<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 December 31, 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)
Montana 81-0486553
-------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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
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 December 31, 1996 -- 1,508,182 shares
Exhibit Index Page 17/Total Pages 18
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SECURITY BANCORP
QUARTERLY REPORT ON FORM 10-Q
Index
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page #
------
<S> <C>
Item 1. - Financial Statements
Consolidated Balance Sheets-December 31,
1996 (Unaudited) and June 30, 1996 3
Consolidated Statements of Income-Three and six months ended
December 31, 1996 and 1995 (Unaudited) 4
Consolidated Statement of Stockholders' Equity -
Six months ended December 31, 1996 (Unaudited) 5
Consolidated Statements of Cash Flows-
Six months ended December 31, 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 17
Item 2. - Change in Securities 17
Item 3. - Default of Senior Securities 17
Item 4. - Submission of Matters to Vote of Security Holders 17
Item 5. - Other Information 17
Item 6. - Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
SECURITY BANCORP AND SUBSIDIARY
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1996
ASSETS (UNAUDITED)
------------ ------------
<S> <C> <C>
Cash and cash equivalents $ 15,034,604 $ 9,789,678
Investment securities available for sale, at estimated
fair value 23,072,922 20,145,344
Mortgage-backed securities available for sale, at
estimated fair value 66,777,128 96,551,111
Investment securities held to maturity, at amortized cost 200,000 -
Mortgage-backed securities held to maturity, at amortized cost 28,249,632 34,704,507
Loans held for sale, at lower of cost or market value 2,999,794 2,687,034
Loans receivable, net 218,064,680 184,903,699
Stock in Federal Home Loan Bank of Seattle, at cost 3,273,300 3,145,600
Accrued interest receivable 2,661,702 2,584,018
Cash surrender value of life insurance 2,720,489 2,663,427
Real estate held for investment 285,714 288,908
Premises and equipment, at cost less accumulated depreciation 9,370,892 9,504,502
Goodwill, net of amortization 4,207,500 4,377,500
Other assets 872,660 893,744
------------ ------------
$377,791,017 $372,239,072
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits 290,673,742 289,219,498
Securities sold under repurchase agreements 7,333,723 7,964,766
Advances from Federal Home Loan Bank of Seattle 38,900,000 36,791,667
Advance payments by borrowers for taxes and insurance 446,955 880,697
Income taxes payable 197,963 37,728
Deferred income taxes 752,563 112,083
Accrued interest payable 1,897,350 2,075,161
Accrued expenses and other liabilities 4,580,857 4,453,808
------------ ------------
Total Liabilities 344,783,153 341,535,408
------------ ------------
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 1,508,182 shares 1,508,182 1,462,182
Additional paid-in capital 9,390,517 8,765,053
Retained earnings, substantially restricted 22,712,666 22,065,712
Net unrealized losses on available for sale securities (603,501) (1,589,283)
------------ ------------
Total stockholders' equity 33,007,864 30,703,664
------------ ------------
$377,791,017 $372,239,072
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 4
CONSOLIDATED STATEMENTS OF INCOME
SECURITY BANCORP AND SUBSIDIARY
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income:
Loans receivable $4,772,994 $3,401,195 $9,123,368 $6,757,494
Investment securities 351,342 387,430 690,636 861,801
Mortgage-backed securities 1,759,605 2,321,466 3,840,330 4,798,883
Other 90,335 174,090 157,636 265,702
---------- ---------- ---------- ----------
TOTAL INTEREST INCOME 6,974,276 6,284,181 13,811,970 12,683,880
---------- ---------- ---------- ----------
Interest expense:
Deposits 3,070,929 3,362,429 6,156,640 6,694,221
Securities sold under repurchase agreement 111,426 123,065 225,276 220,287
Advances from Federal Home Loan Bank of Seattle 580,914 349,806 1,152,288 727,194
---------- ---------- ---------- ----------
TOTAL INTEREST EXPENSE 3,763,269 3,835,300 7,534,204 7,641,702
---------- ---------- ---------- ----------
Net interest income 3,211,007 2,448,881 6,277,766 5,042,178
Provision for loan losses 150,000 30,000 300,000 60,000
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 3,061,007 2,418,881 5,977,766 4,982,178
---------- ---------- ---------- ----------
Non-interest income:
Fees for customer services 526,454 420,440 1,114,820 894,872
Securities brokerage services 65,885 25,396 103,920 48,590
Gain/(loss) on the sale of investment securities
available for sale - (327,933) 319 (327,933)
Gain on sale of mortgage-backed securities available
for sale 402,748 427,511 406,204 427,511
Loss on maturities of mortgage-backed securities
held to maturity (92,901) - (93,863) -
Gain on sale of loans held for sale 135,395 186,508 271,009 331,033
Loss on sale of other real estate owned - - (900) -
Other operating income, net 238,281 291,876 746,184 515,623
---------- ---------- ---------- ----------
TOTAL NON-INTEREST INCOME 1,275,862 1,023,798 2,547,693 1,889,696
---------- ---------- ---------- ----------
Non-interest expense:
Compensation and benefits 1,209,031 1,135,779 2,544,947 2,332,802
Advertising 19,236 45,506 63,882 100,476
Occupancy and equipment 368,926 293,119 714,455 590,465
FDIC deposit insurance premiums 117,968 127,206 237,340 238,029
SAIF assessment - - 1,330,517 -
Data processing services 197,520 169,495 388,879 384,767
Other 719,668 663,500 1,476,757 1,240,293
---------- ---------- ---------- ----------
TOTAL NON-INTEREST EXPENSE 2,632,349 2,434,605 6,756,777 4,886,832
---------- ---------- ---------- ----------
Income before income taxes 1,704,520 1,008,074 1,768,682 1,985,042
Income taxes 526,000 358,000 550,000 710,000
---------- ---------- ---------- ----------
NET INCOME $1,178,520 $ 650,074 $1,218,682 $1,275,042
========== ========== ========== ==========
Income and dividends per share:
Weighted average number of shares outstanding 1,518,678 1,531,124 1,506,870 1,531,119
========== ========== ========== ==========
Income per share $ 0.78 $ 0.42 $ 0.81 $ 0.83
========== ========== ========== ==========
Dividends per share $ 0.1700 $ 0.1525 $ 0.3850 $ 0.3500
========== ========== ========== ==========
</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>
SIX MONTHS ENDED DECEMBER 31, 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 $1,462,182 8,765,053 22,065,712 (1,589,283) 30,703,664
Net Income - - 1,218,682 - 1,218,682
Dividends paid ($.385 per share) - - (571,728) - (571,728)
Change in net unrealized gains (losses)
on securities available for sale - - - 985,782 985,782
Exercise of stock options 46,000 625,464 - - 671,464
---------- --------- ---------- ---------- ----------
Balance at December 31, 1996 $1,508,182 9,390,517 22,712,666 (603,501) 33,007,864
========== ========= ========== ========== ==========
</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>
SIX MONTHS ENDED
DECEMBER 31
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 1,218,682 $ 1,275,042
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for:
Loan losses 300,000 30,000
Amortization of:
Premiums and discounts on investment
securities, net - held to maturity - (1,356)
Premiums and discounts on investment
securities, net - available for sale (3,908) (9,090)
Premiums and discounts on mortgage-backed
securities, net - available for sale 47,640 (195,749)
Premiums and discounts on mortgage-backed
securities, net - held to maturity 52,019 8,846
Deferred loan origination fees (30,785) (37,596)
Goodwill 170,000 170,000
Origination of loans held for sale (14,887,203) (20,957,879)
Proceeds from sales of loans 14,845,452 20,320,066
Stock dividends reinvested in Federal Home Loan
Bank of Seattle (127,700) (105,800)
Depreciation 341,571 271,676
(Gain)/loss on sale or maturities of:
Loans held for sale (271,009) (331,033)
Mortgage-backed securities available for sale (406,204) (427,511)
Mortgage-backed securities held to maturity 93,863 -
Investment securities available for sale (319) 324,943
Change in:
Accrued interest receivable (77,684) (81,986)
Cash surrender value of life insurance (57,062) (55,966)
Other assets 21,084 128,744
Income taxes payable 160,235 191,317
Accrued interest payable (177,811) 263,084
Accrued expenses and other liabilities 127,049 (496,797)
------------ ------------
Net cash provided by operating activities 1,337,910 282,955
------------ ------------
</TABLE>
(Continued on Page 7)
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<PAGE> 7
SECURITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from investing activities:
Purchase of investment securities available for sale (2,981,205) (20,003,125)
Purchase of mortgage-backed securities available for sale (4,918,750) (40,309,672)
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 investment securities available for sale - 8,472,467
Proceeds from the sale of mortgage-backed securities available for sale 32,763,529 25,425,043
Proceeds from maturities of mortgage-backed securities held to maturity 3,591,216 -
Proceeds from maturities of investment securities available for sale 275,000 5,271,419
Proceeds from maturities of investment securities held to maturity - 10,165,962
Principal payments on investment securities available for sale 5,404 -
Principal payments on mortgage-backed securities available for sale 3,684,362 2,697,914
Principal payments on mortgage-backed securities held to maturity 2,717,777 6,178,401
Origination of loans receivable (77,585,863) (39,359,121)
Repayment of principal on loans receivable 44,155,667 30,221,949
Decrease in real estate held for investment 3,194 5,545
Additions to premises and equipment (207,961) (1,435,278)
------------ ------------
Net cash provided (used) in investing activities 1,309,488 (12,668,496)
------------ ------------
Cash flows from financing activities:
Net increase in deposits 1,454,244 2,537,943
Net (decrease) increase in securities sold under repurchase agreements (631,043) 6,154,709
Net change in advances from Federal Home Loan Bank of Seattle 2,108,333 3,000,000
Net decrease in advance payments by borrowers for taxes and insurance (433,742) (548,189)
Cash dividends paid on common stock (571,728) (520,942)
Exercise of stock options 671,464 41,550
------------ ------------
Net cash provided by financing activities 2,597,528 10,665,071
------------ ------------
Net increase (decrease) in cash and cash equivalents 5,244,926 (1,720,470)
------------ ------------
Cash and cash equivalents at beginning of period 9,789,678 10,188,922
Cash and cash equivalents at end of period $ 15,034,604 $ 8,468,452
============ ============
Cash paid for:
Interest $ 7,712,015 $ 7,738,221
Income taxes, net 96,000 551,000
============ ============
</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 and six months ended December
31, 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 December 31, 1996
was $0.78, 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 December 31, 1995 was $0.42. The income per common
share for the six month period ending December 31, 1996 was $0.81, based on the
weighted average number of shares of common stock and common stock equivalent
shares outstanding. Income per common share for the six month period ending
December 31, 1995 was $0.83. Net income for the six month period ended
December 31, 1996 included non-recurring expenses relating to the SAIF special
premium assessment of $1,330,517 and $264,691 in expenses relating to the
proposed merger with Westerfed Financial Corporation. After tax income for the
six month period ending December 31, 1996 would have been $2,223,663 had these
non-recurring expenses not been incurred. This would have resulted in income
per common share of $1.48 as compared with the $0.81 actually reported. Stock
options are outstanding, under the Security Bancorp 1993 Stock Option and Stock
Appreciation Rights Plan, to purchase 62,200 shares of stock. No stock options
were granted during the six month period ending December 31, 1996. Stock
options totaling 46,000 shares were exercised during the same period.
Additionally, 2,500 stock options lapsed during the six month period ended
December 31, 1996. These stock options are considered common stock equivalents
for computation of the income per share in the accompanying consolidated
financial statements.
4. Dividends:
On November 25, 1996, the Board of Directors of Security Bancorp declared a
quarterly cash dividend of $0.17 per share, paid on December 31, 1996, to
stockholders of record on December 13, 1996. On
-8-
<PAGE> 9
January 27, 1997, the Board of Directors of Security Bancorp declared a
dividend of $0.115 per share. The dividend is payable February 25, 1997 to
stockholders of record on February 10, 1997. The ex-dividend date is February
6, 1997. The directors declared the dividend in anticipation of the proposed
merger with WesterFed Financial Corporation.
5. Investment Securities and Mortgage-Backed Securities Available for Sale:
The amortized cost, unrealized gains and losses, and estimated fair values of
securities available for sale at December 31, 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 $ 299,849 - (2,802) 297,047
U. S. Agency securities 17,987,022 - (35,395) 17,951,627
Municipal bonds 2,276,000 - (37,141) 2,238,859
Mutual funds 2,778,498 - (193,109) 2,585,389
----------- ------- -------- ----------
$23,341,369 - (268,447) 23,072,922
=========== ======= ========= ==========
Mortgage-backed securities:
Agency mortgage-backed securities $65,637,743 112,526 (786,316) 87,822,957
Private Issue 1,828,876 - (15,701) 1,813,175
----------- ------- --------- ----------
$67,466,619 112,526 (802,017) 66,777,128
=========== ======= ======== ==========
</TABLE>
The amortized cost, unrealized gains and losses, and estimated fair values of
securities available for sale at June 30, 1996 are as follows:
<TABLE>
<CAPTION>
Gross Gross
unrealized unrealized Estimated
Cost gains losses 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 six months ended December 31, 1996.
Gross gains of $406,204 and no losses were realized on mortgage-backed
securities available for sale during the same period. Gross losses of $93,863
and no gains were realized on the maturities of mortgage-backed securities held
to maturity sold during the six month period ended December 31, 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."
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<PAGE> 10
6. Regulatory Capital:
The Bank is required to meet three FIRREA-enacted capital requirements: 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
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 December
31, 1996 were $207,866,375.
The following table demonstrates as of December 31, 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 $27,888,471 $5,605,893 $22,282,578
% of tangible assets 7.46% 1.5% 5.96%
Core Capital:
$ amount $27,888,471 $11,211,786 $16,676,685
% of adjusted tangible assets 7.46% 3.0% 4.46%
Risk-Based Capital:
$ amount $29,294,170 $16,629,310 $12,664,860
% of risk-weighted assets 14.09% 8.0% 6.09%
</TABLE>
The Bank's generally accepted accounting principles (GAAP) capital differs from
tangible, core, and risk-based capital at December 31, 1996 and June 30, 1996
as a result of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1996 1996
---- ----
<S> <C> <C>
Consolidated capital measured by GAAP $33,007,864 $30,703,664
Less Holding Company assets 772,660 381,049
----------- -----------
Bank capital measured by GAAP 32,235,204 30,322,615
Non-includable assets of subsidiary (623,420) (582,180)
Goodwill (4,207,500) (4,377,500)
Unrealized losses on certain available for sale
securities 484,187 1,443,069
----------- -----------
Tangible and core capital 27,888,471 26,806,004
General valuation reserves 1,405,699 1,180,866
----------- -----------
Risk-based capital $29,294,170 $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 6.48 basis
points 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 six month period ended December 31, 1996.
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<PAGE> 11
8. Recent Accounting Statements:
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing
Rights." SFAS No. 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
financial position or results of operations.
On December 31, 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
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<PAGE> 12
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. Stockholders of Security
Bancorp will vote on the agreement at the Annual Meeting of Stockholders
scheduled for February 24, 1997. Subject to satisfaction of the various
conditions, closing of the merger is anticipated to occur as early as February
28, 1997.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
(1) Material changes in financial condition. Comparison of the six month
period from June 30, 1996 to December 31, 1996.
General. Total assets increased by $5.6 million or 1.5% over the June 30, 1996
level. Stockholders' equity increased $2,304,200 during the six-month period
ended December 31, 1996. The Bank's ratio of stockholders' equity to total
assets increased from 8.25% at June 30, 1996 to 8.74% at December 31, 1996.
Cash and cash equivalents. Cash and cash equivalents increased by $5.2 million
or 53.6% over the June 30, 1996 level. This increase was primarily in the cash
balances held at the Federal Reserve Bank and in the Federal Home Loan Bank.
Investment securities available for sale. Investment securities available for
sale increased $2.9 million from June 30, 1996 to December 31, 1996. This
increase was primarily due to purchases of $3 million and the change in the
unrealized loss of $229,668, offset by maturities of $275,000.
Mortgage-backed securities available for sale. Mortgage-backed securities
available for sale decreased $29.8 million from June 30, 1996 to December 31,
1996. This decrease was primarily due to sales of $32.4 million and principal
payments of $3.7 million, offset by purchases of $4.9 million and the change in
the unrealized loss of $1.4 million. The proceeds from this decrease were used
to partially fund the increase in net loans receivable.
Investment securities held to maturity. Investment securities held to maturity
increased $200,000 from_June 30, 1996 to December 31, 1996 as a result of a
purchase.
Mortgage-backed securities held to maturity. Mortgage-backed securities held
to maturity decreased $6.5 million from June 30, 1996 to December 31, 1996,
primarily as a result of maturities of $3.7 and principal payments of $2.8
million. The proceeds from this decrease were used to partially fund the
increase in net loans receivable. The sales met 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
Loans receivable. Net loans receivable increased $33.2 million from June 30,
1996 to December 31, 1996. This increase was primarily due to $77.6 million
origination of loans partially offset by principal repayments of $44.2 million
and an increase in the reserve for loan losses of $224,833. 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 $616,000 at December 31, 1996, as compared to $668,000 at
June 30,
-12-
<PAGE> 13
1996. Non-performing assets continue to improve and remain at a very low
level.
<TABLE>
<CAPTION>
December 31, June 30,
1996 1996
----- ----
<S> <C> <C>
Total reserves for loan and real
estate owned losses: $1,405,699 1,180,866
Reserves as a percentage of total
loans: .63% .63%
Reserves as a percentage of non-
performing assets: 228% 177%
Non-performing assets as a percentage
of total assets: .16% .18%
</TABLE>
At December 31, 1996, the recorded investment in impaired loans was $424,000,
all of which were on non-accrual status. It is the policy of the Bank to
discontinue accruing interest on loans when payments have not been received
after a predetermined number of days or when the loan is in the process of
being restructured or renegotiated. The principal is placed in non-accrual
status but no part of the loan is charged to the reserve at this time. Any
accrued interest is reversed against interest income. The amount of foregone
interest is tracked and is recognized as income only after payment is received.
The average recorded investment in impaired loans during the six months ended
December 31, 1996 was $546,000. The amount of interest income recognized on
impaired loans during this period was immaterial.
Advances from Federal Home Loan Bank of Seattle. Advances from Federal Home
Loan Bank of Seattle increased $2.1 million from June 30, 1996 to December 31,
1996. This increase was used to partially fund the increase in net loans
receivable. The total available line of credit at the FHLB is 20% of total
assets, approximately $76 million at December 31, 1996. The amount of unused
credit with the FHLB is $37 million at December 31, 1996.
Stockholders' equity. Stockholders' equity increased $2.3 million from June
30, 1996 to December 31, 1996. This increase was comprised of income of $1.2
million, proceeds from the exercise of stock options of $671,464 and a decrease
in the unrealized loss on available for sale securities of $985,782, partially
offset by dividends on common stock of $571,728. The unrealized loss at
December 31, 1996 is comprised of an excess of cost above fair value of
$957,938 offset by the tax effect of $354,437.
(2) Material changes in results of operations. Comparison of three-months
ended December 31, 1996 and December 31,1995.
Summary of Results of Operations
<TABLE>
<CAPTION>
Three months ended
December 31,
1996 1995 Change
---- ---- ------
<S> <C> <C> <C>
Interest income $ 6,974,276 $ 6,284,181 $ 690,095
Interest expense 3,763,269 3,835,300 72,031
----------- ----------- ---------
Net interest income 3,211,007 2,448,881 762,126
Provision for loan losses (150,000) (30,000) (120,000)
Non-interest income 1,275,862 1,023,798 252,064
Non-interest expense (2,632,349) (2,434,605) (197,744)
----------- ----------- ---------
Income before income tax 1,704,520 1,008,074 696,446
Income tax expense (526,000) (358,000) (168,000)
----------- ----------- ---------
Net income $ 1,178,520 $ 650,074 $ 528,446
=========== =========== =========
</TABLE>
-13-
<PAGE> 14
General. Net income for the quarter ended December 31, 1996 was $528,446
higher than for the corresponding period in 1995. This increase was due to
increases in net interest income and in non-interest income, partially offset
by increases in non-interest expense and in income tax expense.
Interest income and expense. Interest income for the quarter ended December
31, 1996 was $690,095 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 December 31, 1996 was 7.75% compared to 7.61% for the prior
year period. Interest expense for the quarter ended December 31, 1996 was
$72,031 lower than interest expense for the 1995 period. This decrease was due
to the lower average balances of deposits and securities sold under repurchase
agreement for the quarter ended December 31, 1996 and a lower average rate paid
on deposits and borrowings, partially offset by higher average balances of
borrowings. The average rate paid on deposits and borrowings decreased from
5.00% for the quarter ended December 31, 1995 to 4.68% for the quarter ended
December 31, 1996.
Net interest income. Net interest income increased $762,126 for the quarter
ended December 31, 1996 as compared to the same quarter in 1995. The interest
rate spread for the quarter ended December 31, 1996 was 3.07% as compared to
2.61% for the quarter ended December 31, 1995.
Provision and allowance for loan losses. The provision for loan losses
increased $120,000 in the quarter ended December 31, 1996 as compared to the
same quarter in 1995. This increase reflects an increase in the amount of
loans outstanding and the change in the loan mix, 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 $1,405,699 at December 31, 1996 (0.63% of loans
receivable) due to the increase in the provision.
Non-interest income. Non-interest income increased $252,064 in the quarter
ended December 31, 1996 in comparison to the same period in 1995. This
increase is related to increases in fees from customer services of $106,014,
increases in securities brokerage services of $40,489 and an increase in net
gains from the sale of mortgage-backed securities, investment securities and
other real estate owned of $211,079, partially offset by decreases in other
operating income of $53,595 and gain on sale of loans held for sale of $51,113.
Non-interest expense. Non-interest expense for the quarter ended December 31,
1996 increased $197,744 in comparison to the corresponding period in 1995.
Compensation and benefits increased $73,252 primarily as a result of the new
branch office in Bozeman, Montana, which opened in February, 1996. Occupancy
and equipment increased $75,807, again primarily due to the operation of the
new Bozeman branch. Other non-interest expense increased $56,168. These
increases were partially offset by decreases in advertising expenses of $26,270
and FDIC deposit insurance premiums of $9,238.
Income tax expense. Income tax expense increased $168,000 for the quarter
ended December 31, 1996 as compared to the same period in 1995. This increase
was the result of higher pre-tax earnings in the 1996 period.
-14-
<PAGE> 15
(3) Material changes in results of operations. Comparison of six-months ended
December 31, 1996 and December 31,1995. Summary Of Results Of Operations
<TABLE>
<CAPTION>
Six months ended
December 31,
1996 1995 Change
---- ---- ------
<S> <C> <C> <C>
Interest income $13,811,970 $12,683,880 $ 1,128,090
Interest expense 7,534,204 7,641,702 107,498
----------- ----------- -----------
Net interest income 6,277,766 5,042,178 1,235,588
Provision for loan losses (300,000) (60,000) (240,000)
Non-interest income 2,547,693 1,889,696 657,997
Non-interest expense (6,756,777) (4,886,832) (1,869,945)
----------- ----------- -----------
Income before income tax 1,768,682 1,985,042 (216,360)
Income tax expense (550,000) (710,000) 160,000
----------- ----------- -----------
Net income $ 1,218,682 $ 1,275,042 $ (56,360)
=========== =========== ===========
</TABLE>
General. Net income for the six months ended December 31, 1996 is down $56,360
compared to net income for the corresponding period in 1995. Net income for
the six month period ended December 31, 1996 included non-recurring expenses
relating to the SAIF special premium assessment of $1,330,517 and $264,691 in
expenses relating to the proposed merger with Westerfed Financial Corporation.
After tax income for the six month period ending December 31, 1996 would have
been $2,223,663 (an increase of $1,004,981) had these non-recurring expenses
not been incurred.
Interest income and expense. Interest income for the six months ended December
31, 1996 was $1,128,090 higher than interest income for the corresponding
period in 1995. This increase was due to higher average balances of loans
receivable and to the higher average yield on interest earning assets,
partially offset by lower average balances of mortgage-backed securities and
investment securities. The average yield on interest earning assets for the
six month period ended December 31, 1996 was 7.71% compared to 7.57% for the
prior year period. Interest expense for the six months ended December 31, 1996
was $107,498 lower than interest expense for the 1995 period. This decrease
was due to the slightly lower average rate paid on deposits and borrowings and
lower average balances of deposits and securities sold under repurchase
agreements, partially offset by higher average balances for borrowings for the
six months ended December 31, 1996. The average rate paid on deposits and
borrowings decreased from 4.79% for the six months ended December 31, 1995 to
4.69% for the six months ended December 31, 1996.
Net interest income. Net interest income increased $1,235,588 for the six
months ended December 31, 1996 as compared to the same period in 1995.
Interest rate spread for the six months ended December 31, 1996 was 3.02% as
compared to 2.78% for the six month period ended December 31, 1995.
Provision and allowance for loan losses. The provision for loan losses
increased $240,000 in the six months ended December 31, 1996 compared to the
prior year period. This increase reflects management's continuing evaluation
of the possible loss exposure in the loan portfolio. The allowance for
possible loan losses increased from $1,156,393 at June 30, 1996 (0.63% of loans
receivable)
-15-
<PAGE> 16
to $1,405,699 at December 31, 1996 (0.63% of loans receivable) due to increases
in the provision for loan losses and net recoveries.
Non-interest income. Non-interest income increased $657,997 in the six month
period ended December 31, 1996 in comparison to the same period in 1995. This
increase is primarily a result of the increase in the the net gain from the
sale of investment securities available for sale, mortgage-backed securities
available for sale, and mortgage-backed securities held to maturity of $213,082
in 1996 over the 1995 net gain. The increase is also related to increases in
fees for customer services of $219,948, securities brokerage services of
$55,330, and other operating income of $230,561 over the same period in 1995,
partially offset by decreases in gain on sale of loans held for sale of
$60,024. Included in other operating income for the six month period ending
December 31, 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 six months ended December
31, 1996 increased $1,869,945 in comparison to the corresponding period in
1995. The largest component of this increase related to the SAIF special
assessment was $1,330,517 in the 1996 period with no corresponding expense in
1995. Compensation and benefits expense for the six months ended December 31,
1996 increased 212,145 as a result of the expansion of the new branch in
Bozeman, Montana. Occupancy and equipment expense increased $123,990, again
primarily due to the operation of the new Bozeman branch. Other non-interest
expense increased $236,464 primarily due to $264,691 in expense as a result of
the proposed merger with Westerfed.
Income tax expense. Income tax expense decreased $160,000 for the six months
ended December 31, 1996 as compared to the same period in 1995. This decrease
was the result of lower pre-tax earnings in the 1996 period and the tax benefit
resulting from the exercise of stock options during the six month period ended
December 31, 1996.
-16-
<PAGE> 17
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 December
31, 1996.
-17-
<PAGE> 18
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: February 12, 1997
----------------- --------------------------------------
David W. Jorgenson
President, CEO and Director
Date: February 12, 1997
----------------- --------------------------------------
Anthony P. Dunn
Assistant Controller/Chief Accounting
Officer
-18-
<PAGE> 19
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: February 12, 1997 /s/ David W. Jorgenson
----------------- --------------------------------------
David W. Jorgenson
President, CEO and Director
Date: February 12, 1997 /s/ Anthony P. Dunn
----------------- --------------------------------------
Anthony P. Dunn
Assistant Controller/Chief Accounting
Officer
-18-
<PAGE> 20
EXHIBIT INDEX
EXHIBIT 27 - Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 11,483
<INT-BEARING-DEPOSITS> 3,552
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 89,850
<INVESTMENTS-CARRYING> 28,450
<INVESTMENTS-MARKET> 28,180
<LOANS> 219,659
<ALLOWANCE> 1,406
<TOTAL-ASSETS> 377,791
<DEPOSITS> 290,674
<SHORT-TERM> 27,334
<LIABILITIES-OTHER> 7,875
<LONG-TERM> 18,900
0
0
<COMMON> 1,508
<OTHER-SE> 31,500
<TOTAL-LIABILITIES-AND-EQUITY> 377,791
<INTEREST-LOAN> 4,773
<INTEREST-INVEST> 2,111
<INTEREST-OTHER> 90
<INTEREST-TOTAL> 6,974
<INTEREST-DEPOSIT> 3,071
<INTEREST-EXPENSE> 3,763
<INTEREST-INCOME-NET> 3,211
<LOAN-LOSSES> 150
<SECURITIES-GAINS> 310
<EXPENSE-OTHER> 2,632
<INCOME-PRETAX> 1,705
<INCOME-PRE-EXTRAORDINARY> 1,705
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,179
<EPS-PRIMARY> .78
<EPS-DILUTED> .78
<YIELD-ACTUAL> 3.65
<LOANS-NON> 424
<LOANS-PAST> 365
<LOANS-TROUBLED> 305
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,281
<CHARGE-OFFS> 30
<RECOVERIES> 5
<ALLOWANCE-CLOSE> 1,406
<ALLOWANCE-DOMESTIC> 1,406
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
