SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 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 July 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 (Unaudited) Page
-------
Condensed Consolidated Balance Sheets
(As of June 30, 2001 and September 30, 2000) 3
Condensed Consolidated Statements of Earnings (For the three
months and nine months ended June 30, 2001 and 2000) 4
Condensed Consolidated Statements of Shareholders' Equity
(For the year ended September 30, 2000 and for
the nine months ended June 30, 2001) 5
Condensed Consolidated Statements of Cash Flows (For the nine
months ended June 30, 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 20
2
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2001 AND SEPTEMBER 30, 2000
(Unaudited)
June 30, 2001 September 30, 2000
ASSETS ------------------- -------------------
Cash and due from banks $ 19,950,903 $ 19,998,788
Interest bearing deposits with banks 37,336,664 2,077,359
Federal funds sold and securities purchased under agreements to resell 67,753,393 7,870,453
------------------ ------------------
Total cash and cash equivalents 125,040,960 29,946,600
Investment securities available for sale, at fair value
(amortized cost: $137,939,158 and $118,689,247) 137,385,770 116,627,756
Investment securities held to maturity, at amortized cost (fair
value: $594,714 and $726,889) 592,528 723,838
Mortgage backed and related securities available for sale, at fair
value (amortized cost: $176,923,769 and $75,483,569) 177,284,989 75,331,311
Mortgage backed and related securities held to maturity, at amortized
cost (fair value: $1,809,832 and $2,145,918) 1,785,964 2,159,868
Loans receivable, net 518,742,647 729,036,847
Real estate owned and repossessed assets 583,017 788,400
Premises and equipment, net 14,420,652 12,727,570
Stock in Federal Home Loan Bank of Seattle, at cost 12,477,900 11,876,500
Accrued interest receivable 6,160,250 6,432,073
Deferred income taxes -- 230,893
Core deposit intangible 6,886,156 8,125,664
Other assets 4,062,321 1,567,318
------------------ ------------------
Total assets $1,005,423,154 $995,574,638
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposit liabilities $710,598,242 $695,380,871
Accrued interest on deposit liabilities 1,191,283 1,185,076
Advances from borrowers for taxes and insurance 4,855,448 9,653,376
Advances from Federal Home Loan Bank of Seattle 168,000,000 173,000,000
Short term borrowings 1,700,000 3,000,000
Accrued interest on borrowings 805,474 857,163
Pension liabilities 985,843 887,896
Deferred income taxes 537,308 --
Other liabilities 2,845,137 2,885,695
------------------ ------------------
Total liabilities 891,518,735 886,850,077
------------------ ------------------
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,
June 30, 2001 - 7,174,742 issued, 6,572,757 outstanding
September 30, 2000 - 7,366,226 issued, 6,692,428 outstanding 71,747 73,662
Additional paid-in capital 35,649,711 37,701,796
Retained earnings-substantially restricted 83,865,301 79,713,255
Unearned shares issued to ESOP (4,207,313) (4,893,250)
Unearned shares issued to MRDP (1,355,884) (2,498,378)
Net unrealized loss on securities available for sale, net of tax (119,143) (1,372,524)
------------------ ------------------
Total shareholders' equity 113,904,419 108,724,561
------------------ ------------------
Total liabilities and shareholders' equity $1,005,423,154 $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 Three Months Ended Nine Months Ended Nine Months Ended
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
-------------- -------------- -------------- --------------
INTEREST INCOME
Loans receivable ................................... $ 10,638,837 $ 14,406,305 $ 36,810,139 $ 42,935,817
Mortgage backed and related securities ........... 3,384,061 1,366,483 7,856,997 3,717,088
Investment securities ............................ 2,040,965 2,387,046 6,013,399 7,378,404
Federal funds sold ............................... 502,589 9,351 906,197 155,795
Interest bearing deposits ........................ 215,959 65,921 462,241 239,627
------------- -------------- -------------- -------------
Total interest income .......................... 16,782,411 18,235,106 52,048,973 54,426,731
------------- -------------- -------------- -------------
INTEREST EXPENSE
Deposit liabilities .............................. 7,398,017 7,006,675 22,492,867 21,066,552
FHLB advances .................................... 2,460,082 3,340,109 7,602,852 9,293,290
Other ............................................ 58,006 67,160 311,994 105,618
------------- -------------- -------------- -------------
Total interest expense ......................... 9,916,105 10,413,944 30,407,713 30,465,460
------------- -------------- -------------- -------------
Net interest income ............................ 6,866,306 7,821,162 21,641,260 23,961,271
Provision for loan losses .......................... 3,000 228,000 384,000 536,000
------------- -------------- -------------- -------------
Net interest income after provision for
loan losses .................................. 6,863,306 7,593,162 21,257,260 23,425,271
------------- -------------- -------------- -------------
NON-INTEREST INCOME
Fees and service charges ......................... 1,208,271 812,006 3,014,285 2,338,893
Gain on sale of investments ...................... 1,681,584 -- 4,191,377 6,836
Gain on sale of real estate owned ................ 33,415 -- 49,843 118,315
Other income ..................................... 276,456 223,761 765,073 530,112
------------- -------------- -------------- -------------
Total non-interest income ...................... 3,199,726 1,035,767 8,020,578 2,994,156
------------- -------------- -------------- -------------
NON-INTEREST EXPENSE
Compensation, employee benefits
and related expense ........................... 3,423,610 2,855,907 9,453,880 8,488,034
Occupancy expense ................................ 682,389 621,536 1,908,358 1,757,259
Data processing expense .......................... 252,267 226,263 740,776 690,595
Insurance premium expense ........................ 32,285 36,685 100,955 150,571
Loss on sale of investments ...................... -- -- 30,632 --
Loss on sale of real estate owned ................ 15,850 -- 15,850 --
Amortization of core deposit intangible .......... 413,169 413,169 1,239,508 1,239,508
Other expense .................................... 2,042,378 1,505,225 5,363,275 4,769,566
------------- -------------- -------------- -------------
Total non-interest expense ..................... 6,861,948 5,658,785 18,853,234 17,095,533
------------- -------------- -------------- -------------
Earnings before income taxes ....................... 3,201,084 2,970,144 10,424,604 9,323,894
Provision for income tax ........................... 1,085,447 1,043,681 3,669,120 3,494,680
------------- -------------- -------------- -------------
Net earnings ....................................... $ 2,115,637 $ 1,926,463 $ 6,755,484 $ 5,829,214
============= ============== ============== =============
Earnings per common share - basic .................. $ 0.32 $ 0.28 $ 1.02 $ 0.85
Earnings per common share - fully diluted .......... $ 0.31 $ 0.28 $ 1.02 $ 0.85
Weighted average common shares
outstanding - basic ............................. 6,629,275 6,773,138 6,616,551 6,855,374
Weighted average common shares
outstanding - with dilution .................... 6,732,583 6,773,138 6,641,484 6,855,374
<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 NINE MONTHS ENDED JUNE 30, 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 ............... -- -- -- (2,603,438) -- -- -- (2,603,438)
Stock repurchased and retired (191,484) (1,915) (2,282,301) -- -- -- -- (2,284,216)
ESOP contribution ............ (4,805) -- 219,935 -- 685,937 -- -- 905,872
MRDP contribution ............ 76,618 -- 10,281 -- -- 1,142,494 -- 1,152,775
--------- ------- ----------- ----------- ---------- ---------- -------- -----------
6,572,757 71,747 35,649,711 77,109,817 (4,207,313) (1,355,884) (1,372,524) 105,895,554
Comprehensive income
Net earnings 6,755,484 6,755,484
Other comprehensive income:
Unrealized gain on securities, net of tax
and reclassification adjustment (2) 1,253,381 1,253,381
----------
Total comprehensive income 8,008,865
--------- ------- ----------- ----------- ---------- ---------- -------- -----------
Balance at June 30, 2001 6,572,757 $71,747 $35,649,711 $83,865,301 ($4,207,313) ($1,355,884) ($119,413) $113,904,419
========= ======= =========== =========== ========== ========== ======== ===========
<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 $3,045,242 (net of $1,866,440 tax expense) less reclassification adjustment
for gains included in net earnings of $1,791,861 (net of $1,098,238 tax expense).
See notes to condensed consolidated financial statements.
</FN>
5
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE Nine MONTHS ENDED June 30, 2001 AND 2000
(Unaudited)
Nine Months Ended Nine Months Ended
June 30, June 30,
2001 2000
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $6,755,484 $5,829,214
ADJUSTMENTS TO RECONCILE NET EARNINGS TO
NET CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization 2,198,018 2,206,667
Provision for deferred taxes -- 438,069
Provision for loan losses 384,000 536,000
Disposition of allowance for loan losses (231,842) --
Provision for loss on real estate owned -- 120,000
Compensation expense related to ESOP benefit 905,872 829,994
Compensation expense related to MRDP Trust 1,152,775 1,023,667
Net amortization of premiums (discounts) paid on
investment and mortgage backed and related securities 207,990 213,468
Decrease in deferred loan fees, net of amortization (2,670,625) (373,730)
Accretion of discounts on purchased loans 6,737 1,541
Net (gain) loss on sale of real estate owned and
premises and equipment 8,499 (138,814)
Net gain on sale of investment and mortgage
backed and related securities (4,160,745) (6,836)
FHLB stock dividend (601,400) (567,400)
CHANGES IN ASSETS AND LIABILITIES
Accrued interest receivable 271,823 (235,201)
Other assets (2,615,003) (737,607)
Accrued interest on deposit liabilities 6,207 (77,630)
Accrued interest on borrowings (51,689) 912,056
Pension liabilities 97,947 97,947
Other liabilities 207,271 41,650
-------------- --------------
Net cash provided by operating activities 1,871,319 10,113,055
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of investment securities
available for sale 130,000 120,000
Proceeds from maturity of investment securities
available for sale 33,000,000 8,000,000
Principal repayments received on mortgage
backed and related securities held to maturity 368,568 298,361
Principal repayments received on mortgage
backed and related securities available for sale 33,027,344 13,242,770
Principal repayments received on loans 84,457,547 73,047,471
Loan originations (81,303,592) (77,154,728)
Loans sold 18,834,094 5,347,283
Purchase of investment securities held to maturity -- (457,000)
Purchase of investment securities available
for sale (62,725,695) (1,110,000)
Purchase of mortgage backed and related
securities available for sale (84,359,568) (29,396,069)
Purchase of FHLB stock -- (160,900)
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 144,259,981 --
Proceeds from sale of real estate owned and
premises and equipment 801,610 1,415,866
Investment in real estate owned (86,741) --
Purchases of premises and equipment (2,532,213) (1,853,652)
-------------- --------------
Net cash provided by investing activities 94,239,081 1,390,965
-------------- --------------
6
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE Nine MONTHS ENDED June 30, 2001 AND 2000
(Unaudited)
(Continued)
Nine Months Ended Nine Months Ended
June 30, June 30,
2001 2000
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase(decrease) in deposit liabilities,
net of withdrawals ................................................... $ 15,217,371 ($ 24,175,925)
Proceeds from FHLB advances ............................................ 2,000,000 585,250,000
Repayments of FHLB advances ............................................ (7,000,000) (560,500,000)
Proceeds from short term borrowings .................................... 3,400,000 2,000,000
Repayments of short term borrowings .................................... (4,700,000) --
Stock repurchase and retirement ........................................ (2,284,216) (5,084,070)
Advances from borrowers for taxes and insurance ........................ (4,797,928) (2,884,515)
Dividends paid ......................................................... (2,851,267) (2,969,761)
------------- -------------
Net cash used in financing activities ...................................... (1,016,040) (8,364,271)
------------- -------------
Net increase in cash and cash
equivalents .............................................................. 95,094,360 3,139,749
Cash and cash equivalents at beginning
of period ................................................................ 29,946,600 24,522,589
------------- -------------
Cash and cash equivalents at end of period ................................. $ 125,040,960 $ 27,662,338
============= =============
SUPPLEMENTAL SCHEDULE OF INTEREST AND
INCOME
TAXES PAID
Interest paid .......................................................... $ 30,453,195 $ 29,631,034
Income taxes paid ...................................................... 3,930,000 3,815,000
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES
Mortgage loans securitized and classified as mortgage-
backed securities available for sale ................................. $ 190,300,518 $ --
Net unrealized gain (loss) on securities
available for sale ................................................... (119,143) (397,440)
Dividends declared and accrued in other
liabilities .......................................................... 932,716 970,609
<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 condensed consolidated
financial statements contain all adjustments necessary for a fair presentation
of Klamath First Bancorp, Inc.'s (the "Company") financial condition as of June
30, 2001 and September 30, 2000, the results of operations for the three and
nine months ended June 30, 2001 and 2000 and cash flows for the nine months
ended June 30, 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 nine
months ended June 30, 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 June 30, 2001, the Company's total comprehensive
income was $454,666 compared to $1.9 million for the three months ended June 30,
2000. Total comprehensive income for the three months ended June 30, 2001 was
comprised of net income of $2.1 million and other comprehensive loss of $1.7
million, net of tax. Total comprehensive income for the three months ended June
30, 2000 was comprised of net income of $1.9 million and other comprehensive
loss of $21,607, net of tax.
For the nine months ended June 30, 2001, the Company's total comprehensive
income was $8.0 million compared to $5.4 million for the nine months ended June
30, 2000. Total comprehensive income for the nine months ended June 30, 2001 was
comprised of net income of $6.8 million and other comprehensive income of $1.2
million, net of tax. Total comprehensive income for the nine months ended June
30, 2000 was comprised of net income of $5.8 million and other comprehensive
loss of $397,440, net of tax.
3. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as
follows:
Nine Months Ended Year Ended
June 30, September 30,
2001 2000
-------------- --------------
Balance, beginning of period $4,082,265 $2,483,625
Charge-offs (75,594) (606,999)
Recoveries 42,406 441,639
Provision for loss 384,000 1,764,000
Dispositions (231,842) --
-------------- --------------
Balance, end of period $4,201,235 $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 mortgage-backed securities ("MBS"). See Note 4.
At June 30, 2001 and 2000, impaired loans totaled $2,812 and $478,062,
respectively. Specifically allocated loan loss reserves related to these loans
totaled $2,812 and $32,500, respectively. The average investment in impaired
loans for the three months and nine months ended June 30, 2001 was $937 and
$44,301, respectively. The average investment in impaired loans for the three
months and nine months ended June 30, 2000 was $478,062 and $696,227,
respectively.
8
There were no troubled debt restructurings at June 30, 2001 and 2000, or for the
nine 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 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. As of June 30, 2001, $140.0 million in MBS have
been sold with a gain of $4.2 million.
5. ADVANCES FROM FEDERAL HOME LOAN BANK
Borrowings at June 30, 2001 consisted of one short term advance totaling $10.0
million and six long term advances totaling $158.0 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:
June 30, 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 $10,000,000 4.08% 4.08% $5,000,000 5.70% 5.70%
After one but within
five years -- -- -- 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%
-------------- --------------
$168,000,000 $173,000,000
============== ==============
6. SHORT TERM BORROWINGS
Short term borrowings at June 30, 2001 consisted of $1.7 million in credit line
borrowings from a financial institution at a rate of 6.01%.
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 plan to repurchase up to five percent of
its common stock over a twelve month period. At completion of the plan, 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.
Subsequent to June 30, 2001, the Company issued $15.0 million of floating rate
Trust Preferred securities as a participant in a pooled offering. Of this
amount, $10 million will be contributed as capital to the Association in order
to facilitate the pending branch acquisition (see Note 11).
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
June 30, June 30,
2001 2000
--------- ---------
Weighted average common shares outstanding - basic 6,629,275 6,773,138
--------- ---------
Effect of Dilutive Securities on Number of Shares:
MRDP shares 38,239 --
Stock options 65,069 --
--------- ---------
Total Dilutive Securities 103,308 --
--------- ---------
Weighted average common shares outstanding - with dilution 6,732,583 6,773,138
========= =========
10
For the Nine Months Ended
June 30, June 30,
2001 2000
--------- ---------
Weighted average common shares outstanding - basic 6,616,551 6,855,374
--------- ---------
Effect of Dilutive Securities on Number of Shares:
MRDP shares 24,933 --
--------- ---------
Total Dilutive Securities 24,933 --
--------- ---------
Weighted average common shares outstanding-with dilution 6,641,484 6,855,374
outstanding ========= =========
Options to purchase 1,036,258 and 916,258 shares of common stock were
outstanding at June 30, 2001 and 2000, respectively. For the nine months ended
June 30, 2001 and the three and nine months ended June 30, 2000, the effect of
the options was not included in the computation of diluted EPS because the
options' exercise prices were greater than the average market price of the
common shares.
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 June 30, 2001:
Categorized as "Well
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
--------------- -------- --------------------- --------- --------------------- ---------
Amount Ratio Amount Ratio Amount Ratio
As of June 30, 2001: ------------ ---------- ------------ ---------- ------------ ---------
Total Capital: $107,361,266 20.7% $41,548,560 8.0% $51,935,700 10.0%
(To Risk Weighted Assets)
Tier I Capital: 103,250,296 19.9% N/A N/A 31,161,420 6.0%
(To Risk Weighted Assets)
Tier I Capital: 103,250,296 10.4% 39,765,909 4.0% 49,707,386 5.0%
(To Total Assets)
Tangible Capital: 103,250,296 10.4% 14,912,216 1.5% N/A N/A
(To Tangible Assets)
11. BRANCH ACQUISITION
On May 29, 2001, the Company announced, subject to regulatory approval, its
intent to purchase 13 branches from Washington Mutual. Twelve of the branches
are from Western Bank, a division of Washington Mutual. These branches include a
commercial bank mix of deposits and loans. The transaction also includes one
branch of Washington Mutual which included deposits and no loans. The
transaction is scheduled to close in September 2001. The transaction will be
accounted for as a purchase under generally accepted accounting principles. The
purchase includes assumption of approximately $416.2 million in deposit
liabilities and purchase of $190.2 million of loans and the branch facilities.
All current employees at the acquired branches will become employees of the
Company. The acquired branches are primarily located in coastal Oregon
communities with two branches in rural northeastern Oregon, extending the
Association's market to 26 counties throughout the state. The Company received
conditional approval from its primary regulator, the Office of Thrift
Supervision, on August 1, 2001.
11
12. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In September 2000, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 140, "Accounting for Transfers and Servicing 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 adoption of SFAS
No. 140 did not have a material impact on its financial position or results of
operations.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations." The
statement discontinues the use of the pooling of interest method of accounting
for business combinations. The statement is effective for all business
combinations initiated after June 30, 2001. Management has completed an
evaluation of the effects of this statement and does not believe that it will
have a material effect on the Company's consolidated financial statements.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." The statement requires discontinuing the amortization of goodwill and
other intangible assets with indefinite useful lives. Instead, these assets will
be tested periodically for impairment and written down to their fair market
value as necessary. This statement is effective for fiscal years beginning after
December 15, 2001, however, early adoption is allowed for companies that have
not issued first quarter financial statements. Management is currently
evaluating the impact and the timing of implementation of SFAS No. 140.
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. (the
"Company") and its subsidiary Klamath First Federal Savings and Loan Association
(the "Association"). 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 June 30, 2001, the Company had total consolidated assets of
$1.0 billion and consolidated shareholders' equity of $113.9 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 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.
The Company has announced the acquisition of 13 branches from Washington Mutual.
These branches are in Oregon locations which complement the existing branch
network. The loans and deposits acquired with these branches will help move the
Company towards a more bank-like profile, with a higher percentage of
non-interest bearing deposits and commercial loans.
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 Federal National Mortgage
Association ("FNMA") during the quarter ended March 31, 2001. The resulting
mortgage-backed securities ("MBS") were retained by the Company and classified
as available for sale. As of June 30, 2001, $140.0 million of the securities
were sold with a gain of $4.2 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 was opened 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. The first of these branches, in Pendleton, Oregon opened in
June 2001 with another in Ontario, Oregon scheduled to be in operation before
the fiscal year end. Two more in-store branches are scheduled to open in
Washington state before December 31, 2001. 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 June 30, 2001. Subsequent to
June 30, 2001, 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
Change in NPV Sensitivity
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 June 30, 2001
Change in NPV Sensitivity
Interest Rates Ratio Measure
(Basis points)
----------------------------- ---------- --------------
200 basis point rise 9.58% (177)
100 basis point rise 10.93% (41)
Base Rate Scenario 11.34% --
100 basis point decline 11.85% 50
200 basis point decline 10.81% (54)
14
Changes in Financial Condition
At June 30, 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 $210.3 million to $518.7 million at June 30,
2001, from $729.0 million at September 30, 2000. During the quarter ended March
30, 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 $18.8 million in single family mortgage loans to FNMA and
other lenders during the nine months ended June 30, 2001, further reducing loans
receivable.
Investment securities increased $20.6 million, or 17.58% from $117.4 million at
September 30, 2000 to $138.0 million at June 30, 2001. This increase was
primarily the result of purchase of investment securities available for sale.
During the nine months ended June 30, 2001, the Company securitized $190.3
million of loans, with the resulting retained MBS recorded as available for
sale. Of these MBS, $140.0 million were sold during the period. In addition,
$84.4 million of MBS were purchased and $33.4 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 $179.1 million at June 30, 2001.
Other assets increased by $2.5 million, or 159.19%, from $1.6 million at
September 30, 2000 to $4.1 million at June 30, 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 $15.2 million, or 2.19%, from $695.4 million at
September 30, 2000 to $710.6 million at June 30, 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 $4.8 million from
September 30, 2000 to June 30, 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 $6.3 million from September 30, 2000 to
June 30, 2001. Borrowings from the FHLB and borrowings on correspondent bank
credit lines were reduced with proceeds from the sale of MBS.
Total shareholders' equity increased $5.2 million, or 4.76%, from $108.7 million
at September 30, 2000 to $113.9 million at June 30, 2001. This increase was
primarily the result of earnings of $6.8 million and a $1.3 million increase in
the unrealized gains on securities available for sale, partially offset by $2.3
million reduction due to repurchase and retirement of shares and payment of $2.6
million in common stock dividends for the nine month period.
15
Results of Operations
Comparison of Nine Months Ended June 30, 2001 and 2000
General. The FNMA loan securitization and sale of a portion of the MBS helped
increase net earnings to $6.8 million for the nine months ended June 30, 2001
compared to $5.8 million for the same period of 2000.
Interest Income. Interest income decreased by $2.4 million as the result of a
$46.8 million decrease in average interest earning assets. Yield on assets
remained consistent from June 30, 2000 to June 30, 2001. Interest income on
loans receivable decreased $6.1 million, or 14.27%, from $42.9 million for the
nine months ended June 30, 2000 to $36.8 million for the same period of 2001.
This decrease was a result of the $122.0 million decrease in average loans
receivable due to the loan securitization in February 2001. Since these loans
were converted to MBS, a corresponding $4.1 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 2 basis points to 7.22% for the nine months
ended June 30, 2001 compared to 7.20% for the same period ended June 30, 2000.
Interest rate spread (the difference between the rates earned on interest
earning assets and the rates paid on interest bearing liabilities) decreased
from 2.54% to 2.29% and interest rate margin (net interest income divided by
average interest earning assets) decreased from 3.17% to 3.00% comparing the
nine month periods.
Interest Expense. Total interest expense remained consistent comparing the nine
months ended June 30, 2001 to the same period in 2000. While the average balance
of deposits decreased by $10.7 million, the average rate paid on deposits
increased by 37 basis points resulting in a $1.4 million increase in interest
expense on deposit liabilities. The average balance of borrowings decreased
$39.0 million from $214.2 million for the nine months ended June 30, 2000 to
$175.2 million for the same period ended June 30, 2001. However, the rate paid
on borrowings increased by 15 basis points from 5.82% for the nine months ended
June 30, 2000 to 5.97% for the same period in 2001.
Provision for Loan Losses. The provision for loan losses was $384,000 and there
were $75,594 of charge offs and $42,406 of recoveries during the nine months
ended June 30, 2001 compared to a $536,000 provision with $389,267 of charge
offs and $347,424 of recoveries during the nine months ended June 30, 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 $5.0 million, or 167.87%, to
$8.0 million for the nine months ended June 30, 2001 from $3.0 million for the
nine months ended June 30, 2000. The most significant factor in this increase
was the sale of MBS resulting from the loan securitization at a gain of $4.2
million. However, even ignoring the effect of the gain on sale, non-interest
income increased $841,881, or 28.18%, over the same period last year. Fees and
service charges continued to improve, increasing by 28.88% 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 44.32% increase in other non-interest
income from $530,112 for the nine months ended June 30, 2000 to $765,073 for the
nine months ended June 30, 2001.
16
Non-Interest Expense. Non-interest expense increased $1.8 million, or 10.28%, to
$18.9 million for the nine months ended June 30, 2001, from $17.1 million for
the comparable period in 2000. Compensation, employee benefits, and related
expense increased $965,846, or 11.38% from $8.5 million for the nine months
ended June 30, 2000 to $9.5 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. The ratio of non-interest expense to
average total assets was 2.51% and 2.17% for the nine months ended June 30, 2001
and 2000, respectively.
Income Taxes. The provision for income taxes increased $174,440 for the nine
months ended June 30, 2001 compared with the prior year. The effective tax rate
was 35.20% for the nine months ended June 30, 2001 compared to 37.48% 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 and $270,000 in tax
refunds received during this fiscal year related to amended tax returns for a
prior year.
17
Comparison of Three Months Ended June 30, 2001 and 2000
General. Basic earnings per share increased from $0.28 for the quarter ended
June 30, 2000 to $0.32 for the same period of 2001. Net income increased
$189,174, or 9.82%, from $1.9 million for the three months ended June 30, 2000
to $2.1 million for the three months ended June 30, 2001. This increase was the
combined result of a $1.7 million gain on sale of MBS and a $482,375 increase in
other non-interest income offset by a decrease in net interest income and an
increase in non-interest expense.
Interest Income. The Company recorded interest income of $16.8 million in the
third quarter ended June 30, 2001, a decrease of 7.97% from $18.2 million for
the same period last year. Average interest earning assets decreased by $46.1
million and yield decreased from 7.24% for the quarter ended June 30, 2000 to
6.98% for the same period of 2001. Yields increased on both loans and MBS,
comparing the quarter ended June 30, 2001 to the same period last year.
Interest Expense. Total interest expense decreased from $10.4 million for the
quarter ended June 30, 2000 to $9.9 million for the same period of 2001. Average
deposits increased by $6.2 million comparing the three months ended June 30,
2000 to 2001, while the average interest paid on interest-bearing deposits
increased 22 basis points from 4.34% for the three months ended June 30, 2000 to
4.56% for the same period ended June 30, 2001. These factors resulted in an
increase of $391,342, or 5.59%, in interest on deposit liabilities, comparing
the quarter ended June 30, 2000 to 2001. The average balance of borrowings
decreased $52.2 million, from $222.0 million for the three months ended June 30,
2000 to $169.8 million for the same period ended June 30, 2001, resulting in a
decrease in interest on borrowings of $880,027 for the three months ended June
30, 2001 compared with the same period ended June 30, 2000. The rate paid on
borrowings decreased by 24 basis points from 6.10% for the quarter ended June
30, 2000 to 5.86% for the same period in 2001.
Provision for Loan Losses. The provision for loan losses was $3,000 and there
were $28,347 of charge offs, and $7,540 of recoveries during the three months
ended June 30, 2001 compared to a $228,000 provision with $238,300 of charge
offs and $755 of recoveries during the three months ended June 30, 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. The Company's analysis of the allowance for loan
losses shows the reserves to be adequate without significant additional
provision at this time.
Non-Interest Income. Non-interest income increased $2.2 million, or 208.92%, to
$3.2 million for the three months ended June 30, 2001 from $1.0 million for the
three months ended June 30, 2000. Again, the $1.7 million gain on sale of MBS is
the primary cause of the increase. However, income from fees and service charges
continues to show growth, increasing by 48.80% from $812,006 for the quarter
ended June 30, 2000 to $1.2 million for the current quarter.
Non-Interest Expense. Non-interest expense increased $1.2 million, or 21.26%, to
$6.9 million for the three months ended June 30, 2001, from $5.7 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 three new branches, Central Point in August 2000, Redmond in May
2001, and the Pendleton Wal Mart branch in June 2001. There have also been
additions of management personnel to help implement the Company's strategic
initiatives. Other expense increased due to increases in general operating
expenses and approximately $34,000 in one-time expenses for consulting and
executive search fees. The ratio of non-interest expense to average total assets
was 2.73% and 2.16% for the three months ended June 30, 2001 and 2000,
respectively.
Income Taxes. The provision for income taxes increased $41,766 for the three
months ended June 30, 2001 compared with the prior year. The effective tax rate
was 33.91% for the quarter ended June 30, 2001 compared to 35.14% 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
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
a) Not applicable.
b) During the quarter ended June 30, 2001 the Company filed the
following Current Reports on Form 8-K:
Form 8-K dated April 25, 2001 describing the Company's corporate
vision
Form 8-K dated May 31, 2001 announcing the Company's intent to
purchase 13 branches from Washington Mutual.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
KLAMATH FIRST BANCORP, INC.
Date: August 14, 2001 By: /s/ Kermit K. Houser
-------------------------------
Kermit K. Houser, President and
Chief Executive Officer
Date: August 14, 2001 By: /s/ Marshall Jay Alexander
-------------------------------
Marshall Jay Alexander, Executive Vice President
and Chief Financial Officer
20