<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 September 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
- ----------- THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------------- ---------------
Commission file number 0-22772
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)
406-721-5254
---------------------------------------------------------
Registrant's telephone number, including area code
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
September 30, 1996 -- 4,554,170 shares (including restricted shares)
- 1 -
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
PART I -- FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS.................................................................... - 3 -
Consolidated Balance Sheets - September 30, 1996 (Unaudited) and
June 30, 1995.................................................................. - 3 -
Consolidated Statements of Income - Three months ended September
30, 1996 and September 30, 1995 (Unaudited) .................................. - 4 -
Consolidated Statement of Stockholders' Equity for the three month
period ended September 30, 1996 (Unaudited).................................... - 5 -
Consolidated Statements of Cash Flows for the three months ended
September 30, 1996 and September 30, 1995 (Unaudited) ......................... - 6 -
Notes to Consolidated Financial Statements (Unaudited).................................. - 7 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................................... - 10 -
PART II -- OTHER INFORMATION....................................................................................... - 21 -
ITEM 1 LEGAL PROCEEDINGS....................................................................... - 21 -
ITEM 2 CHANGE IN SECURITIES.................................................................... - 21 -
ITEM 3 DEFAULTS UPON SENIOR SECURITIES......................................................... - 21 -
ITEM 4 SUBMISSION OF MATTERS TO VOTE OF SECURITY
HOLDERS................................................................................. - 21 -
ITEM 5 OTHER INFORMATION....................................................................... - 21 -
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K........................................................ - 21 -
SIGNATURES ..................................................................................................... - 22 -
</TABLE>
- 2 -
<PAGE>
FINANCIAL STATEMENTS
Consolidated Balance Sheets - September 30, 1996 (Unaudited) and June 30, 1996
(Dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
(Unaudited)
ASSETS
September 30, June 30,
1996 1996
----------------- -----------------
<S> <C> <C>
Cash and due from banks $ 6,256 $ 7,829
Interest-bearing due from banks 6,030 5,470
----------------- -----------------
Cash and cash equivalents 12,286 13,299
Interest-bearing deposits 5,103 3,000
Investment securities available-for-sale 40,223 35,637
Investment securities, at amortized cost (estimated market value of
$6,897 at September 30, 1996 and $9,399 at June 30, 1996) 6,851 9,347
Stock in Federal Home Loan Bank of Seattle, at cost 7,622 7,471
Mortgage-backed securities available-for-sale 42,386 44,909
Mortgage-backed securities, at amortized cost (estimated market
value of $57,913 at September 30, 1996 and $59,278 at June 30, 1996) 58,023 60,038
Loans available-for-sale 4,768 3,967
Loans receivable, net 366,460 364,226
Accrued interest receivable 3,733 3,695
Premises and equipment, net 13,995 13,758
Cash surrender value of life insurance policies 3,220 3,183
Other assets 1,439 1,401
----------------- -----------------
Total assets $ 566,109 $ 563,931
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 342,986 $ 350,212
Borrowed funds 130,351 125,838
Advances from borrowers for taxes and insurance 6,217 3,255
Income taxes 1,899 1,961
Accrued interest payable 1,195 1,219
Accrued expenses and other liabilities 5,172 2,839
----------------- -----------------
Total liabilities 487,820 485,324
Stockholders' Equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized;
none outstanding --- ---
Common stock, $.01 par value, 10,000,000 shares authorized;
4,395,108 shares outstanding at September 30, 1996 and
4,395,204 outstanding at June 30, 1996 46 46
Additional paid-in capital 45,499 45,451
Common stock acquired by ESOP/RRP (3,382) (3,558)
Treasury stock, at cost (3,080) (3,079)
Net unrealized (loss) on securities available-for-sale (196) (226)
Retained earnings, substantially restricted 39,402 39,973
----------------- -----------------
Total stockholders' equity 78,289 78,607
----------------- -----------------
Total liabilities and stockholders' equity $ 566,109 $ 563,931
================= =================
Book value per share $ 17.81 $ 17.88
================= =================
</TABLE>
See accompanying notes to consolidated financial statements.
- 3 -
<PAGE>
Consolidated Statements of Income - Three Month Period Ended September 30, 1996
and September 30, 1995 (Unaudited).
(Dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
September 30,
1996 1995
------------------- ------------------
<S> <C> <C>
Interest income:
Loans receivable $ 7,710 $ 6,624
Mortgage-backed securities available-for-sale 729 1,015
Mortgage-backed securities 1,037 1,368
Investment securities available-for-sale 690 858
Investment securities 153 232
Interest-bearing deposits 228 265
Other 46 44
------------------ -------------------
Total interest income 10,593 10,406
Interest expense:
NOW and money market demand 382 446
Savings 474 494
Certificates of deposit 3,009 3,061
Advances from FHLB - Seattle and other borrowed funds 2,085 2,157
------------------ -------------------
Total interest expense 5,950 6,158
Net interest income 4,643 4,248
Provisions for loan losses 15 ---
------------------ -------------------
Net interest income after provision for loan losses 4,628 4,248
------------------ -------------------
Non-interest income
Loan origination fees on loans sold 125 133
Service fees 566 509
Net gain on sale of loans and securities available-for-sale 109 411
Other 35 36
------------------ -------------------
Total non-interest income 835 1,089
------------------ -------------------
Non-interest expenses:
Compensation and employee benefits 1,887 1,884
Net occupancy expense of premises 223 213
Equipment and furnishings expense 192 138
Data processing expenses 165 150
Federal insurance premium 211 201
SAIF special assessment 2,297 ---
Marketing and advertising 36 145
Net expense (income) from operation of real estate owned --- ---
Other 720 868
------------------ -------------------
Total non-interest expense 5,731 3,599
(Loss) income before income taxes (268) 1,738
Income taxes 89 (670)
------------------ ------------------
Net (loss) income (1) $ (179) $ 1,068
================= ===================
Net (loss) income per share $ (0.04) $ 0.25
================= ===================
Dividends per share $ 0 .095 $ 0.075
================== ===================
Weighted average common shares outstanding for earnings per share 4,260,452 4,254,029
================== ===================
</TABLE>
(1) September, 1996 includes approximately $1.4 million SAIF special assessment
net of tax at 38%
See accompanying notes to consolidated financial statements.
- 4 -
<PAGE>
Consolidated Statement of Stockholders' Equity for the Three Month Period Ended
September 30, 1996 (Unaudited).
(Dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
Net
Unrealized
Loss on
Additional 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, 1996 $ 46 45,451 (3,558) (3,079) 39,973 (226) 78,607
Net loss -- -- -- -- (179) -- (179)
Change in net unrealized
loss on securities
available-for-sale -- -- -- -- -- 30 30
Principal payment made by
ESOP -- 48 57 -- -- -- 105
Amortization of award of
RRP stock -- -- 118 -- -- -- 118
Shares forfeited by RRP
participants (556 shares) -- -- 1 (1) -- -- --
Cash dividends declared
($0.095 per share) -- -- -- -- (392) -- (392)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at
September 30, 1996 $ 46 45,499 (3,382) (3,080) 39,402 (196) 78,289
==================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
- 5 -
<PAGE>
Consolidated Statements of Cash Flows for the Three Month Period Ended
September 30, 1996 and September 30, 1995 (Unaudited)
(Dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
September 30,
1996 1995
---------------- -----------------
<S> <C> <C>
Net cash provided by operating activities $ 4,652 $ 6,332
================= =================
Cash flows from investing activities:
Net change in interest-bearing deposits (2,103) 985
Purchases of mortgage-backed securities (983) (990)
Proceeds from sales of mortgage-backed securities --- 3,187
Principal payments on mortgage-backed securities 5,560 6,405
Purchases of investment securities (21,706) (4,913)
Proceeds from maturities of investment securities 19,659 6,162
Principal payments on investment securities 80 ---
Net change in loans receivable (2,116) (15,699)
Purchases of premises and equipment (439) (450)
----------------- -----------------
Net cash used by investing activities (2,048) (5,313)
----------------- -----------------
Cash flows from financing activities:
Net change in deposits excluding interest credited (11,073) 1,658
Proceeds from borrowings 7,000 600
Payments on borrowings (2,506) (4,853)
Net change in advances from borrowers for taxes and insurance 2,962 2,829
----------------- ------------------
Net cash provided (used) by financing activities (3,617) 234
---------------- ------------------
Net increase (decrease) in cash and cash equivalents (1,013) 1,253
Cash and cash equivalents at beginning of period 13,299 15,374
----------------- ------------------
Cash and cash equivalents at end of period $ 12,286 $ 16,627
================= ==================
Supplemental disclosure of cash flow information:
Payments during the period for:
Interest $ 2 ,167 $ 2,189
Income taxes, net --- ---
</TABLE>
See accompanying notes to consolidated financial statements.
- 6 -
<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
three months ended September 30, 1996 are not necessarily indicative of
the results anticipated for the year ending June 30, 1997. For
additional information, refer to the consolidated financial statements
and footnotes thereto included in WesterFed Financial Corporation's
(the "Company") annual report for the year ended June 30, 1996.
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 NET INCOME PER SHARE
Net income per common share is based on the weighted average
number of shares outstanding during the period applying the treasury
stock method to common stock equivalents. The weighted average number
of common and common stock equivalents for the three month period ended
September 30, 1996 were 4,260,452. Stock options have been granted,
under the Company's stock option and incentive plan, to purchase
419,707 shares. In addition 189,856 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. ESOP shares that have been committed to be released are
considered outstanding and ESOP shares that have not been committed to
be released are not considered outstanding. At September 30, 1996,
94,288 ESOP shares were committed to be released and were considered in
the earnings per share computations.
4. DIVIDENDS DECLARED
On September 24, 1996 the Board of Directors of the Company
declared a quarterly cash dividend of $0.095 per share, payable on
November 22, 1996 to stockholders of record on November 8, 1996.
- 7 -
<PAGE>
5. 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)
September 30, 1996 June 30, 1996
----------------------------------------------- ------------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
--------- ---------- ---------- --------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal Agency obligations $ 3,005 3 (1) 3,007 $ 4,010 2 (7) 4,005
Corporate obligations 3,843 8 --- 3,851 5,333 22 --- 5,355
Other investments 3 36 --- 39 4 35 --- 39
-------- ---- ------ ------ -------- ---- ------ ------
Total investment securities 6,851 47 (1) 6,897 9,347 59 (7) 9,399
Mortgage-backed securities 58,023 328 (438) 57,913 60,038 212 (972) 59,278
-------- ---- ------ ------ -------- ---- ------ ------
$64,874 375 (439) 64,810 $69,385 271 (979) 68,677
======= === === ====== ======== === === ======
AVAILABLE-FOR-SALE
(Dollars in Thousands)
(Unaudited)
September 30, 1996 June 30, 1996
----------------------------------------------- ------------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
--------- ---------- ---------- --------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal Agency obligations $37,962 80 (312) 37,730 $32,841 21 (232) 32,630
Corporate obligations 2,492 9 (8) 2,493 3,000 --- (20) 2,980
Other investments --- --- --- --- 28 --- (1) 27
-------- ---- ------ ------ -------- ---- ------ ------
Total investment securities 40,454 89 (320) 40,223 35,869 21 (253) 35,637
Mortgage-backed securities 42,455 163 (232) 42,386 45,035 154 (280) 44,909
-------- ---- ------ ------ -------- ---- ------ ------
$82,909 252 (552) 82,609 $80,904 175 (533) 80,546
======== ==== ===== ====== ======== ==== ===== ======
</TABLE>
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<PAGE>
A comparison of the amortized cost and estimated fair value of investment
securities by contractual maturities at September 30, 1996 is as follows:
HELD-TO-MATURITY
(Dollars in Thousands)
(Unaudited)
September 30, 1996
----------------------------------
Amortized Estimated
Cost Fair Value
--------- ----------
Due in one year or less $ 5,848 $ 5,861
Due after one year through 5 years 1,000 1,000
Due after 5 years through 10 years --- ---
Due after 10 years --- ---
Other 3 36
------ ------
$6,851 $6,897
====== ======
AVAILABLE-FOR-SALE
(Dollars in Thousands)
(Unaudited)
September 30, 1996
----------------------------------
Amortized Estimated
Cost Fair Value
--------- ----------
Due in one year or less $23,693 $23,814
Due after one year through 5 years 12,100 11,936
SBA loans contractually due after 5 years 4,661 4,473
------- -------
$40,454 $40,223
======= =======
Expected maturities of mortgage-backed securities will differ from
contractual maturities because borrowers may have the right to prepay
obligations with or without penalties.
- 9 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
1. CHANGES IN FINANCIAL CONDITION. COMPARISON OF THE THREE MONTH PERIOD
FROM JUNE 30, 1996 TO SEPTEMBER 30, 1996.
General -- Total assets of the Company increased $2.2 million to
$566.1 million at September 30, 1996 from $563.9 million at June 30,
1996. This increase in assets was primarily the result of a $3.0
million increase in loans receivable and loans held for sale and a $4.9
million increase in investment securities, Federal Home Loan Bank of
Seattle stock and other interest earning assets, partially offset by a
$4.5 million decrease in mortgage-backed securities. The $2.2 million
increase was funded primarily by an increase of $4.6 million in
borrowed funds, a $2.9 million increase in advances from borrowers for
taxes and insurance and a $2.4 million increase in accrued expenses and
other liabilities, partially offset by a $7.2 million decrease in
deposits.
Loans Receivable -- The $3.0 million increase in loans receivable
and loans available-for-sale was primarily the result of $38.1 million
in new loan originations and $900,000 in purchases of real estate
loans, which were partially offset by principal repayments of $24.3
million and the sale of whole loans of $13.2 million. Real estate
mortgage loan originations were $23.9 million and consumer loan
originations were $14.2 million during this three month period as
compared to $38.6 million and $6.8 million respectively for the same
period last year. The consumer loan portfolio increased $7.1 million,
or 16.2%, to $51.0 million at September 30, 1996 from $43.9 million at
June 30, 1996.
Mortgage-Backed Securities -- The $4.5 million decrease in
mortgage-backed securities was primarily the result of principal
repayments of $5.6 which exceeded purchases of $1.0 million. The $1.0
million of mortgage-backed securities that were purchased consisted of
adjustable rate mortgage-backed securities.
Investment Securities, FHLB Stock and Other Interest Earning
Assets -- Investment Securities, FHLB stock and other interest earning
assets increased $4.9 million, or 7.6%, to $69.0 million at September
30, 1996 from $64.1 million at June 30, 1996. The increase was
primarily the result of the purchase of $21.7 million in investment
securities, an increase in FHLB stock of $150,000, a net increase of
$560,000 in interest bearing due from banks and a net increase in
interest bearing deposits of $2.1 million, partially offset by
maturities and principal payments of investment securities of $19.7
million. Investment securities purchased during the quarter ended
September 30, 1996 included $19.7 million of U.S. Agency securities
with maturities of three years or less and $2.0 million of U.S. Agency
securities with maturities of three to five 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 September 30, 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
- 10 -
<PAGE>
its interest income when interest rates increase. The market value of
these securities at September 30, 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 September 30,
1996:
Notional principal Agreement
amount termination Cap
------------------ ----------- ------------
(in thousands)
$25,000 March, 1997 6.5% - 10.0%
5,000 July, 1999 6.5%
5,000 July, 1999 7.0%
-------
$35,000
=======
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 September 30,
1996 the Bank did not have any interest rate swap agreements in place.
The counterparty to the cap agreements is the FHLB of Seattle and
the agreements are not collateralized. Interest rate swaps would be
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 decreased $7.2 million, or 2.1%, to $343.0
million at September 30, 1996 from $350.2 million at June 30, 1996. NOW
and Money Market accounts decreased $2.7 million, Passbook accounts
decreased $1.5 million and Certificates of Deposit decreased $3.0
million. The decrease in deposits is primarily the result of increased
competition in the Bank's market areas. While the Bank pays competitive
interest rates, management believes it is not prudent to pay deposit
rates beyond normal treasury spreads while the Bank's regulatory
liquidity remains strong at 10.6%.
- 11 -
<PAGE>
Borrowed Funds -- Borrowed funds increased $4.6 million, or 3.7%,
to $130.4 million, at September 30, 1996 from $125.8 million at June
30, 1996. There was $7.0 million of new fixed rate advances with
maturities of one to four years. Principal repayments on FHLB advances
were $2.3 million and repayments on collateralized mortgage obligations
were $122,000 during the quarter ended September 30, 1996.
Stockholders' Equity -- Stockholders' equity decreased $318,000,
or 0.4%, to $78.3 million at September 30, 1996 from $78.6 million at
June 30, 1996. This decrease was due to a net loss for the three month
period of $200,000 and $392,000 for dividends declared during the three
month period while stockholders' equity was increased $223,000 related
to contributions to the Employee Stock Ownership Plan and shares earned
under the Recognition and Retention Plan. There was also a $30,000
increase to stockholders' equity 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.
- 12 -
<PAGE>
<TABLE>
<CAPTION>
Three Month Period Ended
(Unaudited)
--------------------------------------------------------------------------------
September 30,1996 September 30,1995
-------------------------------------- ------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance (5) Paid Rate Balance (5) Paid Rate
--------------------------------------- ------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans receivable (1) (2) $ 370,941 $ 7,710 8.31% $ 322,028 $ 6,624 8.23%
Mortgage-backed securities (2) 102,177 1,766 6.91 137,905 2,383 6.91
Investments (2) 54,495 843 6.19 61,524 1,090 7.09
Other interest-earning assets (3) 10,583 228 8.62 19,630 265 5.40
Cash surrender value of life insurance 3,208 46 5.74 2,975 44 5.92
--------- ------- ---- --------- ------- ----
Total Interest-Earning Assets $ 541,404 $10,593 7.83% $ 544,062 $10,406 7.65%
========= ======= ==== ========= ======= ====
INTEREST-BEARING LIABILITIES:
Certificates of deposits $ 209,740 $ 3,009 5.74% $ 209,252 $ 3,061 5.85%
Passbook deposits 63,715 474 2.98 65,282 494 3.03
Demand and now accounts 48,902 177 1.45 47,017 227 1.93
Money market accounts 23,776 205 3.45 25,198 219 3.48
--------- ------- ---- --------- ------- ----
Total deposits 346,133 3,865 4.47 346,749 4,001 4.62
FHLB advances and notes payable 128,424 2,039 6.35 131,356 2,102 6.40
Collateralized mortgage obligations 1,097 46 16.77 1,537 55 14.31
--------- ------- ---- --------- ------- ----
Total Interest-Bearing Liabilities $ 475,654 $ 5,950 5.00% $ 479,642 $ 6,158 5.14%
========= ======= ==== ========= ======= ====
Net interest income $ 4,643 $ 4,248
======= =======
Net interest rate spread 2.83% 2.51%
==== ====
Net interest earning assets $ 65,750 $ 64,420
======== ========
Net interest margin (4) 3.43% 3.12%
==== ====
Average interest-earning assets
to average interest-bearing liabilities 113.82% 113.43%
====== ======
</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
- 13 -
<PAGE>
2. COMPARISON OF OPERATING RESULTS FOR THE THREE MONTH PERIOD ENDED
SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995.
Summary of Results of Operations
<TABLE>
<CAPTION>
Three Months Ended
September 30,
(Unaudited)
---------------------------------------------------------
1996 1995
Amount Change Amount
--------- ------- ------
(In Thousands)
<S> <C> <C> <C>
Total interest income $10,593 $ 187 $10,406
Total interest expense 5,950 (208) 6,158
--------- ------- ------
Net interest income 4,643 395 4,248
Provision for loan losses 15 15 --
--------- ------- ------
Net interest income after provision
for loan losses 4,628 380 4,248
--------- ------- ------
Fees and service charges 691 49 642
Gains on sale of loans, mortgage-backed
securities and investment securities 109 (302) 411
Other non-interest income 35 (1) 36
--------- ------- ------
Total non-interest income 835 (254) 1,089
--------- ------- ------
Income before non-interest expense 5,463 126 5,337
Total non-interest expense 5,731 2,132 3,599
--------- ------- ------
Income before income taxes (268) (2,006) 1,738
Income Taxes 89 759 (670)
--------- ------- ------
Net income $ (179) $(1,247) $1,068
========= ======= ======
</TABLE>
- 14 -
<PAGE>
General -- Net income decreased $1.2 million to a loss of $179,000
for the three month period ended September 30, 1996 from $1.1 million
for the three month period ended September 30, 1995. The $1.2 million
decrease in net income resulted from a $1.4 million after tax one-time
special assessment to recapitalize the Savings Association Insurance
Fund (the "SAIF"). Net income was decreased by increases in
non-interest expense of $2.1 million and a decrease in non-interest
income of $254,000 while increases in net interest income after
provision for loan losses of $380,000 and a reduction in income tax
expense of $759,000 partially offset the decreases to net income. In
addition, the interest rate spread increased to 2.70% at September 30,
1996 from 2.44% at September 30, 1996.
Interest Income -- Interest income increased $187,000, or 1.8%, to
$10.6 million for the three month period ended September 30, 1996 from
$10.4 million for the same period last year. The increase resulted from
an increase in the average yield on interest-earning assets to 7.83%
during the quarter ended September 30, 1996 from 7.65% during the same
period last year, which offset the effects of a $2.7 million decrease
in the average balance of interest-earning assets to $541.4 million
during the quarter ended September 30, 1996 from $544.1 million for the
same period last year.
Interest earned on loans receivable increased $1.1 million, or
16.7%, due primarily to a $48.9 million increase in the average balance
of loans receivable to $370.9 million during the three month period
ended September 30, 1996 from $322.0 million for the same period last
year. In addition, the average yield on loans increased to 8.31% during
the three month period ended September 30, 1996 from 8.23% 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 primarily on
consumer loans. In addition, the average rate received on adjustable
rate mortgage loans increased to 8.21% at September 30, 1996 from 7.85%
at September 30, 1995.
Interest earned on mortgage-backed securities decreased $600,000
due primarily to a $35.7 million decrease in the average balance of
mortgage-backed securities outstanding to $102.2 million for the three
month period ended September 30, 1996 from $137.9 million during the
same period last year. The decrease in average balance was the result
of management's decision during the fiscal year to use a portion of the
mortgage-backed securities portfolio to partially fund the growth in
loans receivable in an attempt to earn yields greater than those
available on mortgage-backed securities.
Interest earned on investment securities, FHLB stock and other
interest earning assets decreased $282,000 due primarily to a decrease
of $15.8 million in average balances to $68.3 million during the three
month period ended September 30, 1996 from $84.1 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 decreased $208,000 to
$6.0 million for the three month period ended September 30, 1996 from
$6.2 million for the same period last year. Interest expense on
deposits decreased $100,000 due to both a decrease in the average rate
paid on deposits to 4.47% during the three month period ended September
30, 1996 from 4.62% during the same period last year and a decrease in
the average balance of deposits of $600,000 to $346.1 million during
the three month period ended September 30, 1996 from $346.7 million
during the same period last year. Certificates of deposit, passbook
deposits, NOW accounts and money market accounts all decreased in both
average balances
- 15 -
<PAGE>
and average rate paid. A new non-interest bearing checking program was
implemented during the quarter ended September 30, 1996 which should
further reduce the interest expense related to NOW accounts. Interest
expense on borrowed funds also decreased $72,000 due to both a decrease
in average balances of $3.4 million to $129.5 million during the three
month period ended September 30, 1996 from $132.9 million for the same
period last year and a decrease in the average rate paid on FHLB
advances to 6.35% for the three months ended September 30, 1996 from
6.40% for the same period last year.
Provisions for Loan Losses -- The provision for loan losses
increased to $15,000 for the three month period ended September 30,
1996 as compared to no provision for the same period last year. The
Company has begun adding to the provision for loan losses due to the
increase in consumer loans and commercial real estate loans held in the
loan portfolio.
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. At
September 30, 1996, the Company had $1.3 million of non-performing
assets (representing 0.23% of total assets) compared to $715,000 at
June 30, 1996 (representing 0.13% of total assets). At September 30,
1996, the Company had allowance for loan losses to non-performing
assets of 157.2% as compared to 280.9% at June 30, 1996. 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 and composition 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 decreased $254,000 to
$835,000 for the three month period ended September 30, 1996 from $1.1
million for the same period last year. Gain on sale of loans,
mortgage-backed securities, and investment securities decreased
$302,000 while fees and service charges increased $49,000. The $49,000
increase in service fees was primarily the result of increases in
checking fees and ATM transaction fees.
Non-Interest Expense -- Non-interest expense increased $2.1
million to $5.7 million for the three month period ended September 30,
1996 from $3.6 million for the same period last year. The reason for
the increase was a $2.3 million one-time special assessment to
recapitalize the SAIF.
The deposits of savings associations, such as Western Federal
Savings Bank, are presently insured by the SAIF, which together with
the Bank Insurance Fund (the "BIF") are the two insurance funds
administered by the Federal Deposit Insurance Corporation (the "FDIC").
Financial institutions which are members of the BIF are experiencing
substantially lower deposit insurance premiums because the BIF has
achieved its required level of reserves while the SAIF has not yet
achieved its required reserves. In order to help eliminate this
disparity and any competitive disadvantage due to disparate deposit
insurance premium schedules, legislation to recapitalize the SAIF was
enacted in September, 1996.
The legislation requires a special one-time assessment of
approximately 65.7 cents per $100 of SAIF insured deposits held by the
Bank at March 31, 1995. The one-time special assessment resulted in a
tax affected charge to earnings of approximately $1.4 million during
the quarter ended September 30, 1996. The legislation is intended to
fully recapitalize the SAIF fund so that commercial bank and thrift
deposits
- 16 -
<PAGE>
will be charged the same FDIC premiums beginning October 1, 1996. As of
such date deposit insurance premiums for highly rated institutions,
such as the Bank, have been eliminated.
The Bank, however, will continue to be subject to an assessment to
fund repayment of the FICO obligations. It is anticipated that the FICO
assessment for the SAIF insured institutions will be 6.5 cents per $100
of deposits while BIF insured institutions will pay 1.3 cents per $100
of deposits until the year 2000 when the assessment will be imposed at
the same rate on all FDIC insured institutions. Accordingly, as a
result of the reduction of the SAIF assessment, and the resulting FICO
assessment, the annual after tax decrease in assessment costs is
expected to be approximately $365,000 based upon a June 30, 1996
assessment base.
Without the $2.3 million SAIF assessment, non-interest expense
decreased $200,000 due primarily to a $109,000 decrease in marketing
and advertising and a $148,000 decrease in other non-interest expense.
Non-interest expense for the three month period ended September 30,
1996 was $3.4 million without the SAIF assessment, a 5.6% decrease from
the $3.6 million for the same period last year.
Income Taxes -- Income tax expense decreased $759,000 due to a
reduction in income before income taxes of $2.0 million.
- 17 -
<PAGE>
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.
(Unaudited)
September 30, June 30,
1996 1996
- --------------------------------------------------------------------------------
Non-accruing loans: (In Thousands)
Real Estate:
One-to-four family $ 5 $ 21
Multi-family - -
Commercial - -
Construction - -
Consumer 311 383
- --------------------------------------------------------------------------------
Total 316 404
- --------------------------------------------------------------------------------
Accruing loans delinquent 90 days or more:
Real Estate:
One-to-four family 454 288
Multi-family - -
Commercial - -
Construction - -
Consumer 503 23
- --------------------------------------------------------------------------------
Total 957 311
- --------------------------------------------------------------------------------
Foreclosed assets:
Real Estate: - -
One-to-four family - -
Multi-family - -
Commercial - -
Construction - -
Consumer 12 -
- --------------------------------------------------------------------------------
Total 12 -
- --------------------------------------------------------------------------------
Total non-performing assets $1,285 $715
- --------------------------------------------------------------------------------
Non-Performing Assets -- Total non-performing assets increased
$570,000 to $1.3 million at September 30, 1996 from $715,000 at fiscal
year end June 30, 1996. The $1.3 million of non-performing assets at
September 30, 1996 includes $440,000 of non-accruing consumer loans
100% secured by loans on savings accounts. Included in the $570,000
increase in non-performing assets were $170,000 of loans on savings
accounts. Total non-performing assets as a percentage of total assets
was 0.23% at September 30, 1996. In addition to the non-performing
loans and foreclosed
- 18 -
<PAGE>
assets set forth in the preceding table, as of June 30, 1996, there was
also an aggregate of $199,000 in net book value of loans identified by
the Company with respect to which information known about the possible
credit problems of the borrowers or of the cash flows of the security
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 asset categories.
At September 30, 1996, the recorded investment in impaired loans
was $316,000, all of which were on non-accrual status. The Company has
not established an impairment allowance for these loans. The amount of
interest income recognized on impaired loans during this period was
immaterial.
Regulatory Capital -- At September 30, 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 September 30, 1996.
(Dollars in Thousands) Approximate
Actual Requirement Excess
------ ----------- ------
Tangible Capital:
Dollar Amount $61,811 $8,258 $53,553
Percent of tangible assets 11.23% 1.50% 9.73%
Core Capital:
Dollar Amount $61,811 $16,515 $45,296
Percent of adjusted tangible assets 11.23% 3.00% 8.23%
Risk-based Capital:
Dollar Amount $63,740 $24,399 $39,341
Percent of risk-weighted assets 20.90% 8.00% 12.90%
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 June 30, 1996, the most recent
date such information is available from the OTS, the deduction from the
Bank's total capital would be $2.3 million under this rule. Based on
the Bank's excess risk-based capital of $39.3 million at September 30,
1996,
- 19 -
<PAGE>
not withstanding this $2.3 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
September 30, 1996 the Bank had $237,000 of unrealized losses, net of
income taxes, that were added to capital for purposes of determining
regulatory capital.
- 20 -
<PAGE>
PART II -- 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
On October 22, 1996 the annual meeting of the stockholders was
held to elect two directors of the Company and to ratify the
appointment of KPMG Peat Marwick LLP as auditors of the Company
for the fiscal year ended June 30, 1997. The voting results are
listed below:
<TABLE>
<CAPTION>
Proposal 1 - Election of Directors For Against Abstain
<S> <C> <C> <C>
John E. Roemer 3,936,039 -0- 34,328
Laurie Caras DeMarois 3,931,547 -0- 38,820
Proposal 2 - Ratify the appointment
of KPMG Peat Marwick LLP as
independent public accountants 3,934,904 30,075 5,388
</TABLE>
ITEM 5 OTHER INFORMATION -- None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
Exhibits None
Form 8-K
1. The registrant filed Form 8-K on September 26, 1996 to report
the announcement of a merger with Security Bancorp Inc. of
Billings, Montana.
2. The registrant filed Form 8-K on October 21, 1996 to report a
SAIF special assessment.
3. The registrant filed current reports on Form 8-K on October
29, 1996 to report the quarterly earnings release and a
dividend declaration of $0.095 per share.
- 21 -
<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 11/14/96 /s/ Lyle R. Grimes
------------------------ ------------------------------------------
Lyle R. Grimes
Chairman of the Board/ President
and Chief Executive Officer
(Duly Authorized Officer)
Date 11/14/96 /s/ James A. Salisbury
------------------------ ------------------------------------------
James A. Salisbury
Treasurer and Chief Financial Officer
(Principal Finance and Accounting Officer)
- 22 -
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-Q FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996 AND IS
QUALIFIED IN ITS EMTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 6,256
<INT-BEARING-DEPOSITS> 11,133
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 82,609
<INVESTMENTS-CARRYING> 72,496
<INVESTMENTS-MARKET> 72,432
<LOANS> 371,228
<ALLOWANCE> 2,001
<TOTAL-ASSETS> 566,109
<DEPOSITS> 342,986
<SHORT-TERM> 34,000
<LIABILITIES-OTHER> 14,483
<LONG-TERM> 96,351
0
0
<COMMON> 46
<OTHER-SE> 78,243
<TOTAL-LIABILITIES-AND-EQUITY> 566,109
<INTEREST-LOAN> 7,710
<INTEREST-INVEST> 2,837
<INTEREST-OTHER> 46
<INTEREST-TOTAL> 10,593
<INTEREST-DEPOSIT> 3,865
<INTEREST-EXPENSE> 5,950
<INTEREST-INCOME-NET> 4,643
<LOAN-LOSSES> 15
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 720
<INCOME-PRETAX> (268)
<INCOME-PRE-EXTRAORDINARY> (179)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (179)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
<YIELD-ACTUAL> 0
<LOANS-NON> 316
<LOANS-PAST> 957
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 199
<ALLOWANCE-OPEN> 2,005
<CHARGE-OFFS> 20
<RECOVERIES> 1
<ALLOWANCE-CLOSE> 2,001
<ALLOWANCE-DOMESTIC> 2,001
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 904
</TABLE>
