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, 2003
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 30, 2003, there were issued 6,924,515 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 SUBSIDIARIES
TABLE OF CONTENTS
Part I. Financial Information
- ------- ----------------------
Item 1. Financial Statements Page
------
Unaudited Condensed Consolidated Balance Sheets
(As of March 31, 2003 and September 30, 2002) 3
Unaudited Condensed Consolidated Statements of Earnings
(For the three months and six months ended March 31, 2003
and 2002) 4
Unaudited Condensed Consolidated Statements of
Shareholders' Equity
(For the year ended September 30, 2002 and for
the six months ended March 31, 2003) 5
Unaudited Condensed Consolidated Statements of
Cash Flows
(For the six months ended March 31, 2003 and 2002) 6 - 7
Notes to Condensed Consolidated Financial Statements 8 - 13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14 - 19
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
Item 4. Controls and Procedures 21
Part II. Other Information
- ------- -------------------
Item 1. Legal Proceedings 22
Item 2. Changes in Securities 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
Certifications Required by Rules 13a-14 and 15d-14
under the Securities Exchange Act of 1934
Certification of Chief Executive Officer and Chief Financial
Officer of Klamath First Bancorp, Inc. Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
2
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2003 AND SEPTEMBER 30, 2002
(Unaudited)
March 31, 2003 September 30, 2002
--------------- ------------------
Cash and due from banks ............................................................. $ 36,647,926 $ 38,444,500
Interest bearing deposits with banks ................................................ 16,109,394 5,762,373
Federal funds sold and securities purchased under agreements to resell .............. 286,501 1,584,540
--------------- ---------------
Total cash and cash equivalents .................................................. 53,043,821 45,791,413
Investment securities available for sale, at fair value
(amortized cost: $155,911,802 and $119,940,845) ................................... 153,734,478 119,542,052
Mortgage backed and related securities available for sale, at fair
value (amortized cost: $587,378,020 and $640,304,722) ............................. 592,316,063 650,796,164
Loans receivable, net ............................................................... 573,395,681 607,464,660
Real estate owned and repossessed assets ............................................ 656,480 758,663
Premises and equipment, net ......................................................... 23,322,508 23,410,847
Stock in Federal Home Loan Bank of Seattle, at cost ................................. 13,968,800 13,510,400
Accrued interest receivable ......................................................... 7,468,711 8,177,014
Deferred income taxes ............................................................... 1,365,730 --
Bank-owned life insurance ........................................................... 15,137,472 --
Core deposit intangible, net ........................................................ 15,601,887 17,426,074
Goodwill and other intangible assets ................................................ 22,872,915 22,872,915
Other assets ........................................................................ 4,755,313 3,745,151
--------------- ---------------
Total assets ..................................................................... $ 1,477,639,859 $ 1,513,495,353
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposit liabilities ............................................................... $ 1,099,727,664 $ 1,142,005,997
Accrued interest on deposit liabilities ........................................... 677,412 721,810
Advances from borrowers for taxes and insurance ................................... 1,580,165 5,105,955
Advances from Federal Home Loan Bank of Seattle ................................... 208,000,000 205,250,000
Short term borrowings ............................................................. 1,700,000 1,700,000
Accrued interest on borrowings .................................................... 910,280 820,975
Pension liabilities ............................................................... 811,347 842,272
Deferred income taxes ............................................................. -- 1,466,556
Other liabilities ................................................................. 17,981,527 8,438,245
--------------- ---------------
Total liabilities ............................................................... 1,331,388,395 1,366,351,810
--------------- ---------------
Mandatorily redeemable preferred securities issued by subsidiary ................... 27,271,807 27,205,507
--------------- ---------------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value, 500,000 shares authorized; none issued ........... -- --
Common stock, $.01 par value, 35,000,000 shares authorized,
March 31, 2003 - 6,859,405 issued, 6,502,780 outstanding
September 30, 2002 - 6,744,040 issued, 6,366,546 outstanding ..................... 68,594 67,440
Additional paid-in capital ........................................................ 32,083,743 30,282,059
Retained earnings-substantially restricted ........................................ 88,414,623 87,265,334
Unearned shares issued to ESOP .................................................... (2,445,805) (2,935,130)
Unearned shares issued to MRDP .................................................... (853,144) (999,111)
Accumulated other comprehensive income, net of tax ................................ 1,711,646 6,257,444
--------------- ---------------
Total shareholders' equity ...................................................... 118,979,657 119,938,036
--------------- ---------------
Total liabilities and shareholders' equity ...................................... $ 1,477,639,859 $ 1,513,495,353
=============== ===============
<FN>
See notes to condensed consolidated financial statements.
</FN>
3
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Three Three Six Six
Months Ended Months Ended Months Ended Months Ended
March 31, March 31, March 31, March 31,
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
INTEREST INCOME
Loans receivable ........................................ $ 11,002,022 $ 13,329,697 $ 22,713,826 $ 27,289,669
Mortgage backed and related securities .................. 5,098,979 6,358,565 11,042,778 12,941,575
Investment securities ................................... 1,569,610 2,081,079 3,044,141 4,248,324
Federal funds sold ...................................... 36,713 82,122 75,951 303,562
Interest bearing deposits ............................... 64,367 70,084 121,522 133,316
--------------- --------------- --------------- ---------------
Total interest income ................................. 17,771,691 21,921,547 36,998,218 44,916,446
--------------- --------------- --------------- ---------------
INTEREST EXPENSE
Deposit liabilities ..................................... 4,698,399 7,509,908 10,248,435 16,757,286
FHLB advances ........................................... 2,626,684 2,362,962 5,277,222 4,793,370
Other ................................................... 23,314 23,693 52,803 64,961
--------------- --------------- --------------- ---------------
Total interest expense ................................ 7,348,397 9,896,563 15,578,460 21,615,617
--------------- --------------- --------------- ---------------
Net interest income ................................... 10,423,294 12,024,984 21,419,758 23,300,829
Provision for loan losses ................................. -- 3,000 -- 156,000
--------------- --------------- --------------- ---------------
Net interest income after provision for
loan losses ......................................... 10,423,294 12,021,984 21,419,758 23,144,829
--------------- --------------- --------------- ---------------
NON-INTEREST INCOME
Fees and service charges on deposit accounts ............ 1,521,020 1,235,712 3,102,383 2,328,099
Other fees and service charges .......................... 828,342 750,948 1,638,691 1,461,433
Gain on sale of investments ............................. 504,451 119,101 884,519 119,101
Gain on sale of real estate owned ....................... 10,715 4,433 16,721 12,452
Brokerage and annuity commissions ....................... 400,980 301,352 908,470 542,903
Gain on sale of mortgage loans .......................... 612,138 329,036 1,016,729 463,431
Income on bank-owned life insurance ..................... 137,472 -- 137,472 --
Other income ............................................ 160,956 180,757 412,474 275,493
--------------- --------------- --------------- ---------------
Total non-interest income ............................. 4,176,074 2,921,339 8,117,459 5,202,912
--------------- --------------- --------------- ---------------
NON-INTEREST EXPENSE
Compensation, employee benefits and related expense ..... 6,206,153 5,523,630 12,082,675 10,899,141
Occupancy expense ....................................... 1,351,646 1,156,041 2,576,092 2,361,786
Data processing expense ................................. 347,311 406,630 693,107 779,718
Insurance premium expense ............................... 46,871 51,483 94,604 83,758
Loss on sale of investments ............................. 404,439 -- 404,439 --
Amortization of intangible assets ....................... 912,094 1,378,135 1,824,187 2,756,270
Mandatorily redeemable preferred securities expense ..... 403,290 244,911 834,441 546,489
Other expense ........................................... 3,577,736 3,635,494 6,907,172 7,098,564
--------------- --------------- --------------- ---------------
Total non-interest expense ............................ 13,249,540 12,396,324 25,416,717 24,525,726
--------------- --------------- --------------- ---------------
Earnings before income taxes .............................. 1,349,828 2,546,999 4,120,500 3,822,015
Provision for income tax .................................. 388,184 875,894 1,273,179 1,329,801
--------------- --------------- --------------- ---------------
Net earnings .............................................. $ 961,644 $ 1,671,105 $ 2,847,321 $ 2,492,214
=============== =============== =============== ===============
Earnings per common share - basic ......................... $ 0.15 $ 0.26 $ 0.44 $ 0.39
Earnings per common share - fully diluted ................. $ 0.14 $ 0.26 $ 0.43 $ 0.39
Weighted average common shares outstanding - basic ........ 6,482,777 6,381,819 6,440,579 6,428,238
Weighted average common shares outstanding - with dilution 6,657,784 6,402,420 6,592,859 6,447,131
<FN>
See notes to condensed consolidated financial statements.
</FN>
4
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED SEPTEMBER 30, 2002 AND THE SIX MONTHS ENDED MARCH 31, 2003
(Unaudited)
Unearned Unearned Accumulated
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, 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 .............. -- -- -- (3,339,749) -- -- -- (3,339,749)
Stock repurchased and
retired ................... (345,986) (3,460) (4,747,387) -- -- -- -- (4,750,847)
ESOP contribution ........... 97,865 -- 410,593 -- 978,380 -- -- 1,388,973
MRDP contribution ........... 23,847 -- 11,511 -- -- 299,748 -- 311,259
Exercise of stock options ... 29,359 293 369,295 -- -- -- -- 369,588
Tax benefit of stock options -- -- 311,251 -- -- -- -- 311,251
----------- ---------- ----------- ----------- ----------- ----------- ------------- -----------
6,366,546 67,440 30,282,059 80,476,558 (2,935,130) (999,111) 1,539,564 108,431,380
Comprehensive income
Net earnings .............. 6,788,776 6,788,776
Other comprehensive income:
Unrealized gain on
securities, net of tax
and reclassification
adjustment (1) .......... 4,717,880 4,717,880
-----------
Total comprehensive
income 11,506,656
----------- ---------- ----------- ----------- ----------- ----------- ------------- -----------
Balance at
September 30, 2002 ........ 6,366,546 67,440 30,282,059 87,265,334 (2,935,130) (999,111) 6,257,444 119,938,036
Cash dividends .............. -- -- -- (1,698,032) -- -- -- (1,698,032)
Stock repurchased and retired (7,605) (76) (119,232) -- -- -- -- (119,308)
ESOP contribution ........... -- -- 301,041 -- 489,325 -- -- 790,366
MRDP contribution ........... 20,869 -- 4,217 -- -- 145,967 -- 150,184
Exercise of stock options ... 122,970 1,230 1,615,658 -- -- -- -- 1,616,888
Tax benefit of stock options -- -- -- -- -- -- -- --
----------- ---------- ----------- ----------- ----------- ----------- ------------- -----------
6,502,780 68,594 32,083,743 85,567,302 (2,445,805) (853,144) 6,257,444 120,678,134
Comprehensive loss
Net earnings .............. 2,847,321 2,847,321
Other comprehensive loss:
Unrealized loss on
securities, net of tax
and reclassification
adjustment (2) .......... (4,545,798) (4,545,798)
------------
Total comprehensive loss (1,698,477)
----------- ---------- ----------- ----------- ----------- ----------- ------------- ------------
Balance at March 31, 2003 ... 6,502,780 $ 68,594 $32,083,743 $88,414,623 ($2,445,805) ($ 853,144) $1,711,646 $118,979,657
=========== ========== =========== =========== =========== =========== ============= ============
<FN>
(1) Net unrealized holding gain on securities of $5,095,497 (net of $3,123,389 tax expense) less reclassification adjustment
for net gains included in net earnings of $377,617 (net of $231,443 tax expense).
(2) Net unrealized holding loss on securities of $3,018,305 (net of $1,849,922 tax benefit) less reclassification adjustment
for net gains included in net earnings of $1,527,493 (net of $936,205 tax expense).
See notes to consolidated financial statements.
</FN>
5
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 2003 AND 2002
(Unaudited)
Six Months Ended Six Months Ended
March 31, March 31,
2003 2002
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings .................................................................... $ 2,847,321 $ 2,492,214
ADJUSTMENTS TO RECONCILE NET EARNINGS TO
NET CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization ................................................... 2,924,997 3,798,741
Deferred income taxes ........................................................... (46,152) --
Provision for loan losses ....................................................... -- 156,000
Compensation expense related to ESOP benefit .................................... 790,366 641,858
Compensation expense related to MRDP Trust ...................................... 150,184 159,518
Net amortization of premiums (discounts) paid on
investment and mortgage backed and related securities ......................... 4,986,797 1,585,035
Decrease in deferred loan fees, net of amortization ............................. (499,711) (189,726)
Accretion of discounts on purchased loans ....................................... -- 7,149
Net (gain) loss on sale of real estate owned and
premises and equipment ........................................................ (8,348) (11,459)
Net gain on sale of investment and mortgage
backed and related securities ................................................. (480,080) (119,101)
FHLB stock dividend ............................................................. (458,400) (415,100)
CHANGES IN ASSETS AND LIABILITIES
Accrued interest receivable ..................................................... 708,303 358,288
Other assets .................................................................... (1,154,675) 3,356,667
Accrued interest on deposit liabilities ......................................... (44,398) (584,549)
Accrued interest on borrowings .................................................. 89,305 12,814
Pension liabilities ............................................................. (30,925) 65,298
Other liabilities ............................................................... 9,778,960 1,050,472
--------------- ---------------
Net cash provided by operating activities ........................................... 19,553,544 12,364,119
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of investment securities
available for sale ............................................................ 3,862,000 --
Principal repayments received on mortgage
backed and related securities held to maturity ............................... -- 327,174
Principal repayments received on mortgage
backed and related securities available for sale ............................. 186,229,080 48,029,224
Principal repayments received on loans .......................................... 178,858,925 148,325,276
Loan originations ............................................................... (195,871,576) (141,897,739)
Loans purchased ................................................................. (1,875,225) --
Loans sold ...................................................................... 53,304,337 28,478,869
Purchase of investment securities available
for sale ...................................................................... (50,136,050) (7,395,197)
Purchase of mortgage backed and related
securities available for sale ................................................. (255,833,371) (126,729,871)
Proceeds from sale of investment securities
available for sale ............................................................ 10,228,950 10,040,625
Proceeds from sale of mortgage backed and related
securities available for sale ................................................. 118,098,423 --
Proceeds from sale of real estate owned and
premises and equipment ........................................................ 262,753 520,782
Purchases of premises and equipment ............................................. (1,005,430) (7,435,410)
Purchase of bank-owned life insurance ........................................... (15,000,000) --
--------------- ---------------
Net cash provided by (used in) investing activities ................................. 31,122,816 (47,736,267)
--------------- ---------------
6
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 2003 AND 2002
(Unaudited)
(Continued)
Six Months Ended Six Months Ended
March 31, March 31,
2003 2002
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in deposit liabilities,
net of withdrawals ............................................................ ($42,278,333) ($11,259,787)
Proceeds from FHLB advances ..................................................... 69,800,000 10,200,000
Repayments of FHLB advances ..................................................... (67,050,000) (10,200,000)
Proceeds from short term borrowings ............................................. -- 200,000
Repayments of short term borrowings ............................................. -- (200,000)
Stock repurchase and retirement ................................................. (119,308) (3,468,670)
Stock options exercised ......................................................... 1,616,888 241,148
Advances from borrowers for taxes and insurance ................................. (3,525,790) (4,180,402)
Dividends paid .................................................................. (1,867,409) (1,840,160)
--------------- ---------------
Net cash used in financing activities ............................................... (43,423,952) (20,507,871)
--------------- ---------------
Net increase (decrease) in cash and cash
equivalents ....................................................................... 7,252,408 (55,880,019)
Cash and cash equivalents at beginning
of period ......................................................................... 45,791,413 118,388,566
--------------- ---------------
Cash and cash equivalents at end of period .......................................... $53,043,821 $62,508,547
=============== ===============
SUPPLEMENTAL SCHEDULE OF INTEREST AND
INCOME
TAXES PAID
Interest paid ................................................................... $15,533,552 $22,187,352
Income taxes paid ............................................................... 1,775,000 1,275,000
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES
Net unrealized loss on securities
available for sale ............................................................ ($4,545,798) ($3,740,518)
Dividends declared and accrued in other
liabilities ................................................................... 891,723 890,158
<FN>
See notes to condensed consolidated financial statements
</FN>
7
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARIES
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, 2003
and September 30, 2002, the results of operations for the three and six months
ended March 31, 2003 and 2002 and cash flows for the six months ended March 31,
2003 and 2002. 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, 2003 are not necessarily indicative of the results which may be expected for
the entire fiscal year.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123. This Statement provides alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. It also expands and clarifies the disclosure requirements
to make those disclosures more prominent and to require such disclosures in
interim as well as annual financial statements. While the Company plans to
continue to account for stock-based compensation under the intrinsic value
method presented in APB Opinion 25, Accounting for Stock Issued to Employees,
the disclosure requirements of SFAS No. 148 have been implemented for interim
reporting for the quarter ended March 31, 2003. The table below presents net
earnings and earnings per share as reported, the stock-based employee
compensation cost, net of related tax effects, that would have been included in
the determination of net earnings if the fair value based method had been
applied and pro forma net earnings and earnings per share that would have
resulted if the fair value method had been applied.
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
March 31, 2003 March 31, 2002 March 31, 2003 March 31, 2002
---------- ---------- ---------- ----------
Net Earnings as reported .................................. $ 961,644 $1,671,105 $2,847,321 $2,492,214
Less: SFAS 123 Compensation expense, net of tax............ (97,393) (118,469) (194,786) (236,938)
---------- ---------- ---------- ----------
Pro forma net earnings .................................... $ 864,251 $1,552,636 $2,652,535 $2,255,276
========== ========== ========== ==========
Weighted average shares - basic ........................... 6,482,777 6,381,819 6,440,579 6,428,238
Earnings per share - basic
As reported .......................................... $ 0.15 $ 0.26 $ 0.44 $ 0.39
Pro forma ............................................ $ 0.13 $ 0.24 $ 0.41 $ 0.35
Weighted average shares - with dilution.................... 6,657,784 6,402,420 6,592,859 6,447,131
Earnings per share - with dilution
As reported .......................................... $ 0.14 $ 0.26 $ 0.43 $ 0.39
Pro forma ............................................ $ 0.13 $ 0.24 $ 0.40 $ 0.35
8
2. COMPREHENSIVE INCOME
For the three months ended March 31, 2003, the Company's total comprehensive
loss was $736,974 compared to total comprehensive income of $42,330 for the
three months ended March 31, 2002. Total comprehensive loss for the three months
ended March 31, 2003 was comprised of net income of $961,644 and other
comprehensive loss of $1.7 million, net of tax. 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.
For the six months ended March 31, 2003, the Company's total comprehensive loss
was $1.7 million compared to total comprehensive loss of $1.2 million for the
six months ended March 31, 2002. Total comprehensive loss for the six months
ended March 31, 2003 was comprised of net income of $2.8 million and other
comprehensive loss of $4.5 million, net of tax. Total comprehensive loss 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.
The significant fluctuations noted in total comprehensive income comparing the
periods ended March 31, 2003 and 2002 resulted from changes in the market value
of investment and mortgage-backed securities available for sale. There was an
unrealized loss on securities available for sale in 2002 which has increased in
2003.
3. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows:
Six Months Ended Year Ended
March 31, September 30,
2003 2002
--------------- ---------------
Balance, beginning of period ............................... $7,375,812 $7,950,680
Charge-offs ................................................ (186,412) (747,092)
Recoveries ................................................. 44,641 16,224
Provision for loss ......................................... -- 156,000
--------------- ---------------
Balance, end of period ..................................... $7,234,041 $7,375,812
=============== ===============
At March 31, 2003 and 2002, impaired loans totaled $195,170 and zero,
respectively. There were no specifically allocated loan loss reserves related to
these loans. The average investment in impaired loans for the three months and
six months ended March 31, 2003 was $177,347 and $172,315, respectively. The
average investment in impaired loans for the three months and six months ended
March 31, 2002 was zero.
At March 31, 2003, the balance of loans resulting from troubled debt
restructurings was $83,860. There were no restructured loans at March 31, 2002.
9
4. GOODWILL AND INTANGIBLE ASSETS
On October 1, 2002, the Company adopted SFAS No. 147, Acquisitions of Certain
Financial Institutions, which requires certain intangible assets to be accounted
for under the provisions of SFAS No. 141, Business Combinations, and SFAS No.
142, Goodwill and Other Intangible Assets, which statements were also adopted on
October 1, 2002. In accordance with these standards, goodwill and other
intangible assets with indefinite lives are no longer being amortized but
instead will be tested for impairment at least annually. Upon adoption of SFAS
No. 147, $22.9 million of intangible assets related to prior branch acquisitions
were reclassified to goodwill and amortization of these assets ceased. Expense
related to amortization of other intangibles totaled $808,749 for the six months
ended March 31, 2002. A similar expense is not being recorded in fiscal year
2003. Core deposit intangibles will continue to be amortized based on the
estimated lives of the underlying deposits. The following table summarizes
selected information about intangible assets:
Gross Carrying Amount Accumulated Amortization
- -------------------------------------------- -------------------------------------- --------------------------------------
Intangible assets March 31, 2003 September 30, 2002 March 31, 2003 September 30, 2002
carrying value
--------------- --------------- --------------- ---------------
Core deposit intangible .................... $ 28,376,467 $ 28,376,467 $ 12,774,580 $ 10,950,393
Mortgage servicing rights (included
in Other Assets).......................... 1,820,823 1,820,823 921,733 604,424
--------------- --------------- --------------- ---------------
Total ...................................... $ 30,197,290 $ 30,197,290 $ 13,696,313 $ 11,554,817
=============== =============== =============== ===============
Amortization expense Amortization expense
Three months ended March 31, Six months ended March 31,
-------------------------------------- --------------------------------------
Intangible assets amortization 2003 2002 2003 2002
- -------------------------------------------- -------------------------------------- --------------------------------------
Core deposit intangible .................... $ 912,094 $ 973,761 $ 1,824,187 $ 1,947,521
Mortgage servicing rights .................. 174,678 107,041 317,309 196,648
--------------- --------------- --------------- ---------------
Total ...................................... $ 1,086,772 $ 1,080,802 $ 2,141,496 $ 2,144,169
=============== =============== =============== ===============
Estimated amortization expense
For year ended 9/30/2004 $3,611,358
For year ended 9/30/2005 $3,306,403
For year ended 9/30/2006 $1,648,489
For year ended 9/30/2007 $1,527,914
For year ended 9/30/2008 $1,258,079
10
5. ADVANCES FROM FEDERAL HOME LOAN BANK
Borrowings at March 31, 2003 consisted of four short term advances totaling
$26.0 million and 14 long term advances totaling $182.0 million from the Federal
Home Loan Bank of Seattle ("FHLB"). The Company has pledged mortgage-backed
securities and collateralized mortgage obligations issued by the U.S. Government
and agencies thereof as collateral for the borrowings.
Scheduled maturities of advances from the FHLB were as follows:
March 31, 2003 September 30, 2002
------------ ------------------ ----------------- -------------- -------------- ---------------
Range of Weighted Range of Weighted
interest average interest average
Amount rates interest rate Amount rates interest rate
------------ ------------------ ----------------- -------------- -------------- ---------------
Due within one year $26,000,000 1.61% - 2.14% 2.02% $31,250,000 1.91% - 2.20% 2.09%
After one but within
five years 24,000,000 2.22% - 3.58% 3.02% 16,000,000 2.48% - 3.58% 3.06%
After five but within
ten years 158,000,000 4.77% - 7.05% 5.86% 158,000,000 4.77% - 7.05% 5.86%
------------ --------------
$208,000,000 $205,250,000
============ ==============
6. SHORT TERM BORROWINGS
Short term borrowings at March 31, 2003 consisted of $1.7 million in credit line
borrowing from a financial institution at a rate of 3.83%.
7. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company has various outstanding
commitments and contingencies that are not reflected in the accompanying
consolidated financial statements. In addition, the Company is a defendant in
certain claims and legal actions arising in the ordinary course of business. In
the opinion of management, after consultation with legal counsel, the ultimate
disposition of these matters is not expected to have a material adverse effect
on the consolidated financial condition of the Company.
8. SHAREHOLDERS' EQUITY
On January 16, 2003, the Company announced a five percent stock repurchase plan
to be completed over a twelve month period. Five percent represents
approximately 339,000 shares. To date, no shares have been repurchased under the
plan.
Shares issued and outstanding have increased since September 30, 2002 due to
exercise of stock options.
11
9. EARNINGS PER SHARE
Earnings per share ("EPS") is computed in accordance with 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,
2003 2002
--------------- ---------------
Weighted average common shares outstanding - basic .................................. 6,482,777 6,381,819
--------------- ---------------
Effect of Dilutive Securities on Number of Shares:
Stock options ....................................................................... 172,266 12,502
MRDP shares ......................................................................... 2,741 8,099
--------------- ---------------
Total Dilutive Securities ........................................................... 175,007 20,601
--------------- ---------------
Weighted average common shares outstanding - with dilution ......................... 6,657,784 6,402,420
=============== ===============
For the Six Months Ended
March 31, March 31,
2003 2002
--------------- ---------------
Weighted average common shares outstanding - basic .................................. 6,440,579 6,428,238
--------------- ---------------
Effect of Dilutive Securities on Number of Shares:
Stock options ....................................................................... 147,236 10,980
MRDP shares ......................................................................... 5,044 7,913
--------------- ---------------
Total Dilutive Securities ........................................................... 152,280 18,893
--------------- ---------------
Weighted average common shares outstanding-with dilution ............................ 6,592,859 6,447,131
=============== ===============
12
10. REGULATORY CAPITAL
The following table illustrates the compliance by Klamath First Federal Savings
and Loan Association (the "Association") with currently applicable regulatory
capital requirements at March 31, 2003:
Categorized as "Well
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
---------------------- ------------------------------ ------------------------------
Amount Ratio Amount Ratio Amount Ratio
As of March 31, 2003 ------------ ----- ------------ ----- ------------ -----
Total Capital: $103,343,358 13.2% $62,545,328 8.0% $78,181,660 10.0%
(To Risk Weighted Assets)
Tier I Capital: 96,251,910 12.3% N/A N/A 46,908,996 6.0%
(To Risk Weighted Assets)
Tier I Capital: 96,251,910 6.7% 57,109,645 4.0% 71,387,056 5.0%
(To Total Assets)
Tangible Capital: 96,251,910 6.7% 21,416,117 1.5% N/A N/A
(To Tangible Assets)
13
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 losses is established to absorb known and inherent losses
attributable to loans outstanding. 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.
Management believes the allowance for loan losses is adequate for the loan
portfolio as it is currently structured. However, as the Company continues
transitioning its loan portfolio to include more commercial bank-like products,
management expects the allowance will increase as the risk profile changes.
Approximately 72 percent of the Company's loan portfolio is secured by
residential and commercial real estate and a significant depreciation in real
estate values in Oregon would cause management to increase the allowance for
loan losses.
14
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 rights 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
current market rates. A significant increase in the discount rate would
negatively impact the value of mortgage servicing rights.
The extended period of low interest rates has resulted in prepayment of mortgage
loans, including those related to the mortgage servicing rights. The Company
monitors the value of the mortgage servicing rights and recognizes impairment,
when necessary, on a quarterly basis. While management expects that there may be
additional impairment of the value of mortgage servicing rights in the continued
low interest rate environment, the balance of mortgage servicing rights at March
31, 2003 was less than $1 million, limiting the amount of impairment which can
be experienced.
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, 2003, the Company had total
consolidated assets of $1.5 billion and consolidated shareholders' equity of
$119.0 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 loans 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, moved the Company strongly in
this direction. Subsequent to the WAMU acquisition, the Company has and will
continue to hire commercial lenders in key market areas to further increase and
enhance the transition from a tradition single family mortgage lender to a full
service commercial bank lender.
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.
15
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 57 office facilities, with the main office located in
Klamath Falls, Oregon. Two additional in-store branches will open this year, one
in Woodburn, Oregon in April and the other in Grants Pass, Oregon in July. The
primary market areas of the Association are the state of Oregon and adjoining
areas of California and Washington.
Liquidity and Capital Resources
The Company generates cash through operating activities, primarily as a result
of net income. The adjustments to reconcile net income to net cash provided by
operations during the periods presented consisted primarily of the provision for
loan losses, depreciation and amortization, stock-based compensation expense,
amortization of deferred loan origination fees, net gain on the sale of
investment and mortgage-backed securities, increases or decreases in various
escrow accounts and increases or decreases in other assets and liabilities. The
primary investing activity of the Association is lending, which is funded with
cash provided from operations and financing activities, as well as proceeds from
amortization and prepayments on existing loans and mortgage backed and related
securities. For additional information about cash flows from operating,
financing, and investing activities, see the Condensed Consolidated Statements
of Cash Flows.
OTS capital regulations require the Association to have: (i) tangible capital
equal to 1.5% of adjusted total assets, (ii) core capital equal to 4.0% of
adjusted total assets, and (iii) total risk-based capital equal to 8.0% of
risk-weighted assets. At March 31, 2003, the Association was in compliance with
all regulatory capital requirements effective as of such date, with tangible,
core and risk-based capital of 6.7%, 6.7% and 13.2%, respectively.
Changes in Financial Condition
At March 31, 2003, the consolidated assets of the Company totaled $1.48 billion,
down slightly from $1.51 billion at September 30, 2002.
Net loans receivable decreased by $34.1 million to $573.4 million at March 31,
2003, from $607.5 million at September 30, 2002. The decrease is the combined
result of continued prepayment of loan balances due to refinancing activity and
the Company's strategy of selling much of its single family mortgage loan
production, so those loans are not adding to the portfolio balance. The Company
sold $53.3 million in single family mortgage loans with servicing released
during the six months ended March 31, 2003.
Investment securities increased $34.2 million, or 28.6% from $119.5 million at
September 30, 2002 to $153.7 million at March 31, 2003. This increase was the
combined result of purchase of $50.1 million in securities, sale of $10.2
million of investment securities available for sale, maturity of $3.9 million of
investment principal, and a $1.8 million decline in the market value of
available for sale securities.
During the six months ended March 31, 2003, the Company purchased $255.8 million
of mortgage-backed securities ("MBS") and sold $118.1 million of MBS. In
addition, $186.2 million was received in principal repayments on MBS, resulting
in an overall decrease in the balance of MBS from $650.8 million at September
30, 2002 to $592.3 million at March 31, 2003. The on-going strategy of
investment in MBS is to maximize income while keeping maturities and cash flows
short, within two to five years, giving the Company the ability to reinvest this
cash flow in loans and investments over the same period.
In December 2002, the Company purchased $15.0 million in bank-owned life
insurance. This insurance is used to fund director benefits, supplement
executive retirement benefits, and provide life insurance to key employees.
Deposit liabilities decreased $42.3 million, or 3.7%, from $1.14 billion at
September 30, 2002 to $1.10 billion at March 31, 2003. 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 $3.5 million from
September 30, 2002 to March 31, 2003. 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 and the overall decrease in the 1-4 family loan
portfolio due to selling of new loan production.
16
The Company's total borrowings remained consistent from September 30, 2002 to
March 31, 2003. Note 5 of the Notes to Condensed Consolidated Financial
Statements gives details of the borrowings, indicating that many of the advances
are longer-term fixed-rate notes at higher rates which were taken out a few
years ago. Due to their higher rates, these notes have substantial prepayment
penalties. Accordingly, it is not cost effective to prepay these borrowings at
this time.
Other liabilities increased by $9.6 million from $8.4 million at September 30,
2002 to $18.0 million at March 31, 2003. The increase relates to $10.3 million
payable to investment brokers for trades recorded in March that would not settle
until April.
Total shareholders' equity decreased $0.9 million, or 0.8%, from $119.9 million
at September 30, 2002 to $119.0 million at March 31, 2003. This decrease was the
combined result of earnings of $2.8 million and additions to capital of $1.6
million related to exercise of stock options, which were more than offset by
payment of $1.7 million in common stock dividends for the six month period and a
$4.5 million unrealized loss on securities available for sale.
Results of Operations
Comparison of Six Months Ended March 31, 2003 and 2002
General. Net income improved for the six months ended March 31, 2003 compared
with the same period last year. While interest income, interest expense, and net
interest income all declined due to the declining interest rates over the last
12 months, non-interest income improved with only a slight increase in
non-interest expense. The overall result was a 14.3% increase in net earnings,
from $2.5 million for the six months ended March 31, 2002 to $2.8 million for
the six months ended March 31, 2003.
Interest Income. Interest income decreased by $7.9 million, showing the combined
effects of a $14.8 million increase in average interest earning assets and a 121
basis point decrease in yield from March 31, 2002 to March 31, 2003. Interest
income on loans receivable decreased $4.6 million, or 16.8%, from $27.3 million
for the six months ended March 31, 2002 to $22.7 million for the same period of
2003. This decrease resulted from an $80.4 million decrease in average loans
receivable due to prepayments and sales of new loan production and a 45 basis
point decrease in the average yield on loans for the six months ended March 31,
2003 compared to the same period ended March 31, 2002. Interest rate spread (the
difference between the rates earned on interest earning assets and the rates
paid on interest bearing liabilities) decreased from 2.95% to 2.71% and interest
rate margin (net interest income divided by average interest earning assets)
decreased from 3.41% to 3.09% comparing the six month periods.
Interest Expense. Total interest expense decreased $6.0 million, or 27.9%, for
the six months ended March 31, 2003 compared to the same period in 2002. That
decrease was the combined result of a $6.5 million decrease in interest on
deposit liabilities and a $483,852 increase in interest expense on borrowings.
The average balance of deposit liabilities decreased $50.7 million and the
average rate paid on deposits decreased by 116 basis points from 3.26% for the
six months ended March 31, 2002 to 2.10% for the same period ended March 31,
2003. The average balance of borrowings increased $38.0 million from $169.8
million for the six months ended March 31, 2002 to $207.8 million for the same
period ended March 31, 2003. The average rate paid on borrowings decreased by 58
basis points from 5.69% for the six months ended March 31, 2002 to 5.11% for the
same period in 2003.
17
Provision for Loan Losses. The provision for loan losses was zero and there were
$186,412 of charge offs and $44,641 of recoveries during the six months ended
March 31, 2003 compared to a $156,000 provision with $117,214 of charge offs and
$3,948 of recoveries during the six months ended March 31, 2002. Based on
analysis of the loan portfolio, it was determined that the allowance for loan
losses was adequate at March 31, 2003 without the need for additional reserves,
thus no provision for loan losses was recorded. In accordance with contemporary
regulatory guidance on the allowance for loan losses, the Company is required to
estimate reserves based on the current inherent risk in the portfolio. Because
payoffs have reduced the 1-4 family mortgage portfolio and historical loan
losses have been low, the allowance required has remained stable without the
need for additional provision.
Non-Interest Income. Non-interest income continues to improve, increasing $2.9
million, or 56.0%, to $8.1 million for the six months ended March 31, 2003 from
$5.2 million for the six months ended March 31, 2002. Income from fees and
service charges on deposit accounts increased by 33.3% from $2.3 million for the
six months ended March 31, 2002 to $3.1 million for the six months ended March
31, 2003. Brokerage and annuity commissions also showed significant growth,
increasing by 67.3% from $542,903 for the six months ended March 31, 2002 to
$908,470 for the same period this year. This growth is a result of the expanded
presence of Klamath First Financial Services, making the brokerage and
investment services available to customers in more of the Company's market
areas. With the high loan volume and subsequent sale of single family mortgage
loan production, gain on sale of mortgage loans has increased 119.4% from
$463,431 for the six months ended March 31, 2002 to $1.0 million for the current
six month period. A $884,519 gain on sale of securities was recorded for the six
months ended March 31, 2003 compared to $119,101 gain on sale recorded in the
prior year. Both gain on sale of securities and loss on sale, as noted below,
are part of the ongoing management of the Company's large investment portfolio
to reposition the portfolio for higher long term yields in the current interest
rate environment. We expect similar sales activity as part of the active
management of investment assets.
Non-Interest Expense. The Company's continued efforts to control expenses can be
seen in the comparison of non-interest expense items year-to-date for the
periods ended March 31, 2003 and 2002. Most categories of expenses were
consistent from year to year. Compensation, employee benefits and related
expense showed a 10.9% increase due to increases in number of employees and
salary increases. Occupancy expense increased 9.1% due to the increase in number
of branch locations and additional space leased for back office operations. The
Company recorded $404,439 in loss on sale of investments as part of the
repositioning of the investment portfolio as noted above. Amortization of
intangibles decreased as the adoption of SFAS No. 142 and SFAS No. 147 required
the Company to cease amortization of other intangibles related to the WAMU
branch acquisition beginning October 1, 2002. Amortization of core deposit
intangibles arising from the branch acquisitions from Wells Fargo and WAMU will
continue to be recorded.
Income Taxes. The provision for income taxes decreased $56,622 for the six
months ended March 31, 2003 compared with the prior year. The effective tax rate
was 30.9% for the six months ended March 31, 2003 compared to 34.8% for the same
period of 2002. As part of the overall plan to reduce the effective tax rate and
enhance the level of investments qualifying under the Community Reinvestment
Act, the Company has increased investment in low income housing tax credits and
tax-exempt municipal securities. The decrease in effective tax rate is primarily
due to these activities and the effect of tax benefits related to employee stock
plans.
Comparison of Three Months Ended March 31, 2003 and 2002
General. As noted for the six months ended March 31, 2003, declining interest
rates resulted in decreasing net interest income, interest income and interest
expense for the quarter ended March 31, 2003 compared to the same quarter a year
ago.
Interest Income. The Company recorded interest income of $17.8 million in the
second quarter ended March 31, 2003, a decrease of 18.9% from $21.9 million for
the same period last year. Average interest earning assets increased by $14.2
million, or 1.0% from the prior year. Yield decreased from 6.47% for the quarter
ended March 31, 2002 to 5.19% for the same period of 2003. Yields on loans, MBS,
investment securities, and cash balances decreased as rates declined over the
year.
18
Interest Expense. Total interest expense decreased 25.8%, from $9.9 million for
the quarter ended March 31, 2002 to $7.3 million for the quarter ended March 31,
2003. Average deposits decreased by $59.0 million comparing the three months
ended March 31, 2002 to 2003, while the average interest paid on
interest-bearing deposits decreased 99 basis points from 2.94% for the three
months ended March 31, 2002 to 1.95% for the same period ended March 31, 2003.
The average balance of borrowings increased $40.6 million, from $169.7 million
for the three months ended March 31, 2002 to $210.3 million for the same period
ended March 31, 2003, resulting in an increase in interest on borrowings of
$265,683 for the three months ended March 31, 2003 compared with the same period
ended March 31, 2002. The rate paid on borrowings decreased by 58 basis points
from 5.61% for the quarter ended March 31, 2002 to 5.03% for the same period in
2003.
Provision for Loan Losses. The provision for loan losses was zero and there were
$108,552 of charge offs, and $14,376 of recoveries during the three months ended
March 31, 2003 compared to a $3,000 provision with $72,984 of charge offs and
$3,948 of recoveries during the three months ended March 31, 2002. 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 continues to improve, increasing $1.3
million, or 43.0%, to $4.2 million for the three months ended March 31, 2003
from $2.9 million for the three months ended March 31, 2002. Fees and service
charges on deposit accounts increased by 23.1% from $1.2 million for the quarter
ended March 31, 2002 to $1.5 million for the current quarter. Brokerage and
annuity commissions also showed significant growth, increasing by 33.1% from
$301,352 for the quarter ended March 31, 2002 to $400,980 for the same quarter
this year. This growth is a result of the expanded presence of Klamath First
Financial Services, making the brokerage and investment services available to
customers in more of the Company's market areas. A $504,451 gain on sale of
securities was recorded in the quarter ended March 31, 2003 compared to a
$119,101 gain on sale of securities for the same quarter last year.
Non-Interest Expense. Non-interest expense increased a modest 6.9% to $13.2
million for the three months ended March 31, 2003, from $12.4 million in the
comparable period in 2002. Compensation, employee benefits and related expense
showed an increase of 12.4% which reflects the addition of staff and salary
increases. The number of full-time equivalent employees increased from 470 at
March 31, 2002 to 506 at March 31, 2003, a 7.7% increase, due to new branches
and expansion of commercial and consumer lending activities. Occupancy expense
has increased 16.9% as the Company has added branches and expanded back office
space. The Company recorded $404,439 in loss on sale of investments as part of
the repositioning of the investment portfolio as noted previously. Amortization
of intangibles decreased as the adoption of SFAS No. 142 and SFAS No. 147
required the Company to cease amortization of other intangibles related to the
WAMU branch acquisition beginning October 1, 2002. Amortization of core deposit
intangibles arising from the branch acquisitions from Wells Fargo and WAMU will
continue to be recorded.
Income Taxes. The provision for income taxes decreased $487,710 for the three
months ended March 31, 2003 compared with the prior year. The effective tax rate
was 28.8% for the quarter ended March 31, 2003 compared to 34.4% for the same
period of 2002. As part of the overall plan to reduce the effective tax rate and
enhance the level of investments qualifying under the Community Reinvestment
Act, the Company has increased investment in low income housing tax credits and
tax-exempt municipal securities. The decrease in effective tax rate is primarily
due to these activities and the effect of tax benefits related to employee stock
plans.
19
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's financial performance is affected by the success of the fee
generating products it offers to its customers, the credit quality of its loans
and securities, and the extent to which its earnings are affected by changes in
interest rates. Credit risk is the risk that borrowers will become unable to
repay their debts as they become due. The Company relies on strict underwriting
standards, loan review, and an adequate allowance for loan losses to mitigate
its credit risk.
Interest rate risk is the risk of loss in principal value and risk of earning
less net interest income due to changes in interest rates. Put simply, savings
institutions solicit deposits and lend the funds they receive to borrowers. The
difference between the rate paid on deposits and the rate received on loans is
the interest rate spread. If the rates paid on deposits change, or reprice, with
the same timing and magnitude as the rates change on the loans, there is perfect
matching of interest rate changes and thus, no change in interest rate spread
and no interest rate risk. In actuality, interest rates on deposits and other
liabilities do not reprice at the same time and/or with the same magnitude as
those on loans, investments and other interest-earning assets. For example,
historically the Company primarily originated fixed-rate residential loans for
its portfolio. Because fixed-rate loans do not reprice until payoff and because
the majority of residential loans have terms of 15 to 30 years (with actual
expected lives of six years or less), the interest rate characteristics of the
loan portfolio do not exactly match the Company's liabilities, which consist of
deposits with maturities ranging up to ten years and borrowings which mature or
reprice in five years or less. When interest rates change, this mismatch creates
changes in interest rate spread that influence net interest income and result in
interest rate risk.
Changes in interest rates also impact the fair value of the assets and
liabilities on the Company's balance sheet, expressed as changes in the net
portfolio value ("NPV"). NPV represents the market value of portfolio equity and
is equal to the market value of assets minus the market value of liabilities
plus or minus the estimated market value of off-balance sheet instruments. For
example, the market value of investment securities and loans is impacted by
changes in interest rates. Fixed-rate loans and investments held in the
Company's portfolio increase in market value if interest rates decline.
Conversely, the market value of fixed-rate portfolio assets decreases in an
increasing interest rate environment. It is generally assumed that assets with
adjustable rates are less subject to market value changes due to interest rate
fluctuations based on the premise that their rates will adjust with the market.
There has not been any material change in the market risk disclosures contained
in the Company's Annual Report on Form 10-K for the fiscal year ended September
30, 2002.
20
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of the
Company's disclosure controls and procedures (as defined in Section 13(a) -
14(c) of the Securities Exchange Act of 1934 (the "Act")) was carried out under
the supervision and with the participation of the Company's Chief Executive
Officer, Chief Financial Officer and several other members of the Company's
senior management within the 90-day period preceding the filing date of this
quarterly report. The Company's Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures as
currently in effect are effective in ensuring that the information required to
be disclosed by the Company in the reports it files or submits under the Act is
(i) accumulated and communicated to the Company's management (including the
Chief Executive Officer and Chief Financial Officer) in a timely manner, and
(ii) recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms.
(b) Changes in Internal Controls: In the quarter ended March 31, 2003, the
Company did not make any significant changes in, nor take any corrective actions
regarding, its internal controls or other factors that could significantly
affect these controls.
21
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 29, 2003. 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
---------- -------------
Timothy A. Bailey 6,052,339 120,423
James D. Bocchi 6,061,048 111,714
William C. Dalton 6,015,916 156,846
The following director was nominated and elected for a two year term:
Vote For Vote Withheld
---------- -------------
Donald N. Bauhofer 6,058,042 114,720
The following directors continue in office for their respective
remaining terms: Rodney N. Murray (one-year term), and Bernard Z.
Agrons (one-year term), Kermit K. Houser (two-year term), and Dianne
E. Spires (two-year term).
Approval of the appointment of Deloitte & Touche LLP as independent
accountants for the fiscal year ending September 30, 2003 was brought
before the security holders for vote. The appointment was approved as
follows:
Vote For Vote Against Vote Withheld
---------- ------------- -------------
6,126,824 35,017 10,921
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) During or related to the quarter ended March 31, 2003, the Company
filed the following Current Reports on Form 8-K:
Form 8-K dated April 24, 2003 announcing the issuance of the
Company's press release for the second quarter ended March 31,
2003.
Form 8-K dated April 25, 2003 correcting an error in the press
release for the second quarter ended March 31, 2003.
22
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, 2003 By: /s/ Kermit K. Houser
-------------------------------
Kermit K. Houser, President and
Chief Executive Officer
Date: May 14, 2003 By: /s/ Marshall Jay Alexander
-------------------------------
Marshall Jay Alexander,
Executive Vice President and
Chief Financial Officer
23
Certification Required
by Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934
I, Kermit K. Houser, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Klamath First
Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003
/s/ Kermit K. Houser
-------------------------------
Kermit K. Houser, President and
Chief Executive Officer
Certification Required
by Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934
I, Marshall J. Alexander, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Klamath First
Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003
/s/ Marshall Jay Alexander
-------------------------------
Marshall Jay Alexander,
Executive Vice President and
Chief Financial Officer
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
OF KLAMATH FIRST BANCORP, INC.
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned hereby certify, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and in connection with this Quarterly Report on Form
10-Q, that:
1. the report fully complies with the requirements of Sections 13(a) and
15(d) of the Securities Exchange Act of 1934, as amended, and
2. the information contained in the report fairly presents, in all
material respects, the company's financial condition and results of
operations.
/s/ Kermit K. Houser /s/ Marshall J. Alexander
- ----------------------- ---------------------------
Kermit K. Houser Marshall J. Alexander
Chief Executive Officer Chief Financial Officer
Dated: May 14, 2003