<PAGE> 1
UNITED STATES
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 quarter period ended September 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission file number 0-23838
_______
SECURITY BANCORP
(Exact name of registrant as specified in this charter)
<TABLE>
<S> <C>
Montana 81-0486553
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
219 North 26th Street, Billings, Montana 59101
________________________________________ _____
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (406)-238-4800
______________
</TABLE>
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 [ ]
The number of shares outstanding of each of the Issuer's
Classes of Common Stock, as of the latest date is:
Class: Common Stock, Par Value $1 per share, Outstanding
at September 30, 1996 -- 1,484,682 shares
Exhibit Index Page 15/Total Pages 17
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SECURITY BANCORP
QUARTERLY REPORT ON FORM 10-Q
Index
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page #
------
Item 1. - Financial Statements
<S> <C>
Consolidated Balance Sheets - September 30,
1996 (Unaudited) and June 30, 1996 3
Consolidated Statements of Income - Three months ended
September 30, 1996 and 1995 (Unaudited) 4
Consolidated Statement of Stockholders' Equity -
Three months ended September 30, 1996 (Unaudited) 5
Consolidated Statements of Cash Flows -
Three months ended September 30, 1996
and 1995 (Unaudited) 6
Notes to Consolidated Financial
Statements (Unaudited) 8
Item 2. - Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
PART II. OTHER INFORMATION
Item 1. - Legal Proceedings 15
Item 2. - Change in Securities 15
Item 3. - Default of Senior Securities 15
Item 4. - Submission of Matters to Vote of Security Holders 15
Item 5. - Other Information 15
Item 6. - Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
SECURITY BANCORP AND SUBSIDIARY SEPTEMBER 30, JUNE 30,
1996 1996
ASSETS (UNAUDITED)
------ ------------- -------------
<S> <C> <C>
Cash and cash equivalents $ 8,429,163 $ 9,789,678
Investment securities available for sale, net, at fair value 19,887,711 20,145,344
Mortgage-backed securities available for sale, net, at fair value 89,638,407 96,551,111
Investment securities held to maturity, at amortized cost 200,000 --
Mortgage-backed securities held to maturity, at amortized cost 33,049,827 34,704,507
Loans held for sale, at lower of cost or market value 1,306,952 2,687,034
Loans receivable, net 205,746,716 184,903,699
Stock in Federal Home Loan Bank of Seattle, at cost 3,208,800 3,145,600
Accrued interest receivable 3,156,075 2,584,018
Cash surrender value of life insurance 2,692,444 2,663,427
Real estate held for investment 287,306 288,908
Premises and equipment, at cost less accumulated depreciation 9,379,059 9,504,502
Goodwill, net of amortization 4,292,500 4,377,500
Other assets 1,033,969 893,744
------------- -------------
$ 382,308,929 $ 372,239,072
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Deposits 289,335,830 289,219,498
Securities sold under repurchase agreements 8,389,107 7,964,766
Advances from Federal Home Loan Bank of Seattle 42,991,667 36,791,667
Advance payments by borrowers for taxes and insurance 950,215 880,697
Income taxes payable (50,487) 37,728
Deferred income taxes 308,154 112,083
Accrued interest payable 2,130,687 2,075,161
Accrued expenses and other liabilities 7,323,343 4,453,808
------------- -------------
Total Liabilities 351,378,516 341,535,408
------------- -------------
Stockholders' equity:
Preferred stock, $1 par value, 5,000,000 shares authorized, none outstanding -- --
Common stock, $1 par value, 10,000,000 shares authorized; issued and
outstanding 1,484,682 shares 1,484,682 1,462,182
Additional paid-in capital 9,015,392 8,765,053
Retained earnings, substantially restricted 21,790,537 22,065,712
Net unrealized gains (losses) on available for sale securities (1,360,198) (1,589,283)
------------- -------------
Total stockholders' equity 30,930,413 30,703,664
------------- -------------
$ 382,308,929 $ 372,239,072
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 4
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
SECURITY BANCORP AND SUBSIDIARY THREE MONTHS ENDED
(UNAUDITED) SEPTEMBER 30,
1996 1995
----------- ----------
<S> <C> <C>
Interest income:
Loans receivable $ 4,350,374 $3,356,299
Investment securities 339,294 474,371
Mortgage-backed securities 2,080,725 2,477,417
Other 67,301 91,612
----------- ----------
TOTAL INTEREST INCOME 6,837,694 6,399,699
----------- ----------
Interest expense:
Deposits 3,085,711 3,331,793
Securities sold under repurchase agreement 113,850 97,221
Advances from Federal Home Loan Bank of Seattle 571,374 377,388
----------- ----------
TOTAL INTEREST EXPENSE 3,770,935 3,806,402
----------- ----------
Net interest income 3,066,759 2,593,297
Provision for loan losses 150,000 30,000
----------- ----------
Net interest income after provision for loan losses 2,916,759 2,563,297
----------- ----------
Non-interest income:
Fees for customer services 588,366 474,432
Securities brokerage services 38,035 23,194
Gain on the sale of investment securities available for sale 319 --
Gain on sale of mortgage-backed securities available for sale 3,456 --
Loss on sale of mortgage-backed securities held to maturity (962) --
Gain on sale of loans held for sale 135,614 144,525
Gain/(loss) on sale of other real estate owned (900) 185
Other operating income, net 507,903 223,747
----------- ----------
TOTAL NON-INTEREST INCOME 1,271,831 866,083
----------- ----------
Non-interest expense:
Compensation and benefits 1,335,916 1,197,023
Advertising 44,646 54,970
Occupancy and equipment 345,529 297,346
FDIC deposit insurance premiums 119,372 110,823
SAIF assessment 1,330,517 --
Data processing services 191,359 215,272
Other 757,089 576,793
----------- ----------
TOTAL NON-INTEREST EXPENSE 4,124,428 2,452,227
----------- ----------
Income before income taxes 64,162 977,153
Income taxes 24,000 352,000
----------- ----------
NET INCOME $ 40,162 $ 625,153
=========== ==========
Income and dividends per share:
Weighted average number of shares outstanding 1,511,180 1,528,801
=========== ==========
Income per share $ 0.03 $ 0.41
=========== ==========
Dividends per share $ 0.215 $ 0.1975
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 5
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
SECURITY BANCORP AND SUBSIDIARY
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1996
-------------------------------------
UNREALIZED
ADDITIONAL HOLDING GAINS
COMMON PAID-IN RETAINED (LOSSES),
STOCK CAPITAL EARNINGS NET TOTAL
---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1996 $1,462,182 8,765,053 22,065,712 (1,589,283) 30,703,664
Net Income -- -- 40,162 -- 40,162
Dividends paid ($.215 per share) -- -- (315,337) -- (315,337)
Change in net unrealized gain (loss) on
securities available for sale -- -- -- 229,085 229,085
Exercise of stock options 22,500 250,339 -- -- 272,839
---------- --------- ---------- ---------- ----------
Balance at September 30, 1996 $1,484,682 9,015,392 21,790,537 (1,360,198) 30,930,413
========== ========= =========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 6
SECURITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30
1996 1995
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 40,162 $ 625,153
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for:
Loan losses 150,000 30,000
Amortization of:
Premiums and discounts on investment
securities, net - held to maturity -- 2,744
Premiums and discounts on investment
securities, net - available for sale 1,479 506
Premiums and discounts on mortgage-backed
securities, net - available for sale 35,266 (5,092)
Premiums and discounts on mortgage-backed
securities, net - held to maturity 22,862 3,599
Deferred loan origination fees (14,376) (22,139)
Goodwill 85,000 85,000
Origination of loans held for sale (7,521,174) (10,174,113)
Proceeds from sales of loans 9,036,870 9,991,658
Stock dividends reinvested in Federal Home Loan Bank of Seattle (63,200) --
Depreciation 172,249 133,336
(Gain)/loss on sale of:
Loans held for sale (135,614) (144,525)
Mortgage-backed securities available for sale (3,456) --
Mortgage-backed securities held to maturity 962 --
Investment securities available for sale (319) --
Change in:
Accrued interest receivable (572,057) (268,220)
Cash surrender value of life insurance (29,017) (18,332)
Other assets (140,225) (3,943)
Income taxes payable (88,215) 382,756
Accrued interest payable 55,526 359,603
Accrued expenses and other liabilities 2,869,535 (224,727)
----------- ------------
Net cash provided by operating activities 3,902,258 753,264
----------- ------------
</TABLE>
(Continued on Page 7)
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<PAGE> 7
SECURITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from investing activities:
Purchase of investment securities available for sale -- (5,003,125)
Purchase of mortgage-backed securities available for sale (4,918,750) (16,178,859)
Purchase of investment securities held to maturity (200,000) --
Proceeds from the call of investment securities available for sale 7,118 --
Proceeds from the sale of mortgage-backed securities available for sale 10,014,063 --
Proceeds from the sale of mortgage-backed securities held to maturity 255,605 --
Proceeds from maturities of investment securities available for sale 240,000 95,631
Proceeds from maturities of investment securities held to maturity -- 4,999,930
Principal payments on investment securities available for sale 3,831 --
Principal payments on mortgage-backed securities available for sale 2,216,260 539,374
Principal payments on mortgage-backed securities held to maturity 1,375,251 3,510,988
Origination of loans receivable (38,007,891) (16,700,000)
Repayment of principal on loans receivable 17,029,251 11,763,100
Decrease in real estate held for investment 1,602 3,951
Additions to premises and equipment (46,806) (612,555)
------------ ------------
Net cash used in investing activities (12,030,466) (17,581,565)
------------ ------------
Cash flows from financing activities:
Net increase in deposits 116,332 3,122,098
Net increase in securities sold under repurchase agreements 424,341 --
Net change in advances from Federal Home Loan Bank of Seattle 6,200,000 11,000,000
Net increase in advance payments by borrowers for taxes and insurance 69,518 54,028
Cash dividends paid on common stock (315,337) (292,139)
Exercise of stock options 272,839 --
------------ ------------
Net cash provided by financing activities 6,767,693 13,883,987
------------ ------------
Net decrease in cash and cash equivalents (1,360,515) (2,944,314)
------------ ------------
Cash and cash equivalents at beginning of period 9,789,678 10,188,922
Cash and cash equivalents at end of period $ 8,429,163 $ 7,244,608
============ ============
Cash paid for:
Interest $ 3,715,409 $ 3,446,799
Income Taxes, net -- --
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 8
SECURITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation:
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, adjustments (consisting of
normal recurring adjustments) considered necessary for a fair presentation have
been included. Operating results for the three months ended September 30, 1996
are not necessarily indicative of the results anticipated for the year ending
June 30, 1997. For additional information, refer to the consolidated financial
statements and footnotes thereto included in Security Bancorp's annual report on
Form 10-K for the year ended June 30, 1996.
2. Organizational Structure:
The accompanying consolidated financial statements include the accounts of
Security Bancorp (the Holding Company) and its wholly owned subsidiary, Security
Bank, FSB (the Bank). The consolidated financial statements also include S.F.S
Industries, Inc., a wholly owned subsidiary of the Bank. All significant
intercompany balances and transactions have been eliminated in consolidation.
S.F.S. Industries, Inc. provides full service brokerage services.
3. Income Per Share:
The income per common share for the three month period ending September 30, 1996
was $0.03, based on the weighted average number of shares of common stock and
common stock equivalent shares outstanding. Income per common share for the
three month period ending September 30, 1995 was $0.41, based on the weighted
average number of shares of common stock and common stock equivalent shares
outstanding. Net income for the three month period ended September 30, 1996
included non-recurring expenses relating to the SAIF special premium assessment
of $1,330,517 and $198,128 in expenses relating to the proposed merger with
Westerfed Financial Corporation. After tax income for the three month period
ending September 30, 1996 would have been $1,003,208 had these non-recurring
expenses not been incurred. This would have resulted in income per common share
of $0.66 as compared with the $0.03 actually reported. Stock options are
outstanding, under the Security Bancorp 1993 Stock Option and Stock Appreciation
Rights Plan, to purchase 87,700 shares of stock. No stock options were granted
during the three month period ending September 30, 1996. Stock options totaling
22,500 shares were exercised during the same period. Additionally, 500 stock
options lapsed during the three month period ended September 30, 1996. These
stock options are considered common stock equivalents for computation of the
income per share in the accompanying financial statements.
4. Dividends:
On August 26, 1996, the Board of Directors of Security Bancorp declared a
quarterly cash dividend of $0.165 per share and a bonus dividend of $0.05 per
share, paid on September 30, 1996, to stockholders of record on September 13,
1996.
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<PAGE> 9
5. Investment Securities and Mortgage-Backed Securities Available for Sale:
The amortized cost, unrealized gains and losses, and approximate fair values of
securities available for sale at September 30, 1996 are as follows:
<TABLE>
<CAPTION>
Gross Gross
unrealized unrealized Estimated
Cost gains losses fair value
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Investment securities:
U. S. Treasury securities $ 299,809 -- (4,841) 294,968
U. S. Agency securities 15,000,000 -- (152,938) 14,847,062
Municipal bonds 2,311,000 15,341 (132,326) 2,194,015
Mutual funds 2,780,540 883 (229,757) 2,551,666
----------- ---------- ----------- ----------
$20,391,349 16,224 (519,862) 19,887,711
=========== ========== =========== ==========
Mortgage-backed securities:
Agency mortgage-backed securities $89,478,363 133,135 (1,788,541) 87,822,957
Private Issue 1,828,916 -- (13,466) 1,815,450
----------- ---------- ----------- ----------
$91,307,279 133,135 (1,802,007) 89,638,407
=========== ========== =========== ==========
</TABLE>
The amortized cost, unrealized gains and losses, and approximate fair values of
securities available for sale at June 30, 1996 are as follows:
<TABLE>
<CAPTION>
Gross Gross
unrealized unrealized Estimated
Cost gains losses fair value
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Investment securities:
U. S. Treasury securities $ 499,761 136 (6,335) 493,562
U. S. Agency securities 15,000,000 -- (234,782) 14,765,218
Municipal bonds 2,351,000 66,096 (80,475) 2,336,621
Mutual funds 2,792,707 842 (243,606) 2,549,943
----------- ---------- ----------- ----------
$20,643,468 67,074 (565,198) 20,145,344
=========== ========== =========== ==========
Mortgage-backed securities:
Agency mortgage-backed securities $96,808,239 91,843 (2,132,571) 94,767,511
Private Issue 1,828,948 -- (45,348) 1,783,600
----------- ---------- ----------- ----------
$98,637,187 91,843 (2,177,919) 96,551,111
=========== ========== =========== ==========
</TABLE>
Gross gains of $319 and no losses were realized on the sale of investment
securities available for sale during the three months ended September 30, 1996.
Gross gains of $3,456 and no losses were realized on mortgage-backed securities
available for sale during the same period. Gross losses of $962 and no gains
were realized on the sale of mortgage-backed securities held to maturity sold
during the three month period ended September 30, 1996. Such sales meet the
conditions for being considered maturities for purposes of the classification of
securities under the provisions of Statement of Financial Accounting Standards
No. 115 ("SFAS 115"), "Accounting for Certain Investments in Debt and Equity
Securities."
6. Regulatory Capital:
The Bank is required to meet three FIRREA-enacted capital regulations: a
tangible capital requirement (stockholders' equity adjusted for the effects of
intangibles, investments and advances to nonincludable subsidiaries and other
factors) equal to not less than 1.5% of tangible assets (as defined in the
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<PAGE> 10
regulations), a core capital requirement (tangible capital adjusted for
supervisory goodwill and other defined factors) equal to not less than 3% of
tangible assets, and a risk-based capital requirement equal to at least 8.0% of
all risk-weighted assets. For risk-weighting, selected assets are given a risk
assignment of 0% to 100%. The Bank's total risk-weighted assets at September 30,
1996 were $199,017,400.
The following table demonstrates as of September 30, 1996, the extent to which
the Bank exceeds in dollars and in percent, the three minimum capital
requirements.
<TABLE>
<CAPTION>
Excess of Actual
Actual Required over Requirement
-------------- -------------- ----------------
<S> <C> <C> <C>
Tangible Capital:
$ amount $ 26,796,456 $ 5,684,172 $ 21,112,284
% of tangible assets 7.07% 1.5% 5.57%
Core Capital:
$ amount $ 26,796,456 $ 11,368,343 $ 15,428,113
% of adjusted tangible assets 7.07% 3.0% 4.07%
Risk-Based Capital:
$ amount $ 28,078,016 $ 15,921,392 $ 12,156,624
% of risk-weighted assets 14.11% 8.0% 6.11%
</TABLE>
Generally accepted accounting principles (GAAP) capital differs from tangible,
core, and risk-based capital at September 30, 1996 and June 30, 1996 as a result
of the following:
<TABLE>
<CAPTION>
September 30, June 30,
1996 1996
---- ----
<S> <C> <C>
Consolidated capital measured by GAAP $ 30,930,413 $ 30,703,664
Less Holding Company assets 464,724 381,049
------------ ------------
Bank capital measured by GAAP 30,465,689 30,322,615
Non-includable assets of subsidiary (594,181) (582,180)
Goodwill (4,292,500) (4,377,500)
Unrealized losses on certain available for sale
securities 1,217,448 1,443,069
------------ ------------
Tangible and core capital 26,796,456 26,806,004
General valuation reserves 1,281,560 1,180,866
------------ ------------
Risk-based capital $ 28,078,016 $ 27,986,870
============ ============
</TABLE>
7. SAIF Special Assessment:
The thrift deposits of the Bank are insured by the Savings Association Insurance
Fund (SAIF), one of two funds administered by the Federal Deposit Insurance
Corporation (FDIC). The Bank currently pays premiums of approximately 0.23% of
thrift deposits. The Deposit Insurance Funds Act of 1996 ("Funds Act") was
enacted in September, 1996. The purpose of the Funds Act was to impose a special
assessment of 0.657% of SAIF-assessable deposits as of March 31, 1995 in order
to recapitalize the SAIF. The special assessment resulted in an additional
after-tax expense of approximately $838,000 or $0.55 per common share during the
quarter ended September 30, 1996.
8. Recent Accounting Statements:
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing
Rights." SFAS No.
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<PAGE> 11
122 generally requires that mortgage banking enterprises, which includes the
Bank, recognize as a separate asset rights to service mortgage loans for others,
regardless of how those servicing rights are acquired. Additionally, SFAS No.
122 requires that capitalized mortgage servicing rights be assessed for
impairment based on the fair value of the mortgage servicing rights. The
provisions of SFAS No. 122 are to be applied prospectively in fiscal years
beginning after December 31, 1995, to transactions in which the Bank sells or
securitizes mortgage loans with servicing rights retained and to impairment
evaluations of all amounts capitalized as mortgage servicing rights, including
those purchased before the adoption of this statement. The Bank adopted the
provisions of SFAS No. 122 on July 1, 1996, and adoption did not have a material
effect on the Bank's consolidated financial position or results of operations.
On September 30, 1995, the FASB issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
SFAS No. 121 provides that long-lived assets and identifiable intangibles should
be reviewed for impairment whenever events or circumstances provide evidence
that suggests the carrying amount of the asset may not be recoverable. The
determination of whether an asset is impaired is based on undiscounted cash
flows. An impairment, if any, is measured based on the fair value of the asset,
if readily determinable. Otherwise impairment would be measured based on the
present value of the expected future net cash flows calculated using either a
market interest rate or the entity's incremental borrowing rate. SFAS No. 121 is
effective for financial statements issued for fiscal years beginning after
December 15, 1995, although earlier application is encouraged. The Bank adopted
the provisions of SFAS No. 121 on July 1, 1996 and adoption did not have a
material effect on the financial position or results of operations of the Bank.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 defines a "fair value based method" of accounting
for an employee stock option whereby compensation cost is measured at the grant
date based on the value of the award and is recognized over the service period.
The FASB encourages all entities to adopt the fair value based method, however,
it will allow entities to continue the use of the "intrinsic value based method"
prescribed by previous pronouncements. Under the intrinsic value based method,
compensation cost is the excess of the market price of the stock at the grant
date over the amount an employee must pay to acquire the stock. However, most
stock option plans have no intrinsic value at the grant date, and, as such, no
compensation cost is recognized under previous pronouncements. Entities electing
to continue use of the accounting treatment of previous announcements must make
certain pro forma disclosures as if the fair value based method had been
applied. SFAS No. 123 is effective for financial statements issued for fiscal
years beginning after December 31, 1995. The Bank adopted the provisions of SFAS
No. 123 on July 1, 1996. Management's current intention is to not adopt the fair
value based method of accounting.
9. Proposed Merger:
On September 24, 1996, Security Bancorp signed a definitive agreement to merge
with and into WesterFed Financial Corporation (Westerfed). The total purchase
price is approximately $44.0 million, subject to certain adjustments. Completion
of the merger, which will be treated as a purchase for accounting purposes, is
subject to various approvals by regulators and shareholders of both companies,
as well as the satisfaction of certain other conditions.
Under the terms of the agreement, Security Bancorp shareholders may elect to
receive for each share of Security Bancorp common stock $30 in cash, a number of
shares of Westerfed common stock or a combination of cash and stock, provided
the total consideration to Security Bancorp shareholders consists of between
40-45% stock and 55-60% cash. Subject to satisfaction of the various conditions,
closing of the merger is scheduled to occur on or before March 31, 1997.
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<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
(1) Material changes in financial condition. Comparison of the three month
period from June 30, 1996 to September 30, 1996.
General. Total assets increased by $10.1 million or 2.7% over the June 30, 1996
level. Stockholders' equity increased $226,749 during the three-month period
ended September 30, 1996. The Bank's ratio of stockholders' equity to total
assets decreased from 8.25% at June 30, 1996 to 8.09% at September 30, 1996.
Mortgage-backed securities available for sale. Mortgage-backed securities
available for sale decreased $6.9 million from June 30, 1996 to September 30,
1996. This decrease was primarily due to purchases of $4.9 million and the
change in the unrealized loss of $430,679, offset by sales of $10 million and
principal payments of $2.2 million. The proceeds from this decrease were used to
partially fund the increase in net loans receivable.
Mortgage-backed securities held to maturity. Mortgage-backed securities held to
maturity decreased $1.7 million from June 30, 1996 to September 30, 1996,
primarily as a result of sales of $255,605 and principal payments of $1.4
million. The proceeds from this decrease were used to partially fund the
increase in net loans receivable.
Loans receivable. Net loans receivable increased $20.8 million from June 30,
1996 to September 30, 1996. This increase was primarily due to $38 million
origination of loans partially offset by principal repayments of $17.1 million
and an increase in the reserve for loan losses of $100,694. Proceeds from the
decrease in mortgage-backed securities available for sale and held to maturity
and the increase in advances from Federal Home Loan Bank of Seattle were used to
partially fund this increase.
Classified assets and reserves. Non-performing assets, consisting of non-accrual
loans, accruing loans 90 days or more overdue, and real estate and other assets
acquired by foreclosure or deed-in-lieu thereof, net of related reserves,
amounted to $704,000 at September 30, 1996, as compared to $668,000 at June 30,
1996. Non-performing assets continue to improve and remain at a very low level.
<TABLE>
<CAPTION>
September 30, June 30,
1996 1996
---- ----
<S> <C> <C>
Total reserves for loan and real
estate owned losses: $ 1,281,560 1,180,866
Reserves as a percentage
of total loans: .62% .63%
Reserves as a percentage of non-
performing assets: 182% 177%
Non-performing assets as a percentage
of total assets: .18% .18%
</TABLE>
At September 30, 1996, the recorded investment in impaired loans was $510,000,
all of which were on non-accrual status. The Bank has not established an
impairment allowance for these loans. The average recorded investment in
impaired loans during the three months ended September 30, 1996 was $444,000.
The amount of interest income recognized on impaired loans during this period
was immaterial.
-12-
<PAGE> 13
Advances from Federal Home Loan Bank of Seattle. Advances from Federal Home Loan
Bank of Seattle increased $6.2 million from June 30, 1996 to September 30, 1996.
The total available line of credit at the FHLB is 20% of total assets, $76
million at September 30, 1996. The amount of unused credit with the FHLB is $33
million at September 30, 1996. This increase was used to partially fund the
increase in net loans receivable.
Stockholders' equity. Stockholders' equity increased $226,749 from June 30, 1996
to September 30, 1996. This increase was comprised of income of $40,162,
proceeds from the exercise of stock options of $272,839 and a decrease in the
unrealized loss on available for sale securities of $229,085, partially offset
by dividends on common stock of $315,337. The unrealized loss at September 30,
1996 is comprised of an excess of cost above fair value of $2,159,044 offset by
the tax effect of $798,846.
(2) Material changes in results of operations. Comparison of three-months ended
September 30, 1996 and September 30,1995.
Summary of Results of Operations
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1996 1995 Change
----------- ----------- -----------
<S> <C> <C> <C>
Interest income $ 6,837,694 $ 6,399,699 $ 437,995
Interest expense 3,770,935 3,806,402 35,467
----------- ----------- -----------
Net interest income 3,066,759 2,593,297 473,462
Provision for loan losses (150,000) (30,000) (120,000)
Non-interest income 1,271,831 866,083 405,748
Non-interest expense (4,124,428) (2,452,227) (1,672,201)
----------- ----------- -----------
Income before income tax 64,162 977,153 (912,991)
Income tax expense (24,000) (352,000) 328,000
----------- ----------- -----------
Net income $ 40,162 $ 625,153 $ (584,991)
=========== =========== ===========
</TABLE>
General. Net income for the quarter ended September 30, 1996 was $584,991 lower
than for the corresponding period in 1995. This decrease was due to an increase
in the provision for loan losses and a substantial increase in non-interest
expense partially offset by increases in net interest income and non-interest
income and a decrease in income tax expense. The increase in non-interest
expense was primarily due to the $1,330,517 SAIF special assessment and $198,128
in extra expense as a result of the proposed merger with Westerfed.
Interest income and expense. Interest income for the quarter ended September 30,
1996 was $437,995 higher than interest income for the same three month period in
1995. This increase was due to higher average balances of loans receivable and a
higher average yield on interest bearing earning assets, partially offset by
lower average balances of investment securities and mortgage-backed securities.
The average yield on interest earning assets for the quarter ended September 30,
1996 was 7.66% compared to 7.45% for the prior year period. Interest expense for
the quarter ended September 30, 1996 was $35,467 lower than interest expense for
the 1995 period. This decrease was due to the lower average rate paid on
deposits and borrowings and lower average balances of borrowings, partially
offset by higher average balances of deposits for the quarter ended September
30, 1996. The average rate paid on deposits and borrowings decreased from 4.91%
for the quarter ended September 30, 1995 to 4.67% for the quarter ended
September 30, 1996.
-13-
<PAGE> 14
Net interest income. Net interest income increased $473,462 for the quarter
ended September 30, 1996 as compared to the same quarter in 1995. The interest
rate spread for the quarter ended September 30, 1996 was 2.99% as compared to
2.55% for the quarter ended September 30, 1995.
Provision and allowance for loan losses. The provision for loan losses increased
$120,000 in the quarter ended September 30, 1996 as compared to the same quarter
period in 1995. This increase reflects an increase in the amount of loans
outstanding, as well as management's continuing evaluation of the possible loss
exposure in the loan portfolio. The allowance for possible loan losses increased
from $1,180,866 at June 30, 1996 (0.63% of loans receivable) to $1,281,560 at
September 30, 1996 (0.62% of loans receivable) due to the increase in the
provision.
Non-interest income. Non-interest income increased $405,748 in the quarter ended
September 30, 1996 in comparison to the same period in 1995. This increase is
related to increases in fees from customer services of $113,934, increases in
other operating income of $284,156, increases in securities brokerage services
of $14,841 and an increase in net gains from the sale of mortgage-backed
securities, investment securities and other real estate owned of $1,728,
partially offset by decreases in gain on sale of loans held for sale of $8,911.
Included in other operating income for the quarter ending September 30, 1996 is
a $209,000 gain on an exchange of land held for a future branch office.
Non-interest expense. Non-interest expense for the quarter ended September 30,
1996 increased $1,672,201 in comparison to the corresponding period in 1995.
Compensation and benefits increased $138,893 primarily as a result of the new
branch office in Bozeman, Montana, which opened in February, 1996. Occupancy and
equipment increased $48,183 again primarily due to the operation of the new
Bozeman branch. The SAIF special assessment was $1,330,517 in the 1996 period
with no corresponding expense in 1995. Other non-interest expense increased
$180,296 primarily due to $198,128 in extra expense as a result of the proposed
merger with Westerfed.
Income tax expense. Income tax expense decreased $328,000 for the quarter ended
September 30, 1996 as compared to the same period in 1995. This decrease was the
result of lower pre-tax earnings in the 1996 period.
-14-
<PAGE> 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There are no material legal proceedings to which the registrant or its
subsidiaries are a party.
Item 2. Change in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits - Exhibit 27, Article Nine Financial Data Schedule
(b) No reports on Form 8-K were filed for the quarter ended September
30, 1996.
-15-
<PAGE> 16
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:
SECURITY BANCORP
(Registrant)
Date: October 30, 1996 /s/ David W. Jorgenson
-------------------------------
David W. Jorgenson
President, CEO and Director
Date: October 30, 1996 /s/ Anthony P. Dunn
-------------------------------
Anthony P. Dunn
Assistant Controller/Chief Accounting Officer
-16-
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 7,995
<INT-BEARING-DEPOSITS> 434
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 109,526
<INVESTMENTS-CARRYING> 33,250
<INVESTMENTS-MARKET> 32,296
<LOANS> 208,335
<ALLOWANCE> 1,282
<TOTAL-ASSETS> 382,309
<DEPOSITS> 289,336
<SHORT-TERM> 49,589
<LIABILITIES-OTHER> 10,662
<LONG-TERM> 1,792
0
0
<COMMON> 1,485
<OTHER-SE> 29,445
<TOTAL-LIABILITIES-AND-EQUITY> 382,309
<INTEREST-LOAN> 4,351
<INTEREST-INVEST> 2,420
<INTEREST-OTHER> 67
<INTEREST-TOTAL> 6,838
<INTEREST-DEPOSIT> 3,086
<INTEREST-EXPENSE> 3,771
<INTEREST-INCOME-NET> 3,067
<LOAN-LOSSES> 150
<SECURITIES-GAINS> 138
<EXPENSE-OTHER> 4,125
<INCOME-PRETAX> 64
<INCOME-PRE-EXTRAORDINARY> 64
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
<YIELD-ACTUAL> 3.47
<LOANS-NON> 510
<LOANS-PAST> 0
<LOANS-TROUBLED> 318
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,181
<CHARGE-OFFS> 57
<RECOVERIES> 8
<ALLOWANCE-CLOSE> 1,282
<ALLOWANCE-DOMESTIC> 1,282
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
