SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 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) I.D. Number)
540 Main Street, Klamath Falls, Oregon 97601
- --------------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (541) 882-3444
- --------------------------------------------------- -------------------
Securities registered pursuant to
Section 12 (b) of the Act: None
- --------------------------------- -------------------
Securities registered pursuant to
Section 12 (g) of the Act: Common Stock, par value $.01 per share
- --------------------------------- --------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO .
As of January 29, 2002, there were issued 7,060,667 shares of the Registrant's
Common Stock. The Registrant's voting common stock is traded over-the-counter
and is listed on the Nasdaq National Market under the symbol "KFBI."
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
TABLE OF CONTENTS
Part I. Financial Information
- ------- ----------------------
Item 1. Financial Statements Page
----
Consolidated Balance Sheets
(As of December 31, 2001 and September 30, 2001) 3
Consolidated Statements of Earnings (For the three months
ended December 31, 2001 and 2000) 4
Consolidated Statements of Shareholders' Equity
(For the year ended September 30, 2001 and for
the three months ended December 31, 2001) 5
Consolidated Statements of Cash Flows (For the three
months ended December 31, 2001 and 2000) 6 - 7
Notes to Consolidated Financial Statements 8 - 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 16
Part II. Other Information
- -------- -------------------
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
2
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2001 AND SEPTEMBER 30, 2001
(Unaudited)
December 31, 2001 September 30, 2001
----------------- ------------------
ASSETS
Cash and due from banks $38,167,131 $40,446,042
Interest bearing deposits with banks 3,637,014 3,791,252
Federal funds sold and securities purchased under agreements to resell 280,701 74,151,272
----------------- ------------------
Total cash and cash equivalents 42,084,846 118,388,566
Investment securities available for sale, at fair value
(amortized cost: $160,091,320 and $154,190,612) 156,675,158 154,675,760
Investment securities held to maturity, at amortized cost (fair
value: $593,824 and $594,429) 592,245 592,388
Mortgage backed and related securities available for sale, at fair
value (amortized cost: $495,855,883 and $419,639,650) 495,937,565 421,637,670
Mortgage backed and related securities held to maturity, at amortized
cost (fair value: $1,451,999 and $1,642,174) 1,434,104 1,620,612
Loans receivable, net 671,143,803 679,990,308
Real estate owned and repossessed assets 462,947 445,855
Premises and equipment, net 21,505,084 16,911,912
Stock in Federal Home Loan Bank of Seattle, at cost 12,922,000 12,698,000
Accrued interest receivable 8,906,843 8,657,586
Deferred federal and state income taxes 696,950 --
Core deposit intangible and other intangible assets 44,205,459 44,088,926
Other assets 4,392,781 8,864,227
----------------- ------------------
Total assets $1,460,959,785 $1,468,571,810
================= ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposit liabilities $1,155,990,942 $1,152,824,144
Accrued interest on deposit liabilities 1,129,395 1,574,606
Advances from borrowers for taxes and insurance 663,358 6,637,994
Advances from Federal Home Loan Bank of Seattle 170,425,000 168,000,000
Short term borrowings 1,700,000 1,700,000
Accrued interest on borrowings 818,177 801,743
Pension liabilities 974,797 942,148
Deferred federal and state income taxes -- 597,345
Other liabilities 5,339,877 6,799,241
----------------- ------------------
Total liabilities 1,337,041,546 1,339,877,221
----------------- ------------------
Mandatorily redeemable preferred securities issued by subsidiary 14,565,079 14,553,684
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value, 500,000 shares authorized; none issued -- --
Common stock, $.01 par value, 35,000,000 shares authorized,
December 31, 2001 - 7,060,667 issued, 6,341,663 outstanding
September 30, 2001 - 7,366,226 issued, 6,561,461 outstanding 68,287 70,607
Additional paid-in capital 30,947,930 33,926,796
Retained earnings-substantially restricted 83,800,564 83,816,307
Unearned shares issued to ESOP (3,668,915) (3,913,510)
Unearned shares issued to MRDP (1,222,527) (1,298,859)
Accumulated other comprehensive income (loss) (572,179) 1,539,564
----------------- ------------------
Total shareholders' equity 109,353,160 114,140,905
----------------- ------------------
Total liabilities and shareholders' equity $1,460,959,785 $1,468,571,810
================= ==================
<FN>
See notes to consolidated financial statements.
</FN>
3
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Three Months Ended Three Months Ended
December 31, December 31,
2001 2000
-------------- --------------
INTEREST INCOME
Loans receivable $13,959,972 $14,244,031
Mortgage backed and related securities 6,583,010 1,236,056
Investment securities 2,167,245 2,046,535
Federal funds sold and securities purchased
agreements to resell 221,440 185,063
Interest bearing deposits 63,232 104,664
-------------- --------------
Total interest income 22,994,899 17,816,349
-------------- --------------
INTEREST EXPENSE
Deposit liabilities 9,247,378 7,603,335
Advances from FHLB of Seattle 2,430,408 2,609,469
Other 41,268 125,417
-------------- --------------
Total interest expense 11,719,054 10,338,221
-------------- --------------
Net interest income 11,275,845 7,478,128
Provision for loan losses 153,000 228,000
-------------- --------------
Net interest income after provision for
loan losses 11,122,845 7,250,128
-------------- --------------
NON-INTEREST INCOME
Fees and service charges 1,802,872 870,656
Gain on sale of investments -- 7,918
Gain on sale of real estate owned 8,019 14,491
Other income 470,682 220,415
-------------- --------------
Total non-interest income 2,281,573 1,113,480
-------------- --------------
NON-INTEREST EXPENSE
Compensation, employee benefits and related expense 5,375,511 2,908,944
Occupancy expense 1,205,745 581,392
Data processing expense 373,088 231,024
Insurance premium expense 32,275 34,792
Loss on sale of investments -- 30,632
Amortization of core deposit intangible and other intangible assets 1,378,135 413,169
Other expense 3,764,648 1,582,733
-------------- --------------
Total non-interest expense 12,129,402 5,782,686
-------------- --------------
Earnings before income taxes 1,275,016 2,580,922
Provision for income taxes 453,907 895,877
-------------- --------------
Net earnings $ 821,109 $1,685,045
========= =========
Earnings per common share - basic $0.13 $0.25
Earnings per common share - diluted $0.13 $0.25
Weighted average common shares outstanding - basic 6,473,649 6,652,096
Weighted average common shares outstanding - with dilution 6,483,860 6,653,266
<FN>
See notes to consolidated financial statements.
</FN>
4
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED SEPTEMBER 30, 2001 AND THE THREE MONTHS ENDED DECEMBER 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, 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 -- -- -- (3,467,950) -- -- -- (3,467,950)
Stock repurchased and
retired (550,221) (5,502) (7,393,921) -- -- -- -- (7,399,423)
ESOP contribution 97,974 -- 396,471 -- 979,740 -- -- 1,376,211
MRDP contribution 76,618 -- 13,708 -- -- 1,199,519 -- 1,213,227
Exercise of stock options 244,662 2,447 3,208,742 -- -- -- -- 3,211,189
--------- ------- ----------- ----------- ---------- ---------- ------------ -----------
6,561,461 70,607 33,926,796 76,245,305 (3,913,510) (1,298,859) (1,372,524) 103,657,815
Comprehensive income
Net earnings 7,571,002 7,571,002
Other comprehensive
income:
Unrealized gain
on securities,
net of tax and
reclassification
adjustment (1) 2,912,088 2,912,088
-----------
Total comprehensive income 10,483,090
--------- ------- ----------- ----------- ---------- ---------- ------------ -----------
Balance at September 30, 2001 6,561,461 70,607 33,926,796 83,816,307 (3,913,510) (1,298,859) 1,539,564 114,140,905
Cash dividends -- -- -- (836,852) -- -- -- (836,852)
Stock repurchased and retired (232,000) (2,320) (3,054,530) -- -- -- -- (3,056,850)
ESOP contribution -- -- 72,237 -- 244,595 -- -- 316,832
MRDP contribution 12,202 -- 3,427 -- -- 76,332 -- 79,759
--------- ------- ----------- ----------- ---------- ---------- ------------ -----------
6,341,663 68,287 30,947,930 82,979,455 (3,668,915) (1,222,527) 1,539,564 110,643,794
Comprehensive loss
Net earnings 821,109 821,109
Other comprehensive
loss:
Unrealized loss on
securities, net of
tax and
reclassification
adjustment (2) (2,111,743) (2,111,743)
-----------
Total comprehensive loss (1,290,634)
--------- ------- ----------- ----------- ---------- ---------- ------------ -----------
Balance at December 31, 2001 6,341,663 $68,287 $30,947,930 $83,800,564 ($3,668,915) ($1,222,527) ($572,179) $109,353,160
========= ======= =========== =========== ========== ========== ============ ===========
<FN>
(1) Net unrealized holding gain on securities of $2,893,883 (net of
$1,773,670 tax expense) less reclassification adjustment for gains
included in net earnings of $18,205 (net of $11,158 tax benefit).
(2) Net unrealized holding loss on securities of $2,111,743 (net of
$1,294,294 tax benefit).
See notes to consolidated financial statements.
</FN>
5
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2001 AND 2000
(Unaudited)
Three Months Ended Three Months Ended
December 31, December 31,
2001 2000
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $821,109 $1,685,045
ADJUSTMENTS TO RECONCILE NET EARNINGS TO
NET CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization 1,879,032 714,933
Provision for loan losses 153,000 228,000
Compensation expense related to ESOP benefit 316,832 239,070
Compensation expense related to MRDP Trust 79,759 258,656
Net amortization of premiums (discounts) paid on
investment and mortgage backed and related securities 646,997 31,837
Increase (decrease) in deferred loan fees, net of 24,664 (108,358)
amortization
Accretion of discounts on purchased loans 3,802 2,192
Net gain on sale of investment and mortgage
backed and related securities -- 22,714
Gain on sale of real estate owned and fixed assets (8,019) (16,157)
FHLB stock dividend (224,000) (194,000)
CHANGES IN ASSETS AND LIABILITIES
Accrued interest receivable (249,257) (568,988)
Other assets 2,936,778 29,388
Accrued interest on deposit liabilities (445,211) 126,203
Accrued interest on borrowings 16,434 35,588
Pension liabilities 32,649 32,649
Other liabilities (1,350,588) 153,019
-------------- --------------
Net cash provided by operating activities 4,633,981 2,671,791
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal repayments received on mortgage backed
and related securities held to maturity 183,645 87,316
Principal repayments received on mortgage backed
and related securities available for sale 19,546,625 6,829,421
Principal repayments received on loans 70,404,303 21,253,492
Loan originations (71,313,970) (24,457,738)
Loans sold 9,511,459 6,366,479
Purchase of investment securities available
for sale (3,580,137) (11,532,379)
Purchase of mortgage-backed and related securities
available for sale (96,315,809) --
Proceeds from sale of investment securities
available for sale -- 10,367,746
Proceeds from sale of real estate owned and
premises and equipment 54,173 192,057
Capitalized improvements to real estate owned -- (15,437)
Purchases of premises and equipment (5,054,069) (538,741)
-------------- --------------
Net cash provided by (used in) investing activities (76,563,780) 8,552,216
-------------- --------------
6
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2001 AND 2000
(Unaudited)
(Continued)
Three Months Ended Three Months Ended
December 31, December 31,
2001 2000
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit
liabilities $3,166,798 ($2,530,126)
Proceeds from FHLB advances 10,200,000 --
Repayments of FHLB advances (7,775,000) --
Proceeds from short term borrowings 200,000 2,400,000
Repayments of short term borrowings (200,000) --
Stock repurchase and retirement (3,056,850) (1,863,650)
Advances from borrowers for taxes and insurance (5,974,636) (9,327,332)
Dividends paid (934,233) (957,609)
-------------- --------------
Net cash used in financing activities ( 4,373,921) (12,278,717)
-------------- --------------
Net decrease in cash and cash
equivalents (76,303,720) (1,054,710)
Cash and cash equivalents at beginning
of period 118,388,566 29,946,600
-------------- --------------
Cash and cash equivalents at end of period $42,084,846 $28,891,890
============== ==============
SUPPLEMENTAL SCHEDULE OF INTEREST AND
INCOME TAXES PAID
Interest paid $12,147,830 $10,176,430
Income taxes paid 425,000 --
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Net unrealized gain (loss) on securities
available for sale, net of tax ($2,111,743) $1,206,222
Dividends declared and accrued in other
liabilities 905,927 956,852
Loans transferred to real estate owned 64,322 140,712
<FN>
See notes to consolidated financial statements
</FN>
7
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments necessary for a fair presentation of Klamath
First Bancorp, Inc. and subsidiaries' (the "Company") financial condition as of
December 31, 2001, and September 30, 2001, and the results of its operations and
cash flows for the three months ended December 31, 2001 and 2000. Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. It is suggested that these consolidated financial statements be read
in conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K. The results of operations
for the three months ended December 31, 2001 and 2000 are not necessarily
indicative of the results which may be expected for the entire fiscal year.
2. COMPREHENSIVE INCOME (LOSS)
For the three months ended December 31, 2001, the Company's total comprehensive
loss was $1.3 million compared to total comprehensive income of $2.9 million for
the three months ended December 31, 2000. Total comprehensive loss for the three
months ended December 31, 2001 was comprised of net income of $821,109 and other
comprehensive loss of $2.1 million, net of tax. Total comprehensive income for
the three months ended December 31, 2000 was comprised of net income of $1.7
million and other comprehensive income of $1.2 million, net of tax.
3. ALLOWANCE FOR LOAN LOSSES
Activity in allowance for loan losses is summarized as follows:
Three Months Ended Year Ended
December 31, September 30,
2001 2001
---------- ----------
Balance, beginning of period $7,950,681 $4,082,265
Charge-offs (44,230) (90,173)
Recoveries -- 42,406
Additions 153,000 387,000
Acquisitions -- 3,761,025
Allowance reclassified with loan securitization -- (231,842)
---------- ----------
Balance, end of period $8,059,451 $7,950,681
========== ==========
<FN>
There were no impaired loans at December 31, 2001 and no specifically allocated loan loss reserves. At
December 31, 2000, impaired loans totaled $78,376. Specifically allocated loan loss reserves related to these
loans totaled $8,500. The average investment in impaired loans for the three months ended December 31,
2001 and 2000 was zero and $79,717, respectively.
</FN>
4. ADVANCES FROM FEDERAL HOME LOAN BANK
Borrowings at December 31, 2001 consisted of two short term advances totaling
$12.4 million and five 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, securities of the U.S.
Government and agencies thereof.
8
Scheduled maturities of advances from the FHLB were as follows:
December 31, 2001 September 30, 2001
----------------------------------------------------- ------------------------------------------------
Range of Weighted Range of Weighted
interest average interest average
Amount rates interest rate Amount rates interest rate
----------------- --------------- -------------- -------------- -------------- --------------
Due within one year $12,425,000 1.88%-2.14% 2.09% $10,000,000 3.60% 3.60%
After five but within
ten years 158,000,000 4.77%-7.05% 5.86% 158,000,000 4.77%-7.05% 5.86%
-------------- --------------
$170,425,000 $168,000,000
============== ==============
5. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company has various outstanding
commitments and contingencies that are not reflected in the accompanying
consolidated financial statements. In addition, the Company is a defendant in
certain claims and legal actions arising in the ordinary course of business. In
the opinion of management, after consultation with legal counsel, the ultimate
disposition of these matters is not expected to have a material adverse effect
on the consolidated financial condition of the Company.
6. SHAREHOLDERS' EQUITY
On September 27, 2001, the Company announced a five percent stock repurchase
plan to be completed over a twelve month period. Five percent represents
approximately 340,800 shares. As of December 31, 2001, about 68% of the
repurchase plan was completed, at a weighted average price of $13.18.
7. EARNINGS PER SHARE
Earnings per share ("EPS") is computed in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share." Shares held by the
Company's Employee Stock Ownership Plan ("ESOP") that are committed for release
are considered 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.
9
For the Three Months Ended
December 31, December 31,
2001 2000
------------- ------------
Weighted average common
shares outstanding - basic 6,473,649 6,652,096
------------- ------------
Effect of Dilutive Securities on Number of Shares:
MRDP shares 7 1,170
Stock options 10,204 --
------------- ------------
Total Dilutive Securities 10,211 1,170
------------- ------------
Weighted average common shares
outstanding - with dilution 6,483,860 6,653,266
============= ============
<FN>
Options to purchase 779,096 shares of common stock were outstanding at December
31, 2001 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. Additionally, 61,290 shares awarded under the MRDP but not yet
released to the individuals were not included in the computation of diluted EPS
at December 31, 2001 because their effect would not have been dilutive.
</FN>
8. REGULATORY CAPITAL
The following table illustrates the compliance by Klamath First Federal Savings
and Loan Association (the "Association") with currently applicable regulatory
capital requirements at December 31, 2001:
Categorized as "Well
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
------------------------- ----------------------------- ---------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ---------- ---------------- -------- ---------------- --------
Total Capital: $82,203,144 11.1% $59,168,000 8.0% $73,960,000 10.0%
(To Risk Weighted Assets)
Tier I Capital: 74,210,572 10.0% N/A N/A 44,376,000 6.0%
(To Risk Weighted Assets)
Tier I Capital: 74,210,572 5.3% 56,507,871 4.0% 70,634,839 5.0%
(To Total Assets)
Tangible Capital: 74,210,572 5.3% 21,190,452 1.5% N/A N/A
(To Tangible Assets)
10
9. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
142, Goodwill and Other Intangible Assets, which is effective for fiscal years
beginning after December 15, 2001. SFAS No. 142 will require that goodwill no
longer be amortized and instead be tested for impairment at least annually. In
addition, the standard includes provisions for the accounting and reporting of
certain existing recognized intangibles and goodwill. Management is currently
evaluating the effect that SFAS No. 142 may have on its consolidated financial
statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which is effective for fiscal years beginning
after December 15, 2001. This statement supersedes SFAS No. 121 and the
accounting and reporting provisions of Accounting Principles Board Opinion No.
30 for the disposal of a segment of a business. Management is currently
evaluating the effect that adoption of SFAS No. 144 may have on its consolidated
financial statements.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Special Note Regarding Forward-Looking Statements
Management's Discussion and Analysis of Financial Condition and Results of
Operations and other portions of this report contain certain "forward-looking
statements" concerning the future operations of Klamath First Bancorp, Inc.
Management desires to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 and is including this statement
for the express purpose of availing the Company of the protections of such safe
harbor with respect to all "forward-looking statements" contained in this
quarterly report. We have used "forward- looking statements" to describe future
plans and strategies, including our expectations of the Company's future
financial results. Management's ability to predict results or the effect of
future plans or strategies is inherently uncertain. Factors which could affect
actual results include interest rate trends, the general economic climate in the
Company's market area and the country as a whole which could affect the
collectibility of loan balances, the ability to increase non-interest income
through expansion of new lines of business, the ability of the Company to
control costs and expenses, the success and costs of integration of branches,
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 the Association. At December 31, 2001, the Company had total
consolidated assets of $1.5 billion and consolidated shareholders' equity of
$109.4 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 loans, multi-family residential loans,
residential construction loans, commercial and industrial 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 acquisition of 13 branches from Washington Mutual Bank
("WAMU"), which was completed in September 2001, moves the Company strongly in
this direction. 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.
During the last 12 months, new management has been updating many areas of the
Company that had been negatively affected by very conservative historical
spending patterns. Projects to update existing branches and make needed repairs
were completed. Programs necessary for training employees and updating phone
systems and information technology have been implemented. These initiatives have
resulted in increased non-interest expense comparing the current period with
that a year ago. The Company believes these improvements in strategic areas will
contribute to the bottom line in the future. The Company intends to continue to
focus on efficiency issues and the effort to capitalize on the training and
technology put in place.
12
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 53 office facilities, with the main office located in
Klamath Falls, Oregon. The primary market areas of the Association are the state
of Oregon and adjoining areas of California and Washington.
Changes in Financial Condition
At December 31, 2001, the consolidated assets of the Company totaled $1.5
billion, unchanged from $1.5 billion at September 30, 2001.
Cash and cash equivalents decreased $76.3 million, or 64.45%, from $118.4
million at September 30, 2001 to $42.1 million at December 31, 2001. The high
balance at September 30, 2001 related to cash received in the acquisition of the
WAMU branches which was held in federal funds and had not yet been transferred
to other investment vehicles. By December 31, 2001 the funds had been placed in
appropriate investment and mortgage-backed securities ("MBS").
Net loans receivable decreased $8.9 million, or 1.30%, to $671.1 million at
December 31, 2001, compared to $680.0 million at September 30, 2001. The Company
is selling much of its single family mortgage loan production, so those loans
are not adding to the portfolio balance. The Company sold $9.5 million in single
family mortgage loans with servicing released during the quarter ended December
31, 2001.
13
Loans receivable consisted of the following:
At December 31, At September 30,
2001 2001
--------------- ----------------
Secured by real estate:
1-4 family $409,802,265 $421,499,010
Construction 19,829,697 21,673,519
Multi-family and commercial real estate loans 131,743,344 130,490,333
Non-real estate loans
Home improvement and home equity 49,898,264 50,464,521
Other consumer 19,932,031 20,787,466
Commercial business loans 58,578,602 56,098,520
--------------- ----------------
Total gross loans outstanding $689,784,203 $701,013,369
=============== ================
Allowance for loan losses by loan type is as follows:
At December 31, At September 30,
2001 2001
--------------- ----------------
1-4 family mortgage loans $1,285,163 $1,275,163
Multi-family and commercial real estate loans 4,701,803 4,661,803
Commercial business loans 1,396,916 1,301,916
Consumer loans 675,569 711,799
-------------- --------------
Total allowance for loan losses $8,059,451 $7,950,681
============== ==============
Investment securities increased $2.0 million, or 1.29%, from $155.3 million at
September 30, 2001 to $157.3 million at December 31, 2001. This increase was the
result of the purchase of $3.6 million of securities during the quarter ended
December 31, 2001 offset by a decrease in the market value of the investment
portfolio.
During the three months ended December 31, 2001, $19.7 million of principal
payments were received on MBS and $96.3 million in MBS were purchased, resulting
in an increase in the balance of MBS from $423.3 million at September 30, 2001
to $497.4 million at December 31, 2001.
Premises and equipment increased $4.6 million from $16.9 million at September
30, 2001 to $21.5 million at December 31, 2001. The increase reflects the
acquisition of real estate for the WAMU branches which were acquired in
September 2001.
Other assets decreased from $8.9 million at September 30, 2001 to $4.4 million
at December 31, 2001. The balance at September 30, 2001 included a $4.1 million
receivable from WAMU related to the final settlement for the branch acquisition.
This amount was received by the Company in October 2001.
Deposit liabilities increased $3.2 million, less than 1.00%, from $1.15 billion
at September 30, 2001 to $1.16 billion at December 31, 2001. The increase
reflects the Company's continued efforts to increase demand deposits throughout
the branch network.
Advances from borrowers for taxes and insurance decreased $6.0 million from
September 30, 2001 to December 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 2001.
The Company's total borrowings increased $2.4 million from September 30, 2001 to
December 31, 2001. The increase is the result of a short term FHLB borrowing at
the end of the quarter ended December 31, 2001.
14
Total shareholders' equity decreased $4.8 million from $114.1 million at
September 30, 2001 to $109.4 million at December 31, 2001. This decrease was the
combined result of $821,109 in earnings for the quarter, a $2.1 million decrease
in unrealized gains on securities available for sale, a $3.1 million reduction
due to the repurchase of shares, and $836,852 reduction for payment of dividends
on common stock.
Results of Operations
Comparison of Three Months Ended December 31, 2001 and 2000
General. The impact of the September 2001 acquisition of 13 branches from
Washington Mutual is clearly seen during the quarter ended December 31, 2001.
Interest income and interest expense both showed significant increases due to
the acquired loans and deposits. The acquisition and the addition of six de novo
branches in the last year also resulted in significant increases in operating
expenses.
Interest Income. The Company recorded interest income of $23.0 million in the
first quarter ended December 31, 2001, an increase of 29.07% from $17.8 million
for the same period last year. Average interest earning assets for the first
quarter increased by $421.3 million, or 43.74%, compared to the first quarter
last year, due primarily to the branch acquisition. During the same period,
yield decreased 76 basis points, from 7.40% for the quarter ended December 31,
2000 to 6.64% for the same period in 2001.
Interest Expense. Total interest expense increased $1.4 million from $10.3
million for the quarter ended December 31, 2000 to $11.7 million for the quarter
ended December 31, 2001. Average deposits increased by $390.9 million comparing
the three months ended December 31, 2000 to the same period in 2001, while the
average interest paid on interest-bearing deposits decreased 115 basis points
from 4.73% for the three months ended December 31, 2000 to 3.58% for the same
period ended December 31, 2001. As noted above, the increase in average deposits
was a direct result of the branch acquisition. The average balance of borrowings
decreased $7.3 million from $177.3 million for the three months ended December
31, 2000 to $170.0 million for the same period ended December 31, 2001. However,
the rate paid on borrowings decreased by 34 basis points from 6.11% for the
quarter ended December 31, 2000 to 5.77% for the same period in 2001.
Provision for Loan Losses. The provision for loan losses was $153,000 and there
were $44,230 of charge offs, and no recoveries during the three months ended
December 31, 2001 compared to a $228,000 provision with $16,253 of charge offs
and $777 of recoveries during the three months ended December 31, 2000.
At December 31, 2001, the allowance for loan losses was equal to 699.6% of total
non-performing assets compared to 275.3% at December 31, 2000. The increase in
the coverage ratio was the result of a decrease in non-performing assets and a
higher allowance which incorporates the risk factors associated with the
significant increase in commercial and consumer loans over the last 12 months.
The ratio of non-performing assets to total assets decreased from 0.16% at
December 31, 2000 to 0.08% at December 31, 2001. The decrease primarily relates
to a decrease in real estate owned, which is included in non-performing assets.
At December 31, 2001, the Company had no restructured loans.
15
Non-Interest Income. Non-interest income improved significantly over the last
year, increasing $1.2 million, or 104.90%, to $2.3 million for the three months
ended December 31, 2001 from $1.1 million for the three months ended December
31, 2000. Income from fees and service charges provided the majority of the
growth, increasing by 107.07% from $870,656 for the quarter ended December 31,
2000 to $1.8 million for the current quarter. The increase is the result of the
increase in the number of deposit accounts related to the WAMU branch
acquisition in September 2001.
Non-Interest Expense. In large part due to the September 2001 branch acquisition
and the opening of six de novo branches during the past year, non-interest
expense increased $6.3 million, or 109.75%, to $12.1 million for the three
months ended December 31, 2001, from $5.8 million for the comparable period in
2000. Compensation, employee benefits and related expense increased 84.79% which
reflects addition of staff both at the acquired branches and in support and back
office areas. The acquired and newly-built branches were operating for the
entire quarter ended December 31, 2001, increasing occupancy expense by 107.39%.
Data processing expense also increased due to the additional accounts and
locations. Other expense increased by $2.2 million, or 137.86%, primarily due to
increased costs associated with the addition of branches and expenses related to
termination of the Company's defined benefit pension.
Income Taxes. The provision for income taxes decreased $441,970 for the three
months ended December 31, 2001 compared with the prior year. The effective tax
rate was 35.6% for the quarter ended December 31, 2001 compared to 34.7% for the
same period of 2000. The increase in effective tax rate is primarily due to a
lowered rate in the prior year due to tax refunds received on amended tax
returns from previous periods.
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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) Reference is made to the following Reports on Form 8-K
(1) The Company's Current Report on Form 8-K/A dated September 7,
2001, and filed on November 21, 2001, containing the financial
statements of the branches acquired from Washington Mutual Bank,
which is incorporated herein by reference.
(2) The Company's Current Report on Form 8-K filed on October 16,
2001 announcing the retirement of Robert A. Tucker, Executive
Vice President and Chief Credit Officer, and the appointment of
Ben A. Gay as his successor.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KLAMATH FIRST BANCORP, INC.
Date: February 14, 2002 By: /s/ Kermit K. Houser
---------------------------
Kermit K. Houser, President and
Chief Executive Officer
Date: February 14, 2002 By: /s/ Marshall Jay Alexander
---------------------------
Marshall Jay Alexander,
Executive Vice President and
Chief Financial Officer
18