnings per common share - diluted ................................................ $ 0.29 $ 0.27
Weighted average common shares outstanding - basic ................................. 7,021,894 8,911,878
Weighted average common shares outstanding - with dilution ......................... 7,021,894 9,182,339
<FN>
See notes to consolidated financial statements.
</FN>
4
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED SEPTEMBER 30, 1999 AND THE THREE MONTHS ENDED DECEMBER 31, 1999
(Unaudited)
Unearned Unearned
Common Common Additional shares shares Other Total
stock stock paid-in Retained issued issued comprehensive shareholders'
shares amount capital earnings to ESOP to MRDP income (loss) equity
--------- -------- ----------- ----------- ----------- ----------- ------------- -------------
Balance at October 1, 1998 8,898,972 $99,168 $82,486,183 $71,051,445 ($6,850,550)($4,536,865) $2,831,574 $145,080,955
Cash dividends -- -- -- (3,340,186) -- -- -- (3,340,186)
Stock repurchased and retired (2,008,389) (20,084)(39,314,056) -- -- -- -- (39,334,140)
ESOP contribution 97,865 -- 602,287 -- 978,650 -- -- 1,580,937
MRDP contribution 73,644 -- 20,121 -- -- 1,017,569 -- 1,037,690
--------- -------- ----------- ----------- ----------- ----------- ------------- -------------
7,062,092 79,084 43,794,535 67,711,259 (5,871,900) (3,519,296) 2,831,574 105,025,256
Comprehensive income
Net earnings 9,155,193 9,155,193
Other comprehensive income:
Unrealized loss on
securities, net of tax
and reclassification
adjustment(1) (4,594,986) (4,594,986)
-----------
Total comprehensive
income 4,560,207
--------- -------- ----------- ----------- ----------- ----------- ------------- -------------
Balance at September 30, 1999 7,062,092 79,084 43,794,535 76,866,452 (5,871,900) (3,519,296) (1,763,412) 109,585,463
Cash dividends -- -- -- (879,960) -- -- -- (879,960)
Stock repurchased and retired (281,500) (2,815) (3,346,185) -- -- -- -- (3,349,000)
ESOP contribution -- -- 46,739 -- 244,662 -- -- 291,401
MRDP contribution 1,223 -- 3,427 -- -- 255,229 -- 258,656
--------- -------- ----------- ----------- ----------- ----------- ------------- -------------
6,781,815 76,269 40,498,516 75,986,492 (5,627,238) (3,264,067) (1,763,412) 105,906,560
Comprehensive income
Net earnings 2,028,610 2,028,610
Other comprehensive income:
Unrealized loss on
securities, net of tax
and reclassification
adjustment(2) (1,042,770) (1,042,770)
-----------
Total comprehensive
income 985,840
--------- -------- ----------- ----------- ----------- ----------- ------------- -------------
Balance at December 31, 1999 6,781,815 $76,269 $40,498,516 $78,015,102 $(5,627,238)$(3,264,067) $(2,806,182) $106,892,400
========= ======== =========== =========== =========== =========== ============= =============
<FN>
(1) Net unrealized holding loss on securities of $4,332,997 (net of $2,655,708 tax benefit) less reclassification adjustment
for gains included in net earnings of $261,989 (net of $160,574 tax expense).
(2) Net unrealized holding loss on securities of $992,788 (net of $608,483 tax benefit) less reclassification adjustment for
gains included in net earnings of $49,982 (net of $30,634 tax expense).
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, 1999 AND 1998
(Unaudited)
Three Months Ended Three Months Ended
December 31, December 31,
1999 1998
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings ................................................. $ 2,028,610 $ 2,453,815
ADJUSTMENTS TO RECONCILE NET EARNINGS TO
NET CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization ................................ 722,128 724,661
Provision for deferred taxes ................................. 269,403 (585,356)
Provision for loan losses .................................... 108,000 123,000
Provision for losses on real estate owned .................... 120,000 --
Compensation expense related to ESOP benefit ................. 291,401 438,264
Compensation expense related to MRDP Trust ................... 258,656 251,881
Net amortization of premiums (discounts) paid on
investment and mortgage backed and related securities ...... 70,505 (154,421)
Increase (decrease) in deferred loan fees, net of amortization (77,888) 309,351
Accretion of discounts on purchased loans .................... (1,879) (3,826)
Net gain on sale of investment and mortgage
backed and related securities .............................. (6,836) (15,937)
Gain on sale of real estate owned ............................ (117,566) --
FHLB stock dividend .......................................... (200,200) (198,700)
CHANGES IN ASSETS AND LIABILITIES
Accrued interest receivable .................................. (228,552) (209,637)
Other assets ................................................. 263,905 (722,526)
Accrued interest on deposit liabilities ...................... 60,178 (9,259)
Accrued interest on borrowings ............................... 894,927 (33,947)
Pension liabilities .......................................... 32,649 32,649
Other liabilities ............................................ 673,144 2,525,421
------------ ------------
Net cash provided by operating activities ........................ 5,160,585 4,925,433
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of investment securities
held to maturity ........................................... -- 30,000,000
Proceeds from maturity of investment securities
available for sale ......................................... -- 13,550,000
Principal repayments received on mortgage backed
and related securities held to maturity ................... 141,592 463,483
Principal repayments received on mortgage backed
and related securities available for sale ................. 3,450,154 6,483,237
Principal repayments received on loans ....................... 25,629,270 46,578,685
Loan originations ............................................ (30,642,882) (74,617,179)
Loans sold ................................................... 3,403,823 --
Purchase of investment securities held
to maturity ................................................ -- (79,711,523)
Purchase of investment securities available
for sale ................................................... (1,110,000) --
Proceeds from sale of investment securities
available for sale ......................................... 10,051,563 5,109,374
Proceeds from sale of mortgage backed and related
securities available for sale .............................. -- 9,454,776
Proceeds from sale of real estate owned and
premises and equipment ..................................... 1,090,381 --
Purchases of premises and equipment .......................... (710,710) (117,713)
------------ ------------
Net cash provided by (used in) investing activities .............. 11,303,191 (42,806,860)
------------ ------------
6
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
(Unaudited)
(Continued)
Three Months Ended Three Months Ended
December 31, December 31,
1999 1998
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in deposit
liabilities, net of withdrawals ............................. ($ 2,163,559) $ 26,488,003
Proceeds from FHLB advances .................................. 92,000,000 5,000,000
Repayments of FHLB advances .................................. (76,000,000) (5,000,000)
Proceeds from short term borrowings .......................... -- 8,595,000
Repayments of short term borrowings .......................... -- (12,112,500)
Stock repurchase and retirement .............................. (3,349,000) --
Advances from borrowers for taxes and insurance .............. (9,094,151) (8,480,258)
Dividends paid ............................................... (988,548) (892,509)
------------ ------------
Net cash provided by financing activities ........................ 404,742 13,597,736
------------ ------------
Net increase (decrease) in cash and cash
equivalents .................................................... 16,868,518 (24,283,691)
Cash and cash equivalents at beginning
of period ...................................................... 24,522,589 66,985,269
------------ ------------
Cash and cash equivalents at end of period ....................... $ 41,391,107 $ 42,701,578
============ ============
SUPPLEMENTAL SCHEDULE OF INTEREST AND
INCOME TAXES PAID
Interest paid ................................................ $ 8,858,256 $ 9,830,823
Income taxes paid ............................................ -- 50,000
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Net unrealized loss on securities
available for sale ......................................... ($ 1,042,770) ($ 1,423,894)
Dividends declared and accrued in other
liabilities ................................................ 953,360 753,674
<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 financial
statements contain all adjustments necessary for a fair presentation of Klamath
First Bancorp, Inc.'s (the "Company") financial condition as of December 31,
1999, and September 30, 1999, the results of operations and cash flows for the
three months ended December 31, 1999 and 1998. 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, 1999 and 1998 are not necessarily indicative of the results which
may be expected for the entire fiscal year.
2. COMPREHENSIVE INCOME
For the three months ended December 31, 1999, the Company's total comprehensive
income was $1.0 million compared to $1.1 million for the three months ended
December 31, 1998. Total comprehensive income for the three months ended
December 31, 1999 was comprised of net income of $2.0 million and other
comprehensive loss of $1.0 million, net of tax. Total comprehensive income for
the three months ended December 31, 1998 was comprised of net income of $2.5
million and other comprehensive loss of $1.4 million, net of tax.
3. ALLOWANCE FOR LOAN LOSSES
Activity in allowance for loan losses is summarized as follows:
Three Months Ended Year Ended
December 31, September 30,
1999 1999
----------- -----------
Balance, beginning of period $ 2,483,625 $ 1,949,677
Charge-offs ................ (2,414) (398,052)
Recoveries ................. 340,818 --
Additions .................. 108,000 932,000
----------- -----------
Balance, end of period ..... $ 2,930,029 $ 2,483,625
=========== ===========
4. ADVANCES FROM FEDERAL HOME LOAN BANK
Borrowings at December 31, 1999 consisted of three short term advances totaling
$60.0 million and eight long term advances totaling $153.0 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.
8
Scheduled maturities of advances from the FHLB were as follows:
December 31, 1999 September 30, 1999
----------------------------------------------------- -------------------------------------------------
Range of Weighted Range of Weighted
interest average interest average
Amount rates interest rate Amount rates interest rate
----------------------------------- ----------------- -------------- -------------- ---------------
Due within one year $60,000,000 5.81%-6.01% 5.88% $-- -- --
After two but within
five years 15,000,000 5.70%-6.50% 6.23% 40,000,000 5.39%-5.70% 5.43%
After five but within
ten years 138,000,000 4.77%-5.94% 5.39% 157,000,000 4.77%-5.87% 5.32%
-------------- --------------
$213,000,000 $197,000,000
============== ==============
5. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company has various outstanding
commitments and contingencies that are not reflected in the accompanying
consolidated financial statements. In addition, the Company is a defendant in
certain claims and legal actions arising in the ordinary course of business. In
the opinion of management, after consultation with legal counsel, the ultimate
disposition of these matters is not expected to have a material adverse effect
on the consolidated financial condition of the Company.
6. SHAREHOLDER' EQUITY
In September 1998, the Board of Directors authorized the repurchase of
approximately 20 percent of the Company's outstanding common stock. The
repurchase was completed through a "Modified Dutch Auction Tender." Under this
procedure, the Company's shareholders were given the opportunity to sell part or
all of their shares to the Company at a price of not less than $18.00 per share
and not more than $20.00 per share. Results of the offer were finalized on
January 15, 1999 when the Company announced purchase of 1,984,090 shares at
$19.50 per share. This represented approximately 85.9 percent of the shares
tendered at $19.50 per share or below, and 64.7 percent of all shares tendered.
The value of the shares purchased was approximately $38.7 million.
In December 1999, the Company announced a five percent stock repurchase plan to
be completed over a twelve month period. Five percent represents approximately
395,000 shares. As of December 31, 1999, about 74% of the repurchase plan was
completed, at a weighted average price of $11.88.
7. EARNINGS PER SHARE
Earnings per share ("EPS") is computed in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share." Shares held by the
Company's Employee Stock Ownership Plan ("ESOP") that are committed for release
are considered common stock equivalents and are included in weighted average
shares outstanding (denominator) for the calculation of basic and diluted EPS.
Diluted EPS is computed using the treasury stock method, giving effect to
potential additional common shares that were
9
outstanding during the period. Potential dilutive common shares include shares
awarded but not released under the Company's Management Recognition and
Development Plan ("MRDP"), and stock options granted under the Stock Option
Plan. Following is a summary of the effect of dilutive securities on weighted
average number of shares (denominator) for the basic and diluted EPS
calculations. There are no resulting adjustments to net earnings. For the
quarter ended December 31, 1999, there were no dilutive MRDP shares or stock
options.
For the Three Months Ended
December 31, December 31,
1999 1998
------------ ------------
Weighted average common
shares outstanding - basic ....................... 7,021,894 8,911,878
------------
Effect of Dilutive Securities on Number of Shares:
MRDP shares ...................................... -- 35,184
Stock options .................................... -- 235,277
------------ ------------
Total Dilutive Securities ........................ -- 270,461
------------ ------------
Weighted average common shares
outstanding - with dilution ..................... 7,021,894 9,182,339
============ ============
8. 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, 1999:
To Be Categorized
as "Well Capitalized"
Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
----------------- ----------- ------------------ ------------ ------------------- ----------
Amount Ratio Amount Ratio Amount Ratio
----------------- ----------- ------------------ ------------ ------------------- ----------
Total Capital: $98,066,152 17.8% $44,048,152 8.0% $55,060,190 10.0%
(To Risk Weighted Assets)
Tier I Capital: 95,640,343 17.4% N/A N/A 33,036,114 6.0%
(To Risk Weighted Assets)
Tier I Capital: 95,640,343 9.2% 31,090,588 3.0% 51,817,647 5.0%
(To Total Assets)
Tangible Capital: 95,640,343 9.2% 15,545,294 1.5% N/A N/A
(To Tangible Assets)
10
9. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, was issued. SFAS No. 133 establishes the accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (c) a hedge of the foreign currency exposure of
a net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. The effective date of this Statement was deferred by the issuance
of SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133. This Statement is now
effective for fiscal years beginning after June 15, 2000.
The Company has determined that it currently has no instruments or contracts
that meet the scope of SFAS No. 133. Accordingly, the adoption of this Statement
in 2001 is not expected to have a material impact on the financial statements of
the Company.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Special Note Regarding Forward-Looking Statements
Management's Discussion and Analysis of Financial Condition and Results of
Operations and other portions of this report contain certain "forward-looking
statements" concerning the future operations of Klamath First Bancorp, Inc.
Management 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 the Company of the protections of such safe
harbor with respect to all "forward-looking statements" contained in this
quarterly report. We have used "forward-looking statements" to describe future
plans and strategies, including our expectations of the Company's future
financial results. Management'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 which could affect the
collectibility of loan balances, the ability to increase non-interest income
through expansion of new lines of business, the ability of the Company to
control costs and expenses, competitive products and pricing, 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, 1999, the Company had total
consolidated assets of $1.04 billion and consolidated shareholders' equity of
$106.9 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.
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. While the Association has historically
emphasized fixed rate mortgage lending, it has been diversifying its loan
portfolio by focusing on increasing the number of originations of commercial
real estate loans, multi-family residential loans, residential construction
loans, small business loans and non-mortgage consumer loans. A significant
portion of these newer loan products carry adjustable rates, higher yields, or
shorter terms than the traditional fixed rate mortgages. This lending strategy
is designed to enhance earnings, reduce interest rate risk, and provide a more
complete range of financial services to customers and the local communities
served by the Association.
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
12
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 expansion of its consumer and
commercial loan products. Consumer and commercial loans increased 39% from $12.5
million at December 31, 1998 to $17.4 million at December 31, 1999. The Company
has recently hired an experienced commercial loan officer to spearhead the plan
to further increase commercial loan growth. 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.
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 35 office facilities, with the main office located in
Klamath Falls, Oregon. The Association has applied for approval to open new
branches in Central Point, near Medford, and Redmond, Oregon. The primary market
areas of the Association are the state of Oregon and adjoining areas of
California and Washington.
Year 2000 Review
As with other organizations, some of the data processing programs used by the
Company were originally designed to recognize calendar years by their last two
digits. There was concern whether calculations performed using these truncated
fields would work properly with dates beyond 1999. Correct processing of date
oriented information is critical to the operation of all financial institutions
because computer systems track deposit account and loan balances, record
transaction activity in accounts, and calculate interest amounts, among other
activities. Failure of these processes could have severely hindered the ability
to continue operations and provide customer service. Because of the critical
nature of the issue, the Company established a committee early in 1997 to
address "Year 2000" issues. The committee, consisting of executive management,
technical staff, and a full time project manager, has chosen to use the Office
of Thrift Supervision Year 2000 Checklist as a guide for Year 2000 preparation.
The committee is also using a Year 2000 Testing Guide and Contingency Guide
provided by Alex Information Systems, Inc. to complement the OTS checklist.
The Company kept customers informed regarding Year 2000 issues and the Company's
preparation activities, through statement brochures and "Year 2000" bulletin
boards in all the branches, which contained information on Year 2000 readiness
for the Company and the financial services industry. Employees were proactive in
reassuring customers that their funds were safe with Klamath First Federal,
minimizing large withdrawals of deposits and other adverse customer concerns.
The change over to Year 2000 did not cause disruption in the Company's ability
to serve its customers. As of December 31, 1999, the Company estimated that
total Year 2000 implementation costs will be approximately $200,000 and have
been expensed over a period of 18 months, affecting fiscal years 1998, 1999, and
2000. This estimate is based on information available at December 31, 1999, and
may be revised as additional information and actual costs become available.
During the quarter ended December 31, 1999 and the years ended September 30,
1999 and 1998, $10,000, $82,000 and $89,000 of Year 2000 expenses were incurred
and expensed, respectively.
13
Changes in Financial Condition
At December 31, 1999, the consolidated assets of the Company totaled $1.045
billion, up slightly from $1.042 billion at September 30, 1999.
Net loans receivable increased by $724,180 to $740.5 million at December 31,
1999, compared to $739.8 million at September 30, 1999. Rising mortgage interest
rates have dampened mortgage demand, reducing loan originations this quarter. In
addition, the Company sold $3.4 million in single family mortgage loans to
Fannie Mae, further reducing loans receivable.
Investment securities decreased $10.2 million, or 6.40%, from $159.2 million at
September 30, 1999 to $149.0 million at December 31, 1999. This decrease was
primarily the result of sale of $10.1 million of investment securities available
for sale.
During the three months ended December 31, 1999, $3.6 million of principal
payments were received on mortgage backed and related securities ("MBS") and
market value of MBS available for sale decreased by $463,516, resulting in a
decrease in the balance of MBS from $75.3 million at September 30, 1999 to $71.2
million at December 31, 1999.
Deposit liabilities decreased $2.2 million, less than 1.00%, from $720.4 million
at September 30, 1999 to $718.2 million at December 31, 1999, the first decrease
in the Company's history. The decrease reflects the Company's strategy to rely
on Federal Home Loan Bank of Seattle borrowed funds which can be acquired at
lower rates than corresponding maturities of new deposits. This approach
controls interest expense as well as managing scheduled liability maturities.
Advances from borrowers for taxes and insurance decreased $9.1 million from
September 30, 1999 to December 31, 1999. The decrease is the result of using the
reserves to pay the required real estate taxes due on the Association's loans
receivable portfolio in November.
The Company's total borrowings increased $16.0 million from September 30, 1999
to December 31, 1999. The majority of the increase was used as part of the
Company's Year 2000 readiness plan to fund anticipated cash needs for the end of
the year date change to year 2000.
Total shareholders' equity decreased $2.7 million, or 2.46%, from $109.6 million
at September 30, 1999 to $106.9 million at December 31, 1999. This decrease was
primarily the result of a $3.3 million reduction due to the buyback of shares
and a $1.0 million decrease in unrealized gains on securities available for
sale, partially offset by $2.0 million in earnings for the first quarter.
Results of Operations
Comparison of Three Months Ended December 31, 1999 and 1998
General. Basic earnings per share increased from $.28 for the quarter ended
December 31, 1998 to $.29 for the same period of 1999. Net income decreased
$425,205, or 17.33%, from $2.5 million for the three months ended December 31,
1998 to $2.0 million for the three months ended December 31, 1999. This decrease
was primarily attributable to an increase in non-interest expense.
14
Interest Income. The Company recorded interest income of $18.1 million in the
first quarter ended December 31, 1999, a slight decrease of 1.09% from $18.3
million for the same period last year. While average interest earning assets
increased by $8.5 million, or 7.88%, yield decreased from 7.34% for the quarter
ended December 31, 1998 to 7.19% for the same period of 1999. The primary factor
contributing to the decrease in yield was a decrease in the yield on loans
receivable from 8.01% for the quarter ended December 31, 1998 to 7.60% for the
current quarter. Yields on other interest earning assets remained stable or
improved for the period.
Interest Expense. Total interest expense remained constant at $9.8 million for
the quarters ended December 31, 1998 and 1999. Average deposits increased by
$14.0 million comparing the three months ended December 31, 1998 to 1999, while
the average interest paid on interest-bearing deposits decreased 33 basis points
from 4.54% for the three months ended December 31, 1998 to 4.21% for the same
period ended December 31, 1999. The average balance of FHLB advances increased
$33.3 million from $167.1 million for the three months ended December 31, 1998
to $200.5 million for the same period ended December 31, 1999 resulting in an
increase in interest on FHLB advances of $559,632 for the three months ended
December 31, 1999 compared with the same period ended December 31, 1998. The
rate paid on borrowings increased by 21 basis points from 5.32% for the quarter
ended December 31, 1998 to 5.53% for the same period in 1999.
Provision for Loan Losses. The provision for loan losses was $108,000 and there
were $2,414 of charge offs, and $340,818 of recoveries during the three months
ended December 31, 1999 compared to a $123,000 provision and $3,000 of charge
offs during the three months ended December 31, 1998. In previous periods, the
provision was increased in response to portfolio growth and changes in the
composition of the portfolio to include a higher percentage of loans, such as
commercial real estate and consumer loans, which are considered to have more
associated risk than the Company's traditional portfolio of one- to four-family
residential mortgages. The provision for loan losses is being maintained at the
higher level.
Non-Interest Income. Non-interest income increased $132,956, or 14.78%, to $1.0
million for the three months ended December 31, 1999 from $899,420 for the three
months ended December 31, 1998. Income from fees and service charges continues
to show growth, increasing by 11.43% from $671,677 for the quarter ended
December 31, 1998 to $770,719 for the current quarter. Other non-interest income
increased significantly due to gains recorded on sale of mortgage loans to
Fannie Mae.
Non-Interest Expense. Non-interest expense increased $791,024, or 15.59%, to
$5.9 million for the three months ended December 31, 1999, from $5.1 million in
the comparable period in 1998. The most significant increases were noted in
compensation, employee benefits and related expense, and other expense. As a
routine accounting procedure, a portion of compensation expense is allocated to
the cost of originating loans and such cost is taken to expense over the life of
the loans. Because the number of loan originations decreased significantly in
the quarter ended December 31, 1999, less compensation cost was allocated to
loan originations and deferred, resulting in an increase in compensation
expense. Other expense increased due to increases in general operating expenses
and approximately $400,000 in charges related to foreclosure of a commercial
real estate property. The ratio of non-interest expense to average total assets
was 2.24% and 1.94% for the three months ended December 31, 1999 and 1998,
respectively.
Income Taxes. The provision for income taxes decreased $470,734 for the three
months ended December 31, 1999 compared with the prior year. The effective tax
rate was evaluated and revised to 38.44% for the quarter ended December 31, 1999
compared to 41.45% for the same period of 1998.
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
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, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KLAMATH FIRST BANCORP, INC.
Date: February 11, 2000 By: /s/ Gerald V. Brown
---------------------------
Gerald V. Brown, President and
Chief Executive Officer
Date: February 11, 2000 By: /s/ Marshall Jay Alexander
---------------------------
Marshall Jay Alexander, Senior Vice President
and Chief Financial Officer
17