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, 2001
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 20, 2001, there were issued 7,174,742 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
-------
Condensed Consolidated Balance Sheets
(As of March 31, 2001 and September 30, 2000) 3
Condensed Consolidated Statements of Earnings (For the three
months and six months ended March 31, 2001 and 2000) 4
Condensed Consolidated Statements of Shareholders' Equity
(For the year ended September 30, 2000 and for
the six months ended March 31, 2001) 5
Condensed Consolidated Statements of Cash Flows (For the six
months ended March 31, 2001 and 2000) 6 - 7
Notes to Condensed Consolidated Financial Statements 8 - 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 18
Part II. Other Information
- -------- -------------------
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
2
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2001 AND SEPTEMBER 30, 2000
(Unaudited)
March 31, 2001 September 30, 2000
ASSETS --------------- ------------------
Cash and due from banks ...................................................... $ 20,524,357 $ 19,998,788
Interest bearing deposits with banks ......................................... 10,157,224 2,077,359
Federal funds sold and securities purchased under agreements to resell ....... 16,998,376 7,870,453
--------------- -------------
Total cash and cash equivalents ........................................... 47,679,957 29,946,600
Investment securities available for sale, at fair value
(amortized cost: $135,502,219 and $118,689,247) ............................ 135,071,029 116,627,756
Investment securities held to maturity, at amortized cost (fair
value: $727,539 and $726,889) .............................................. 723,309 723,838
Mortgage backed and related securities available for sale, at fair
value (amortized cost: $241,407,264 and $75,483,569) ....................... 244,325,272 75,331,311
Mortgage backed and related securities held to maturity, at amortized
cost (fair value: $1,938,300 and $2,596,408) ............................... 1,925,810 2,159,868
Loans receivable, net ........................................................ 527,458,226 729,036,847
Real estate owned and repossessed assets ..................................... 1,003,234 788,400
Premises and equipment, net .................................................. 13,764,585 12,727,570
Stock in Federal Home Loan Bank of Seattle, at cost .......................... 12,263,900 11,876,500
Accrued interest receivable .................................................. 6,399,257 6,432,073
Deferred income taxes ........................................................ -- 230,893
Core deposit intangible ...................................................... 7,299,325 8,125,664
Other assets ................................................................. 3,383,914 1,567,318
--------------- -------------
Total assets .............................................................. $ 1,001,297,818 $995,574,638
=============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposit liabilities ........................................................ $ 701,800,577 $ 695,380,871
Accrued interest on deposit liabilities .................................... 1,232,580 1,185,076
Advances from borrowers for taxes and insurance ............................ 2,636,475 9,653,376
Advances from Federal Home Loan Bank of Seattle ............................ 173,000,000 173,000,000
Short term borrowings ...................................................... 1,700,000 3,000,000
Accrued interest on borrowings ............................................. 865,553 857,163
Pension liabilities ........................................................ 953,194 887,896
Deferred income taxes ...................................................... 1,555,322 --
Other liabilities .......................................................... 3,900,331 2,885,695
--------------- -------------
Total liabilities ........................................................ 887,644,032 886,850,077
--------------- -------------
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,
March 31, 2001 - 7,196,197 issued, 6,521,796 outstanding
September 30, 2000 - 7,366,226 issued, 6,692,428 outstanding ............. 71,962 73,662
Additional paid-in capital ................................................. 35,820,748 37,701,796
Retained earnings-substantially restricted ................................. 82,618,143 79,713,255
Unearned shares issued to ESOP ............................................. (4,451,975) (4,893,250)
Unearned shares issued to MRDP ............................................. (1,946,920) (2,498,378)
Net unrealized gain (loss) on securities available for sale, net of tax .... 1,541,828 (1,372,524)
--------------- -------------
Total shareholders' equity ............................................... 113,653,786 108,724,561
--------------- -------------
Total liabilities and shareholders' equity ............................... $ 1,001,297,818 $ 995,574,638
=============== =============
<FN>
See notes to condensed consolidated financial statements.
</FN>
3
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Three Months Ended Six Months Ended
March 31, March 31, March 31, March 31,
2001 2000 2001 2000
------------ ----------- ----------- -----------
INTEREST INCOME
Loans receivable ........................................ $11,927,271 $14,283,921 $26,171,302 $28,529,511
Mortgage backed and related securities .................. 3,236,880 1,266,675 4,472,936 2,350,605
Investment securities ................................... 1,925,899 2,469,830 3,972,434 4,991,358
Federal funds sold ...................................... 218,545 49,320 403,608 146,444
Interest bearing deposits ............................... 141,618 71,432 246,282 173,706
----------- ----------- ----------- -----------
Total interest income ................................. 17,450,213 18,141,178 35,266,562 36,191,624
----------- ----------- ----------- -----------
INTEREST EXPENSE
Deposit liabilities ..................................... 7,491,515 7,036,474 15,094,850 14,059,877
FHLB advances ........................................... 2,533,302 3,182,153 5,142,770 5,953,181
Other ................................................... 128,570 19,529 253,988 38,458
----------- ----------- ----------- -----------
Total interest expense ................................ 10,153,387 10,238,156 20,491,608 20,051,516
----------- ----------- ----------- -----------
Net interest income ................................... 7,296,826 7,903,022 14,774,954 16,140,108
Provision for loan losses ................................. 153,000 200,000 381,000 308,000
----------- ----------- ----------- -----------
Net interest income after provision for
loan losses ......................................... 7,143,826 7,703,022 14,393,954 15,832,108
----------- ----------- ----------- -----------
NON-INTEREST INCOME
Fees and service charges ................................ 935,358 756,168 1,806,014 1,526,887
Gain on sale of investments ............................. 2,501,874 -- 2,509,793 6,836
Gain on sale of real estate owned ....................... 1,938 748 16,429 118,314
Other income ............................................ 268,203 169,097 488,617 306,352
----------- ----------- ----------- -----------
Total non-interest income ............................. 3,707,373 926,013 4,820,853 1,958,389
----------- ----------- ----------- -----------
NON-INTEREST EXPENSE
Compensation, employee benefits and related expense ..... 3,121,325 2,884,515 6,030,270 5,632,127
Occupancy expense ....................................... 644,578 584,203 1,225,969 1,135,723
Data processing expense ................................. 257,484 243,283 488,509 464,331
Insurance premium expense ............................... 33,879 38,057 68,670 113,886
Loss on sale of investments ............................. -- -- 30,632 --
Amortization of core deposit intangible ................. 413,169 413,169 826,339 826,339
Other expense ........................................... 1,738,165 1,407,419 3,320,898 3,264,341
----------- ----------- ----------- -----------
Total non-interest expense ............................ 6,208,600 5,570,646 11,991,287 11,436,747
----------- ----------- ----------- -----------
Earnings before income taxes .............................. 4,642,599 3,058,389 7,223,520 6,353,750
Provision for income tax .................................. 1,687,796 1,184,248 2,583,673 2,450,999
----------- ----------- ----------- -----------
Net earnings .............................................. $ 2,954,803 $ 1,874,141 $ 4,639,847 $ 3,902,751
=========== =========== =========== ===========
Earnings per common share - basic ......................... $ 0.45 $ 0.28 $ 0.70 $ 0.57
Earnings per common share - fully diluted ................. $ 0.45 $ 0.28 $ 0.70 $ 0.57
Weighted average common shares outstanding - basic ........ 6,567,352 6,769,260 6,610,189 6,896,199
Weighted average common shares outstanding - with dilution 6,585,719 6,769,260 6,623,185 6,896,199
<FN>
See notes to condensed consolidated financial statements.
</FN>
4
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED SEPTEMBER 30, 2000 AND THE SIX MONTHS ENDED MARCH 31, 2001
(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, 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 -- -- -- (3,579,349) -- -- -- (3,579,349)
Stock repurchased and retired (542,151) (5,422) (6,249,273) -- -- -- -- (6,254,695)
ESOP contribution 97,865 -- 142,826 -- 978,650 -- -- 1,121,476
MRDP contribution 74,622 -- 13,708 -- -- 1,020,918 -- 1,034,626
----------- ------- ----------- ----------- ---------- ----------- ----------- ------------
6,692,428 73,662 37,701,796 73,287,103 (4,893,250) (2,498,378) (1,763,412) 101,907,521
Comprehensive income
Net earnings 6,426,152 6,426,152
Other comprehensive income:
Unrealized gain on
securities, net of tax
and reclassification
adjustment (1) 390,888 390,888
------------
Total comprehensive
income 6,817,040
----------- ------- ----------- ----------- ---------- ----------- ----------- ------------
Balance at September 30, 2000 6,692,428 73,662 37,701,796 79,713,255 (4,893,250) (2,498,378) (1,372,524) 108,724,561
Cash dividends -- -- -- (1,734,959) -- -- -- (1,734,959)
Stock repurchased and retired (170,029) (1,700) (2,009,385) -- -- -- -- (2,011,085)
ESOP contribution (4,805) -- 121,483 -- 441,275 -- -- 562,758
MRDP contribution 4,202 -- 6,854 -- -- 551,458 -- 558,312
----------- ------- ----------- ----------- ---------- ----------- ----------- ------------
6,521,796 71,962 35,820,748 77,978,296 (4,451,975) (1,946,920) (1,372,524) 106,099,587
Comprehensive income
Net earnings 4,639,847 4,639,847
Other comprehensive income:
Unrealized gain on
securities, net of tax
and reclassification
adjustment (2) 2,914,352 2,914,352
------------
Total comprehensive
income 7,554,199
----------- ------- ----------- ----------- ---------- ----------- ---------- ------------
Balance at March 31, 2001 6,521,796 $71,962 $35,820,748 $82,618,143 ($4,451,975) ($1,946,920) $1,541,828 $113,653,786
========= ======== =========== =========== =========== =========== ========== ============
<FN>
(1) Net unrealized holding gain on securities of $440,870 (net of $270,211
tax expense) less reclassification adjustment for gains included in net
earnings of $49,982 (net of $30,634 tax expense).
(2) Net unrealized holding gain on securities of $2,932,557 (net of $1,797,374 tax expense) less
reclassification adjustment for gains included in net earnings of $18,205
(net of $11,158 tax expense).
</FN>
<FN>
See notes to condensed consolidated financial statements.
</FN>
5
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 2001 AND 2000
(Unaudited)
Six Months Ended Six Months Ended
March 31, March 31,
2001 2000
-------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings .......................................... $ 4,639,847 $ 3,902,751
ADJUSTMENTS TO RECONCILE NET EARNINGS TO
NET CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization ......................... 1,446,629 1,455,295
Provision for deferred taxes .......................... -- 343,721
Provision for loan losses ............................. 381,000 308,000
Disposition of allowance for loan losses .............. (231,842) --
Provision for loss on real estate owned ............... -- 120,000
Compensation expense related to ESOP benefit .......... 562,758 560,742
Compensation expense related to MRDP Trust ............ 558,312 517,313
Net amortization of premiums (discounts) paid on
investment and mortgage backed and related securities 62,488 128,325
Decrease in deferred loan fees, net of amortization ... (2,547,764) (270,335)
Accretion of discounts on purchased loans ............. 3,999 (689)
Net (gain) loss on sale of real estate owned and
premises and equipment .............................. 3,494 (129,314)
Net gain on sale of investment and mortgage
backed and related securities ....................... (2,479,160) (6,836)
FHLB stock dividend ................................... (387,400) (381,800)
CHANGES IN ASSETS AND LIABILITIES
Accrued interest receivable ........................... 32,816 (90,527)
Other assets .......................................... (1,896,596) (754,391)
Accrued interest on deposit liabilities ............... 47,504 (2,071)
Accrued interest on borrowings ........................ 8,390 1,043,684
Pension liabilities ................................... 65,298 65,298
Other liabilities ..................................... 1,194,137 9,977,914
------------- ------------
Net cash provided by operating activities ................. 1,463,910 16,787,080
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of investment securities
available for sale .................................. 20,000,000 --
Principal repayments received on mortgage
backed and related securities held to maturity ..... 230,666 196,011
Principal repayments received on mortgage
backed and related securities available for sale ... 18,006,036 5,333,869
Principal repayments received on loans ................ 51,021,891 49,032,568
Loan originations ..................................... (48,292,954) (51,915,658)
Loans sold ............................................ 200,747,467 4,108,823
Purchase of investment securities available
for sale ............................................ (47,211,334) (1,110,000)
Purchase of mortgage backed and related
securities available for sale ....................... (259,486,468) (29,197,384)
Purchase of FHLB stock ................................ -- (117,500)
Proceeds from sale of investment securities
available for sale .................................. 10,367,746 10,051,563
Proceeds from sale of mortgage backed and related
securities available for sale ....................... 78,007,947 --
Proceeds from sale of real estate owned and
premises and equipment .............................. 347,706 1,406,366
Investment in real estate owned ....................... (69,210) --
Purchases of premises and equipment ................... (1,577,305) (1,063,876)
------------- ------------
Net cash provided by (used in) investing activities ....... 22,092,188 (13,275,218)
------------- ------------
6
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 2001 AND 2000
(Unaudited)
(Continued)
Six Months Ended Six Months Ended
March 31, March 31,
2001 2000
-------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in deposit liabilities............. $ 6,419,706 ($11,097,919)
Proceeds from FHLB advances ........................... -- 429,500,000
Repayments of FHLB advances ........................... -- (403,500,000)
Proceeds from short term borrowings ................... 3,400,000 1,000,000
Repayments of short term borrowings ................... (4,700,000) --
Stock repurchase and retirement ....................... (2,011,085) (4,618,984)
Advances from borrowers for taxes and insurance ....... (7,016,901) (5,982,960)
Dividends paid ........................................ (1,914,461) (1,977,097)
------------- ------------
Net cash provided by (used in) financing activities ....... (5,822,749) 3,323,040
------------- ------------
Net increase in cash and cash
equivalents ............................................. 17,733,357 6,834,902
Cash and cash equivalents at beginning
of period ............................................... 29,946,600 24,522,589
------------- ------------
Cash and cash equivalents at end of period ................ $ 47,679,957 $ 31,357,491
============= ============
SUPPLEMENTAL SCHEDULE OF INTEREST AND
INCOME
TAXES PAID
Interest paid ......................................... $ 20,435,714 $ 19,009,603
Income taxes paid ..................................... 1,730,000 2,940,000
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES
Net unrealized gain (loss) on securities
available for sale .................................. $2,914,352 ($ 375,833)
Dividends declared and accrued in other
liabilities ......................................... 936,806 976,685
<FN>
See notes to condensed consolidated financial statements
</FN>
7
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
NOTES TO CONDENSED 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 March 31, 2001
and September 30, 2000, the results of operations for the three and six months
ended March 31, 2001 and 2000 and cash flows for the six months ended March 31,
2001 and 2000. Certain information and note disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been omitted pursuant to the rules
and regulations of the Securities and Exchange Commission. These consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K. The results of operations for the three and six months ended March
31, 2001 are not necessarily indicative of the results which may be expected for
the entire fiscal year.
2. COMPREHENSIVE INCOME
For the three months ended March 31, 2001, the Company's total comprehensive
income was $4.7 million compared to $2.5 million for the three months ended
March 31, 2000. Total comprehensive income for the three months ended March 31,
2001 was comprised of net income of $3.0 million and other comprehensive income
of $1.7 million, net of tax. Total comprehensive income for the three months
ended March 31, 2000 was comprised of net income of $1.9 million and other
comprehensive income of $666,937, net of tax.
For the six months ended March 31, 2001, the Company's total comprehensive
income was $7.6 million compared to $3.5 million for the six months ended March
31, 2000. Total comprehensive income for the six months ended March 31, 2001 was
comprised of net income of $4.6 million and other comprehensive income of $2.9
million, net of tax. Total comprehensive income for the six months ended March
31, 2000 was comprised of net income of $3.9 million and other comprehensive
loss of $375,833, net of tax.
3. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows:
Six Month Ended Year Ended
March 31, September 30,
2001 2000
-------------- --------------
Balance, beginning of period .............................. $ 4,082,265 $ 2,483,625
Charge-offs ............................................... (47,247) (606,999)
Recoveries ................................................ 34,866 441,639
Provision for loss ........................................ 381,000 1,764,000
Dispositions .............................................. (231,842) --
------------- ------------
Balance, end of period .................................... $ 4,219,042 $ 4,082,265
============= ============
The disposition of allowance for loan losses relates to general valuation
allowances allocated to $190.3 million in mortgages sold to Federal National
Mortgage Association ("FNMA") during the quarter ended March 31, 2001. This
allowance was included in the basis of the loans for determination of the basis
to be recorded for the resulting MBS. See Note 4.
At March 31, 2001 and 2000, impaired loans totaled zero and $445,562,
respectively. Specifically allocated loan loss reserves related to these loans
totaled zero and $32,500, respectively. The average investment in impaired loans
for the three months and six months ended March 31, 2001 was $52,251 and
$65,983, respectively. The average investment in impaired loans for the three
months and six months ended March 31, 2000 was $913,560 and $648,610,
respectively.
8
There were no troubled debt restructurings at March 31, 2001 and 2000 or for the
six months then ended.
4. MORTGAGE LOAN SECURITIZATION
During the quarter ended March 31, 2001, the Company sold $190.3 million in
seasoned fixed-rate single- family loans to FNMA. The mortgages were aggregated
into 14 pools and securitized with the resulting mortgage-backed securities
("MBS") being retained by the Company and classified as available for sale.
Securitization of the loans provided more liquid instruments that could be sold
when the market conditions were considered favorable. Sale of the MBS will
reduce the long-term assets in the Company's portfolio, thus improving interest
rate risk. The loans were sold with servicing retained by the Company.
Because the Company was retaining an interest in the loans by receiving the MBS,
various items associated with the loans were combined with the principal balance
of the loans to arrive at the Company's basis in the MBS. These items include
deferred origination fees, mortgage servicing rights, and allowance for loan
losses. Deferred loan origination fees associated with the sold loans totaled
$2.3 million. The fair value of mortgage servicing rights was determined using
the Company's model, which incorporates the expected life of the loans,
estimated costs to service the loans, servicing fees to be received, and other
factors. Mortgage servicing rights were valued at $1.7 million. The general
valuation allowance associated with these loans was $231,842. The Company pays a
guarantee fee to FNMA as part of the securitization and servicing of the loans,
thus transferring all credit risk to FNMA. The final resulting basis in the MBS
recorded was $185.9 million. Gain on the transaction will not be recognized
until such time as the individual MBS are sold. During the quarter ended March
31, 2001, $75.5 million in MBS were sold with a gain of $2.5 million.
5. ADVANCES FROM FEDERAL HOME LOAN BANK
Borrowings at March 31, 2001 consisted of one short term advance totaling $5.0
million and seven long term advances totaling $168.0 million from the Federal
Home Loan Bank of Seattle ("FHLB"). The advances are collateralized in aggregate
by certain mortgages or deeds of trust and securities of the U.S. Government and
agencies thereof.
Scheduled maturities of advances from the FHLB were as follows:
March 31, 2001 September 30, 2000
------------------------------------------------------ --------------------------------------------------
Range of Weighted Range of Weighted
interest average interest average
Amount rates interest rate Amount rates interest rate
---------------- -------------- --------------- -------------- ------------ -------------
Due within one year . $ 5,000,000 5.70% 5.70%$ 5,000,000 5.70% 5.70%
After one but within
five years .......... 10,000,000 5.31% 5.31% 10,000,000 6.65% 6.65%
After five but within
ten years ........... 158,000,000 4.77%-7.05% 5.86% 158,000,000 4.77%-7.05% 5.86%
--------------- --------------
$ 173,000,000 $ 173,000,000
=============== ===============
6. SHORT TERM BORROWINGS
Short term borrowings at March 31, 2001 consisted of $1.7 million in credit line
borrowing from a financial institution at a rate of 7.26%.
9
7. 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.
8. SHAREHOLDERS' EQUITY
In May 2000, the Company announced a five percent stock repurchase plan to be
completed over a twelve month period. As of April 26, 2001, the Company had
repurchased 294,200 shares, or 78.32% of the shares to be repurchased, at a
weighted average price per share of $11.52.
9. 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 contingently issuable shares and are included in the computation
of basic EPS. 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 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 Three Months Ended
March 31, March 31,
2001 2000
--------- ---------
Weighted average common shares outstanding - basic ......... 6,567,352 6,769,260
--------- ---------
Effect of Dilutive Securities on Number of Shares:
MRDP shares ................................................ 18,367 --
--------- ---------
Total Dilutive Securities .................................. 18,367 --
--------- ---------
Weighted average common shares outstanding - with dilution 6,585,719 6,769,260
========= =========
For the Six Months Ended
March 31, March 31,
2001 2000
--------- ---------
Weighted average common shares outstanding - basic ......... 6,610,189 6,896,199
--------- ---------
Effect of Dilutive Securities on Number of Shares:
MRDP shares ................................................ 12,996 --
--------- ---------
Total Dilutive Securities .................................. 12,996 --
--------- ---------
Weighted average common shares outstanding-with dilution ... 6,623,185 6,896,199
========= =========
Options to purchase 916,258 shares of common stock were outstanding at March 31,
2001 and September 30, 2000 but were not included in the computation of diluted
EPS because the options' exercise prices were greater than the average market
price of the common shares.
11
10. 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, 2001:
Categorized as "Well
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
---------------------- -------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
As of March 31, 2001: ------------ ------- ----------- ------ ----------- ------
Total Capital: ........................ $106,480,404 21.6% $39,376,032 8.0% $49,220,040 10.0%
(To Risk Weighted Assets)
Tier I Capital: ....................... 102,411,847 20.8% N/A N/A 29,532,024 6.0%
(To Risk Weighted Assets)
Tier I Capital: ....................... 102,411,847 10.4% 39,527,913 4.0% 49,409,891 5.0%
(To Total Assets)
Tangible Capital: ..................... 102,411,847 10.4% 14,822,967 1.5% N/A N/A
(To Tangible Assets)
11. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In September 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for
Transfers of Financial Assets and Extinguishments of Liabilities." This
pronouncement replaces SFAS No. 125, issued in June 1996. SFAS No. 140 is
effective for transfers occurring after March 31, 2001 and for disclosures
relating to securitization transactions and collateral for fiscal years ending
after December 15, 2000. The Company does not believe that the adoption of SFAS
No. 140 will have a material impact on its financial position or results of
operations.
12
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, is the unitary savings and loan holding
company for Klamath First Federal Savings and Loan Association (the
"Association"). At March 31, 2001, the Company had total consolidated assets of
$1.0 billion and consolidated shareholders' equity of $113.7 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 progressive, 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 and loans on commercial real estate, multi- family residential
properties, and to consumers and small businesses within its market area. 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, 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 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. 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.
13
As part of the strategy to reduce interest rate risk, the Company securitized
$190.3 million of single family loans through FNMA during the quarter ended
March 31, 2001. The resulting MBS were retained by the Company and classified as
available for sale. In March 2001, $75.5 million of the securities were sold
with a gain of $2.5 million.
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 36 office facilities, with the main office located in
Klamath Falls, Oregon. A new branch is scheduled to open in Redmond, Oregon
during the third quarter. The Company has also announced its agreement with
retailer Wal-Mart to place branches in certain of the Wal-Mart locations in
Oregon and Washington state. Currently, locations in Pendleton and Ontario,
Oregon are scheduled to be in operation before the fiscal year end. The primary
market areas of the Association are the state of Oregon and adjoining areas of
California and Washington.
Market Risk and Asset/Liability Management
Because the majority of the Company's assets have historically been 15 to
30-year fixed rate mortgages which were funded by shorter term liabilities, the
Company's interest rate risk sensitivity has been high. In order to reduce that
sensitivity, the Company completed a loan securitization, as discussed above.
The impact of this transaction can be seen in the following comparison of
interest rate sensitivity at September 30, 2000 and March 31, 2001. After the
end of the quarter, additional MBS were sold, which should result in further
reductions in interest rate sensitivity.
PROJECTED CHANGES IN NET PORTFOLIO VALUE
as of September 30, 2000
NPV Sensitivity
Change in Interest Rates Ratio Measure
(Basis points)
- ----------------------------------------------------------- ------------- ------------
200 basis point rise ...................................... 10.79% (352)
100 basis point rise ...................................... 12.61% (170)
Base Rate Scenario ........................................ 14.31% --
100 basis point decline ................................... 15.20% 89
200 basis point decline ................................... 14.81% 50
PROJECTED CHANGES IN NET PORTFOLIO VALUE
as of March 31, 2001
NPV Sensitivity
Change in Interest Rates Ratio Measure
(Basis points)
- ----------------------------------------------------------- ------------- ------------
200 basis point rise ...................................... 9.99% (263)
100 basis point rise ...................................... 11.87% (75)
Base Rate Scenario ........................................ 12.62% --
100 basis point decline ................................... 13.23% 61
200 basis point decline ................................... 11.85% (76)
14
Changes in Financial Condition
At March 31, 2001, the consolidated assets of the Company totaled $1.0 billion,
up slightly from $995.6 million at September 30, 2000.
Net loans receivable decreased by $201.6 million to $527.5 million at March 31,
2001, from $729.0 million at September 30, 2000. During the quarter ended March
31, 2001, the Company converted $190.3 million in fixed rate single family
mortgages to MBS through a securitization transaction with FNMA. In addition,
the Company has sold $10.4 million in single family mortgage loans to FNMA
during the six months ended March 31, 2001, further reducing loans receivable.
Investment securities increased $18.4 million, or 15.72% from $117.4 million at
September 30, 2000 to $135.8 million at March 31, 2001. This increase was
primarily the result of purchase of investment securities available for sale.
During the six months ended March 31, 2001, the Company purchased $259.5 million
of MBS resulting from the loan securitization. Of these MBS, $75.5 million were
sold during the period. In addition, $18.0 million was received in principal
repayments on MBS, resulting in an overall increase in the balance of MBS from
$77.5 million at September 30, 2000 to $246.3 million at March 31, 2001.
Other assets increased by $1.8 million, or 115.90%, from $1.6 million at March
31, 2000 to $3.4 million at March 31, 2001. The increase is primarily due to the
recording of $1.7 million in mortgage servicing rights related to the loans sold
to FNMA during the period.
Deposit liabilities increased $6.4 million, or 0.92%, from $695.4 million at
September 30, 2000 to $701.8 million at March 31, 2001. The increase reflects
the Company's marketing efforts and the public's movement of funds to
investments more secure than the volatile equity markets.
Advances from borrowers for taxes and insurance decreased $7.0 million from
September 30, 2000 to March 31, 2001. 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 decreased $1.3 million from September 30, 2000 to
March 31, 2001. Borrowings from the FHLB remained consistent while borrowings on
correspondent bank credit lines were reduced with proceeds of the sale of MBS.
Total shareholders' equity increased $5.0 million, or 4.53%, from $108.7 million
at September 30, 2000 to $113.7 million at March 31, 2001. This increase was
primarily the result of earnings of $4.6 million and a $2.9 million increase in
the unrealized gains on securities available for sale, partially offset by $2.0
million reduction due to repurchase and retirement of shares and payment of $1.7
million in common stock dividends for the six month period.
Results of Operations
Comparison of Six Months Ended March 31, 2001 and 2000
General. The FNMA loan securitization and sale of a portion of the MBS helped
increase net earnings to $4.6 million for the six months ended March 31, 2001
compared to $3.9 million for the same period of 2000. The higher interest rate
environment, the inverted yield curve, and low loan volume had an adverse effect
on net interest income.
15
Interest Income. Interest income decreased by $925,062 showing the combined
effects of a $47.2 million decrease in average interest earning assets and a 16
basis point increase in yield from March 31, 2000 to March 31, 2001. Interest
income on loans receivable decreased $2.3 million, or 8.27%, from $28.5 million
for the six months ended March 31, 2000 to $26.2 million for the same period of
2001. This decrease was a result of the $76.8 million decrease in average loans
receivable due to the loan securitization in February 2001. Since these loans
were converted to MBS, a corresponding $2.1 million increase in interest
income on MBS is noted for the period. Investments matured and funds were
reinvested in federal funds and were also used to reduce borrowings. The average
yield on interest earning assets increased 16 basis points to 7.34% for the six
months ended March 31, 2001 compared to 7.18% for the same period ended March
31, 2000. Interest rate spread (the difference between the rates earned on
interest earning assets and the rates paid on interest bearing liabilities)
decreased from 2.59% to 2.35% and interest rate margin (net interest income
divided by average interest earning assets) decreased from 3.20% to 3.07%
comparing the six month periods.
Interest Expense. Total interest expense increased $440,092, or 2.19%, for the
six months ended March 31, 2001 compared to the same period in 2000. That
increase was the combined result of a $1.0 million increase in interest on
deposit liabilities and a $594,881 decrease in interest expense on FHLB
advances and other liabilities. Interest on deposit liabilities increased due to
a 46 basis point increase in the average interest rate paid on deposit accounts.
The average balance of borrowings decreased $32.4 million from $210.2 million
for the six months ended March 31, 2000 to $177.8 million for the same period
ended March 31, 2001. However, the rate paid on borrowings increased by 36 basis
points from 5.67% for the six months ended March 31, 2000 to 6.03% for the same
period in 2001.
Provision for Loan Losses. The provision for loan losses was $381,000 and there
were $47,247 of charge offs and $34,866 of recoveries during the six months
ended March 31, 2001 compared to a $308,000 provision with $155,716 of charge
offs and $346,669 of recoveries during the six months ended March 31, 2000.
During the quarter ended March 31, 2001, the allowance for loan losses
associated with the mortgage loans sold to FNMA, totaling $231,842, was
transferred from the allowance accounts as a disposition. The balance of
non-performing loans has decreased during the current fiscal year as the Company
has foreclosed on properties and sold them. The Company is not anticipating any
material loss on the remaining non-performing loans at this time.
Non-Interest Income. Non-interest income increased $2.8 million, or 146.16%, to
$4.8 million for the six months ended March 31, 2001 from $2.0 million for the
six months ended March 31, 2000. The most significant factor in this increase
was the sale of MBS resulting from the loan securitization at a gain of $2.5
million. Fees and service charges continued to improve, increasing by 18.28%
over the same period last year due to an increase in deposit accounts subject to
service charges and increased loan servicing income. Income from sale of
mortgage loans and retail investment activities can be seen in the 59.50%
increase in other non-interest income from $306,352 for the six months ended
March 31, 2000 to $488,617 for the six months ended March 31, 2001.
Non-Interest Expense. Non-interest expense increased $554,540, or 4.85%, to
$12.0 million for the six months ended March 31, 2001, from $11.4 million for
the comparable period in 2000. Compensation, employee benefits, and related
expense increased $398,143, or 7.07% from $5.6 million for the six months ended
March 31, 2000 to $6.0 million for the same period in 2001. The increase
primarily relates to modest salary increases and the addition of employees as
new corporate initiatives were enacted. Occupancy expense increased by $90,246,
or 7.95%, comparing the six months ended March 31, 2001 with the same period of
2000 due to the addition of the new Central Point branch in August 2000. The
ratio of non-interest expense to average total assets was 2.40% and 2.18% for
the six months ended March 31, 2001 and 2000, respectively.
16
Income Taxes. The provision for income taxes increased $132,674 for the six
months ended March 31, 2001 compared with the prior year. The effective tax rate
was 35.77% for the six months ended March 31, 2001 compared to 38.57% for the
same period of 2000. The decrease in effective tax rate is primarily due to an
increase in income on tax-exempt municipal securities.
Comparison of Three Months Ended March 31, 2001 and 2000
General. Basic and diluted earnings per share increased from $0.28 for the
quarter ended March 31, 2000 to $0.45 for the same period of 2001. Net income
increased $1.1 million, or 57.66%, from $1.9 million for the three months ended
March 31, 2000 to $3.0 million for the three months ended March 31, 2001. This
increase was the combined result of the $2.5 million gain on sale of MBS and an
increase in other non-interest income partially offset by a decrease in net
interest income.
Interest Income. The Company recorded interest income of $17.5 million in the
second quarter ended March 31, 2001, a decrease of 3.81% from $18.1 million for
the same period last year. Average interest earning assets decreased by $52.5
million, or 5.19%, and yield increased from 7.17% for the quarter ended March
31, 2000 to 7.27% for the same period of 2001. Yields increased on both loans
and MBS, comparing the quarter ended March 31, 2001 to the same period last
year.
Interest Expense. Total interest expense remained stable at $10.2 million for
the quarters ended March 31, 2001 and 2000. Average deposits decreased by $13.4
million comparing the three months ended March 31, 2000 to 2001, while the
average interest paid on interest-bearing deposits increased 38 basis points
from 4.29% for the three months ended March 31, 2000 to 4.67% for the same
period ended March 31, 2001. The average balance of borrowings decreased $41.7
million, from $220.1 million for the three months ended March 31, 2000 to $178.4
million for the same period ended March 31, 2001, resulting in a decrease in
interest on borrowings of $542,240 for the three months ended March 31, 2001
compared with the same period ended March 31, 2000. The rate paid on borrowings
increased by 14 basis points from 5.80% for the quarter ended March 31, 2000 to
5.94% for the same period in 2001.
Provision for Loan Losses. The provision for loan losses was $153,000 and there
were $30,994 of charge offs, and $34,089 of recoveries during the three months
ended March 31, 2001 compared to a $200,000 provision with $153,303 of charge
offs and $5,581 of recoveries during the three months ended March 31, 2000. As
noted above, the $231,842 of the allowance for loan losses was transferred out
as part of the basis of loans sold to FNMA and securitized during the second
quarter ended March 31, 2001.
Non-Interest Income. Non-interest income increased $2.8 million, or 300.36%, to
$3.7 million for the three months ended March 31, 2001 from $926,013 for the
three months ended March 31, 2000. Again, the $2.5 million gain on sale is the
primary cause of the increase. However, income from fees and service charges
continues to show growth, increasing by 23.70% from $756,168 for the quarter
ended March 31, 2000 to $935,358 for the current quarter. Other non-interest
income increased significantly due to profit on the sale of mortgage loans
(separate from the securitization) and interest on a tax refund for the tax
year 1996.
Non-Interest Expense. Non-interest expense increased $637,954, or 11.45%, to
$6.2 million for the three months ended March 31, 2001, from $5.6 million in the
comparable period in 2000. The most significant increases were noted in
compensation, employee benefits and related expense, and other expense.
Compensation expense increased due to annual salary increases and the addition
of staff at a new branch as well as the addition of management personnel to help
implement the Company's strategic initiatives. Other expense increased due to
increases in general operating expenses and approximately $10,000 in one-time
expenses for consulting and executive search fees. The ratio of non-interest
expense to average total assets was 2.48% and 2.12% for the three months ended
March 31, 2001 and 2000, respectively.
17
Income Taxes. The provision for income taxes increased $503,548 for the three
months ended March 31, 2001 compared with the prior year. The effective tax rate
was 36.35% for the quarter ended March 31, 2001 compared to 38.72% for the same
period of 2000. The decrease in effective tax rate is primarily due to an
increase in income on tax-exempt municipal securities.
18
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 26, 2001. The
election of three directors was brought before the security
holders for vote. The following two directors were nominated and
elected for three-year terms:
Vote For Vote Withheld
Rodney N. Murray 6,148,310 260,552
Bernard Z. Agrons 6,179,787 229,075
The following individual was nominated and elected for a one-year
term:
Vote For Vote Withheld
Kermit K. Houser 6,149,107 259,755
The following directors continue in office for their respective
remaining terms: Timothy A. Bailey (two-year term), James D.
Bocchi (two-year term), William C. Dalton (two-year term), J.
Gillis Hannigan (one-year term), and Dianne E. Spires (one-year
term).
Approval of the appointment of Deloitte & Touche LLP as
independent accountants for the fiscal year ending September 30,
2001 was brought before the security holders for vote. The
appointment was approved as follows:
Vote For Vote Against Vote Withheld
6,337,890 9,670 61,302
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.
19
Item 6. Exhibits and Reports on Form 8-K
a) Not applicable.
b) No Current Reports on Form 8-K were filed during the quarter
ended March 31, 2001.
20
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, 2001 By: /s/ Kermit K. Houser
----------------------------------
Kermit K. Houser, President and
Chief Executive Officer
Date: May 14, 2001 By: /s/ Marshall Jay Alexander
----------------------------------
Marshall Jay Alexander,
Executive Vice President
and Chief Financial Officer