<PAGE>
UNITED STATES SECURITY AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934
For the quarter period ended March 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 0-22772
---------
WESTERFED FINANCIAL CORPORATION
-------------------------------------------------------
(Exact name of registrant as specified in this charter)
DELAWARE 81-0487794
- ---------------------------------------- -------------------
(State or other jurisdiction of (IRS Employer ID #)
incorporation or organization
110 East Broadway, Missoula, Montana 59802
- ---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code 406-721-5254
-------------------
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 subjected 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 $0.01 per share; Outstanding at March 31, 1996
-- 4,533,752 shares (including restricted shares)
<PAGE>
FINANCIAL STATEMENTS
Consolidated Balance Sheets - March 31, 1996 (Unaudited) and June 30, 1995
(Dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
ASSETS (Unaudited)
March 31, June 30,
1996 1995
------------ ------------
<S> <C> <C>
Cash and due from banks $ 7,225 $ 7,173
Interest-bearing due from banks 9,532 8,201
------------ ------------
Cash and cash equivalents 16,757 15,374
Interest-bearing deposits - 2,102
Investment securities available-for-sale 34,205 49,577
Investment securities, at amortized cost
(estimated market value of $13,017 at
March 31, 1996 and $12,964 at June 30, 1995) 12,936 12,794
Stock in Federal Home Loan Bank of Seattle,
at cost 7,329 6,750
Mortgage-backed securities available-for-sale 71,178 64,900
Mortgage-backed securities, at amortized cost
(estimated market value of $62,852 at
March 31, 1996 and $79,303 at June 30, 1995) 62,433 78,925
Loans available-for-sale 2,269 2,960
Loans receivable, net 359,637 310,161
Accrued interest receivable 3,859 3,875
Real estate owned, net - -
Premises and equipment, net 12,671 11,372
Cash surrender value of life insurance policies 3,145 2,951
Other assets 1,836 1,544
------------ ------------
Totals $ 588,255 $ 563,285
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 356,332 $ 344,155
Borrowed funds 141,847 134,704
Advances from borrowers for
taxes and insurance 5,838 3,309
Income taxes 2,457 2,162
Accrued interest payable 1,349 1,247
Accrued expenses and other liabilities 2,330 2,562
------------ ------------
Total liabilities 510,153 488,139
Stockholders' Equity:
Preferred stock, $.01 par value, 5,000,000
shares authorized; none outstanding - -
Common stock, $.01 par value, 10,000,000
shares authorized; 4,395,804 shares
outstanding at March 31 ,1996 and 4,396,456
outstanding at June 30, 1995 46 46
Additional paid-in capital 45,352 45,232
Common stock acquired by ESOP/RRP (3,685) (4,271)
Treasury stock, at cost (3,073) (3,066)
Net unrealized gain on securities
available-for-sale 208 295
Retained earnings, substantially restricted 39,254 36,910
------------ ------------
Total stockholders' equity 78,102 75,146
------------ ------------
Totals $ 588,255 $ 563,285
============ ============
Book value per share $ 17.77 $ 17.09
============ ============
</TABLE>
<PAGE>
Consolidated Statements of Income - Three Month and Nine Month Periods Ended
March 31, 1996 and March 31, 1995 (Unaudited)
(Dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income:
Loans receivable $ 7,359 $ 5,873 $ 21,034 $ 17,015
Mortgage-backed securities
available-for-sale 1,157 944 3,332 2,445
Mortgage-backed securities 1,191 1,261 3,824 4,420
Investment securities
available-for-sale 646 887 2,264 2,610
Investment securities 211 65 698 65
Interest-bearing deposits 163 434 572 1,083
Other 46 45 135 135
-------- -------- -------- --------
Total interest income 10,773 9,509 31,859 27,773
-------- -------- -------- --------
Interest expense:
NOW and money market demand 438 466 1,326 1,459
Savings 478 510 1,463 1,614
Certificates of deposit 3,077 2,505 9,107 6,865
Cost of Swaps and Caps 80 88 249 297
Advances from FHLB - Seattle and
other borrowed funds 2,196 1,810 6,544 4,917
-------- -------- -------- -------
Total interest expense 6,269 5,379 18,689 15,152
-------- -------- -------- --------
Net interest income 4,504 4,130 13,170 12,621
Provision for loan losses - - - -
-------- -------- -------- --------
Net interest income after
provision for loan losses 4,504 4,130 13,170 12,621
-------- -------- -------- --------
Other operating income:
Loan origination fees 47 46 250 216
Service fees 516 453 1,563 1,294
Net gain on sale of loans and
securities available-for-sale 91 108 540 274
Other 265 173 626 589
-------- -------- -------- --------
Total other operating income 919 780 2,979 2,373
-------- -------- -------- --------
Operating expenses:
Compensation and employee benefits 2,073 1,928 5,862 5,750
Net occupancy expense of premises 381 351 1,091 1,016
Equipment and furnishings expense 179 145 462 401
Data processing expenses 173 156 481 460
Federal insurance premium 203 200 603 606
Marketing and advertising 65 122 389 298
Net expense (income) from operation
of real estate owned - - - 3
Other 528 518 1,840 1,479
-------- -------- -------- --------
Total operating expense 3,602 3,420 10,728 10,013
-------- -------- -------- --------
Income before income taxes 1,821 1,490 5,421 4,981
Income taxes (703) (546) (2,090) (1,858)
-------- -------- -------- --------
Net income $ 1,118 $ 944 $ 3,331 $ 3,123
======== ======= ======== ========
Net income per share $ 0.25 $ 0.21 $ 0.74 $ 0.67
======== ======= ======== ========
Dividends per share $ 0.085 $ 0.060 $ 0.240 $ 0.231
======== ======= ======== ========
Dividend payout ratio 34.0 % 28.6 % 32.4 % 34.5 %
======== ======= ======== ========
Weighted average common shares
outstanding for earnings
per share 4,533,716 4,526,605
========= =========
4,597,623 4,671,481
========= =========
</TABLE>
<PAGE>
Consolidated Statements of Stockholders' Equity for the Nine Month
Period Ended March 31, 1996 (Unaudited)
(Dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
Net
Unrealized
Loss on
Add. Securities
Common Paid-In ESOP/ Treasury Retained Available
Stock Capital RRP Stock Earnings for Sale Total
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995 $ 46 45,232 (4,271) (3,066) 36,910 295 75,146
Net Income - - - - 3,331 - 3,331
Change in net unrealized
loss on securities
available for sale - - - - - (87) (87)
Amortization of award of
ESOP stock - - 338 - - - 338
Principal payment made by
ESOP - 120 (114) - - - 6
Amortization of award of
RRP stock - - 355 - - - 355
Shares forfeited by RRP
participants (652 shares) - - 7 (7) - - 0
Cash dividends paid - - - - (987) - (987)
- -------------------------------------------------------------------------------------
Balance at March 31, 1996 $ 46 45,352 (3,685) (3,073) 39,254 208 78,102
=====================================================================================
</TABLE>
<PAGE>
Consolidated Statements of Cash Flows for the Nine Month Periods
Ended March 31, 1996 and March 31, 1995 (Unaudited)
(Dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended
March 31,
1996 1995
------- -------
<S> <C> <C>
Net cash provided by operating activities 15,767 34,022
======= =======
Cash flows from investing activities:
Net change in interest-bearing deposits 2,102 (682)
Purchases of mortgage-backed securities (20,039) (7,892)
Proceeds from sales of mortgage-backed
securities 9,877 10,114
Principal payments on mortgage-backed
securities 20,358 13,490
Purchases of investment securities (24,196) (27,108)
Proceeds from sales on investment securities 3,840 -
Proceeds from maturities of investment
securities 34,990 13,513
Principal payments on investment securities 643 -
Net change in mortgage loans (49,094) (45,014)
Proceeds from sales of real estate owned - 83
Purchases of premises and equipment (1,831) (1,159)
------- ------
Net cash used by investing activities (23,350) (44,655)
------- -------
Cash flows from financing activities:
Net change in deposits excluding
interest credited 333 (12,145)
Proceeds from borrowings 71,300 91,300
Payments on borrowings (64,210) (58,401)
Treasury stock acquired - (3,062)
Cash dividends paid (986) (704)
Net change in advances from borrowers
for taxes and insurance 2,529 2,730
------- -------
Net cash provided (used)
by financing activities 8,966 19,718
------- -------
Net increase (decrease) in cash
and cash equivalents 1,383 9,085
Cash and cash equivalents at
beginning of period 15,374 16,946
------- -------
Cash and cash equivalents at end of period 16,757 26,031
======= =======
Supplemental disclosure of cash flow information:
Payments during the period for:
Interest 6,637 4,900
Income taxes, net 1,747 1,934
</TABLE>
<PAGE>
WESTERFED FINANCIAL CORPORATION AND SUBSIDIARIES
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, the information contained herein reflects all adjustments
necessary to make the results of operations for the interim periods a fair
statement of such operations. All such adjustments are of a normal
recurring nature. Operating results for the nine months ended March 31,
1996 are not necessarily indicative of the results anticipated for the year
ending June 30, 1996. For additional information, refer to the
consolidated financial statements and footnotes thereto included in
WesterFed Financial Corporation's (the "Company") annual report for the
year ended June 30, 1995.
2. CASH EQUIVALENTS
For purposes of the Consolidated Statements of Cash Flows, the
Company considers all cash, daily interest demand deposits, non-
interest bearing deposits with banks, and interest bearing deposits
having original maturities of three months or less to be cash
equivalents.
3. COMPUTATION OF INCOME PER SHARE
Income per share is based on the weighted average number of
shares outstanding during the period. The weighted average number of
common and common stock equivalents for the nine month period ended
March 31, 1996 were 4,526,605. Stock options have been granted, under
the Company's stock option and incentive plan, to purchase 419,707
shares. In addition 190,552 shares of restricted stock have been
issued in accordance with the recognition and retention plan
established by the Company. These stock options and restricted stock
awards are reflected in the income per share computations in the
accompanying financial statements. In addition, there have been
354,933 shares of common stock issued to the Employee Stock Ownership
Plan (ESOP) trust for the benefit of the employees of the
Company and its subsidiaries. In accordance with American Institute of
Certified Public Accountants Accounting Standards Division statement of
position 93-6 on "Employers Accounting for Employee Stock Ownership
Plans," ESOP shares that have been committed to be released should be
considered outstanding and ESOP shares that have not been committed to
be released should not be considered outstanding. At March 31, 1996,
73,174 ESOP shares were committed to be released and were considered in
the earnings per share computations.
4. DIVIDENDS DECLARED
On March 26, 1996 the Board of Directors of the Company declared
a quarterly cash dividend of $ 0.085 per share, payable on May 21, 1996
to stockholders of record on May 7, 1996.
<PAGE>
5. IMPACT OF NEW ACCOUNTING STANDARDS
In May 1993, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan".
SFAS No. 114 generally requires all creditors to account for impaired
loans, except those loans that are accounted for at fair value or at
the lower of cost or fair value, at the present value of the expected
future cash flows discounted at the loan's effective interest rate.
SFAS No. 114 also provides that in-substance foreclosed loans should not
be included in real estate owned for financial reporting purposes, but
rather should be included in the loan portfolio. SFAS No. 114 is
effective for fiscal years beginning after December 15, 1994. In
October 1994, the FASB amended certain provisions of SFAS No. 114 by
the issuance of SFAS No. 118, "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures". SFAS No. 118 amends
SFAS No. 114 by eliminating provisions describing how a creditor should
report income on an impaired loan and increasing disclosure
requirements as to information on recorded investments in certain
impaired loans and how a creditor recognizes related interest income.
The Company adopted the provisions of SFAS No. 114 and 118 on a
prospective basis on July 1, 1995, and did not have a material effect
on the financial position or results of operations of the Company. The
Company's impaired loans are those non-consumer loans currently
reported as non-accrual. The Company uses the cash method to record
income on impaired loans.
In October 1994, the FASB issued SFAS No. 119, "Disclosure about
Derivative Financial Instruments and Fair Value of Financial
Instruments", which requires disclosure about amounts, nature and terms
of derivative financial instruments that are not presently subject to
existing disclosure requirements because they do not result in off-
balance sheet risk of accounting loss. Distinction must be made
between financial instruments held or issued for trading purposes and
financial instruments held or issued for purposes other than trading.
For entities that hold or issue derivative financial instruments
for trading purposes, this statement requires disclosure of average
fair value and of net trading gains or losses. For entities that hold
or issue derivative financial instruments for purposes other than
trading, it requires disclosure about those purposes and about how the
instruments are reported in the financial statements. For entities
that hold or issue derivative financial instruments and account for
them as hedges of anticipated transactions, it requires disclosure
about the anticipated transactions, the classes of derivative financial
instruments used to hedge those transactions, the amounts of hedging
gains and losses deferred, and the transactions or other events that
result in recognition of the deferred gains or losses in earnings. The
statement also encourages, but does not require, quantitative
information about market risks of derivative financial instruments, and
also of other assets and liabilities, that is consistent with the way
the entity manages or adjusts risks and that is useful for comparing
the results of applying the entity's strategies to its objectives for
holding or issuing the derivative financial instruments.
The statement is effective for the Company's financial statements
for fiscal years ending after March 31, 1996. The Company currently
engages in interest rate exchange agreements (see interest rate caps
and interest rate swaps) to manage interest rate risk. The Company
intends to adopt the provisions of SFAS No. 119 on July 1, 1996, and
management expects adoption will not have a material effect on the
financial position or results of operations of the Company.
On March 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. An impairment loss is
recognized if the sum of the expected future cash flows is less than
the carrying amount of the asset.
SFAS No. 121 is effective for financial statements issued for
fiscal years beginning after December 15, 1995, although earlier
application is encouraged. The Company intends to adopt the provisions
of SFAS No. 121 on July 1, 1996 and management expects adoption will
not have a material effect on the financial position or results of
operations of the Company.
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,
including those purchased before the adoption of this statement. The
Company intends to adopt the provisions of SFAS No. 122 on July 1,
1996, and management expects adoption will not have a material effect
on the financial position or results of operations of the Company.
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 pronouncements 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 March 31, 1996. The Company will be
required to adopt 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.
In April 1995, the AICPA issued SOP 94-6, "Disclosure of Certain
Significant Risks and Uncertainties." This SOP applies to financial
statements prepared in conformity with generally accepted accounting
principles by all non-governmental entities. The disclosure
requirements in SOP 94-6 focus primarily on risk and uncertainties that
could significantly affect the amounts reported in the financial
statement in the near-term functioning of the reporting entity. The
risks and uncertainties discussed in SOP 94-6 stem from the nature of
the entity's operations, from the necessary use of estimates in the
preparation of the entity's financial statements, and from significant
concentrations in certain aspects of the entity's operations. SOP 94-6
is effective for financial statements issued for fiscal years ending
after December 15, 1995 and is not expected to have any impact on the
Bank's operations.
A comparison of the amortized cost and estimated fair value of investment and
mortgage-backed securities at the dates indicated is as follows:
<TABLE>
<CAPTION>
HELD-TO-MATURITY
(Dollars in Thousands)
(Unaudited)
March 31, 1996
-------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Government obligations - - - -
Federal Agency obligation 6,016 28 (1) 6,043
Other investments 6,920 54 - 6,974
-------------------------------------------
Total inv. securities 12,936 82 (1) 13,017
Mortgage-backed securities 62,433 591 (172) 62,852
-------------------------------------------
75,369 673 (173) 75,869
===========================================
<CAPTION>
June 30, 1995
-------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Government obligations - - - -
Federal Agency obligation 6,518 48 (2) 6,564
Other investments 6,276 124 - 6,400
-------------------------------------------
Total inv. securities 12,794 172 (2) 12,964
Mortgage-backed securities 78,925 745 (367) 79,303
-------------------------------------------
91,719 917 (369) 92,267
===========================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE
(Dollars in Thousands)
(Unaudited)
March 31, 1996
--------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Government obligations - - - -
Federal Agency obligation 26,118 47 (177) 25,988
Other investments 8,222 5 (10) 8,217
-------------------------------------------
Total inv. securities 34,340 52 (187) 34,205
Mortgage-backed securities 70,706 821 (349) 71,178
-------------------------------------------
105,046 873 (536) 105,383
===========================================
<CAPTION>
June 30, 1995
-------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Government obligations 2,025 - (4) 2,021
Federal Agency obligation 47,350 91 (386) 47,055
Other investments 500 1 - 501
-------------------------------------------
Total inv. securities 49,875 92 (390) 49,577
Mortgage-backed securities 64,123 1,145 (368) 64,900
-------------------------------------------
113,998 1,237 (758) 114,477
===========================================
</TABLE>
<PAGE>
A comparison of the amortized cost and estimated fair value of investment
and mortgage-backed securities by contractual maturities at March 31 ,1996
is as follows:
<TABLE>
<CAPTION>
HELD-TO-MATURITY
(Dollars in Thousands)
(Unaudited)
March 31, 1996
--------------------------------
Estimated
Amortized Fair
Cost Value
<S> <C> <C>
Due in one year or less 9,934 9,995
Due after one year through 5 years 2,999 3,001
Due after 5 years through 10 years - -
Due after 10 years - -
Other 3 21
Mortgage-backed securities 62,433 62,852
--------------------------------
75,369 75,869
================================
<CAPTION>
AVAILABLE-FOR-SALE
(Dollars in Thousands)
(Unaudited)
March 31, 1996
--------------------------------
Estimated
Amortized Fair
Cost Value
<S> <C> <C>
Due in one year or less 17,869 17,973
Due after one year through 5 yrs 11,256 11,073
SBA loans contractually due after 5 yrs 5,215 5,159
Mortgage-backed securities 70,706 71,178
--------------------------------
105,046 105,383
================================
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
1. CHANGES IN FINANCIAL CONDITION. COMPARISON OF THE NINE MONTH
PERIOD FROM JUNE 30, 1995 TO MARCH 31, 1996.
General -- Total assets increased $25.0 million, or 4.4%, to $588.3
million at March 31, 1996 from $563.3 million at June 30, 1995. This
increase in assets was primarily the result of a $48.8 million increase in
loans receivable and loans available-for-sale, partially offset by a $10.2
million decrease in mortgage-backed securities and a $15.4 million
decrease in investment securities, Federal Home Loan Bank of Seattle
("FHLB") stock and other interest earning assets. The $25.0 million
increase in assets was funded primarily by increases in deposits, borrowed
funds and stockholders' equity of $12.1 million, $7.1 million and $3.0
million respectively.
Loans Receivable -- The $48.8 million increase in loans receivable
and loans available-for-sale was primarily the result of $125.3 million in
new loan originations and $2.9 million in purchases of commercial real
estate loans, $588,000 in purchases of 1-4 family residential loans and
$2.8 million in five or more residential unit loans, which were partially
offset by principal repayments of $62.4 million and the sale of whole
loans of $20.0 million. Real estate mortgage loan originations were
$105.7 million and consumer loan originations were $19.6 million during
this nine month period as compared to $68.5 million and $18.6 million
respectively for the same period last year. The consumer loan portfolio
increased $5.9 million, or 18.5%, to $37.8 million at March 31, 1996 from
$31.9 million at June 30, 1995.
Mortgage-Backed Securities -- The $10.2 million decrease in
mortgage-backed securities was primarily the result of principal
repayments of $20.4 million and the sale of mortgage-backed securities
available-for-sale of $9.8 million, which exceeded purchases of $19.7
million. The $9.8 million of mortgage-backed securities that were sold
consisted of $2.2 million in adjustable rate and $7.6 million in fixed
rate fifteen year mortgage-backed securities while the $19.7 million in
purchases consisted of $2.2 million of fixed rate five year balloon and
$17.5 million of adjustable rate mortgage-backed securities. The
mortgage-backed securities that were sold were experiencing increasing
prepayments and therefore were sold to maximize the net gains available on
them. In addition, $5.6 million of fifteen year fixed rate mortgage-
backed securities and $5.0 million of fixed rate collateralized mortgage
obligations were transferred from the held-to-maturity category to the
available-for-sale category prior to December 31, 1995 in accordance with
a special report issued by the FASB "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities". The $10.6 million in transfers were at amortized cost and
had gross unrealized losses of $140,000.
Investment Securities, FHLB Stock and Other Interest Earning Assets
- -- Investment Securities, FHLB stock and other interest earning assets
decreased $15.3 million, or 19.4%, from $82.4 million at June 30, 1995 to
$67.1 million at March 31, 1996. This decrease was primarily the result
of the maturities and principal payments of investment securities of $39.5
million and a net reduction in interest bearing deposits of $2.1 million,
partially offset by a net increase in interest bearing due from banks
of $1.3 million, the purchase of $24.8 million in investment securities
and an increase of $579,000 in FHLB stock. Investment securities
purchased during the nine month period ended March 31, 1996 included $20.9
million of U.S. Agency securities and $3.1 million of corporate securities
with fixed rates and maturities ranging from one month to two years.
These investments were purchased in an attempt to earn rates in excess of
over-night fund rates while minimizing the effect of potential interest
rate increases. These purchases were funded primarily from the proceeds
of maturing investments.
From time to time, Western Federal Savings Bank (the "Bank"), the
regulated thrift institution subsidiary of the Company, may, in order to
reduce interest rate risk, purchase financial instruments that lock in a
spread between interest-earning assets and interest-bearing liabilities.
While these types of financial instruments limit risk, they also reduce
the Bank's ability to maximize profits during periods of favorable
interest rate trends. At March 31, 1996 the Bank had three structured
notes totaling $4.7 million wherein their interest rate is based upon a
fraction of the increase or decrease in a specified index. These
securities have variable interest rates and were purchased to enable the
Bank to increase its interest income when interest rates increase. The
market value of these securities at March 31, 1996 was $4.6 million and
they will mature in 1998.
The Bank may be a party to financial instruments with off-balance-
sheet risk in the normal course of business to reduce its own exposure to
fluctuations in interest rates. These financial instruments may include
interest rate cap and interest rate swap agreements. These instruments
involve, to varying degrees, elements of credit and interest rate risk in
excess of amounts recognized in the consolidated balance sheets. The
contract or notional amounts of these instruments reflect the extent of
involvement the Bank has in particular classes of financial instruments.
For interest rate cap and interest rate swap agreements, the contract or
notional amounts do not represent exposure to credit loss. The Bank
controls the credit risk of those instruments through credit approval,
limits and monitoring procedures.
Interest Rate Caps -- Interest rate caps entitle the Bank to receive
various interest payments in exchange for payment of a premium, provided
the three-month LIBOR exceeds an agreed upon interest rate. Transaction
fees paid in connection with interest rate cap agreements are amortized to
interest expense as an adjustment of the interest cost of liabilities.
Interest rate cap agreements are used to manage interest rate risk by
synthetically extending the life of interest-bearing liabilities.
The following summarizes interest rate cap agreements at March 31,
1996:
Notional principal Agreement termination Cap
amount
------------------ --------------------- ---
(in thousands)
$25,000 March 1997 6.5% - 10.0%
5,000 July 1999 6.5%
5,000 July 1999 7.0%
-------
$35,000
=======
<PAGE>
Interest Rate Swaps -- Interest rate swap agreements involve the
exchange of fixed and floating rate payments without the exchange of the
underlying principal amounts. Estimated amounts to be received or paid on
the swap settlement dates are accrued when realized. The net swap
settlements are reflected in interest expense. Interest rate swap
agreements are used to manage interest rate risk by synthetically extending
the life of interest-bearing liabilities.
At March 31, 1996 the Bank did not have any interest rate swap
agreements in place.
The counterparty to the cap agreement is the FHLB of Seattle and are
not collateralized. Interest rate swaps are collateralized by stock in
FHLB, certificates of deposit issued by the FHLB, securities issued by the
U.S. Government or agency thereof, mortgage-backed securities, or
qualifying first mortgage loans not otherwise pledged.
Deposits -- Deposits increased $12.1 million, or 3.5%, to $356.3
million at March 31, 1996 from $344.2 million at June 30, 1995. Interest
credited was $11.9 million while deposits exceeded withdrawals by $200,000.
Checking, certificates of deposit and passbooks increased $3.7 million,
$9.7 million and $100,000 respectively, while money market accounts
decreased $1.4 million. Checking accounts have increased since the
introduction and heavy promotion of the new "Western Style checking"
program. Certificates of deposit continue to offer significantly higher
interest rates than the lower yielding money market and passbook accounts
and this has resulted in a transfer of funds from these lower yielding
accounts into certificates of deposit.
Borrowed Funds -- Borrowed funds increased $7.1 million, or 5.3%, to
$141.9 million, at March 31, 1996 from $134.7 million at June 30, 1995.
There was $71.3 million of new advances, of which $15.6 million were
amortizing fixed rate advances of five years or more to partially fund new
thirty year fixed rate mortgages added to portfolio, while $50.7 million
were less than one year in maturity and used to fund short-term cash
requirements and $5.0 million were fixed rate advances with maturities of
one to four years. Principal repayments on FHLB advances were $63.9
million and repayments on collateralized mortgage obligations were
$304,000.
Stockholders' Equity -- Stockholders' equity increased $3.0
million,or 4.0%, to $78.1 million at March 31, 1996 from $75.1 million at
June 30, 1995. This increase was due to net income for the nine month
period of $3.3 million and $699,000 related to contributions to the
Employee Stock Ownership Plan and shares earned under the Recognition and
Retention Plan while stockholders' equity was reduced $987,000 for
dividends declared during the nine month period and $87,000 related to the
change in unrealized loss associated with assets classified as available-
for-sale being adjusted to market value in accordance with Statement of
Financial Accounting Standards No. 115. Stockholders' equity was reduced
$987,000 for dividends declared during the nine month period.
<PAGE>
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED
(Unaudited)
-----------------------------
MARCH 31, 1996
-----------------------------
(Dollars in Thousands)
Average Interest
Outstanding Earned/ Yield/
Balance (5) Paid Rate
-----------------------------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loan receivable (1) (2) $ 356,823 $ 7,360 8.25%
Mortgage-backed securities (2) 135,618 2,347 6.92
Investments (2) 47,659 857 7.19
Other interest-earning assets(3) 15,512 163 4.20
Cash surrender value of life insurance 3,077 46 5.98
-----------------------------
Total Interest-Earning Assets $ 558,689 $ 10,773 7.71%
=============================
INTEREST-BEARING LIABILITIES:
Certificates of deposits $ 216,527 $ 3,157 5.83%
Passbook deposits 64,721 478 2.95
Demand and NOW accounts 47,277 225 1.90
Money market accounts 24,884 213 3.42
-----------------------------
Total deposits 353,409 4,073 4.61
FHLB advances and notes payable 137,968 2,142 6.21
Collateralized mortgage obligations 1,324 54 16.31
-----------------------------
Total Interest-Bearing Liabilities $ 492,701 $ 6,269 5.09%
=============================
Net interest income $ 4,504
=====
Net interest rate spread 2.62%
====
Net interest-earning assets $ 65,988
======
Net interest margin (4) 3.22%
====
Average interest-earning assets to
average interest-bearing liabilities 113.39%
======
</TABLE>
(1) Calculated net of deferred loan fees, loan discounts, loans in process
and loss reserves
(2) Includes held and available-for-sale categories
(3) Includes primarily short-term liquid assets
(4) Net interest income divided by average interest earning assets
(5) Based on average monthly balances
<PAGE>
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED
(Unaudited)
-----------------------------
MARCH 31, 1995
-----------------------------
(Dollars in Thousands)
Average Interest
Outstanding Earned/ Yield/
Balance (5) Paid Rate
-----------------------------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loan receivable (1) (2) $ 295,089 $ 5,873 7.96%
Mortgage-backed securities (2) 129,942 2,204 6.78
Investments (2) 61,086 952 6.23
Other interest-earning assets(3) 30,359 435 5.73
Cash surrender value of life insurance 2,901 45 6.20
-----------------------------
Total Interest-Earning Assets $ 519,377 $ 9,509 7.32%
=============================
INTEREST-BEARING LIABILITIES:
Certificates of deposits $ 202,163 $ 2,593 5.13%
Passbook deposits 69,353 510 2.94
Demand and NOW accounts 44,806 230 2.05
Money market accounts 28,251 236 3.34
-----------------------------
Total deposits 344,573 3,569 4.14
FHLB advances and notes payable 111,587 1,747 6.26
Collateralized mortgage obligations 1,758 63 14.33
-----------------------------
Total Interest-Bearing Liabilities $ 457,918 $ 5,379 4.70%
=============================
Net interest income $ 4,130
=====
Net interest rate spread 2.62%
====
Net interest-earning assets $ 61,459
======
Net interest margin (4) 3.18%
====
Average interest-earning assets to
average interest-bearing liabilities 113.42%
======
</TABLE>
(1) Calculated net of deferred loan fees, loan discounts, loans in process
and loss reserves
(2) Includes held and available-for-sale categories
(3) Includes primarily short-term liquid assets
(4) Net interest income divided by average interest earning assets
(5) Based on average monthly balances
<PAGE>
<TABLE>
<CAPTION>
NINE MONTH PERIOD ENDED
(Unaudited)
-----------------------------
MARCH 31, 1996
-----------------------------
(Dollars in Thousands)
Average Interest
Outstanding Earned/ Yield/
Balance (5) Paid Rate
-----------------------------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loan receivable (1) (2) $ 40,173 $ 21,034 8.24%
Mortgage-backed securities (2) 38,738 7,155 6.88
Investments (2) 54,457 2,962 7.25
Other interest-earning assets(3) 16,261 572 4.69
Cash surrender value of life insurance 3,021 136 6.00
-----------------------------
Total Interest-Earning Assets $ 552,650 $ 31,859 7.69%
=============================
INTEREST-BEARING LIABILITIES:
Certificates of deposits $ 212,532 $ 9,356 5.87%
Passbook deposits 64,850 1,463 3.01
Demand and NOW accounts 47,163 681 1.93
Money market accounts 24,896 645 3.45
-----------------------------
Total deposits 349,441 12,145 4.63
FHLB advances and notes payable 135,894 6,384 6.26
Collateralized mortgage obligations 1,437 160 14.85
-----------------------------
Total Interest-Bearing Liabilities $ 486,772 $ 18,689 5.12%
=============================
Net interest income $ 13,170
======
Net interest rate spread 2.57%
====
Net interest-earning assets $ 65,878
======
Net interest margin (4) 3.18%
====
Average interest-earning assets to
average interest-bearing liabilities 113.53%
======
</TABLE>
(1) Calculated net of deferred loan fees, loan discounts, loans in process
and loss reserves
(2) Includes held and available-for-sale categories
(3) Includes primarily short-term liquid assets
(4) Net interest income divided by average interest earning assets
(5) Based on average monthly balances
<PAGE>
<TABLE>
<CAPTION>
NINE MONTH PERIOD ENDED
(Unaudited)
-----------------------------
MARCH 31, 1995
-----------------------------
(Dollars in Thousands)
Average Interest
Outstanding Earned/ Yield/
Balance (5) Paid Rate
-----------------------------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loan receivable (1) (2) $ 288,405 $ 17,014 7.87%
Mortgage-backed securities (2) 136,791 6,866 6.69
Investments (2) 59,051 2,675 6.04
Other interest-earning assets(3) 29,613 1,083 4.88
Cash surrender value of life insurance 2,863 135 6.29
-----------------------------
Total Interest-Earning Assets $ 516,723 $ 27,773 7.17%
=============================
INTEREST-BEARING LIABILITIES:
Certificates of deposits $ 195,431 $ 7,163 4.89%
Passbook deposits 72,922 1,614 2.95
Demand and NOW accounts 46,671 731 2.09
Money market accounts 30,082 727 3.22
-----------------------------
Total deposits 345,106 10,235 3.95
FHLB advances and notes payable 107,447 4,715 5.85
Collateralized mortgage obligations 1,959 202 13.75
-----------------------------
Total Interest-Bearing Liabilities $ 454,512 $15,152 4.44%
=============================
Net interest income $ 12,621
======
Net interest rate spread 2.73%
====
Net interest-earning assets $ 62,211
======
Net interest margin (4) 3.26%
====
Average interest-earning assets to
average interest-bearing liabilities 113.69%
======
</TABLE>
(1) Calculated net of deferred loan fees, loan discounts, loans in process
and loss reserves
(2) Includes held and available-for-sale categories
(3) Includes primarily short-term liquid assets
(4) Net interest income divided by average interest earning assets
(5) Based on average monthly balances
<PAGE>
2. COMPARISON OF OPERATING RESULTS FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 1996 AND MARCH 31, 1995.
<TABLE>
<CAPTION>
Summary of Results of Operations
Three Months Ended
March 31,
------------------------
(Unaudited)
1996 1995
---- ----
(In Thousands)
Amount Change Amount
------ ------ ------
<S> <C> <C> <C>
Total interest income $10,773 $ 1,264 $ 9,509
Total interest expense 6,269 890 5,379
------ ------ ------
Net interest income 4,504 374 4,130
Provision for loan losses - - -
------ ------ ------
Net interest income after
provision for loan losses 4,504 374 4,130
Fees and service charges 563 64 499
Gains on sale of loans, mortgage-
backed securities and investment
securities 91 (17) 108
Other non-interest income 265 92 173
------ ------ ------
Income before non-interest expense 5,423 513 4,910
Total non-interest expense 3,602 182 3,420
------ ------ ------
Income before income taxes 1,821 331 1,490
Income taxes (703) (157) (546)
------ ------ ------
Net income $ 1,118 $ 174 $ 944
====== ====== ======
</TABLE>
General -- Net income increased $174,000, or 18.4%, to $1,118,000 for
the three month period ended March 31, 1996 from $944,000 for the same
period last year. Net interest income increased $374,000 and non-interest
income increased $139,000 while non-interest expenses increased $182,000
and income tax expense increased $157,000. Return on equity (ratio of net
income to average equity) increased to an annualized 5.73% for the three
month period ended March 31, 1996 from an annualized 5.11% for the same
period last year. The interest rate spread increased to 2.54% at March 31,
1996 from 2.36% at March 31, 1995.
Interest Income -- Interest income increased $1.3 million, or 13.7%,
to $10.8 million for the three month period ended March 31, 1996 from $9.5
million for the same period last year. This increase resulted from an
increase in the average balance of interest-earning assets of $39.3
million, or 7.6%, to $558.7 million for the three month period ended March
31, 1996 from $519.4 million for the same period last year.
Interest earned on loans receivable increased $1.5 million, or 25.4%,
due primarily to a $61.7 million increase in the average balance of loans
receivable to $356.8 million during the three month period ended March 31,
1996 from $295.1 million for the same period last year. In addition, the
average yield on loans increased to 8.25% during the three month period
ended March 31, 1996 from 7.96% for the same period last year. The
increase in the average balance of loans receivable was the result of
continued loan production in excess of principal repayments and the sale
and securitization of loans. The increase in yield was the result of new
loans being originated at rates greater than the average rate of loans
being repaid. In addition, the average rate received on adjustable rate
mortgage loans increased to 8.15% at March 31, 1996 from 7.01% at March 31,
1995.
Interest earned on mortgage-backed securities increased $143,000 due
primarily to an increase in both average balance and average yield. The
average balance of mortgage-backed securities increased $5.7 million and
the average yield increased to 6.92% during the three month period ended
March 31, 1996 from 6.78% during the same period last year.
Interest earned on investment securities, FHLB stock and other
interest earning assets decreased $366,000 due primarily to a decrease of
$28.1 million in average balances to $66.2 million during the three month
period ended March 31, 1996 from $94.3 million during the same period last
year. This decrease was the result of investing the proceeds of maturing
investments into higher yielding new production mortgage and consumer loans
and the purchase of higher yielding mortgage-backed securities.
Interest Expense -- Total interest expense increased $900,000 to $6.3
million for the three month period ended March 31, 1996 from $5.4 million
for the same period last year. Interest expense on deposits increased
$504,000 due to an increase in the average rate paid on deposits to 4.61%
during the three month period ended March 31, 1996 from 4.14% during the
same period last year, while the average balance of deposits increased to
$353.4 million during the three month period ended March 31, 1996 from
$344.6 million for the same period last year. The average rate paid on
certificates of deposits increased to 5.83% during the three month period
ended March 31, 1996 from 5.13% during the same period last year. This
increase was a result of a rapid increase in short-term interest rates
since the quarter ended March 31, 1995 and a transfer of funds from lower
yielding money market and passbook accounts into the higher yielding
certificates of deposit. Interest expense on borrowed money also increased
$386,000 due to an increase in the average balance on FHLB advances of
$26.4 million, while the average rate paid on FHLB advances decreased to
6.21% during the three month period ended March 31, 1996 from 6.26% during
the same period last year. The new FHLB advances were obtained in an
effort to fund asset growth and increase net interest income.
Provisions for Loan Losses -- The provision for loan losses is
determined by management as the amount to be added to the allowance for
loan losses after net charge-offs have been deducted to bring the allowance
to a level which is considered adequate to absorb losses inherent in the
loan portfolio in accordance with generally accepted accounting principles.
The Company made no additional provision for loan losses for the three
month periods ended March 31, 1996 and March 31, 1995. At March 31, 1996,
the Company had $428,000 of non-performing assets (representing .07% of
total assets) compared to $573,000 at June 30, 1995 (representing .10% of
total assets). At March 31, 1996, the Company had allowance for loan
losses to non-performing assets of 468.9% as compared to 350.4% at June 30,
1995. Management's evaluation of the adequacy of its loan loss reserves,
the quality of the loan portfolio and economic conditions in Montana
resulted in no additional provision for loan losses. Future additions to
the Company's allowance for loan losses and any change in the related ratio
of the allowance for loan losses to non-performing loans are dependent upon
the performance of the Company's loan portfolio, the economy, inflation,
changes in real estate values and interest rates and the view of the
regulatory authorities toward adequate reserve levels.
Non-Interest Income -- Non-interest income increased $139,000 to
$919,000 for the three month period ended March 31, 1996 from $780,000 for
the same period last year. Service fees and other operating income
increased $63,000 and $92,000 respectively while net gain on sale of loans
and securities available-for-sale decreased $17,000. Service fees
increased due to increased checking and ATM fees. The $92,000 increase in
other operating income was due primarily to an $83,000 refund of previously
expensed life insurance fees.
Non-Interest Expense -- Non-interest expense increased $182,000 with
increases in compensation and employee benefits, net occupancy expense of
premises, equipment and furnishing expense, data processing expenses,
federal insurance premiums and other expenses of $145,000, $30,000,
$34,000, $17,000, $3,000 and $10,000 respectively, while marketing and
advertising decreased $57,000. The $145,000 increase in compensation and
employee benefits was the result of a one-time charge of $160,000 related
to expenses associated with the restructuring of the loan processing
operations and the severance benefits paid to seventeen employees. The
ratio of non-interest expense to average total assets decreased to 2.47%
during the three month period ended March 31, 1996 from 2.53% during the
same period last year.
Income Taxes -- Income tax expense increased $157,000 to $703,000
during the three month period ended March 31, 1996 from $546,000 for the
same period last year. The increase was the result of an increase in income
before income taxes of $331,000 to $1.8 million for the three month period
ended March 31, 1996 from $1.5 million for the same period last year.
<PAGE>
3. CHANGES IN RESULTS OF OPERATIONS. COMPARISON OF THE NINE MONTH
PERIODS ENDED MARCH 31, 1996 AND MARCH 31, 1995.
<TABLE>
<CAPTION>
Summary of Results of Operations
Nine Months Ended
March 31,
------------------------
(Unaudited)
1996 1995
---- ----
(In Thousands)
Amount Change Amount
------ ------ ------
<S> <C> <C> <C>
Total interest income $31,859 $ 4,086 $27,773
Total interest expense 18,689 3,537 15,152
------ ------ ------
Net interest income 13,170 549 12,621
Provision for loan losses - - -
------ ------ ------
Net interest income after
provision for loan losses 13,170 549 12,621
Fees and service charges 1,813 303 1,510
Gains on sale of loans, mortgage-
backed securities and investment
securities 540 266 274
Other non-interest income 626 37 589
------ ------ ------
Income before non-interest expense 16,149 1,155 14,994
Total non-interest expense 10,728 715 10,013
------ ------ ------
Income before income taxes 5,421 440 4,981
Income taxes (2,090) (232) (1,858)
------ ------ ------
Net income $ 3,331 $ 208 $ 3,123
====== ====== ======
</TABLE>
Net income increased $208,000, or 6.5%, to $3.3 million for the nine
month period ended March 31, 1996 from $3.1 million for the same period
last year. Net interest income increased $549,000 and non-interest income
increased $606,000 while non-interest expense increased $715,000 and income
taxes increased $232,000.
Interest Income -- Interest income increased $4.1 million, or 14.7%,
to $31.9 million for the nine month period ended March 31, 1996 from $27.8
million for the same period last year. This increase was a result of both
an increase in the average balance and the rate earned on interest earning
assets during nine month period. The average balance of interest earning
assets increased $35.9 million, or 6.9%, to $552.6 million during the nine
month period ended March 31, 1996 from $516.7 million for the same period
last year. The average rate earned on interest-earning assets increased to
7.69% during the nine month period ended March 31, 1996 from 7.17% during
the same period last year.
Interest earned on loans receivable increased $4.0 million, or 23.5%,
to $21.0 million for the nine month period ended March 31, 1996 from $17.0
million for the same period last year, due primarily to a $51.8 million
increase in the average balance of loans receivable to $340.2 million
during the nine month period ended March 31, 1996 from $288.4 million for
the same period last year. In addition, the average yield on loans
increased to 8.24% during the nine month period ended March 31, 1996 from
7.87% during the same period last year. The increase in the average
balance of loans receivable was the result of continued loan production in
excess of principal repayments and the sale and securitization of loans.
Real estate mortgage originations were $105.7 million and consumer loan
originations were $19.6 million during the nine month period ended March
31, 1996 as compared to $68.5 million and $18.6 million respectively for
the same period last year. The increase in yield was the result of new
loans being originated at rates greater than the average rate on loans
being repaid.
Interest earned on mortgage-backed securities increased $289,000 due
primarily to an increase in the average yield to 6.88% during the nine
month period ended March 31, 1996 from 6.69% for the same period last year.
Interest earned on investment securities, FHLB stock and other
interest earning assets decreased $223,000 due primarily to a $17.8 million
decrease in the average balance of these assets to $73.7 million during the
nine month period ended March 31, 1996 from $91.5 million for the same
period last year.
Interest Expense -- Total interest expense increased $3.5 million to $18.7
million for the nine month period ended March 31, 1996 from $15.2 million
for the same period last year. Interest expense on deposits increased $1.9
million due primarily to an increase in the average rate paid on deposits
to 4.63% during the nine month period ended March 31, 1996 as compared to
3.95% during the same period last year. The average rate paid on
certificates of deposits increased to 5.87% during the nine month period
ended March 31, 1996 from 4.89% during the same period last year. This
increase in the average rate paid on deposits was a result of both a
general increase in short-term interest rates and lower rate maturing
certificates being re-invested into higher rate certificates. Customers
also transferred funds from lower rate passbook and money market accounts
into the higher rate certificates. Interest expense on borrowed funds also
increased $1.6 million due to an increase in the average balance of FHLB
advances of $28.5 million and an increase in the average rate paid on FHLB
advances to 6.26% during the nine month period ended March 31, 1996 from
5.85% during the same period last year. The new FHLB advances were
obtained in an effort to fund asset growth and increase net interest
income.
Non-Interest Income -- Non-interest income increased $606,000 to $3.0
million for the nine month period ended March 31, 1996 from $2.4 million
for the same period last year. This increase was a result of increases in
loan origination fees, service fees, net gain on sale of loans and
securities available-for-sale and other operating income of $34,000,
$269,000, $266,000 and $37,000 respectively. The $269,000 increase in
service fees was primarily the result of increases in checking fees and ATM
transaction fees.
<PAGE>
Non-Interest Expense -- Non-interest expense increased $715,000 to
$10.7 million for the nine month period ended March 31, 1996 from $10.0
million for the same period last year. The $715,000 increase in non-
interest expense was primarily the result of increases in compensation and
employee benefits, net occupancy expense of premises, equipment and
furnishings expense, data processing expense, marketing and advertising
and other operating expenses of $112,000, $75,000, $61,000, $21,000,
$91,000 and $361,000 respectively. The $361,000 increase in other
operating expenses was primarily related to costs incurred in the first
quarter for the engagement of a consulting firm to assist in developing
a long-term operations plan. The ratio of non-interest expense to average
total assets remained unchanged at 2.48% for the nine month period ended
March 31, 1996 and the same period last year.
Income Taxes -- Income tax expense increased $232,000 to $2.1 million
for the nine month period ended March 31, 1996 from $1.9 million for the
same period last year. The increase was the result of an increase in
income before income taxes of $440,000 to $5.4 million for the nine month
period ended March 31, 1996 from $5.0 million for the same period last
year.
Loan Quality -- The following table sets forth the amounts and
categories on non-performing assets in the Company's loan portfolio. For
all periods presented, the Company did not have any troubled debt
restructuring which involved forgiving a portion of interest or principal
on any loans or making loans at a rate materially less than market rates.
Foreclosed assets include assets acquired in settlement of loans, and are
recorded at the lower of the related loan balance, less any specific
allowance for loss, or fair value at the date of foreclosure.
<PAGE>
<TABLE>
<CAPTION>
March 31, June 30,
1996 1995
(Unaudited)
---------------------------------------------------------
(In Thousands)
<S> <C> <C>
Non-accruing loans:
Real Estate:
One-to-four family $ 21 $ -
Multi-family - -
Commercial - 166
Construction - -
Consumer 113 153
---------------------------------------------------------
Total 134 319
---------------------------------------------------------
Accruing loans delinquent
90 days or more:
Real Estate:
One-to-four family 164 253
Multi-family - -
Commercial - -
Construction 120 -
Consumer 10 1
---------------------------------------------------------
Total 294 254
---------------------------------------------------------
Foreclosed assets:
Real Estate:
One-to-four family - -
Multi-family - -
Commercial - -
Construction - -
Consumer - -
---------------------------------------------------------
Total - -
---------------------------------------------------------
Total non-performing assets $428 $573
=========================================================
</TABLE>
Non-Performing Assets -- Non-performing assets decreased $145,000 to
$428,000 at March 31, 1996 from $573,000 at fiscal year end June 30, 1995.
Non-performing assets to total assets decreased to .07% at March 31, 1996
from .10% at fiscal year end June 30, 1995. The Company had no foreclosed
assets at March 31, 1996, the sixth consecutive quarter with no foreclosed
assets. In addition to the non-performing loans and foreclosed assets set
forth in the preceding table, as of March 31, 1996, there was also an
aggregate of $198,000 in net book value of loans identified by the Company
with respect to the majority of which known information about the possible
credit problems of the borrowers on the cash flows of the secured
properties have caused management to have some concerns as to the ability
of the borrowers to comply with present loan repayment terms and which may
result in the future inclusion of such items in the non-performing
categories.
At March 31, 1996, the recorded investment in impaired loans was
$134,000, all of which were on non-accrual status. The Company has not
established an impairment allowance for these loans. The average recorded
investment in impaired loans during the nine month period ended March 31,
1996 was $86,000. The amount of interest income recognized on impaired
loans during this period was immaterial.
Regulatory Capital -- At March 31, 1996, Western Federal Savings Bank
(the "Bank"), the regulated thrift institution subsidiary of the Company,
met all applicable regulatory capital requirements, including the fully
phased-in risk based capital requirements. The following table provides
information on an unconsolidated basis indicating the extent to which the
Bank exceeds the minimum capital requirements under federal regulations as
of March 31, 1996.
<TABLE>
<CAPTION>
(Dollars in Thousands) Approximate
Actual Requirement Excess
-------- ------------- --------
<S> <C> <C> <C>
Tangible Capital:
Dollar Amount $60,902 $ 8,584 $52,318
Percent of tangible
assets 10.64% 1.50% 9.14%
Core Capital:
Dollar Amount $60,902 $17,168 $43,734
Percent of adjusted
tangible assets 10.64% 3.00% 7.64%
Risk-based Capital:
Dollar Amount $62,908 $24,032 $38,876
Percent of risk-
weighted assets 20.94% 8.00% 12.94%
</TABLE>
The OTS has adopted, but temporarily postponed implementation until
further notice, a final rule that requires every savings association with
more than normal interest rate risk to deduct from its total capital an
amount equal to 50% of its interest-rate risk exposure multiplied by the
present value of its assets when calculating and determining compliance
with risk-based capital requirements. This exposure is a measure of the
potential decline in the net portfolio value of a savings association,
greater than 2% of the present value of its assets, based upon a
hypothetical 200 basis point increase or decrease in interest rates
(whichever results in a greater decline). Net portfolio value is the
present value of expected cash flows from assets, liabilities and off-
balance sheet contracts. The rule provides for a two quarter lag between
calculating interest rate risk and recognizing any deduction from capital.
The amount to be deducted from capital is the lowest interest rate risk
component reported in an institution's exposure reports to the OTS for the
three most recent quarters. Based upon interest-rate risk exposure
calculations as provided by the OTS for the period ended December 31,
1995, the most recent date such information is available from the OTS, the
deduction from the Bank's total capital would be $1.7 million under this
rule. Based on the Bank's excess risk-based capital of $38.9 million at
March 31, 1996, not withstanding this $1.7 million deduction from capital,
the Bank would continue to exceed its risk-based capital requirement.
The OTS has amended its regulatory capital regulations to exclude
from regulatory capital the unrealized gains and losses, net of income
taxes, as required by FASB accounting standard SFAS No. 115 , "Accounting
for Certain Investments in Debt and Equity Securities". At March 31, 1996
the Bank had $191,000 of unrealized gains, net of income taxes, that were
deducted from capital for purposes of determining regulatory capital.
<PAGE>
OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
Neither the registrant or its subsidiaries are part to any legal
proceedings, other than routine litigation arising in the normal course of
its business. While the ultimate outcome of these various legal proceedings
cannot be predicted with certainty, it is the opinion of management that the
resolution of these legal actions should not have a material effect on the
Company's consolidated financial position or results of operations.
ITEM 2 CHANGE IN SECURITIES
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
ITEM 5 OTHER INFORMATION
None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
Exhibits None
Form 8-K The registrant filed current reports on form 8-K
on April 19, 1996 to report the quarterly earnings release, a dividend
declaration of $.085 per share.
<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:
WESTERFED FINANCIAL CORPORATION
Date May 10, 1996 /s/ Lyle R. Grimes
----------------------- -------------------------------
Lyle R. Grimes
President and Chief Executive
Officer
(Duly Authorized Officer)
Date May 10, 1996 /s/ James A. Salisbury
----------------------- -------------------------------
James A. Salisbury
Treasurer and Chief Financial
Officer
(Principal Finance and
Accounting Officer)
