SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2002
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 April 19, 2002, there were issued 6,813,054 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
--------
Unaudited Condensed Consolidated Balance Sheets
(As of March 31, 2002 and September 30, 2001) 3
Unaudited Condensed Consolidated Statements of Earnings
(For the three months and six months ended March 31, 2002
and 2001) 4
Unaudited Condensed Consolidated Statements of
Shareholders' Equity (For the year ended September 30, 2001
and for the six months ended March 31, 2002) 5
Unaudited Condensed Consolidated Statements of Cash Flows
(For the six months ended March 31, 2002 and 2001) 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 19
Signatures 20
2
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2002 AND SEPTEMBER 30, 2001
(Unaudited)
March 31, 2002 Sept. 30, 2001
ASSETS --------------- ---------------
Cash and due from banks ................................................. $ 30,636,460 $ 40,446,042
Interest bearing deposits with banks .................................... 3,990,075 3,791,252
Federal funds sold and securities purchased under agreements to resell .. 27,882,012 74,151,272
--------------- ---------------
Total cash and cash equivalents ...................................... 62,508,547 118,388,566
Investment securities available for sale, at fair value
(amortized cost: $153,894,323 and $154,190,612) ....................... 148,997,038 154,675,760
Investment securities held to maturity, at amortized cost (fair
value: $592,694 and $594,429) ......................................... 592,100 592,388
Mortgage backed and related securities available for sale, at fair
value (amortized cost: $496,942,071 and $419,639,650) ................. 495,877,819 421,637,670
Mortgage backed and related securities held to maturity, at amortized
cost (fair value: $1,300,178 and $1,642,174) .......................... 1,288,489 1,620,612
Loans receivable, net ................................................... 644,998,235 679,990,308
Real estate owned and repossessed assets ................................ 48,776 445,855
Premises and equipment, net ............................................. 23,384,851 16,911,912
Stock in Federal Home Loan Bank of Seattle, at cost ..................... 13,113,100 12,698,000
Accrued interest receivable ............................................. 8,299,298 8,657,586
Deferred income taxes ................................................... 1,695,231 --
Core deposit intangible and other intangible assets ..................... 42,827,325 44,088,926
Other assets ............................................................ 3,932,892 8,864,227
--------------- ---------------
Total assets ......................................................... $ 1,447,563,701 $ 1,468,571,810
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposit liabilities ................................................... $ 1,141,564,357 $ 1,152,824,144
Accrued interest on deposit liabilities ............................... 990,057 1,574,606
Advances from borrowers for taxes and insurance ....................... 2,457,592 6,637,994
Advances from Federal Home Loan Bank of Seattle ....................... 168,000,000 168,000,000
Short term borrowings ................................................. 1,700,000 1,700,000
Accrued interest on borrowings ........................................ 814,557 801,743
Pension liabilities ................................................... 1,007,446 942,148
Deferred income taxes ................................................. -- 597,345
Other liabilities ..................................................... 7,653,315 6,799,241
--------------- ---------------
Total liabilities ................................................... 1,324,187,324 1,339,877,221
--------------- ---------------
Mandatorily redeemable preferred securities issued by subsidiary ....... 14,576,474 14,553,684
--------------- ---------------
Commitments and contingent liabilities .............................. -- --
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value, 500,000 shares authorized; none issued -- --
Common stock, $.01 par value, 35,000,000 shares authorized,
March 31, 2002 - 6,817,367 issued, 6,332,363 outstanding
September 30, 2001 - 7,060,667 issued, 6,561,461 outstanding ......... 68,174 70,607
Additional paid-in capital ............................................ 30,861,229 33,926,796
Retained earnings-substantially restricted ............................ 84,641,969 83,816,307
Unearned shares issued to ESOP ........................................ (3,424,320) (3,913,510)
Unearned shares issued to MRDP ........................................ (1,146,195) (1,298,859)
Accumulated other comprehensive income (loss), net of tax.............. (2,200,954) 1,539,564
--------------- ---------------
Total shareholders' equity .......................................... 108,799,903 114,140,905
--------------- ---------------
Total liabilities and shareholders' equity .......................... $ 1,447,563,701 $ 1,468,571,810
=============== ===============
<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 Six Months Ended Six Months Ended
March 31, 2002 March 31, 2001 March 31, 2002 March 31, 2001
--------------- --------------- --------------- ---------------
INTEREST INCOME
Loans receivable ........................................ $13,329,697 $11,927,271 $27,289,669 $26,171,302
Mortgage backed and related securities .................. 6,358,565 3,236,880 12,941,575 4,472,936
Investment securities ................................... 2,081,079 1,925,899 4,248,324 3,972,434
Federal funds sold ...................................... 82,122 218,545 303,562 403,608
Interest bearing deposits ............................... 70,084 141,618 133,316 246,282
----------- ----------- ----------- -----------
Total interest income ................................. 21,921,547 17,450,213 44,916,446 35,266,562
----------- ----------- ----------- -----------
INTEREST EXPENSE
Deposit liabilities ..................................... 7,509,908 7,491,515 16,757,286 15,094,850
FHLB advances ........................................... 2,362,962 2,533,302 4,793,370 5,142,770
Other ................................................... 23,693 128,570 64,961 253,988
----------- ----------- ----------- -----------
Total interest expense ................................ 9,896,563 10,153,387 21,615,617 20,491,608
----------- ----------- ----------- -----------
Net interest income ................................... 12,024,984 7,296,826 23,300,829 14,774,954
Provision for loan losses ................................. 3,000 153,000 156,000 381,000
----------- ----------- ----------- -----------
Net interest income after provision for
loan losses ......................................... 12,021,984 7,143,826 23,144,829 14,393,954
----------- ----------- ----------- -----------
NON-INTEREST INCOME
Fees and service charges ................................ 1,986,660 935,358 3,789,532 1,806,014
Gain on sale of investments ............................. 119,101 2,501,874 119,101 2,509,793
Gain on sale of real estate owned ....................... 4,433 1,938 12,452 16,429
Other income ............................................ 811,145 268,203 1,281,827 488,617
----------- ----------- ----------- -----------
Total non-interest income ............................. 2,921,339 3,707,373 5,202,912 4,820,853
----------- ----------- ----------- -----------
NON-INTEREST EXPENSE
Compensation, employee benefits and related expense ..... 5,523,630 3,121,325 10,899,141 6,030,270
Occupancy expense ....................................... 1,156,041 644,578 2,361,786 1,225,969
Data processing expense ................................. 406,630 257,484 779,718 488,509
Insurance premium expense ............................... 51,483 33,879 83,758 68,670
Loss on sale of investments ............................. -- -- -- 30,632
Amortization of intangible assets ....................... 1,378,135 413,169 2,756,270 826,339
Other expense ........................................... 3,880,405 1,738,165 7,645,053 3,320,898
----------- ----------- ----------- -----------
Total non-interest expense ............................ 12,396,324 6,208,600 24,525,726 11,991,287
----------- ----------- ----------- -----------
Earnings before income taxes .............................. 2,546,999 4,642,599 3,822,015 7,223,520
Provision for income tax .................................. 875,894 1,687,796 1,329,801 2,583,673
----------- ----------- ----------- -----------
Net earnings .............................................. $ 1,671,105 $ 2,954,803 $ 2,492,214 $ 4,639,847
=========== =========== =========== ===========
Earnings per common share - basic ......................... $ 0.26 $ 0.45 $ 0.39 $ 0.70
Earnings per common share - fully diluted ................. $ 0.26 $ 0.45 $ 0.39 $ 0.70
Weighted average common shares outstanding - basic ........ 6,381,819 6,567,352 6,428,238 6,610,189
Weighted average common shares outstanding - with dilution 6,402,420 6,585,719 6,447,131 6,623,185
<FN>
See notes to condensed 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 SIX MONTHS ENDED MARCH 31, 2002
(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 -- -- -- (1,666,552) -- -- -- (1,666,552)
Stock repurchased and retired (262,873) (2,629) (3,466,041) -- -- -- -- (3,468,670)
ESOP contribution -- -- 152,668 -- 489,190 -- -- 641,858
MRDP contribution 14,202 -- 6,854 -- -- 152,664 -- 159,518
Exercise of stock options 19,573 196 240,952 -- -- -- -- 241,148
--------- ------- ----------- ----------- ------------ ------------ ----------- ------------
6,332,363 68,174 30,861,229 82,149,755 (3,424,320) (1,146,195) 1,539,564 110,048,207
Comprehensive loss
Net earnings 2,492,214 2,492,214
Other comprehensive
loss:
Unrealized loss on
securities, net of
tax and
reclassification
adjustment (2) (3,740,518) (3,740,518)
------------
Total comprehensive
loss (1,248,304)
--------- ------- ----------- ----------- ------------ ------------ ----------- ------------
Balance at
March 31, 2002 6,332,363 $68,174 $30,861,229 $84,641,969 ($3,424,320) ($1,146,195) ($2,200,954) $108,799,903
========= ======= =========== =========== ============ ============ =========== ============
<FN>
(1) Net unrealized holding gain on securities of $2,893,883 (net of $1,773,670
tax expense) less reclassification adjustment for net losses included in
net earnings of $18,205 (net of $11,158 tax benefit).
(2) Net unrealized holding loss on securities of $3,712,479 (net of $2,275,390
tax benefit) less reclassification adjustment for net gains included in net
earnings of $28,039 (net of $17,185 tax expense).
See notes to consolidated financial statements.
</FN>
5
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 2002 AND 2001
(Unaudited)
Six Months Ended Six Months Ended
March 31, March 31,
2002 2001
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $2,492,214 $4,639,847
ADJUSTMENTS TO RECONCILE NET EARNINGS TO
NET CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization 3,798,741 1,446,629
Provision for loan losses 156,000 381,000
Disposition of allowance for loan losses -- (231,842)
Compensation expense related to ESOP benefit 641,858 562,758
Compensation expense related to MRDP Trust 159,518 558,312
Net amortization of premiums (discounts) paid on
investment and mortgage backed and related securities 1,585,035 62,488
Decrease in deferred loan fees, net of amortization (189,726) (2,547,764)
Accretion of discounts on purchased loans 7,149 3,999
Net (gain) loss on sale of real estate owned and
premises and equipment (11,459) 3,494
Net gain on sale of investment and mortgage
backed and related securities (119,101) (2,479,160)
FHLB stock dividend (415,100) (387,400)
CHANGES IN ASSETS AND LIABILITIES
Accrued interest receivable 358,288 32,816
Other assets 3,356,667 (1,896,596)
Accrued interest on deposit liabilities (584,549) 47,504
Accrued interest on borrowings 12,814 8,390
Pension liabilities 65,298 65,298
Other liabilities 1,050,472 1,194,137
-------------- --------------
Net cash provided by operating activities 12,364,119 1,463,910
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of investment securities
available for sale -- 20,000,000
Principal repayments received on mortgage
backed and related securities held to maturity 327,174 230,666
Principal repayments received on mortgage
backed and related securities available for sale 48,029,224 18,006,036
Principal repayments received on loans 148,325,276 51,021,891
Loan originations (141,897,739) (48,292,954)
Loans sold 28,478,869 200,747,467
Purchase of investment securities available
for sale (7,395,197) (47,211,334)
Purchase of mortgage backed and related
securities available for sale (126,729,871) (259,486,468)
Proceeds from sale of investment securities
available for sale 10,040,625 10,367,746
Proceeds from sale of mortgage backed and related
securities available for sale -- 78,007,947
Proceeds from sale of real estate owned and
premises and equipment 520,782 347,706
Investment in real estate owned -- (69,210)
Purchases of premises and equipment (7,435,410) (1,577,305)
-------------- --------------
Net cash provided by (used in) investing activities (47,736,267) 22,092,188
-------------- --------------
6
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 2002 AND 2001
(Unaudited)
(Continued)
Six Months Ended Six Months Ended
March 31, March 31,
2002 2001
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in deposit liabilities,
net of withdrawals ($11,259,787) $6,419,706
Proceeds from FHLB advances 10,200,000 --
Repayments of FHLB advances (10,200,000) --
Proceeds from short term borrowings 200,000 3,400,000
Repayments of short term borrowings (200,000) (4,700,000)
Stock repurchase and retirement (3,468,670) (2,011,085)
Stock options exercised 241,148 --
Advances from borrowers for taxes and insurance (4,180,402) (7,016,901)
Dividends paid (1,840,160) (1,914,461)
-------------- --------------
Net cash used in financing activities (20,507,871) (5,822,749)
-------------- --------------
Net increase (decrease) in cash and cash
equivalents (55,880,019) 17,733,357
Cash and cash equivalents at beginning
of period 118,388,566 29,946,600
-------------- --------------
Cash and cash equivalents at end of period $62,508,547 $47,679,957
============== ==============
SUPPLEMENTAL SCHEDULE OF INTEREST AND
INCOME
TAXES PAID
Interest paid $22,187,352 $20,435,714
Income taxes paid 1,275,000 1,730,000
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES
Net unrealized gain (loss) on securities
available for sale ($3,740,518) $2,914,352
Dividends declared and accrued in other
liabilities 890,158 936,806
<FN>
See notes to condensed consolidated financial statements
</FN>
7
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
In the opinion of Management, the accompanying unaudited consolidated financial
statements contain all adjustments necessary for a fair presentation of Klamath
First Bancorp, Inc.'s (the "Company") financial condition as of March 31, 2002
and September 30, 2001, the results of operations for the three and six months
ended March 31, 2002 and 2001 and cash flows for the six months ended March 31,
2002 and 2001. Certain information and note disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been omitted pursuant to the rules
and regulations of the Securities and Exchange Commission. These consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K. The results of operations for the three and six months ended March
31, 2002 are not necessarily indicative of the results which may be expected for
the entire fiscal year.
2. COMPREHENSIVE INCOME
For the three months ended March 31, 2002, the Company's total comprehensive
income was $42,330 compared to $4.7 million for the three months ended March 31,
2001. Total comprehensive income for the three months ended March 31, 2002 was
comprised of net income of $1.7 million and other comprehensive loss of $1.6
million, net of tax. Total comprehensive income for the three months ended March
31, 2001 was comprised of net income of $3.0 million and other comprehensive
income of $1.7 million, net of tax.
For the six months ended March 31, 2002, the Company's total comprehensive loss
was $1.2 million compared to total comprehensive income of $7.6 million for the
six months ended March 31, 2001. Total comprehensive income for the six months
ended March 31, 2002 was comprised of net income of $2.5 million and other
comprehensive loss of $3.7 million, net of tax. Total comprehensive income for
the six months ended March 31, 2001 was comprised of net income of $4.6 million
and other comprehensive income of $2.9 million, net of tax.
The significant fluctuations noted in total comprehensive income comparing the
periods ended March 31, 2002 and 2001 resulted from changes in the market value
of investment and mortgage-backed securities available for sale. There was an
unrealized gain on securities available for sale in 2001 which turned to an
unrealized loss in 2002.
3. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows:
Six Month Ended Year Ended
March 31, September 30,
2002 2001
-------------- --------------
Balance, beginning of period $7,950,680 $4,082,265
Charge-offs (117,214) (90,173)
Recoveries 3,948 42,406
Provision for loss 156,000 387,000
Acquisitions -- 3,761,024
Allowance reclassified with loan securitization -- (231,842)
-------------- --------------
Balance, end of period $7,993,414 $7,950,680
============== ==============
At March 31, 2002 and 2001, impaired loans totaled zero. Specifically allocated
loan loss reserves related to these loans totaled zero, for both periods. The
average investment in impaired loans for the three months and six months ended
March 31, 2002 was zero. The average investment in impaired loans for the three
months and six months ended March 31, 2001 was $52,251 and $65,983,
respectively.
There were no troubled debt restructurings at March 31, 2002 and 2001 or for the
six months then ended.
8
4. ADVANCES FROM FEDERAL HOME LOAN BANK
Borrowings at March 31, 2002 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:
March 31, 2002 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 $10,000,000 1.89% 1.89% $10,000,000 3.60% 3.60%
After one but within
five years -- -- -- -- -- --
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 $168,000,000
============== ==============
5. SHORT TERM BORROWINGS
Short term borrowings at March 31, 2002 consisted of $1.7 million in credit line
borrowing from a financial institution at a rate of 3.83%.
6. 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.
7. 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 March 31, 2002, the Company had repurchased
262,000 shares, or 76.88% of the shares to be repurchased, at a weighted average
price per share of $13.19.
9
8. EARNINGS PER SHARE
Earnings per share ("EPS") is computed in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share." Shares held by the
Company's Employee Stock Ownership Plan ("ESOP") that are committed for release
are considered contingently issuable shares and are included in the computation
of basic EPS. Diluted EPS is computed using the treasury stock method, giving
effect to potential additional common shares that were outstanding during the
period. Potential dilutive common shares include shares awarded but not released
under the Company's Management Recognition and Development Plan ("MRDP"), and
stock options granted under the Stock Option Plan. Following is a summary of the
effect of dilutive securities on weighted average number of shares (denominator)
for the basic and diluted EPS calculations. There are no resulting adjustments
to net earnings.
For the Three Months Ended
March 31, March 31,
2002 2001
--------- ---------
Weighted average common shares outstanding - basic 6,381,819 6,567,352
--------- ---------
Effect of Dilutive Securities on Number of Shares:
Stock options 12,502 --
MRDP shares 8,099 18,367
--------- ---------
Total Dilutive Securities 20,601 18,367
--------- ---------
Weighted average common shares outstanding - with dilution 6,402,420 6,585,719
========= =========
For the Six Months Ended
March 31, March 31,
2002 2001
--------- ---------
Weighted average common shares outstanding - basic 6,428,238 6,610,189
--------- ---------
Effect of Dilutive Securities on Number of Shares:
Stock options 11,355 --
MRDP shares 7,913 12,996
--------- ---------
Total Dilutive Securities 19,268 12,996
--------- ---------
Weighted average common shares outstanding-with dilution 6,447,131 6,623,185
========= =========
9. REGULATORY CAPITAL
The following table illustrates the compliance by Klamath First Federal Savings
and Loan Association (the "Association") with currently applicable regulatory
capital requirements at March 31, 2002:
Categorized as "Well
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
----------------------- ------------------------------- -------------------------------
Amount Ratio Amount Ratio Amount Ratio
As of March 31, 2002: ------------ ---------- ------------ ---------- ------------ ----------
Total Capital: $85,608,487 11.7% $58,702,768 8.0% $73,378,460 10.0%
(To Risk Weighted Assets)
Tier I Capital: 77,622,388 10.1% N/A N/A 44,027,076 6.0%
(To Risk Weighted Assets)
Tier I Capital: 77,622,388 5.5% 56,152,552 4.0% 70,190,690 5.0%
(To Total Assets)
Tangible Capital: 77,622,388 5.5% 21,057,207 1.5% N/A N/A
(To Tangible Assets)
10
10. 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 October 1, 2002
for the Company. 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 October 1, 2002 for the
Company. 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, 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.
Critical Accounting Policies and Estimates
The "Management's Discussion and Analysis of Financial Condition and Results of
Operations," as well as disclosures included elsewhere in this Form 10-Q, are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires management to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. On an ongoing basis, management evaluates
the estimates used, including the adequacy of the allowance for loan and lease
losses, impairment of intangible assets, and contingencies and litigation.
Estimates are based upon historical experience, current economic conditions and
other factors that management considers reasonable under the circumstances.
These estimates result in judgments regarding the carrying values of assets and
liabilities when these values are not readily available from other sources as
well as assessing and identifying the accounting treatments of commitments and
contingencies. Actual results may differ from these estimates under different
assumptions or conditions. The following critical accounting policies involve
the more significant judgments and assumptions used in the preparation of the
consolidated financial statements.
The allowance for loan and lease losses is established to absorb known and
inherent losses attributable to loans and leases outstanding and related
off-balance sheet commitments. The adequacy of the allowance is monitored on an
ongoing basis and is based on management's evaluation of numerous factors. These
factors include the quality of the current loan portfolio, the trend in the loan
portfolio's risk ratings, current economic conditions, loan concentrations, loan
growth rates, past-due and non-performing trends, evaluation of specific loss
estimates for all significant problem loans, historical charge-off and recovery
experience and other pertinent information. Approximately 80 percent of the
Company's loan portfolio is secured by real estate and a significant
depreciation in real estate values in Oregon would cause management to increase
the allowance for loan and lease losses.
Retained mortgage servicing rights are measured by allocating the carrying value
of the loans between the assets sold and the interest retained, based on the
relative fair value at the date of the sale. The fair market values are
determined using a discounted cash flow model. Mortgage servicing assets are
amortized over the expected life of the loan and are evaluated periodically for
impairment. The expected life of the loan can vary from management's estimates
due to prepayments by borrowers. Prepayments in excess of management's estimates
would negatively impact the recorded value of the mortgage servicing rights. The
value of the mortgage servicing rights is also dependent upon the discount rate
used in the model. Management reviews this rate on an ongoing basis based on
12
current market rates. A significant increase in the discount rate would
negatively impact the value of mortgage servicing rights.
At March 31, 2002 the Company had approximately $42.8 million in core deposit
intangibles and other intangible assets as a result of business combinations.
Because these intangible assets were generated by purchases of bank branches,
the Company is required to account for them under SFAS No. 72, "Accounting for
Certain Acquisitions of Banking or Thrift Institutions," rather than SFAS No.
142, "Goodwill and Other Intangible Assets". Ongoing analysis of the fair value
of recorded core deposit intangibles and other intangibles for impairment will
involve a substantial amount of judgment, as will establishing and monitoring
estimated lives of other amortizable intangible assets.
The Company is party to various legal proceedings. These matters have a high
degree of uncertainty associated with them. There can be no assurance that the
ultimate outcome will not differ materially from our assessment of them. There
can also be no assurance that all matters that may be brought against us are
known to us at any point in time.
General
The Company, an Oregon corporation, is the unitary savings and loan holding
company for the Association. At March 31, 2002, the Company had total
consolidated assets of $1.4 billion and consolidated shareholders' equity of
$108.8 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 of 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.
13
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 55 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.
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, reducing the balance
of long term, fixed-rate mortgages in the loan portfolio. In addition, the
acquisition of 13 WAMU branches added significant commercial and consumer loan
balances to the portfolio mix, further reducing the interest rate sensitivity.
Both of these strategies were reflected in the market risk as reported at
September 30, 2001, and the market risk and sensitivity profile at March 31,
2002 is consistent with that reported in the Annual Report.
Changes in Financial Condition
At March 31, 2002, the consolidated assets of the Company totaled $1.4 billion,
down slightly from $1.5 billion at September 30, 2001.
Net loans receivable decreased by $35.0 million to $645.0 million at March 31,
2002, from $680.0 million at September 30, 2001. The decrease is the result of
sale of $28.5 million in single family mortgage loans during the six months
ended March 31, 2002 as well as loan repayments exceeding loan originations.
Investment securities decreased $5.7 million, or 3.66% from $155.3 million at
September 30, 2001 to $149.6 million at March 31, 2002. This decrease was the
combined result of purchase of $7.4 million in securities, sale of $10.0 million
of investment securities available for sale and a $3.0 million decline in the
mark to market adjustment for available for sale securities.
During the six months ended March 31, 2002, the Company purchased $126.7 million
of mortgage-backed securities ("MBS"). In addition, $48.3 million was received
in principal repayments on MBS, resulting in an overall increase in the balance
of MBS from $423.3 million at September 30, 2001 to $497.2 million at March 31,
2002.
Other assets decreased by $4.9 million, or 55.63%, from $8.9 million at
September 30, 2001 to $3.9 million at March 31, 2002. The balance at September
30, 2001 included a $4.1 million receivable from Washington Mutual Bank related
to the final settlement for the branch acquisition in September 2001.
Deposit liabilities decreased $11.3 million, or 0.98%, from $1.15 billion at
September 30, 2001 to $1.14 billion at March 31, 2002. The decrease reflects the
Company's pricing strategy in light of its high liquidity and low loan to
deposit ratio.
Advances from borrowers for taxes and insurance decreased $4.2 million from
September 30, 2001 to March 31, 2002. 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 remained consistent from September 30, 2001 to
March 31, 2002.
14
Total shareholders' equity decreased $5.3 million, or 4.68%, from $114.1 million
at September 30, 2001 to $108.8 million at March 31, 2002. This decrease was the
combined result of earnings of $2.5 million which were more than offset by a
$3.5 million reduction due to repurchase and retirement of shares, payment of
$1.7 million in common stock dividends for the six month period and a $3.7
million unrealized loss on securities available for sale.
Results of Operations
Comparison of Six Months Ended March 31, 2002 and 2001
General.
Over the last twelve months, the Company has grown from 35 branches to 55
branches. The impact of this growth is seen in interest income, non-interest
income, and non-interest expense.
Interest Income.
Interest income increased by $9.6 million, showing the combined effects of a
$409.0 million increase in average interest earning assets and a 79 basis point
decrease in yield from March 31, 2001 to March 31, 2002. Interest income on
loans receivable increased $1.1 million, or 4.27%, from $26.2 million for the
six months ended March 31, 2001 to $27.3 million for the same period of 2002.
This increase was a result of the $8.0 million increase in average loans
receivable due to the loans acquired with Washington Mutual Bank branches in
September 2001. The average yield on interest earning assets decreased 79 basis
points to 6.55% for the six months ended March 31, 2002 compared to 7.34% for
the same period ended March 31, 2001. Interest rate spread (the difference
between the rates earned on interest earning assets and the rates paid on
interest bearing liabilities) increased from 2.35% to 2.95% and interest rate
margin (net interest income divided by average interest earning assets)
increased from 3.07% to 3.40% comparing the six month periods. The increases in
interest rate spread and margin are primarily a result of the decreased cost of
deposits due to the addition of significant balances in non-interest bearing
accounts with the WAMU acquisition.
Interest Expense.
Total interest expense increased $1.1 million, or 5.49%, for the six months
ended March 31, 2002 compared to the same period in 2001. That increase was the
combined result of a $1.7 million increase in interest on deposit liabilities
and a $349,400 decrease in interest expense on FHLB advances and other
liabilities. The average balance of deposit liabilities increased $385.6 million
and the average rate paid on deposits decreased by 144 basis points as a result
of the addition of $423.5 million in deposit liabilities with the WAMU branch
acquisition in September 2001. The composition of the acquired deposits, with
18.38% non-interest bearing demand deposits and an additional 33.66% of
interest- bearing demand deposits with low rates of interest, reduced the
overall cost of deposits significantly. The result is evident in the modest
11.01% increase in interest expense on deposits coupled with a 60.08% increase
in the average balance of deposits, comparing the six month periods ended March
31, 2002 and 2001. The average balance of borrowings decreased $8.0 million from
$177.8 million for the six months ended March 31, 2001 to $169.8 million for the
same period ended March 31, 2002. In addition, the rate paid on borrowings
decreased by 34 basis points from 6.03% for the six months ended March 31, 2001
to 5.69% for the same period in 2002.
Provision for Loan Losses.
The provision for loan losses was $156,000 and there were $117,214 of charge
offs and $3,948 of recoveries during the six months ended March 31, 2002
compared to a $381,000 provision with $47,247 of charge offs and $34,866 of
recoveries during the six months ended March 31, 2001.
At March 31, 2002, the allowance for loan losses was equal to 1233.5% of total
non-performing assets compared to 297.1% at March 31, 2001. 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 0.14% at
March 31, 2001 to 0.04% at March 31, 2002. The decrease primarily relates to a
decrease in real estate owned, which is included in non-performing assets. At
March 31, 2002, the Company had no restructured loans.
15
Non-Interest Income.
Non-interest income increased $382,059, or 7.93%, to $5.2 million for the six
months ended March 31, 2002 from $4.8 million for the six months ended March 31,
2001. During the quarter ended March 31, 2001, the Company recorded the sale of
MBS resulting from the loan securitization at a gain of $2.5 million which is
compared to a $119,101 gain on sale of investments recorded in the period ended
March 31, 2002. Disregarding the gains on sales of securities, non-interest
income increased from $2.3 million for the six months ended March 31, 2001 to
$5.1 million for the same period in 2002, a 119.98% increase. Fees and service
charges improved significantly, increasing by 109.83% over the same period last
year due to the acquisition of deposit accounts subject to service charges and
increased loan servicing income. Increased income from sale of mortgage loans
and retail investment activities can be seen in the 162.34% increase in other
non-interest income from $488,617 for the six months ended March 31, 2001 to
$1.3 million for the six months ended March 31, 2002.
Non-Interest Expense.
In large part due to the September 2001 branch acquisition and the opening of
seven de novo branches during the past year, non-interest expense increased
$12.5 million, or 104.53%, to $24.5 million for the six months ended March 31,
2002, from $12.0 million for the comparable period in 2001. The growth was
accompanied by an increase in employees from 270 full-time equivalents at March
31, 2001 to 496 a year later, an 83.70% increase. Correspondingly, compensation,
employee benefits, and related expense increased $4.9 million, or 80.74% from
$6.0 million for the six months ended March 31, 2001 to $10.9 million for the
same period in 2002. Occupancy expense increased by $1.1 million, or 92.65%,
comparing the six months ended March 31, 2002 with the same period of 2001 due
to the addition of the branches. Insurance premium expense increased 21.97% as
expected due to the increase in deposit balances on which premiums are based.
Other expense increased $4.3 million, or 130.18%, from $3.3 million for the six
months ended March 31, 2001 to $7.6 million for the same period in 2002. The
increase in branches, accounts, and employees was followed by significant
increases in most expense categories, including telephone, postage, office
supplies, advertising, license and maintenance fees, ATM expense, and checking
department expense. Additionally, the increase in loans serviced for FNMA (after
the loan securitization in February 2001) resulted in a $513,000 increase in
expense related to FNMA loan pools sold and amortization of the related mortgage
servicing rights, comparing the six month periods ended March 31 2002 and 2001.
Income Taxes.
The provision for income taxes decreased $1.3 million for the six months ended
March 31, 2002 compared with the prior year. The effective tax rate was 34.79%
for the six months ended March 31, 2002 compared to 35.77% for the same period
of 2001. The decrease in effective tax rate is primarily due to an increase in
income on tax-exempt municipal securities.
Comparison of Three Months Ended March 31, 2002 and 2001
General.
As noted for the six months ended March 31, 2002, the WAMU branch acquisition
had significant impact on the results of the quarter ended March 31, 2002
compared to the same quarter a year ago. Net income decreased $1.3 million, or
43.44%, from $3.0 million for the three months ended March 31, 2001 to $1.7
million for the three months ended March 31, 2002. This decrease resulted
primarily from the $2.5 million gain on sale of MBS recorded for the quarter
ended March 31, 2001 which was not repeated in the current quarter.
Interest Income.
The Company recorded interest income of $21.9 million in the second quarter
ended March 31, 2002, an increase of 25.62% from $17.5 million for the same
period last year. Average interest earning assets increased by $396.1 million,
or 41.25%, due to the branch acquisition. Yield decreased from 7.27% for the
quarter ended March 31, 2001 to 6.47% for the same period of 2002. Yields
increased slightly on loans due to the increase in the proportion of higher rate
commercial and consumer loans in the portfolio after the branch acquisition.
Yields on MBS, investment securities, and cash balances decreased as rates
declined over the year. Also, funds obtained in the acquisition were invested
during a period of low rates, reducing the overall yield of interest-earning
assets.
16
Interest Expense.
Total interest expense decreased 2.53%, from $10.2 million for the quarter ended
March 31, 2001 to $9.9 million for the quarter ended March 31, 2002. Average
deposits increased by $380.2 million comparing the three months ended March 31,
2001 to 2002, while the average interest paid on interest-bearing deposits
decreased 173 basis points from 4.67% for the three months ended March 31, 2001
to 2.94% for the same period ended March 31, 2002. Both the increase in average
balance and the decrease in rate paid resulted from the branch acquisition. The
average balance of borrowings decreased $8.7 million, from $178.4 million for
the three months ended March 31, 2001 to $169.7 million for the same period
ended March 31, 2002, resulting in a decrease in interest on borrowings of
$275,217 for the three months ended March 31, 2002 compared with the same period
ended March 31, 2001. The rate paid on borrowings decreased by 33 basis points
from 5.94% for the quarter ended March 31, 2001 to 5.61% for the same period in
2002.
Provision for Loan Losses.
The provision for loan losses was $3,000 and there were $72,984 of charge offs,
and $3,948 of recoveries during the three months ended March 31, 2002 compared
to a $153,000 provision with $30,994 of charge offs and $34,089 of recoveries
during the three months ended March 31, 2001. Based on the Company's analysis of
the allowance for loan losses, the allowance is adequate to cover anticipated
losses in the loan portfolio and additional provision for losses was not
considered necessary.
Non-Interest Income.
Non-interest income decreased $786,034, or 21.20%, to $2.9 million for the three
months ended March 31, 2002 from $3.7 million for the three months ended March
31, 2001. Again, the $2.5 million gain on sale in the prior year is the primary
cause of the decrease. However, income from fees and service charges showed
significant growth, increasing by 112.40% from $935,358 for the quarter ended
March 31, 2001 to $2.0 million for the current quarter.
Non-Interest Expense.
Non-interest expense increased $6.2 million, or 99.66%, to $12.4 million for the
three months ended March 31, 2002, from $6.2 million in the comparable period in
2001. All categories of non- interest expense increased due to the WAMU branch
acquisition and addition of seven de novo branches over the last 12 months.
Compensation, employee benefits and related expense showed an increase of 76.96%
which reflects the addition of staff both at the acquired branches and de novo
branches, as well as in support and back office areas. The number of full-time
equivalent employees increased from 296 at March 31, 2001 to 470 at March 31,
2002. The acquired and newly-built branches were operating for the entire
quarter ended March 31, 2002, pushing occupancy expense up by 79.35% compared to
the same quarter a year ago. Data processing expense also increased 57.92% due
to the additional accounts and locations. Other expense increased by $2.1
million, or 123.25%, primarily due to increased costs with the growth in
branches.
Income Taxes.
The provision for income taxes decreased $811,902 for the three months ended
March 31, 2002 compared with the prior year. The effective tax rate was 34.39%
for the quarter ended March 31, 2002 compared to 36.35% for the same period of
2001. The decrease in effective tax rate is primarily due to an increase in
income on tax-exempt municipal securities.
17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in various claims and legal actions arising in
the normal course of business. Management believes that these
proceedings will not result in a material loss to the Company.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held an annual meeting on January 30, 2002. The election
of three directors was brought before the security holders for vote.
The following three directors were nominated and elected for
three-year terms:
Vote For Vote Withheld
--------- -------
Kermit K. Houser 5,739,075 548,280
J. Gillis Hannigan 5,900,545 386,810
Dianne E. Spires 5,870,705 416,650
The following directors continue in office for their respective
remaining terms: Timothy A. Bailey (one-year term), James D. Bocchi
(one-year term), William C. Dalton (one-year term), Rodney N. Murray
(two-year term), and Bernard Z. Agrons (two-year term).
Approval of the appointment of Deloitte & Touche LLP as independent
accountants for the fiscal year ending September 30, 2002 was brought
before the security holders for vote. The appointment was approved as
follows:
Vote For Vote Against Vote Withheld
6,010,965 241,637 34,753
No additional items were on the agenda of the annual meeting and no
items were brought to a vote during the meeting.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
a) Not applicable.
b) No Current Reports on Form 8-K were filed during the quarter
ended March 31, 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KLAMATH FIRST BANCORP, INC.
Date: May 14, 2002 By: /s/ Kermit K. Houser
-------------------------------
Kermit K. Houser, President and
Chief Executive Officer
Date: May 14, 2002 By: /s/ Marshall Jay Alexander
-------------------------------
Marshall Jay Alexander,
Executive Vice President and
Chief Financial Officer
19