SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-26556
KLAMATH FIRST BANCORP, INC.
(Exact name of registrant as specified in its charter)
Oregon 93-1180440
State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification Number)
540 Main Street, Klamath Falls, Oregon 97601
Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (541) 882-3444
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to
Section 12(g) of the Act: Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO .
As of July 21, 1999, there were outstanding 6,964,227 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."
<PAGE>
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
TABLE OF CONTENTS
Part I. Financial Information
- ------- ----------------------
Item 1. Financial Statements Page
-------
Consolidated Balance Sheets
(As of June 30, 1999 and September 30, 1998) 3
Consolidated Statements of Earnings (For the three months
and nine months ended June 30, 1999 and 1998) 4
Consolidated Statements of Shareholders' Equity
(For the years ended September 30, 1998 and 1997 and for
the nine months ended June 30, 1999) 5
Consolidated Statements of Cash Flows (For the nine
months ended June 30, 1999 and 1998) 6 - 7
Notes to Consolidated Financial Statements 8 - 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13 - 18
Part II. Other Information
- -------- -------------------
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
2
<PAGE>
<TABLE>
<CAPTION>
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1999 AND SEPTEMBER 30, 1998
(Unaudited)
June 30, 1999 September 30, 1998
ASSETS ----------------- ------------------
<S> <C> <C>
Cash and due from banks ................................................. $ 23,694,978 $ 25,644,460
Interest bearing deposits with banks .................................... 8,648,716 11,496,026
Federal funds sold and securities purchased under agreements to resell .. 17,140,774 29,844,783
--------------- ---------------
Total cash and cash equivalents ...................................... 49,484,468 66,985,269
Investment securities available for sale, at fair value
(amortized cost: $174,869,632 and $199,251,123) ....................... 173,754,165 203,224,184
Investment securities held to maturity, at amortized cost (fair
value: $787,416 and $2,928,324) ....................................... 770,120 2,888,759
Mortgage backed and related securities available for sale, at fair
value (amortized cost: $38,909,526 and $42,741,863) ................... 38,621,556 43,335,857
Mortgage backed and related securities held to maturity, at amortized
cost (fair value: $2,744,416 and $3,696,444) .......................... 2,742,929 3,661,683
Loans receivable, net ................................................... 727,255,499 668,146,380
Real estate owned and repossessed assets ................................ 273,535 --
Premises and equipment, net ............................................. 11,830,730 12,347,467
Stock in Federal Home Loan Bank of Seattle, at cost ..................... 10,760,700 10,172,900
Accrued interest receivable ............................................. 7,430,882 7,471,717
Core deposit intangible ................................................. 10,191,510 11,431,018
Other assets ............................................................ 2,337,374 1,637,164
--------------- ---------------
Total assets ......................................................... $ 1,035,453,468 $ 1,031,302,398
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposit liabilities ................................................... $ 726,829,006 $ 689,541,345
Accrued interest on deposit liabilities ............................... 1,271,376 1,291,784
Advances from borrowers for taxes and insurance ....................... 6,948,624 9,420,791
Advances from Federal Home Loan Bank of Seattle ....................... 187,000,000 167,000,000
Short term borrowings ................................................. -- 12,112,500
Accrued interest on borrowings ........................................ 35,895 213,957
Pension liabilities ................................................... 877,339 779,392
Deferred federal and state income taxes ............................... 695,797 3,655,944
Other liabilities ..................................................... 3,274,876 2,205,730
--------------- ---------------
Total liabilities ................................................... 926,932,913 886,221,443
--------------- ---------------
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value, 500,000 shares authorized; none issued -- --
Common stock, $.01 par value, 35,000,000 shares authorized,
June 30, 1999 - 7,908,377 issued, 6,964,227 outstanding
September 30, 1998 - 9,916,766 issued, 8,898,972 outstanding ......... 79,084 99,168
Additional paid-in capital ............................................ 43,688,961 82,486,183
Retained earnings-substantially restricted ............................ 75,266,031 71,051,445
Unearned shares issued to ESOP ........................................ (6,116,563) (6,850,550)
Unearned shares issued to MRDP ........................................ (3,526,827) (4,536,865)
Net unrealized loss on securities available for sale, net of tax ...... (870,131) 2,831,574
--------------- ---------------
Total shareholders' equity .......................................... 108,520,555 145,080,955
--------------- ---------------
Total liabilities and shareholders' equity .......................... $ 1,035,453,468 $ 1,031,302,398
=============== ===============
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Three Three Nine Nine
Months Ended Months Ended Months Ended Months Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
-------------- ------------ ------------ --------------
INTEREST INCOME
<S> <C> <C> <C> <C>
Loans receivable ........................................ $14,287,654 $12,805,756 $42,191,692 $36,285,128
Mortgage backed and related securities .................. 394,188 815,350 1,346,490 3,003,161
Investment securities ................................... 2,680,817 3,610,547 8,973,462 11,506,858
Federal funds sold ...................................... 260,157 223,879 682,473 563,839
Interest bearing deposits ............................... 178,988 254,666 571,760 476,387
----------- ----------- ----------- -----------
Total interest income ................................. 17,801,804 17,710,198 53,765,877 51,835,373
----------- ----------- ----------- -----------
INTEREST EXPENSE
Deposit liabilities ..................................... 7,213,918 7,261,297 21,895,479 21,617,957
FHLB advances ........................................... 2,193,605 2,210,515 6,540,329 5,648,181
Other ................................................... 33,030 238,422 253,464 753,397
----------- ----------- ----------- -----------
Total interest expense ................................ 9,440,553 9,710,234 28,689,272 28,019,535
----------- ----------- ----------- -----------
Net interest income ................................... 8,361,251 7,999,964 25,076,605 23,815,838
Provision for loan losses ................................. 243,000 198,000 669,000 364,000
----------- ----------- ----------- -----------
Net interest income after provision for
loan losses ......................................... 8,118,251 7,801,964 24,407,605 23,451,838
----------- ----------- ----------- -----------
NON-INTEREST INCOME
Fees and service charges ................................ 749,074 591,528 2,126,966 1,747,028
Gain on sale of investments ............................. 22,106 189,661 329,435 189,661
Gain on sale of real estate owned ....................... -- -- 26,179 --
Other income ............................................ 55,662 42,180 189,212 159,842
----------- ----------- ----------- -----------
Total non-interest income ............................. 826,842 823,369 2,671,792 2,096,531
----------- ----------- ----------- -----------
NON-INTEREST EXPENSE
Compensation, employee benefits and related expense ..... 2,648,891 2,361,607 7,612,394 7,258,946
Occupancy expense ....................................... 543,532 508,317 1,664,089 1,544,687
Data processing expense ................................. 214,317 246,640 697,100 720,339
Insurance premium expense ............................... 74,509 43,007 222,147 216,205
Loss on sale of investments ............................. -- -- 112,256 --
Loss on sale of real estate owned ....................... -- -- 5,398 --
Amortization of core deposit intangible ................. 413,169 413,169 1,239,508 1,239,508
Other expense ........................................... 1,868,350 1,259,609 4,348,688 3,569,060
----------- ----------- ----------- -----------
Total non-interest expense ............................ 5,762,768 4,832,349 15,901,580 14,548,745
----------- ----------- ----------- -----------
Earnings before income taxes .............................. 3,182,325 3,792,984 11,177,817 10,999,624
Provision for income tax .................................. 1,291,968 1,302,438 4,538,194 4,155,231
----------- ----------- ----------- -----------
Net earnings .............................................. $ 1,890,357 $ 2,490,546 $ 6,639,623 $ 6,844,393
=========== =========== =========== ===========
Earnings per common share - basic ......................... $ 0.27 $ 0.28 $ 0.86 $ 0.74
Earnings per common share - fully diluted ................. $ 0.26 $ 0.26 $ 0.83 $ 0.71
Weighted average common shares outstanding - basic ........ 7,020,994 9,056,453 7,737,494 9,192,138
Weighted average common shares outstanding - with dilution 7,164,093 9,441,551 7,952,159 9,637,698
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1998 AND
THE NINE MONTHS ENDED JUNE 30, 1999
(Unaudited)
Unearned Unearned Unrealized
Common Common Additional shares shares gain Total
Stock Stock paid-in Retained issued issued (loss) on shareholders'
Shares Amount capital earnings to ESOP to MRDP securities equity
----------- -------- ------------ ----------- ------------ ------------ ------------ -------------
Balance at
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 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 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 .... -- -- -- (2,425,037) -- -- -- (2,425,037)
Net unrealized
loss on
securities
available for sale -- -- -- -- -- -- (3,701,705) (3,701,705)
Stock repurchased
and retired ....... (2,008,389) (20,084) (39,314,056) -- -- -- -- (39,334,140)
ESOP contribution . -- -- 500,140 -- 733,987 -- -- 1,234,127
MRDP contribution . 73,644 -- 16,694 -- -- 1,010,038 -- 1,026,732
Net earnings ...... -- -- -- 6,639,623 -- -- -- 6,639,623
---------- -------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at
June 30, 1999 ..... 6,964,227 $ 79,084 $43,688,961 $75,266,031 ($6,116,563) ($3,526,827) ($ 870,131) $108,520,555
========== ======== =========== =========== =========== =========== =========== ===========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
Nine Nine
Months Ended Months Ended
June 30, June 30,
1999 1998
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net earnings ................................................ $ 6,639,623 $ 6,844,393
ADJUSTMENTS TO RECONCILE NET EARNINGS TO
NET CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization ............................... 2,170,315 2,099,424
Provision for loan losses ................................... 669,000 364,000
Compensation expense related to ESOP benefit ................ 1,234,127 1,583,544
Compensation expense related to MRDP Trust .................. 1,026,732 1,082,292
Net amortization of premiums (discounts) paid on
investment and mortgage backed and related securities ..... 42,134 (118,332)
Increase in deferred loan fees, net of amortization ......... 498,388 957,607
Accretion of discounts on purchased loans ................... 900 14,673
Net gain on sale of real estate owned and
premises and equipment .................................... (20,781) --
Net gain on sale of investment and mortgage
backed and related securities ............................. (217,179) (189,661)
FHLB stock dividend ......................................... (587,800) (444,100)
CHANGES IN ASSETS AND LIABILITIES
Accrued interest receivable ................................. 40,835 (1,010,779)
Other assets ................................................ (820,210) (20,824)
Accrued interest on deposit liabilities ..................... (20,408) (30,621)
Accrued interest on borrowings .............................. (178,062) (219,231)
Pension liabilities ......................................... 97,947 95,947
Deferred income taxes ...................................... (691,360) 37,210
Other liabilities ........................................... 1,242,143 926,963
------------- -------------
Net cash provided by operating activities ....................... 11,126,344 11,972,505
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of investment securities
held to maturity .......................................... 82,245,000 20,000,000
Proceeds from maturity of investment securities
available for sale ........................................ 34,072,000 77,180,000
Principal repayments received on mortgage
backed and related securities held to maturity ........... 904,705 1,345,395
Principal repayments received on mortgage
backed and related securities available for sale ......... 12,816,215 17,092,223
Principal repayments received on loans ...................... 127,964,628 85,300,991
Loan originations ........................................... (184,108,981) (170,838,668)
Loans purchased ............................................. (4,764,023) (5,094,787)
Loans sold .................................................. 119,350 --
Purchase of investment securities held
to maturity ............................................... (79,711,523) --
Purchase of investment securities available
for sale .................................................. (21,361,687) (41,817,595)
Purchase of mortgage backed and related
securities available for sale ............................. (18,827,640) (10,040,575)
Purchase of FHLB stock ...................................... -- (1,316,200)
Proceeds from sale of investment securities
available for sale ........................................ 11,834,420 9,014,539
Proceeds from sale of mortgage backed and related
securities available for sale ............................. 9,454,776 9,656,938
Proceeds from sale of real estate owned and
premises and equipment .................................... 258,865 --
Purchases of premises and equipment ......................... (294,070) (1,275,012)
------------- -------------
Net cash used in investing activities ........................... (29,397,965) (10,792,751)
------------- -------------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
(Continued)
Nine Nine
Months Ended Months Ended
June 30, June 30,
1999 1998
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
<S> <C> <C>
Increase in deposit liabilities,
net of withdrawals ........................................ $ 37,287,661 $ 5,285,384
Proceeds from FHLB advances ................................. 165,000,000 139,000,000
Repayments of FHLB advances ................................. (145,000,000) (108,000,000)
Proceeds from short term borrowings ......................... 8,595,000 70,156,821
Repayments of short term borrowings ......................... (20,707,500) (73,209,321)
Stock repurchase and retirement ............................. (39,334,140) (11,561,483)
Stock options exercised ..................................... -- 411,035
Advances from borrowers for tax and insurance ............... (2,472,167) (2,251,925)
Dividends paid .............................................. (2,598,034) (2,555,235)
------------- -------------
Net cash provided by financing activities ....................... 770,820 17,275,276
------------- -------------
Net (decrease) increase in cash and cash
equivalents ................................................... (17,500,801) 18,455,030
Cash and cash equivalents at beginning
of period ..................................................... 66,985,269 32,043,196
------------- -------------
Cash and cash equivalents at end of period ...................... $ 49,484,468 $ 50,498,226
============= =============
SUPPLEMENTAL SCHEDULE OF INTEREST AND
INCOME TAXES PAID
Interest paid ............................................... $ 28,887,742 $ 28,171,707
Income taxes paid ........................................... 4,656,000 4,195,275
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES
Net unrealized gain (loss) on securities
available for sale ........................................ ($ 3,701,705) $ 628,956
Dividends declared and accrued in other
liabilities ............................................... 949,005 892,509
</TABLE>
See notes to consolidated financial statements
7
<PAGE>
KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Klamath First
Bancorp, Inc. (the "Company") include all the accounts of Klamath First Bancorp,
Inc. and the consolidated accounts of its wholly-owned subsidiary, Klamath First
Federal Savings and Loan Association (the "Association"). Significant
intercompany balances and transactions have been eliminated in the
consolidation. In the opinion of Management, the accompanying unaudited
consolidated financial statements contain all adjustments necessary for a fair
presentation of the Company's financial condition as of June 30, 1999 and
September 30, 1998, results of operations for the three and nine months ended
June 30, 1999 and 1998 and cash flows for the nine months ended June 30, 1999
and 1998. 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. These consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K. The results
of operations for the three and nine months ended June 30, 1999 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 June 30, 1999, the Company's total comprehensive
income was $148,452 compared to $2.7 million for the three months ended June 30,
1998. Total comprehensive income for the three months ended June 30, 1999 was
comprised of net income of $1.9 million and other comprehensive loss of $1.7
million, net of tax. Total comprehensive income for the three months ended June
30, 1998 was comprised of net income of $2.5 million and other comprehensive
income of $224,039, net of tax.
For the nine months ended June 30, 1999, the Company's total comprehensive
income was $2.9 million compared to $7.5 million for the nine months ended June
30, 1998. Total comprehensive income for the nine months ended June 30, 1999 was
comprised of net income of $6.6 million and other comprehensive loss of $3.7
million, net of tax. Total comprehensive income for the nine months ended June
30, 1998 was comprised of net income of $6.8 million and other comprehensive
income of $628,956, net of tax.
8
<PAGE>
3. ALLOWANCE FOR LOAN LOSSES
Activity in allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
June 30, September 30,
1999 1998
-------------- --------------
<S> <C> <C>
Balance, beginning of period $1,949,677 $1,296,451
Charge-offs (3,000) (20,774)
Additions 669,000 674,000
-------------- --------------
Balance, end of period $2,615,677 $1,949,677
============== ==============
</TABLE>
4. ADVANCES FROM FEDERAL HOME LOAN BANK
Borrowings at June 30, 1999 consisted of nine long term advances totaling $187.0
million from the Federal Home Loan Bank of Seattle ("FHLB"). The advances are
collateralized in aggregate by certain mortgages or deeds of trust and
securities of the U.S. Government and agencies thereof.
Scheduled maturities of advances from the FHLB were as follows:
<TABLE>
<CAPTION>
June 30, 1999 September 30, 1998
----------------------------------------------- -----------------------------------------------
Range of Weighted Range of Weighted
interest average interest average
Amount rates interest rate Amount rates interest rate
------------- ----------- --------------- ------------ ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Due within one year . $-- -- -- $ 30,000,000 5.54%-5.56% 5.55%
After one but within
five years .......... 40,000,000 4.97%-5.70% 5.32% 55,000,000 5.39%-5.74% 5.56%
After five but within
ten years ........... 147,000,000 4.77%-5.87% 5.33% 82,000,000 4.77%-5.24% 4.96%
------------ ------------
$187,000,000 $167,000,000
============ ============
</TABLE>
5. SHORT TERM BORROWINGS
Securities sold under agreements to repurchase at September 30, 1998 matured
during the quarter ended March 31, 1999 and were not renewed.
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 cost of the shares purchased was approximately $39.3 million. The effect of
the transaction is reflected in a reduction in cash and investments and a
reduction in equity with a corresponding impact on the performance ratios for
the quarter ended June 30, 1999.
9
<PAGE>
7. EARNINGS PER SHARE ("EPS")
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
vested 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.
<TABLE>
<CAPTION>
For the Nine Months Ended
----------------------------------
June 30, 1999 June 30, 1998
----------------- -------------
Effect of Dilutive Securities on Number of Shares
(Denominator):
<S> <C> <C>
MRDP shares ..................................................... 24,715 66,256
Stock options ................................................... 189,950 379,304
------------- -------------
Total Dilutive Securities ....................................... 214,665 445,560
============= =============
For the Three Months Ended
-------------------------------
June 30, 1998 June 30, 1999
------------- -------------
Effect of Dilutive Securities on Number of Shares
(Denominator):
MRDP shares ..................................................... 1,634 37,651
Stock options ................................................... 141,465 347,447
------------- -------------
Total Dilutive Securities ....................................... 143,099 385,098
============= =============
</TABLE>
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 June 30, 1999:
<TABLE>
<CAPTION>
Categorized as "Well
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
---------------------- -------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
As of June 30, 1999: ------------ ------- ----------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Total Capital: ........... $92,460,511 17.4% $42,635,584 8.0% $53,264,480 10.0%
(To Risk Weighted Assets)
Tier I Capital: .......... 89,844,834 16.9% N/A N/A 31,976,688 6.0%
(To Risk Weighted Assets)
Tier I Capital: .......... 89,844,834 8.8% 30,547,675 3.0% 50,912,791 5.0%
(To Total Assets)
Tangible Capital: ........ 89,844,834 8.8% 15,273,837 1.5% N/A N/A
(To Tangible Assets)
</TABLE>
10
<PAGE>
9. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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 is effective
for fiscal years beginning after June 15, 2000. The Statement should not be
applied retroactively to financial statements of prior periods.
The Company has determined that it currently has no instruments or contracts
that meet the scope of SFAS No. 133. Accordingly, the adoption of this statement
in 2001 is not expected to have a material impact on the financial statements of
the Company.
10. RECENTLY ISSUED REGULATORY GUIDANCE
In December 1998, the Office of Thrift Supervision released two final policy
statements: Thrift Bulletin 13a ("TB 13a") and a rule on financial derivatives.
The financial derivatives rule allows institutions to engage in transactions
with derivatives to the extent that such transactions are authorized under
applicable law and are otherwise safe and sound. In addition, the use of
financial derivatives should generally be limited to transactions which reduce
risk exposure. As noted above, the Company does not currently hold any
derivative instruments.
Thrift Bulletin 13a provides guidance on the management of interest rate risk,
investment securities, and derivatives activities as well as providing a
description of how the "Sensitivity to Market Risk" rating will be determined.
"Sensitivity to Market Risk" represents the "S" component of the CAMELS rating
which is used by regulators in their evaluation of financial institutions. TB
13a also provides implementation guidance for the Federal Financial Institutions
Examination Council's ("FFIEC") 1998 Supervisory Statement on Investment
Securities and End-user Derivative Activities. TB 13a replaces a number of
Thrift Bulletins including TB 13, "Responsibilities of Directors and Management
with Regard to Interest Rate Risk," TBs 13-1 and 13-2, "Implementation of TB
13," TB 52, "Supervisory Statement of Policy on Securities Activities," TB 52-1,
"Mismatched Floating Rate CMOs," and TB 65 "Structured Notes."
The Office of Thrift Supervision ("OTS") has established detailed minimum
guidelines for two areas of interest rate risk management. These guidelines
establish minimum expectations for (1) the establishment and maintenance of
board-approved risk limits and (2) an institution's ability to measure their
interest rate risk exposure.
Each thrift's board of directors is responsible for the establishment of risk
limits for the institution. The interest rate risk limits are expected to
include limits on the change in net portfolio value ("NPV") as well as limits on
11
<PAGE>
earnings sensitivity.
The NPV limits should specify the minimum NPV ratio (calculated by dividing the
NPV, previously referred to as the market value of portfolio equity ("MVPE"), by
the present value of the institution's assets for a given rate scenario) the
board is willing to allow under interest rate shifts of 100, 200, and 300 basis
points up and down. Both the NPV limits and the actual NPV forecast calculations
will play a role in determining a thrift's Sensitivity to Market Risk. The
prudence of the limits and the compliance with board-prescribed limits will be
factors in the determination as to whether or not the institution's risk
management is sufficient. In addition, the NPV ratio permitted by the
institution's policies under an adverse 200 basis point rate shift scenario is
combined with the institution's current interest rate sensitivity to determine
the institution's "Level of Interest Rate Risk." The level of interest rate risk
is then utilized in conjunction with an assessment of the "Quality of Risk
Management Practices" to determine the "S" component of the CAMELS rating.
The Company's board of directors had established risk limits under the previous
guidance in TB 13. These guidelines have been revised and approved to bring them
into compliance with TB 13a.
As part of TB 13a, the OTS developed a matrix for determining a thrift's "Level
of Interest Rate Risk" based on post-shock NPV and interest rate sensitivity.
The matrix categorizes institutions as having minimal, moderate, significant or
high levels of interest rate risk. Based on these guidelines in TB 13a, as of
June 30, 1999 the Association is considered to be in the "significant risk"
category. The board of directors has adopted a plan for management and
improvement of the Company's interest rate risk position.
Because the Company is well capitalized, the excess equity provides a buffer for
interest rate risk. In other words, the high level of equity can absorb
considerable change in NPV due to interest rate changes.
12
<PAGE>
Item 2. 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 June 30, 1999, the Company had total
consolidated assets of $1.0 billion and consolidated shareholders' equity of
$108.5 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 commercial real estate and multi-family
residential loans from other Oregon financial institutions, as well as using
mortgage brokers to locate mortgage loans that meet its existing conservative
underwriting standards outside of the current branch market areas.
Subsequent to June 30, 1999, the Company announced that it will begin offering
investment services through a new subsidiary of the Association, Klamath First
Financial Services. The new subsidiary will offer general securities trading as
well as financial and retirement planning to customers of the Company and the
public at large.
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 45.63%
from $10.3 million at June 30, 1998 to $15.0 million at June 30, 1999. 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.
13
<PAGE>
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 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
The Company's computer systems and infrastructure are ready for the Year 2000.
The following information explains the process that Klamath First Bancorp, Inc.
used to achieve Year 2000 readiness.
Background. 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, chose to use the Office of Thrift Supervision Year
2000 Checklist as a guide for Year 2000 preparation. The committee also used a
Year 2000 Testing Guide and Contingency Guide provided by Alex Information
Systems, Inc. to complement the OTS checklist.
Process. The FFIEC issued guidelines for Year 2000 project management by
financial institutions, which were followed by the Company. These guidelines
identified 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 June 30, 1999 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
continued 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 and third party service bureaus are 100%
tested as of June 30, 1999. The Company is either testing or reviewing test
documents of additional third party vendors that are deemed critical to the
operations of the Company. Overall, the validation phase is considered 100%
complete as of June 30, 1999.
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 has been completed as of June 30, 1999.
14
<PAGE>
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 were
also 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 and in April 1999.
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. During the quarter ended March 31, 1999, the Company
converted the accounts payable and fixed asset applications to the Year 2000
ready software provided by the Fiserv affiliate.
Other third party vendors identified by the Company were monitored for Year 2000
readiness. Validation with critical vendors was 100% complete as of June 30,
1999.
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 has been successfully completed. All ATM machines
have been upgraded and are now ready for Year 2000.
Contingency plans were developed by the committee. 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. Contingency planning was 100% complete
as of June 30, 1999.
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 quarter ending September 30, 1999. In addition, the Company has published
advertisements in local newspapers and has placed "Year 2000" bulletin boards in
all the branches, which contain current information on Year 2000 readiness for
the Company and the financial services industry.
Conclusion. 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 June 30,
1999, the Company estimated that total Year 2000 implementation costs will be
approximately $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 June 30, 1999, and may be revised as additional
information and actual costs become available. During the nine months ended June
30, 1999 and the year ended September 30, 1998, $80,000 and $89,000 of Year 2000
expenses were incurred and expensed, respectively.
15
<PAGE>
Changes in Financial Condition
At June 30, 1999, the consolidated assets of the Company totaled $1,035.5
million, an increase of $4.2 million, or 0.40%, from $1,031.3 million at
September 30, 1998. The increase in total assets was primarily a result of $59.2
million growth in loans which offset the Company's repurchase of 20% of the
outstanding common stock in January 1999, which reduced cash and investments by
$39.0 million.
Net loans receivable increased by $59.2 million, or 8.85%, to $727.3 million at
June 30, 1999, compared to $668.1 million at September 30, 1998. The increase
was primarily the result of continued new loan demand exceeding loan repayments,
augmented by the Company's purchase of $4.8 million in higher yielding loans on
multi-family residential and commercial properties in Oregon during the nine
months ended June 30, 1999.
Investment securities decreased $31.6 million, or 15.33%, from $206.1 million at
September 30, 1998 to $174.5 million at June 30, 1999. This decrease was the
result of scheduled maturities, primarily maturities of short term commercial
paper. The proceeds from these maturities were used to fund the stock
repurchase.
During the nine months ended June 30, 1999, $13.7 million of principal payments
were received on mortgage backed and related securities ("MBS") and $9.5 million
of MBS were sold, thus reducing the balance of MBS. This reduction was partially
offset by the purchase of $18.8 million in Collateralized Mortgage Obligations
resulting in a net decrease in total MBS from $47.0 million at September 30,
1998 to $41.4 million at June 30, 1999.
Deposit liabilities increased $37.3 million, or 5.41%, from $689.5 million at
September 30, 1998 to $726.8 million at June 30, 1999. 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. The increase in deposits has been experienced throughout
the network of 34 full service branches.
Advances from borrowers for taxes and insurance decreased $2.5 million from
September 30, 1998 to June 30, 1999. 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 partially offset by collection of taxes from
borrowers.
Advances from the FHLB of Seattle increased from $167.0 million at September 30,
1998 to $187.0 million at June 30, 1999. The increase was used to fund loan
growth. During the quarter ended June 30, 1999, the Company converted adjustable
rate borrowings to fixed rate three- to five-year maturity borrowings as a
strategic move to improve interest rate risk. Short term borrowings at September
30, 1998 consisted of $12.1 million in reverse repurchase agreements. These
agreements matured during the quarter ended March 31, 1999, and they were not
renewed.
Total shareholders' equity decreased $36.6 million, or 25.20%, from $145.1
million at September 30, 1998 to $108.5 million at June 30, 1999. The decrease
is primarily attributable to $39.0 million paid out for the 20% stock repurchase
completed in January 1999. Equity was also decreased by a $3.7 million decrease
in unrealized gains on securities available for sale during the nine month
period from September 30, 1998 to June 30, 1999. These decreases were partially
offset by $6.6 million in earnings for the year to date.
Results of Operations
Comparison of Nine Months Ended June 30, 1999 and 1998
General. Net interest income increased by $1.3 million from $23.8 million for
the nine months ended June 30, 1998 to $25.1 million for the same period in
1999. This increase was the combined result of an increase in interest income
and a decrease in interest expense. Net income decreased by $204,770, or 2.99%,
from $6.8 million for the nine months ended June 30, 1998 to $6.6 million for
the nine months ended June 30, 1999.
16
<PAGE>
Increases in net interest income and non-interest income were offset by
increases in the provision for loan losses and non-interest expense.
Interest Income. Additional interest income generated by the $41.6 million
increase in average interest earning assets contributed to an increase of $1.3
million in interest income for the nine months ended June 30, 1999 compared to
1998. Interest income on loans receivable increased $5.9 million, or 16.28%,
from $36.3 million for the nine months ended June 30, 1998 to $42.2 million for
the same period of 1999. This increase was a result of the $116.7 million
increase in average loans receivable. The increase in interest on loans was
offset by a $4.2 million decrease in interest on investment and mortgage backed
securities. Short term investments matured and interest bearing deposits were
liquidated in January 1999 to fund the $39.0 million stock repurchase, reducing
average investment balances, thus generating less income. The average yield on
interest earning assets decreased 5 basis points to 7.29% for the nine months
ended June 30, 1999 compared to 7.34% for the same period ended June 30, 1998.
In spite of the lower yields experienced for the period, interest rate spread
(the difference between the rates earned on interest earning assets and the
rates paid on interest bearing liabilities) improved from 2.57% to 2.75% and
interest rate margin (net interest income divided by average interest earning
assets) improved slightly from 3.37% to 3.40% comparing the nine month periods.
Interest Expense. Total interest expense increased $669,737, or 2.39%, for the
nine months ended June 30, 1999 compared to the same period in 1998. Of that
increase, $277,522 related to an increase in interest expense on deposit
liabilities. This increase was the combined result of a $35.5 million increase
in the average deposit balance offset by a 19 basis point reduction in the
average rate paid on deposits. The average balance of FHLB advances increased
$34.7 million from $133.8 million for the nine months ended June 30, 1998 to
$168.5 million for the same period ended June 30, 1999 resulting in an increase
in interest on FHLB advances of $892,148 for the nine months ended June 30, 1999
compared with the same period ended June 30, 1998.
Provision for Loan Losses. The provision for loan losses was $669,000 and there
were $3,000 of charge offs during the nine months ended June 30, 1999 compared
to a $364,000 provision and $20,774 of charge offs during the nine months ended
June 30, 1998. As the Company has grown over the last twelve months, the
composition of the loan portfolio has changed with increases in construction
loans and commercial and consumer loans, which are considered to have more
associated risk than the Company's traditional portfolio of one- to four- family
residential mortgages. Because of the Company's history of relatively low loan
loss experience, it has historically maintained an allowance for loan losses at
a lower percentage of total loans as compared with other institutions with
higher risk loan portfolios and higher loss experience. The increased provision
for loan losses reflects such changes in the composition of the loan portfolio,
although the Company's recent experience has not indicated a deterioration in
loan quality. The balance of non-performing loans has increased during the
current fiscal year, primarily as a result of the addition of a $1.6 million
secured commercial real estate loan and a $1.5 million land development loan.
The Company is not anticipating any material loss on these loans at this time
and sees these as isolated problem assets, not a market or underwriting trend.
Non-Interest Income. Non-interest income increased $575,261, or 27.44%, to $2.7
million for the nine months ended June 30, 1999 from $2.1 million for the nine
months ended June 30, 1998. The increase was primarily attributable to increases
in fee income related to the increase in deposit accounts subject to service
charges and $329,435 gain on sale of investment securities.
Non-Interest Expense. Non-interest expense increased $1.4 million, or 9.30%, to
$15.9 million for the nine months ended June 30, 1999, from $14.5 million for
the comparable period in 1998. Compensation, employee benefits, and related
expense increased $353,448, or 4.87%, from $7.3 million for the nine months
ended June 30, 1998 to $7.6 million for the same period in 1999. Occupancy
expense increased from $1.5 million for the nine months ended June 30, 1998 to
$1.7 million for the same period in 1999. Both of these increases are due to the
addition of two branches and expenditures on equipment related to preparing for
the 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. Other expense
increased $779,628, from $3.6 million for the nine months ended June 30, 1998 to
$4.3 million for the nine months ended June 30, 1999. The increase primarily
resulted from losses identified in the third quarter related to the Wells Fargo
17
<PAGE>
branch integration. Management does not anticipate any additional costs related
to the branch integration process. The ratio of non-interest expense to average
total assets was 2.06% and 1.96% for the nine months ended June 30, 1999 and
1998, respectively.
Income Taxes. The provision for income taxes was $4.5 million for the nine
months ended June 30, 1999, representing an effective tax rate of 40.60%,
compared with $4.2 million for the nine months ended June 30, 1998, representing
an effective tax rate of 37.78%. The effective rate for 1998 was unusually low
reflecting the impact of a one year reduction in the state tax rate for Oregon.
Comparison of Three Months Ended June 30, 1999 and 1998
General. Net interest income increased $361,287, or 4.52%, from $8.0 million for
the three months ended June 30, 1998 to $8.4 million for the three months ended
June 30, 1999. Increases in net interest income were offset by increases in
non-interest expense, resulting in a $600,189 decrease in net income from $2.5
million for the quarter ended June 30, 1998 to $1.9 million for the same quarter
of 1999.
Interest Income. Additional interest income generated by the $18.9 million
increase in average interest earning assets contributed to an increase of
$91,606 in interest income for the three months ended June 30, 1999 compared to
1998. The average yield on interest earning assets decreased 10 basis points to
7.23% for the three months ended June 30, 1999 compared to 7.33% for the same
period ended June 30, 1998. Average yield decreased because overall yields are
lower due to the downward shift in the yield curve. In spite of the lower yields
experienced for the period, interest rate spread (the difference between the
rates earned on interest earning assets and the rates paid on interest bearing
liabilities) improved from 2.55% to 2.80%, and interest rate margin (net
interest income divided by average interest earning assets) improved from 3.31%
to 3.39% comparing the three month periods.
Interest Expense. Total interest expense decreased $269,681 for the three months
ended June 30, 1999 compared to the same period in 1998. Of that decrease,
$47,379 related to a decrease in interest expense on deposit liabilities.
Although average deposits increased by $44.4 million comparing June 30, 1998 to
1999, the average interest paid on interest-bearing deposits decreased 32 basis
points from 4.57% for the three months ended June 30, 1998 to 4.25% for the same
period ended June 30, 1999. The average balance of other borrowings, consisting
of reverse repurchase agreements, decreased from $14.1 million for the three
months ended June 30, 1998 to zero for the same period ended June 30, 1999
resulting in a decrease in interest on other borrowings of $205,392 for the
three months ended June 30, 1999 compared with the same period ended June 30,
1998. The slight increase in interest income coupled with the decrease in
interest expense resulted in the noted improvements in interest rate spread and
margin.
Provision for Loan Losses. The provision for loan losses was $243,000 and there
were no charge offs during the three months ended June 30, 1999 compared to a
$198,000 provision and $20,774 of charge offs during the three months ended June
30, 1998. As noted above, the provision for loan losses was increased in
response to changes in the composition of the loan portfolio, although the
Company's recent experience has not indicated a deterioration in loan quality.
Non-Interest Income. Non-interest income was consistent for the three months
ended June 30, 1999 and 1998. For the third quarter of 1998, non-interest income
consisted of $591,528 in fees and service charges and $189,661 of non-recurring
gains on sale of investments. For the third quarter of 1999, fees and service
charges increased by 26.63% to $749,074, with only $22,106 of non-interest
income arising from gains on sale of investments.
Non-Interest Expense. Non-interest expense increased $930,419, or 19.25%, to
$5.8 million for the three months ended June 30, 1999, from $4.8 million for the
comparable period in 1998. Of this increase, $287,284 was attributable to an
increase in compensation and benefit expense in 1999, reflecting addition of
staff related to the addition of two branches during the past year. Occupancy
expense increased slightly from $508,317 for the three months ended June 30,
18
<PAGE>
1998 to $543,532 for the three months ended June 30, 1999 due to the addition of
the two branches. Other expense increased $608,741, from $1.3 million for the
three months ended June 30, 1998 to $1.9 million for the three months ended June
30, 1999. The increase primarily resulted from losses identified in the third
quarter related to the Wells Fargo branch integration. Management does not
anticipate any additional costs related to the branch integration process. The
ratio of non-interest expense to average total assets was 2.24% and 1.90% for
the three months ended June 30, 1999 and 1998, respectively.
Income Taxes. The provision for income taxes was $1.3 million for the three
months ended June 30, 1999, representing an effective tax rate of 40.60%,
compared with $1.3 million for the three months ended June 30, 1998,
representing an effective tax rate of 34.34%. The effective rate for 1998 was
unusually low reflecting the impact of a one year reduction in the state tax
rate for Oregon.
19
<PAGE>
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
June 30, 1999.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KLAMATH FIRST BANCORP, INC.
Date: August 13, 1999 By: /s/ Gerald V. Brown
--------------------------------
Gerald V. Brown, President and
Chief Executive Officer
Date: August 13, 1999 By: /s/ Marshall Jay Alexander
--------------------------------
Marshall Jay Alexander,
Senior Vice President and
Chief Financial Officer
20
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE THIRD
QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 23,694,978
<INT-BEARING-DEPOSITS> 8,648,716
<FED-FUNDS-SOLD> 17,140,774
<TRADING-ASSETS> 0
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<INVESTMENTS-MARKET> 3,531,832
<LOANS> 729,871,176
<ALLOWANCE> 2,615,677
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<DEPOSITS> 726,829,006
<SHORT-TERM> 0
<LIABILITIES-OTHER> 13,103,907
<LONG-TERM> 187,000,000
0
0
<COMMON> 79,084
<OTHER-SE> 108,441,471
<TOTAL-LIABILITIES-AND-EQUITY> 1,035,453,468
<INTEREST-LOAN> 42,191,692
<INTEREST-INVEST> 10,319,952
<INTEREST-OTHER> 1,254,233
<INTEREST-TOTAL> 53,765,877
<INTEREST-DEPOSIT> 21,895,479
<INTEREST-EXPENSE> 28,689,272
<INTEREST-INCOME-NET> 25,076,605
<LOAN-LOSSES> 669,000
<SECURITIES-GAINS> 217,179
<EXPENSE-OTHER> 15,789,324
<INCOME-PRETAX> 11,177,817
<INCOME-PRE-EXTRAORDINARY> 11,177,817
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,639,623
<EPS-BASIC> 0.86
<EPS-DILUTED> 0.83
<YIELD-ACTUAL> 3.40
<LOANS-NON> 3,905,521
<LOANS-PAST> 0
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<ALLOWANCE-OPEN> 1,949,677
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<ALLOWANCE-CLOSE> 2,615,677
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,615,677
</TABLE>
