SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-26556
KLAMATH FIRST BANCORP, INC.
(Exact name of registrant as specified in its charter)
Oregon 93-1180440
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification Number)
540 Main Street, Klamath Falls, Oregon 97601
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (541) 882-3444
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to
Section 12(g) of the Act: Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO .
As of January 29, 1999, there were issued 7,932,676 shares of the
Registrant's Common Stock. The Registrant's voting common stock is traded
over-the-counter and is listed on the Nasdaq National Market under the symbol
"KFBI."
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
TABLE OF CONTENTS
Part I. Financial Information
- ------- ----------------------
Item 1. Financial Statements Page
----
Consolidated Balance Sheets
(As of December 31, 1998 and September 30, 1998) 3
Consolidated Statements of Earnings (For the three months
ended December 31, 1998 and 1997) 4
Consolidated Statement of Shareholders' Equity
(For the years ended September 30, 1998 and 1997 and for
the three months ended December 31, 1998) 5
Consolidated Statements of Cash Flows (For the three
months ended December 31, 1998 and 1997) 6 - 7
Notes to Consolidated Financial Statements 8 - 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 16
Part II. Other Information
- -------- -------------------
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
2
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND SEPTEMBER 30, 1998
(Unaudited)
December 31, 1998 September 30, 1998
ASSETS ------------------ ------------------
Cash and due from banks $ 22,101,813 $ 25,644,460
Interest bearing deposits with banks 3,340,243 11,496,026
Federal funds sold and securities purchased under agreements to resell 17,259,522 29,844,783
------------------ ------------------
Total cash and cash equivalents 42,701,578 66,985,269
Investment securities available for sale, at fair value
(amortized cost: $180,641,521 and $199,251,123) 182,595,244 203,224,184
Investment securities held to maturity, at amortized cost (fair
value: $53,019,616 and $2,928,324) 52,974,310 2,888,759
Mortgage backed and related securities available for sale, at fair
value (amortized cost: $26,557,857 and $42,741,863) 26,874,585 43,335,857
Mortgage backed and related securities held to maturity, at amortized
cost (fair value: $3,209,803 and $3,696,444) 3,190,751 3,661,683
Loans receivable, net 695,756,350 668,146,380
Real estate owned 69,153 --
Premises and equipment, net 12,193,688 12,347,467
Stock in Federal Home Loan Bank of Seattle, at cost 10,371,600 10,172,900
Accrued interest receivable 7,681,354 7,471,717
Core deposit intangible 11,017,849 11,431,018
Other assets 2,250,537 1,637,164
------------------ -----------------
Total assets $1,047,676,999 $1,031,302,398
================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposit liabilities $716,029,348 $689,541,345
Accrued interest on deposit liabilities 1,282,525 1,291,784
Advances from borrowers for taxes and insurance 940,533 9,420,791
Advances from Federal Home Loan Bank of Seattle 167,000,000 167,000,000
Short term borrowings 8,595,000 12,112,500
Accrued interest on borrowings 180,010 213,957
Pension liabilities 812,041 779,392
Deferred federal and state income taxes 2,197,879 3,655,944
Other liabilities 4,527,236 2,205,730
------------------ ------------------
Total liabilities 901,564,572 886,221,443
------------------ ------------------
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value, 500,000 shares authorized; none issued -- --
Common stock, $.01 par value, 35,000,000 shares authorized,
December 31, 1998 - 9,916,766 issued, 8,900,195 outstanding
September 30, 1998 - 9,916,766 issued, 8,898,972 outstanding 99,168 99,168
Additional paid-in capital 82,679,785 82,486,183
Retained earnings-substantially restricted 72,816,666 71,051,445
Unearned shares issued to ESOP (6,605,888) (6,850,550)
Unearned shares issued to MRDP (4,284,984) (4,536,865)
Net unrealized gain on securities available for sale, net of tax 1,407,680 2,831,574
------------------ ------------------
Total shareholders' equity 146,112,427 145,080,955
------------------ ------------------
Total liabilities and shareholders' equity $1,047,676,999 $1,031,302,398
================== ==================
<FN>
See notes to consolidated financial statements.
</FN>
3
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Three Months Ended Three Months Ended
December 31, December 31,
1998 1997
-------------- --------------
INTEREST INCOME
Loans receivable $13,839,389 $11,416,429
Mortgage backed and related securities 561,210 1,107,748
Investment securities 3,429,265 4,191,435
Federal funds sold 207,560 148,649
Interest bearing deposits 240,149 81,027
-------------- --------------
Total interest income 18,277,573 16,945,288
-------------- --------------
INTEREST EXPENSE
Deposit liabilities 7,418,560 7,207,485
FHLB advances 2,211,396 1,689,424
Other 157,660 289,429
-------------- --------------
Total interest expense 9,787,616 9,186,338
-------------- --------------
Net interest income 8,489,957 7,758,950
Provision for loan losses 123,000 75,000
-------------- --------------
Net interest income after provision for
loan losses 8,366,957 7,683,950
-------------- --------------
NON-INTEREST INCOME
Fees and service charges 691,677 605,364
Gain on sale of investments 128,193 --
Other income 79,550 91,303
-------------- --------------
Total non-interest income 899,420 696,667
-------------- --------------
NON-INTEREST EXPENSE
Compensation, employee benefits and related expense 2,413,886 2,479,533
Occupancy expense 559,105 520,511
Data processing expense 239,805 232,512
Insurance premium expense 69,975 67,340
Loss on sale of investments 112,256 --
Amortization of core deposit intangible 413,169 413,169
Other expense 1,266,881 1,115,411
-------------- --------------
Total non-interest expense 5,075,077 4,828,476
-------------- --------------
Earnings before income taxes 4,191,300 3,552,141
Provision for income tax 1,737,485 1,406,067
-------------- --------------
Net earnings $2,453,815 $2,146,074
============== ==============
Earnings per common share - basic $0.28 $0.23
Earnings per common share - fully diluted $0.27 $0.22
Weighted average common shares outstanding - basic 8,911,878 9,247,916
Weighted average common shares outstanding - with dilution 9,175,123 9,716,094
<FN>
See notes to consolidated financial statements.
</FN>
4
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1998 AND THE THREE MONTHS ENDED DECEMBER 31, 1998
(Unaudited)
Common Common Additional Unearned Unearned Net unrealized Total
Stock Stock paid-in Retained ESOP shares shares issued gain (loss) shareholders'
Shares Amount capital earnings at cost to MRDP Trust on securities equity
---------- -------- ------------ ----------- ----------- -------------- ------------- -------------
Balance at
October 1, 1996 ....... 10,242,360 $116,124 $110,762,678 $59,082,479 $(8,807,850) $(6,694,470) $(1,047,987) $153,410,974
Cash dividends ........ -- -- -- (2,895,234) -- -- -- (2,895,234)
Net unrealized
gain (loss) on
securities
available for sale .... -- -- -- -- -- -- 1,512,041 1,512,041
Stock repurchased
and retired ........... (1,182,936) (11,829) (18,866,299) -- -- -- -- (18,878,128)
ESOP contribution ..... 97,865 -- 705,260 -- 978,650 -- -- 1,683,910
MRDP contribution ..... 78,293 -- -- -- -- 1,071,130 -- 1,071,130
Net earnings .......... -- -- -- 8,557,750 -- -- -- 8,557,750
--------- ------- ------------ ----------- ------------ ------------- -------------- -------------
Balance at
September 30, 1997 .... 9,235,582 104,295 92,601,639 64,744,995 (7,829,200) (5,623,340) 464,054 144,462,443
Cash dividends ........ -- -- -- (3,244,587) -- -- -- (3,244,587)
Net unrealized
gain (loss) on
securities
available for sale .... -- -- -- -- -- -- 2,367,520 2,367,520
Stock repurchased
and retired ........... (544,085) (5,440) (11,556,044) -- -- -- -- (11,561,484)
ESOP contribution ..... 97,865 -- 1,029,866 -- 978,650 -- -- 2,008,516
MRDP contribution ..... 78,293 -- -- -- -- 1,086,475 -- 1,086,475
Exercise of stock
options ............... 31,317 313 410,722 -- -- -- -- 411,035
Net earnings .......... -- -- -- 9,551,037 -- -- -- 9,551,037
--------- ------- ------------ ----------- ------------ ------------- -------------- -------------
Balance at
September 30, 1998 .... 8,898,972 99,168 82,486,183 71,051,445 (6,850,550) (4,536,865) 2,831,574 145,080,955
Cash dividends ........ -- -- -- (688,594) -- -- -- (688,594)
Net unrealized
gain (loss) on
securities
available for sale .... -- -- -- -- -- -- (1,423,894) (1,423,894)
ESOP contribution ..... -- -- 193,602 -- 244,662 -- -- 438,264
MRDP contribution ..... 1,223 -- -- -- -- 251,881 -- 251,881
Net earnings .......... -- -- -- 2,453,815 -- -- -- 2,453,815
---------- -------- ------------ ----------- ------------ ------------- -------------- -------------
Balance at
December 31, 1998 ..... 8,900,195 $ 99,168 $ 82,679,785 $72,816,666 ($ 6,605,888) ($ 4,284,984) $ 1,407,680 $ 146,112,427
========== ======== ============ =========== ============ ============= ============== =============
<FN>
See notes to consolidated financial statements.
</FN>
5
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
(Unaudited)
Three Months Three Months
Ended Ended
December 31, December 31,
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings ................................................ $ 2,453,815 $ 2,146,074
ADJUSTMENTS TO RECONCILE NET EARNINGS TO
NET CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization ............................... 724,661 697,640
Provision for loan losses ................................... 123,000 75,000
Compensation expense related to ESOP benefit ................ 438,264 535,974
Compensation expense related to MRDP Trust .................. 251,881 270,571
Net amortization of premiums (discounts) paid on
investment and mortgage backed and related securities ..... (154,421) (178,961)
Increase in deferred loan fees, net of amortization ......... 309,351 283,958
Accretion of discounts on purchased loans ................... (3,826) 14,907
Net (gain) loss on sale of investment and mortgage
backed and related securities ............................. (15,937) --
FHLB stock dividend ......................................... (198,700) (144,100)
CHANGES IN ASSETS AND LIABILITIES
Accrued interest receivable ................................. (209,637) (1,444,935)
Other assets ................................................ (722,526) (889,816)
Accrued interest on deposit liabilities ..................... (9,259) (52,915)
Accrued interest on borrowings .............................. (33,947) (184,436)
Pension liabilities ......................................... 32,649 30,649
Deferred federal and state income taxes ..................... (585,356) 26,551
Other liabilities ........................................... 2,525,421 961,422
------------ ------------
Net cash provided by operating activities ....................... 4,925,433 2,147,583
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of investment securities
held to maturity .......................................... 30,000,000 20,000,000
Proceeds from maturity of investment securities
available for sale ........................................ 13,550,000 21,680,000
Principal repayments received on mortgage backed
and related securities held to maturity .................. 463,483 397,097
Principal repayments received on mortgage backed
and related securities available for sale ................ 6,483,237 4,367,763
Principal repayments received on loans ...................... 46,578,685 20,595,908
Loan originations ........................................... (74,617,179) (40,940,648)
Loans purchased ............................................. -- (1,900,000)
Purchase of investment securities held
to maturity ............................................... (79,711,523) --
Purchase of investment securities available
for sale .................................................. -- (3,753,870)
Purchase of mortgage backed and related
securities available for sale ............................. -- (5,035,162)
Proceeds from sale of investment securities
available for sale ........................................ 5,109,374 --
Proceeds from sale of mortgage backed and related
securities available for sale ............................. 9,454,776 --
Purchases of premises and equipment ......................... (117,713) (197,791)
------------ ------------
Net cash provided by (used in) investing activities ............. (42,806,860) 15,213,297
------------ ------------
6
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
(Unaudited)
(Continued)
Three Months Three Months
Ended Ended
December 31, December 31,
1998 1997
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in deposit
liabilities, net of withdrawals ............................ $ 26,488,003 $ 4,816,157
Proceeds from FHLB advances ................................. 5,000,000 45,000,000
Repayments of FHLB advances ................................. (5,000,000) (49,000,000)
Proceeds from short term borrowings ......................... 8,595,000 25,485,000
Repayments of short term borrowings ......................... (12,112,500) (26,517,500)
Advances from borrowers for tax and insurance ............... (8,480,258) (8,140,202)
Dividends paid .............................................. (892,509) (834,363)
------------ ------------
Net cash provided by (used in) financing activities ............. 13,597,736 (9,190,908)
------------ ------------
Net (decrease) increase in cash and cash
equivalents ................................................... (24,283,691) 8,169,972
Cash and cash equivalents at beginning
of period ..................................................... 66,985,269 32,043,196
------------ ------------
Cash and cash equivalents at end of quarter ..................... $ 42,701,578 $ 40,213,168
============ ============
SUPPLEMENTAL SCHEDULE OF INTEREST AND
INCOME
TAXES PAID
Interest paid ............................................... $ 9,830,823 $ 9,377,162
Income taxes paid ........................................... 50,000 690,762
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES
Net unrealized gain (loss) on securities
available for sale ........................................ (1,423,894) 363,286
Dividends declared and accrued in other
liabilities ............................................... 753,674 834,363
<FN>
See notes to consolidated financial statements
</FN>
7
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
In the opinion of Management, the accompanying unaudited consolidated financial
statements contain all adjustments necessary for a fair presentation of Klamath
First Bancorp, Inc.'s (the "Company") financial condition as of December 31,
1998, and September 30, 1998, the results of operations for the three months
ended December 31, 1998 and 1997 and the cash flows for the three months ended
December 31, 1998 and 1997. Certain information and note disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to the rules and regulations of
the Securities and Exchange Commission. It is suggested that these consolidated
financial statements be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K. The results of operations for the three months ended December 31, 1998 and
1997 are not necessarily indicative of the results which may be expected for the
entire fiscal year.
2. COMPREHENSIVE INCOME
Effective October 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130
requires all items that are required to be recognized under accounting standards
as components of comprehensive income to be reported in a financial statement
that is displayed in equal prominence with the other financial statements and to
disclose as a part of shareholders' equity accumulated comprehensive income.
Comprehensive income is defined as the change in equity during a period from
transactions and other events from nonowner sources. The Company has chosen, for
purposes of its interim financial reporting, to present comprehensive income in
the notes to the financial statements.
Comprehensive income is the total of net income and other comprehensive income,
which for the Company is comprised entirely of unrealized gains and losses on
securities available for sale and realized gains and losses on the sale of
securities available for sale.
For the three months ended December 31, 1998, the Company's total comprehensive
income was $1.1 million compared to $2.5 million for the three months ended
December 31, 1997. Total comprehensive income for the three months ended
December 31, 1998 was comprised of net income of $2.5 million and other
comprehensive loss of $1.4 million, net of tax. Total comprehensive income for
the three months ended December 31, 1997 was comprised of net income of $2.1
million and other comprehensive income of $383,286, net of tax.
3. ALLOWANCE FOR LOAN LOSSES
Activity in allowance for loan losses is summarized as follows:
Three Months Ended Year Ended
December 31, September 30,
1998 1998
----------- -----------
Balance, beginning of year ............. $ 1,949,677 $ 1,296,451
Charge-offs ............................ (3,000) (20,774)
Additions .............................. 123,000 674,000
----------- -----------
Balance, end of period ................. $ 2,069,677 $ 1,949,677
=========== ===========
8
4. ADVANCES FROM FEDERAL HOME LOAN BANK
Borrowings at December 31, 1998 consisted of two short term advances totaling
$30.0 million and ten long term advances totaling $137.0 million from the
Federal Home Loan Bank of Seattle ("FHLB"). The advances are collateralized in
aggregate by certain mortgages or deeds of trust, securities of the U.S.
Government and agencies thereof.
Scheduled maturities of advances from the FHLB were as follows:
December 31, 1998 September 30, 1998
------------------------------------------------ ----------------------------------------------
Range of Weighted Range of Weighted
interest average interest average
Amount rates interest rate Amount rates interest rate
------------ ----------- ------------- ------------ ----------- ------------
Due within one year $30,000,000 5.08%-5.13% 5.11% $30,000,000 5.54%-5.56% 5.55%
After two but within
five years 55,000,000 5.29%-5.70% 5.46% 55,000,000 5.39%-5.74% 5.56%
After five but within
ten years 82,000,000 4.77%-5.24% 4.96% 82,000,000 4.77%-5.24% 4.96%
------------ ------------
$167,000,000 $167,000,000
============ ============
5. SHORT TERM BORROWINGS
Securities sold under agreements to repurchase totaled $8.1 million. All of the
agreements had interest rates of 5.60% and were due within 48 days. The Company
also had $500,000 in short term borrowings with the Federal Reserve Bank of San
Francisco at December 31, 1998. These borrowings carried an interest rate of
4.50%.
6. SHAREHOLDERS' EQUITY
In September 1998, the Board of Directors authorized the repurchase of
approximately 20 percent of the Company's outstanding common stock. The
repurchase was completed through a "Modified Dutch Auction Tender." Under this
procedure, the Company's shareholders were given the opportunity to sell part or
all of their shares to the Company at a price of not less than $18.00 per share
and not more than $20.00 per share. Results of the offer were finalized on
January 15, 1999 when the Company announced purchase of 1,984,090 shares at
$19.50 per share. This represents approximately 85.9 percent of the shares
tendered at $19.50 per share or below, and 64.7 percent of all shares tendered.
The value of the shares purchased is approximately $38.7 million.
Following are selected performance ratios for December 31, 1998 and comparable
pro forma ratios as if the transaction had occurred in the quarter ended
December 31, 1998. Income statement data give effect to the purchase of shares
as of the beginning of the period. The funds used to purchase the shares are
considered to have been provided by cash, overnight funds and short term
investments. The reduction in investment income that would have resulted from
using the funds for the repurchase of shares and the reduction in equity are
reflected in the ratios shown below. The pro forma data assumes a rate of
interest of 4.75% on overnight funds and a rate of 5.89% on the short term
investments. The pro forma data is not necessarily indicative of the results
that would have been obtained had the transaction been completed in the quarter
ended December 31, 1998.
9
Three Months Ended Three Months Ended
December 31,1998 December 31, 1998
Actual Pro Forma
---------------- -----------------
Return on Average Equity 6.67% 8.33%
Earnings per Share - Basic $0.28 $0.33
Dividend Payout Ratio 35.19% 29.12%
7. EARNINGS PER SHARE
Earnings per share ("EPS") is computed in accordance with SFAS No. 128,
"Earnings per Share," which was adopted by the Company as of December 31, 1997.
EPS for all prior periods have been restated to reflect the adoption. Shares
held by the Company's Employee Stock Ownership Plan ("ESOP") that are committed
for release are considered common stock equivalents and are included in weighted
average shares outstanding (denominator) for the calculation of basic and
diluted 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
---------------------------------------------
December 31, 1998 December 31, 1997
----------------- -----------------
Weighted average common
shares outstanding - basic ............................ 8,911,878 9,247,916
------------ ------------
Effect of Dilutive Securities on Number of Shares:
MRDP shares ........................................... 27,968 76,473
Stock options ......................................... 235,277 391,705
------------ ------------
Total Dilutive Securities ............................. 263,245 468,178
------------ ------------
Weighted average common shares
outstanding - with dilution .......................... 9,175,123 9,716,094
============ ============
10
8. REGULATORY CAPITAL
The following table illustrates the compliance by Klamath First Federal Savings
and Loan Association (the "Association") with currently applicable regulatory
capital requirements at December 31, 1998:
To Be
Categorized as "Well
For Capital Capitalized" Under
Adequacy Prompt Corrective
Actual Purposes Action Provision
-------------------- -------------------- --------------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ----- ------------ ----- ------------ ------
Total Capital: $86,289,627 16.0% $43,173,144 8.0% $53,966,430 10.0%
(To Risk Weighted Assets)
Tier I Capital: 84,219,949 15.6% N/A N/A 32,379,858 6.0%
(To Risk Weighted Assets)
Tier I Capital: 84,219,949 8.5% 29,617,662 3.0% 49,362,770 5.0%
(To Total Assets)
Tangible Capital: 84,219,949 8.5% 14,839,876 1.5% N/A N/A
(To Tangible Assets)
9. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 1998, SFAS No. 132, "Employers' Disclosures About Pensions and Other
Postretirement Benefits," was issued. SFAS No. 132 revises employers'
disclosures about pensions and other postretirement benefit plans. It does not
change the measurement or recognition of those plans. It standardizes the
disclosure requirements for pensions and other postretirement benefits to the
extent practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer as useful. This
Statement becomes effective for fiscal years beginning after December 15, 1997.
Restatement of disclosures for earlier periods provided for comparative purposes
is required unless the information is not readily available.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued. SFAS No.133 established accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. If certain conditions are met, a derivative may
be specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment, (b)
a hedge of the exposure to variable cash flows of a forecasted transaction, or
(c) a hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. This Statement becomes
effective for fiscal years beginning after June 15, 1999, and should not be
applied retroactively to financial statements of prior periods.
An analysis of the Company's current operations and practices indicates that the
Company is not involved in derivative instruments or hedging activities.
Accordingly, the adoption of these statements is not expected to have a material
impact on the financial statements of the Company.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Safe Harbor Clause. This report contains certain "forward-looking statements."
The Company 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 itself of the protection of such safe harbor
with respect to all of such forward-looking statements. These forward-looking
statements, which are included in Management's Discussion and Analysis, describe
future plans or strategies and include the Company's expectations of future
financial results. The words "believe," "expect," "anticipate," "estimate,"
"project," and similar expressions identify forward-looking statements. The
Company'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, loan delinquency rates, and changes in federal and
state regulation. These factors should be considered in evaluating the
forward-looking statements, and undue reliance should not be placed on such
statements.
General
The Company, an Oregon corporation, became the unitary savings and loan holding
company for the Association upon the Association's conversion from a federally
chartered mutual to a federally chartered stock savings and loan association
("Conversion") on October 4, 1995. At December 31, 1998, the Company had total
consolidated assets of $1.05 billion and consolidated shareholders' equity of
$146.1 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.
As a traditional, community-oriented, savings and loan, the Association focuses
on personalized customer service within its principal market area. The
Association's primary market activity is attracting deposits from the general
public and using those and other available sources of funds to originate
permanent residential one- to four-family real estate loans within its market
area and, to a lesser extent, loans on commercial property and multi-family
dwellings. To supplement internal growth generated through its branch network,
the Association also purchases Oregon-based commercial real estate and
multi-family residential loans from other Oregon financial institutions, as well
as using mortgage brokers to locate construction loans that meet our existing
conservative underwriting standards outside of the current branch market areas.
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. Consumer and commercial loans increased 98% from
$6.3 million at December 31, 1997 to $12.5 million at December 31, 1998. 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. The acquisition of
25 branches from Wells Fargo in 1997 contributed to improvement of the Company's
non-interest income by providing a larger customer base to generate service
charge and fee income.
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").
12
The Association is a member of the Federal Home Loan Bank of Seattle, conducting
its business through thirty-five 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.
Year 2000 Readiness
As with other organizations, some of the data processing programs used by the
Company were originally designed to recognize calendar years by their last two
digits. Calculations performed using these truncated fields may not work
properly with dates beyond 1999. Correct processing of date oriented information
is critical to the operation of all financial institutions because computer
systems track deposit account and loan balances, record transaction activity in
accounts, and calculate interest amounts, among other activities. Failure of
these processes could severely hinder the ability to continue operations and
provide customer service. Because of the critical nature of the issue, the
Company established a committee early in 1997 to address "Year 2000" issues. The
committee, consisting of executive management, technical staff, and a full time
project manager, has chosen to use the Office of Thrift Supervision Year 2000
Checklist as a guide for Year 2000 preparation. The committee is also using a
Year 2000 Testing Guide and Contingency Guide provided by Alex Information
Systems, Inc. to complement the OTS checklist.
The Federal Financial Institutions Examination Council ("FFIEC") has also issued
guidelines for Year 2000 project management by financial institutions, which are
being followed by the Company. These guidelines identify the following five
steps for Year 2000 conversion programs:
Awareness Phase - Define the Year 2000 problem and establish a Year 2000
program team and overall strategy. This step was completed by the Company
as of September 30, 1997.
Assessment Phase - Assess the size and complexity of the problem and detail
the magnitude of effort necessary to address Year 2000 issues, including
hardware, software, networks, automated teller machines, etc. This step was
approximately 99% complete by December 31, 1998 and assessment will be
ongoing until the Year 2000.
Renovation Phase - This phase includes hardware and software upgrades, and
system replacements. This step was 100% complete for in-house systems at
December 31, 1998. This phase also encompasses ongoing discussions with and
monitoring of outside servicers and third-party software providers.
Validation/Testing Phase - This process includes testing of hardware and
software components. Testing is completed by performing extensive tests
with the computer dates changed to January 1,2, and 3, 2000. Such testing
will continue through June 30, 1999, with the most critical functions
tested first. This allows time to correct any discovered deficiencies
before the end of 1999. In-house systems are 100% tested, many third party
vendors have been tested and others are scheduled for testing soon.
Overall, this phase is approximately 94% complete as of December 31, 1998.
Implementation Phase - Systems successfully tested will be certified as
Year 2000 compliant. For any system failing validation testing, the
business impact must be assessed and a contingency plan implemented. This
phase is scheduled for completion by June 30, 1999.
13
All personal computers ("PCs") and related software throughout the Company have
been inventoried and tested for Year 2000 capability. The Company used two
testing methods, BIOS and off line, for PC certification of Year 2000
compatibility. PCs were required to pass both tests to be considered ready for
Year 2000. As of September 30, 1998, all of the Company's PCs were Year 2000
compatible. The Company's Wide Area Network and various Local Area Networks have
also been upgraded, tested, and determined to be Year 2000 prepared.
Data processing for the Company is provided by Fiserv, the nation's largest
third party service bureau serving financial institutions. Fiserv has stated
that all their processing was Year 2000 ready of as June 30, 1998. The Company
successfully performed test procedures for critical service bureau processes in
December 1998.
Software purchased from a Fiserv affiliate is used for applications such as
accounts payable, fixed assets, and investment portfolio accounting. The
investment portfolio accounting software was Year 2000 compatible as of
September 30, 1998. The Company currently uses DOS-based versions of the
application software for accounts payable and fixed assets which are not Year
2000 capable. The Fiserv affiliate had Year 2000 ready versions of these
applications available as of September 30, 1998. The Company is currently
converting the accounts payable and fixed asset applications to the Year 2000
ready software and appropriate testing procedures are being performed.
Other third party vendors identified by the Company were sent questionnaires in
May 1998 regarding their preparations for Year 2000. Responses have been
received and further updates will be requested in order to monitor vendors'
status. Validation with vendors is approximately 50% complete as of December 31,
1998.
Critical data processing applications, in addition to those provided by the
service bureau, have been identified. These include applications such as
electronic processing through the Federal Reserve Bank and ATM processing.
Testing with Federal Reserve is currently in progress. Testing procedures for
ATM applications are in the process of development. Contingency plans are also
being developed by each department. The contingency plans address actions to be
taken to continue operations in the event of system failure due to areas that
cannot be tested in advance, such as power and telephone service, which are
vital to business continuation.
For many financial institutions, the Year 2000 readiness of borrowers to whom
the institution has commercial operating loans is of concern. Lack of Year 2000
preparedness could cause disruptions of borrowers' businesses significant enough
to compromise their ability to repay indebtedness. The Company's loans of this
type represent less than one half of one percent of the total loan portfolio,
and are not considered to represent a significant risk of loss.
To assist customers in understanding Year 2000 issues and to inform them of the
Company's preparation activities, brochures regarding Year 2000 preparedness
have been distributed to all customers. Another mailing is anticipated during
the fiscal year ending September 30, 1999. In addition, the Company has placed
"Year 2000" bulletin boards in all the branches, which will contain current
information on Year 2000 readiness for the Company and the financial services
industry.
The Company believes that the Year 2000 issue will not pose significant
operational problems and is not anticipated to be material to its financial
position or results of operations in any given year. As of September 30, 1998,
the Company estimated that total Year 2000 implementation costs will not exceed
$200,000 and are expected to be expensed over a period of 18 months, affecting
fiscal years 1998, 1999, and 2000. This estimate is based on information
available at December 31, 1998, and may be revised as additional information and
actual costs become available. During the quarter ended December 31, 1998 and
the year ended September 30, 1998, $37,000 and $89,000 of Year 2000 expenses
were incurred and expensed, respectively.
14
Changes in Financial Condition
At December 31, 1998, the consolidated assets of the Company totaled $1.05
billion, an increase of $16.4million, or 1.59%, from $1.03 billion at September
30, 1998. The increase in total assets was primarily the result of continued
growth in net loans receivable.
Net loans receivable increased by $27.6 million, or 4.13%, to $695.8 million at
December 31, 1998, compared to $668.1 million at September 30, 1998. The
increase was primarily the result of continued new loan demand exceeding loan
repayments.
Investment securities increased $29.5 million, or 14.29%, from $206.1 million at
September 30, 1998 to $235.6 million at December 31, 1998. This increase was the
result of cash needed for the anticipated share repurchase being invested in
short term commercial paper until the funds were needed to complete the
transaction in January 1999.
During the three months ended December 31, 1998, $6.9 million of principal
payments were received on mortgage backed and related securities ("MBS") and
$9.5 million in available for sale MBS were sold, resulting in a decrease in the
balance of MBS from $47.0 million at September 30, 1998 to $30.1 million at
December 31, 1998.
Deposit liabilities increased $26.5 million, or 3.84%, from $689.5 million at
September 30, 1998 to $716.0 million at December 31, 1998. Management attributes
the increase to the maintaining of competitive rates in its market areas as well
as the use of an automated on-line personal computer-based system to market
deposits nationally. Interest credited on accounts also contributed to the
increase. The increase in deposits has been experienced throughout the network
of 34 branches.
Advances from borrowers for taxes and insurance decreased $8.5 million from
September 30, 1998 to December 31, 1998. The decrease is the result of using the
reserves to pay the required real estate taxes due on the Association's loan
receivable portfolio in November.
The Company's total borrowings decreased $3.5 million from September 30, 1998 to
December 31, 1998. Advances from the FHLB of Seattle remained consistent with
$167.0 million at September 30, 1998 and at December 31, 1998, while short term
borrowings decreased $3.5 million, or 29.04%, from $12.1 million at September
30, 1998 to $8.6 million at December 31, 1998. Proceeds from maturities of
securities were used to reduce the borrowings.
Total shareholders' equity increased $1.0 million, or 0.71%, from $145.1 million
at September 30, 1998 to $146.1 million at December 31, 1998. This increase was
primarily the result of $2.5 million in earnings for the first quarter, offset
by a $1.4 million decrease in unrealized gains on securities available for sale
during the three month period from September 30, 1998 to December 31, 1998.
Results of Operations
Comparison of Three Months Ended December 31, 1998 and 1997
General. Net income increased $307,741, or 14.34%, from $2.1 million for the
three months ended December 31, 1997 to $2.5 million for the three months ended
December 31, 1998. This increase was primarily attributable to an increase in
net interest income and non-interest income partially offset by increases in
interest expense and non-interest expense.
Interest Income. Additional interest income generated by the $68.0 million
increase in average interest earning assets contributed to an increase of $1.3
million in interest income for the three months ended December 31, 1998 compared
to 1997. Of this increase, $2.4 million is attributable to increased interest
income on loans which was offset by $1.3 million decrease in interest income on
investment and mortgage backed securities. The average yield on interest earning
assets increased 4 basis points to 7.34% for the three months ended December 31,
1998 compared to 7.30% for the same period ended December 31, 1997.
15
Interest Expense. Total interest expense increased $601,278 for the three months
ended December 31, 1998 as compared to the same period in 1997. Of that
increase, $211,075 related to an increase in interest expense on deposit
liabilities. Average deposits increased by $34.1 million comparing the three
months ended December 31, 1997 to 1998, and the average interest paid on
interest-bearing deposits decreased 9 basis points from 4.62% for the three
months ended December 31, 1997 to 4.53% for the same period ended December 31,
1998. The average balance of FHLB advances increased $49.9 million from $117.7
million for the three months ended December 31, 1997 to $167.0 million for the
same period ended December 31, 1997 resulting in an increase in interest on FHLB
advances of $521,972 for the three months ended December 31, 1998 compared with
the same period ended December 31, 1997. The rate paid on borrowings decreased
by 44 basis points from 5.76% for the quarter ended December 31, 1997 to 5.32%
for the same period in 1998. The decrease resulted primarily from obtaining a
very favorable rate of 4.77% on $40 million in long term FHLB advances in
September 1998.
Provision for Loan Losses. The provision for loan losses was $123,000 and there
were $3,000 of charge offs during the three months ended December 31, 1998
compared to a $75,000 provision and no charge offs during the three months ended
December 31, 1997. The provision was increased in response to portfolio growth
and continuing additions of consumer loans, which are considered to have more
associated risk than the Company's traditional portfolio of one- to four-family
residential mortgages.
Non-Interest Income. Non-interest income increased $202,753, or 29.10%, to
$899,420 for the three months ended December 31, 1998 from $696,667 for the
three months ended December 31, 1997. The increase was primarily attributable to
an $86,313 increase in fee income related to the increase in deposit accounts
subject to service charges and $128,193 gain on sale of investment securities.
Non-Interest Expense. Non-interest expense increased $246,601, or 5.11%, to $5.1
million for the three months ended December 31, 1998, from $4.8 million in the
comparable period in 1997. Occupancy expense increased from $520,511 for the
quarter ended December 31, 1997 to $559,105 for the quarter ended December 31,
1998 due to the addition of two branches and expenditures on equipment related
to preparing for Year 2000. Sale of mortgage-backed and related securities
resulted in a loss of $112,256 which partially offset the gain on sale noted
above. The ratio of non-interest expense to average total assets was 1.94% and
1.98% for the three months ended December 31, 1998 and 1997, respectively.
Income Taxes. The provision for income taxes increased $331,418 for the three
months ended December 31, 1998 compared with the prior year, primarily as a
result of a higher state income tax rate for this year.
16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in various claims and legal actions arising in
the normal course of business. Management believes that these
proceedings will not result in a material loss to the Company.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
a) Not applicable.
b) No Current Reports on Form 8-K were filed during the quarter ended
December 31, 1998.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KLAMATH FIRST BANCORP, INC.
Date: February 12, 1999 By: /s/ Gerald V. Brown
--------------------------------------
Gerald V. Brown, President and
Chief Executive Officer
Date: February 12, 1999 By: /s/ Marshall Jay Alexander
--------------------------------------
Marshall Jay Alexander, Senior Vice
President and Chief Financial Officer
18