<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, 1997
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, 406-721-5254
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 October 31, 1997
-- 5,577,127 shares (including restricted shares)
- 1 -
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I -- FINANCIAL INFORMATION Page
ITEM 1. FINANCIAL STATEMENTS
<S> <C>
Consolidated Balance Sheets - September 30, 1997 (Unaudited) and June 30, 1997........................- 3 -
Consolidated Statements of Income - Three Month Period Ended September 30, 1997 and
September 30, 1996 (Unaudited)....................................................................- 4 -
Consolidated Statement of Stockholders' Equity for the Three Month Period Ended
September 30, 1997 (Unaudited)....................................................................- 5 -
Consolidated Statements of Cash Flows for the Three Month Period Ended September 30,
1997 and September 30, 1996 (Unaudited) .........................................................- 6 -
Notes to Consolidated Financial Statements
1. Basis of Presentation........................................................................- 7 -
2. Cash Equivalents.............................................................................- 7 -
3. Computation of Net Income per Share..........................................................- 7 -
Recently Issued Accounting Standard..........................................................- 8 -
4. Dividends Declared...........................................................................- 8 -
5. Completed Acquisition........................................................................- 8 -
6. A Comparison of the Amortized Cost and Estimated Fair Value of Investment and
Mortgage-backed Securities ..............................................................- 9 -
A Comparison of the Amortized Cost and Estimated Fair Value of Investment
Securities by Contractual Maturities....................................................- 10 -
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, 1997 to September 30, 1997.....................................................- 11 -
2. Comparison of Operating Results for the Three Month Period Ended September 30,
1997 and September 30, 1996............................................................- 13 -
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk..................................- 19 -
PART II -- OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS.......................................................................- 20 -
ITEM 2 CHANGE IN SECURITIES....................................................................- 20 -
ITEM 3 DEFAULTS UPON SENIOR SECURITIES.........................................................- 20 -
ITEM 4 SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.......................................- 20 -
ITEM 5 OTHER INFORMATION.......................................................................- 20 -
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K........................................................- 20 -
SIGNATURES
</TABLE>
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<PAGE>
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - September 30, 1997 (Unaudited) and June 30, 1997
<TABLE>
<CAPTION>
(Unaudited)
September 30, June 30,
(Dollars in thousands, except share and per share data) 1997 1997
---------------- ----------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 17,132 $ 16,999
Interest-bearing due from banks 4,160 160
----------------- ----------------
Cash and cash equivalents 21,292 17,159
Interest-bearing deposits 2,000 2,000
Investment securities available-for-sale 57,166 51,683
Investment securities, at amortized cost (estimated market value of
$32,248 at September 30, 1997 and $27,728 at June 30, 1997) 31,945 27,466
Stock in Federal Home Loan Bank of Seattle, at cost 11,687 11,456
Mortgage-backed securities available-for-sale 34,451 31,388
Mortgage-backed securities, at amortized cost (estimated market
value of $117,423 at September 30, 1997 and $119,193 at June 30, 1996) 114,833 117,781
Loans available-for-sale 8,260 3,700
Loans receivable, net 647,381 626,577
Accrued interest receivable 7,789 6,957
Premises and equipment, net 30,777 29,291
Core deposit intangible 5,095 5,276
Goodwill 15,421 15,562
Cash surrender value of life insurance policies 6,474 6,120
Other assets 4,632 3,223
----------------- ----------------
Total assets $ 999,203 $ 955,639
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 630,638 $ 630,869
Repurchase agreements 7,481 7,786
Borrowed funds 230,462 191,450
Advances from borrowers for taxes and insurance 7,227 3,753
Income taxes 4,539 3,504
Accrued interest payable 3,836 3,593
Accrued expenses and other liabilities 8,872 10,425
----------------- -----------------
Total liabilities 893,055 851,380
----------------- -----------------
Stockholders' Equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized;
none outstanding --- ---
Common stock, $.01 par value, 10,000,000 shares authorized;
5,577,127 shares outstanding at September 30, 1997 and
5,564,904 outstanding at June 30, 1997 56 56
Additional paid-in capital 68,482 67,941
Common stock acquired by ESOP/RRP (2,756) (2,936)
Treasury stock, at cost (3,461) (3,081)
Net unrealized gain on securities available-for-sale 318 (35)
Retained earnings, substantially restricted 43,509 42,314
----------------- -----------------
Total stockholders' equity $ 106,148 $ 104,259
----------------- ----------------
Total liabilities and stockholders' equity $ 999,203 $ 955,639
================= ================
Book value per share $ 19.03 $ 18.74
================= ================
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
Consolidated Statements of Income - Three Month Period Ended September 30,
1997 and September 30, 1996 (Unaudited).
<TABLE>
<CAPTION>
(Dollars in thousands, except share and per share data) (Unaudited)
Three Months Ended
September 30,
1997 1996
----------- -----------
Interest income:
<S> <C> <C>
Loans receivable $ 13,807 $ 7,710
Mortgage-backed securities available-for-sale 579 729
Mortgage-backed securities 1,990 1,037
Investment securities available-for-sale 1,218 690
Investment securities 515 153
Interest-bearing deposits 143 228
Other 77 46
----------- -----------
Total interest income 18,329 10,593
----------- -----------
Interest expense:
NOW and money market demand 817 382
Savings 690 474
Certificates of deposit 5,391 3,009
Advances from FHLB-Seattle and other borrowed funds 3,434 2,085
----------- -----------
Total interest expense 10,332 5,950
----------- -----------
Net interest income 7,997 4,643
Provision for loan losses 164 15
----------- -----------
Net interest income after provision for loan losses 7,833 4,628
----------- -----------
Non-interest income:
Loan origination fees 529 125
Service fees 1,125 566
Net gain on sale of loans and securities available-for-sale 221 109
Other 88 35
----------- -----------
Total non-interest income 1,963 835
----------- -----------
Non-interest expenses:
Compensation and employee benefits 3,469 1,887
Net occupancy expense of premises 532 223
Equipment and furnishings expense 389 192
Data processing expenses 380 165
Federal insurance premium 90 211
SAIF special assessment -- 2,297
Intangible amortization 331 --
Marketing and advertising 257 36
Other 1,405 720
----------- -----------
Total non-interest expense 6,853 5,731
----------- -----------
Income (loss) before income taxes 2,943 (268)
Income taxes 1,134 (89)
----------- -----------
Net income (loss) (1) $ 1,809 $ (179)
----------- -----------
Net income (loss) per share $ 0.32 $ (0.04)
----------- -----------
Dividends per share $ 0.115 $ 0.095
=========== ===========
Dividend payout ratio before SAIF assessment 35.94% 32.76%
=========== ===========
Weighted average common shares outstanding for
earnings per share 5,622,429 4,260,452
=========== ===========
</TABLE>
(1) September 1996 includes approximately $1,414 special SAIF assessment net
of tax at 38.5%.
See accompanying notes to consolidated financial statements.
- 4 -
<PAGE>
Consolidated Statement of Stockholders' Equity for the Three Month Period
Ended September 30, 1997 (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, 1997 $ 56 $ 67,941 $ (2,936) $ (3,081) $ 42,314 $ (35) $ 104,259
Net income -- -- -- -- 1,809 -- 1,809
Change in net unrealized loss on
securities available-for-sale -- -- -- -- -- 353 353
ESOP shares committed to
be released -- 97 57 -- -- -- 154
Amortization of award of
RRP stock -- -- 123 -- -- -- 123
Purchase of treasury stock
at cost - 17,500 shares -- -- -- (380) -- -- (380)
Stock options exercised
(29,725 shares) -- 444 -- -- -- -- 444
Cash dividends declared
($0.115 per share) -- -- -- -- (614) -- (614)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1997 $ 56 $ 68,482 $ (2,756) $ (3,461) $ 43,509 $ 318 $ 106,148
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
- 5 -
<PAGE>
Consolidated Statements of Cash Flows for the Three Month Period Ended
September 30, 1997 and September 30, 1996 (Unaudited)
(Dollars in thousands except share and per share data)
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
September 30,
1997 1996
-----------------------------------
<S> <C> <C>
Net cash provided by operating activities $ (1,471) $ 4,652
------------- -------------
Cash flows from investing activities:
Net change in interest-bearing deposits --- (2,103)
Principal payments on mortgage-backed securities 2,985 2,027
Purchases of mortgage-backed securities available-for-sale (4,999) (983)
Principal payments on mortgage-backed securities available-for-sale 2,118 3,533
Purchases of investment securities (4,500) ---
Proceeds from maturities of investment securities 40 2,500
Proceeds from maturities of investment securities available-for-sale 15,295 17,159
Purchase of investment securities available-for-sale (20,573) (21,706)
Principal payments on investment securities available-for-sale 141 80
Net change in loans receivable (20,821) (2,116)
Purchases of premises and equipment (1,922) (439)
------------- -------------
Net cash provided (used) by investing activities (32,236) (2,048)
------------- -------------
Cash flows from financing activities:
Net change in deposits excluding interest credited (4,392) (11,073)
Net change in repurchase agreements (305) ---
Proceeds from borrowings 130,215 7,000
Payments on borrowings (91,217) (2,506)
Net change in advances from borrowers for taxes and insurance 3,475 2,962
Proceeds from exercise of options 444 ---
Payments to acquire treasury stock (380) ---
------------- -------------
Net cash (used) provided by financing activities 37,840 (3,617)
------------- -------------
Net increase (decrease) in cash and cash equivalents 4,133 (1,013)
Cash and cash equivalents at beginning of period 17,159 13,299
------------- -------------
Cash and cash equivalents at end of period $ 21,292 $ 12,286
============= =============
Supplemental disclosure of cash flow information:
Payments during the period for:
Interest $ 3,021 $ 2,167
Income taxes, net 167 ---
============= =============
</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, 1997 are not necessarily
indicative of the results anticipated for the year ending June 30,
1998. 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, 1997.
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, 1997 were 5,622,429. Stock options have been
granted, under the Company's stock option and incentive plan, to
purchase 543,079 shares. The adoption of an Equity Incentive Plan was
ratified by the stockholders of the Company at the Special Meeting of
Stockholders held on February 25, 1997. The plan provides for
granting various awards to various Directors, Officers, and Employees
of the Company or any of its parent or subsidiary corporations of
various awards covering up to 250,000 shares of Common Stock. In
addition, 195,175 shares of restricted stock have been issued in
accordance with the Recognition and Retention Plan established by the
Company. The common stock equivalents of these stock options and
restricted stock awards are reflected in the income per share
computations in the accompanying financial statements. Also there had
been 354,933 shares of common stock originally 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, 1997, 121,593 ESOP shares were
committed to be released and were considered in the earnings per
share computations.
- 7 -
<PAGE>
RECENTLY ISSUED ACCOUNTING STANDARD
SFAS No. 128, Earnings per Share, was issued in February, 1997
and will replace the presentation of primary and fully dilluted
earnings per share ("EPS") with a presentation of basic and diluted
EPS on the face of the income statement for all entities with complex
capital structures. SFAS No. 128 also requires a reconciliation of
the numerator and denominator of the basic EPS computation to the
numerator and denominator of the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of
common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts
to issue common stock were exercised or converted into common stock
or resulted in the issuance of common stock that then shared in the
earnings of the equity.
This statement will be effective for the Company commencing
February 1, 1998 and earlier application is not permitted. Once
effective, this statement requires restatement of all prior-period
EPS data. Pro forma basic and diluted net income per share as
determined under this statement does not differ from the amounts as
currently reported herein.
4. DIVIDENDS DECLARED
On October 24, 1997 the Board of Directors of the Company
declared a quarterly cash dividend of $0.115 per share, payable on
November 21, 1997 to stockholders of record on November 7, 1997.
5. COMPLETED ACQUISITION
On February 28, 1997, the Company completed its acquisition of
Security Bancorp (the "Acquisition"). The Acquisition was accounted
for as a purchase transaction and accordingly, the consolidated
statement of income includes the results of operations of Security
Bancorp commencing March 1, 1997. Under this method of accounting,
assets and liabilities of Security Bancorp are adjusted to their
estimated fair value and combined with the historical recorded book
value of the assets and liabilities of the Company. The actual
revaluation of Security Bancorp's net assets acquired is subject to
the completion of studies and evaluations by management. The Company
issued 1,150,175 shares of WesterFed Common Stock, options to acquire
94,696 common shares and committed to pay $25,995,480 in cash for all
of the outstanding shares of Security Bancorp Common Stock, for total
consideration (based on the $18.49 per share average closing price of
WesterFed Common Stock as reported on the NASDAQ National Market
System for the twenty business days from January 16, 1997 through
February 12, 1997) of $48.7 million. In addition, as of such date,
Security Bank, a federally chartered stock savings bank and wholly
owned subsidiary of Security Bancorp, merged with and into the Bank.
At the time of the merger, Security Bancorp had assets on a
consolidated basis of $372.6 million, deposits of $286.5 million and
stockholders equity of $30.8 million. Unless the context otherwise
requires, reference herein to the company includes WesterFed, Western
Federal and its subsidiaries on a consolidated basis.
- 8 -
<PAGE>
6. 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, 1997 June 30, 1997
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 $ 23,318 195 (25) 23,488 $ 18,804 184 --- 18,988
U.S. Government obligations 298 --- --- 298 297 1 --- 298
Corporate obligations 5,982 120 --- 6,102 5,980 66 --- 6,046
Other investments 2,347 16 (3) 2,360 2,385 13 (2) 2,396
---------------------------------------------- ------------------------------------------------
Total investment securities 31,945 331 (28) 32,248 27,466 264 (2) 27,728
Mortgage-backed securities 114,833 2,619 (29) 117,423 117,781 1,698 (286) 119,193
---------------------------------------------- ------------------------------------------------
$ 146,778 2,950 (57) 149,671 $ 145,247 1,962 (288) 146,921
============================================== ================================================
AVAILABLE-FOR-SALE
(Dollars in Thousands)
(Unaudited)
September 30, 1997 June 30, 1997
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
--------- ---------- ---------- --------- --------- ---------- ---------- ----------
Federal Agency obligations $ 49,761 256 (14) 50,003 $ 46,067 113 (211) 45,969
Corporate obligations 7,076 48 --- 7,124 5,622 54 (1) 5,675
Other investments 3 36 --- 39 3 36 --- 39
----------------------------------------------- -----------------------------------------------
Total investment securities 56,840 340 (14) 57,166 51,692 203 (212) 51,683
Mortgage-backed securities 34,265 400 (214) 34,451 31,434 220 (266) 31,388
----------------------------------------------- -----------------------------------------------
$ 91,105 740 (228) 91,617 $ 83,126 423 (478) 83,071
=============================================== ===============================================
</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, 1997 IS AS FOLLOWS:
HELD-TO-MATURITY
(Dollars in Thousands)
(Unaudited)
September 30, 1997
Amortized Estimated
Cost Fair Value
--------- ----------
Due in one year or less $ 298 $ 298
Due after one year through 5 years 29,407 29,700
Due after 5 years through 10 years 235 234
Due after 10 years 2,005 2,016
Other --- ---
--------------- ---------------
31,945 32,248
=============== ===============
AVAILABLE-FOR-SALE
(Dollars in Thousands)
(Unaudited)
September 30, 1997
Amortized Estimated
Cost Fair Value
--------- ----------
Due in one year or less $ 7,082 $ 7,102
Due after one year through 5 years 48,323 48,585
Other 3 36
SBA loans contractually due after 5 years 1,432 1,443
-------------- --------------
56,840 57,166
-------------- --------------
Expected maturities of mortgage-backed securities will differ from contractual
maturities because borrowers may have the right to prepay obligations with or
without penalties.
- 10 -
<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, 1997 TO SEPTEMBER 30, 1997.
General -- Total assets increased $43.6 million to $999.2
million at September 30, 1997 from $955.6 million at June 30, 1997.
The increase in assets was primarily the result of increases in loans
receivable and loans available-for-sale of $25.3 million and an
increase in investment securities, Federal Home Loan Bank of Seattle
(FHLB) stock and all other interest earning assets of $14.5 million.
Loans Receivable and Loans Available-for-Sale -- Loans
receivable and loans available-for-sale increased $25.3 million to
$655.6 million at September 30, 1997 from $630.3 million at June 30,
1997. Loans secured by real estate increased by $5.4 million and
non-real estate commercial business loans, agricultural loans and
consumer loans increased $18.5 million. The increase in loans
receivable was primarily the result of loan originations of $95.4
million, partially offset by principal repayments of $54.2 million
and the sale of loans available-for-sale of $16.5 million.
Mortgage-Backed Securities -- Mortgage-backed securities
increased $100,000 to $149.3 million at September 30, 1997 from
$149.2 million at June 30, 1997.
Investment Securities, FHLB Stock and Other Interest Earning
Assets -- Investment securities, FHLB stock and other interest
earning assets increased $14.5 million to $113.4 million at September
30, 1997 from $98.9 million at June 30, 1997. The $14.5 million
increase was primarily the result of increases in interest-bearing
due from banks and interest-bearing deposits of $4.0 million and
investment securities of $9.9 million.
Goodwill and Core Deposit Intangible - Goodwill is being
amortized over 25 years, or approximately $600,000 per year. The core
deposit intangible is amortized on an accelerated basis over its
estimated economic life of seven years, or approximately $724,000 in
the current fiscal year.
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, 1997 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 September 30, 1997 was $4.7 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.
- 11 -
<PAGE>
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. Because the Bank receives various
interest payments if the three-month LIBOR exceeds the agreed upon
interest rate, the Bank is generally at risk to the extent of the
unamortized premium paid if the three-month LIBOR does not exceed the
agreed upon interest rate. At September 30, 1997, the amount of the
unamortized premiums paid related to the interest rate cap
transactions was $218,000. 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, 1997:
Notional principal Agreement
amount termination Cap
------------------ ----------- ---
(in thousands)
$ 5,000 July, 1999 6.5%
5,000 July, 1999 7.0%
5,000 July, 2000 6.0%
--------
$15,000
========
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, 1997 the Bank did not have any interest rate swap
agreements in place.
The counter parties to the interest rate cap agreements are the
FHLB of Seattle in the amount of $10.0 million and Merrill Lynch in
the amount of $5.0 million. 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 $300,000 to $630.6 million at
September 30, 1997 from $630.9 million at June 30, 1997. Checking and
money market accounts increased $2.7 million while passbook accounts
and certificates of deposit decreased $3.0 million.
Borrowed Funds and Repurchase Agreements -- Borrowed funds and
repurchase agreements increased $38.7 million to $237.9 million at
September 30, 1997 from $199.2 million at June 30, 1997. There were
new borrowings of $91.9 million with maturities of less than one year
and $10.0 million of advances maturing in one or more years. The
increase in borrowings were reduced by principal repayments and
maturities of $63.7 million.
Stockholders' Equity -- Stockholders' equity increased $1.8
million to $106.1 million at September 30, 1997 from $104.3 million
at June 30, 1997. This increase was due to net income for the three
month period of $1.8 million, $630,000 related to contributions to
the Employee Stock Ownership Plan and shares earned and issued under
the Recognition and Retention Plan, $353,000 related to the change in
unrealized gains
- 12 -
<PAGE>
associated with assets classified as available-for-sale being
adjusted to market value in accordance with Statement of Financial
Accounting Standards No. 115, and the issuance of 29,725 new common
shares with a recorded value of $444,000 related to exercised stock
options. Stockholders' equity was reduced $614,000 for dividends
declared during the three month period and the purchase of $380,000
of treasury stock.
2. COMPARISON OF OPERATING RESULTS FOR THE THREE MONTH PERIOD ENDED
SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS
Three Months Ended
September 30,
(Unaudited)
1997 1996
Amount Change Amount
------------- ------ ------
(In Thousands)
<S> <C> <C> <C>
Total interest income $ 18,329 $ 7,736 $ 10,593
Total interest expense 10,332 4,382 5,950
------------- ------------- ------------
Net interest income 7,997 3,354 4,643
Provision for loan losses 164 149 15
------------- ------------- ------------
Net interest income after provision for loan losses 7,833 3,205 4,628
------------- ------------- ------------
Fees and service charges 1,654 963 691
Gain on sale of loans, mortgage-backed securities and
investment securities 221 112 109
Other non-interest income 88 53 35
------------- ------------- ------------
Total non-interest income 1,963 1,128 835
------------- ------------- ------------
Income before non-interest expense 9,796 4,333 5,463
Total non-interest expense 6,853 1,122 5,731
------------- ------------- ------------
Income before income taxes 2,943 3,211 (268)
Income taxes 1,134 1,223 (89)
------------- ------------- ------------
Net income $ 1,809 $ 1,988 $ (179)
============= ============= ============
</TABLE>
- 13 -
<PAGE>
Net Interest Income Analysis -- The following table presents for the
periods indicated the total dollar amount of interest income from average
interest-earning assets and the resultant yields, as well as the interest
expense on average interest-bearing liabilities, expressed both in dollars and
rates. No tax equivalent adjustments were made. Non-accruing loans have been
included in the table as loans carrying a zero yield.
<TABLE>
<CAPTION>
Three Month Period Ended
(Unaudited)
September 30, 1997 September 30, 1996
----------------------------------------------------------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance (5) Paid Rate Balance (5) Paid Rate
----------- ---- ---- ----------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans receivable (1) (2) $ 648,412 $ 13,806 8.52% $ 370,941 $ 7,710 8.31%
Mortgage-backed securities (2) 151,127 2,569 6.80 102,177 1,766 6.91
Investments (2) 99,786 1,734 6.95 54,495 843 6.19
Other interest-earning assets (3) 8,876 143 6.44 10,583 228 8.62
Cash surrender value of life insurance 6,356 77 4.85 3,208 46 5.74
---------- ------------ ---- ----------- ----------- ----
Total Interest-Earning Assets 914,557 18,329 8.02 541,404 10,593 7.83
========== ============ ==== =========== =========== ====
INTEREST-BEARING LIABILITIES:
Certificates of deposits 375,705 5,391 5.74 209,740 3,009 5.74
Passbook deposits 100,734 690 2.74 63,715 474 2.98
Demand and NOW accounts 103,377 318 1.23 48,902 177 1.45
Money market accounts 49,925 499 4.00 23,776 205 3.45
---------- ------------ ---- ----------- ----------- ----
Total deposits 629,741 6,898 4.38 346,133 3,865 4.47
FHLB advances and notes payable 232,042 3,401 5.86 128,424 2,039 6.35
Collateralized mortgage obligations 756 33 17.46 1,097 46 16.77
---------- ------------ ---- ----------- ----------- ----
Total Interest-Bearing Liabilities $ 862,539 $ 10,332 4.79% $ 475,654 $ 5,950 5.00%
========== ============ ==== =========== =========== ====
Net interest income $ 7,997 $ 4,643
============ ===========
Net interest rate spread 3.23% 2.83%
==== ====
Net interest earning assets $ 52,018 $ 65,750
========== ===========
Net interest margin (4) 3.50% 3.43%
==== ====
Average interest-earning assets to average
interest-bearing liabilities 106.03% 113.82%
============ ===========
</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
- 14 -
<PAGE>
General -- Net income increased $2.0 million to $1.8 million for the
three month period ended September 30, 1997 from a loss of $179,00 for
the same period last year. Net interest income after provision for loan
losses increased $3.2 million and non-interest income increased $1.1
million while non-interest expense and income tax expense increased $1.1
million and $1.2 million respectively. The net interest margin (net
interest income divided by average interest-earning assets) increased to
3.50% during the quarter ended September 30, 1997 from 3.43% during the
same period last year. The interest rate spread at September 30, 1997 was
3.15% as compared to 2.70% at September 30, 1996. The increase in net
income is primarily the result of a combination of the increased earnings
as a result of the acquisition of Security Bancorp in February, 1997 and
a one-time after tax charge to earnings of $1.4 million, levied on all
thrift institutions, to recapitalize the Savings Association Insurance
Fund ("SAIF") during the September 30, 1997 quarter.
Interest Income -- Interest income increased $7.7 million to $18.3
million for the three month period ended September 30, 1997 from $10.6
million for the same period last year. The increase was primarily the
result of a $373.2 million increase in average total interest-earning
assets to $914.6 million during the three month period ended September
30, 1997 from $541.4 million during the same period last year. In
addition, the average yield on interest-earning assets increased to 8.02%
during the quarter ended September 30, 1997 from 7.83% during the same
period last year due primarily to the Acquisition.
Interest earned on loans receivable increased $6.1 million due
primarily to a $277.5 million increase in the average balance of loans
receivable to $648.4 million during the three month period ended
September 30, 1997 from $370.9 million for the same period last year. In
addition, the average yield on loans increased to 8.52% during the three
month period ended September 30, 1997 from 8.31% for the same period last
year. The increase in the average balance of loans receivable was
primarily the result of the loans acquired in the Acquisition.
Interest earned on mortgage-backed securities increased $803,000 due
primarily to a $48.9 million increase in the average balance of
mortgage-backed securities outstanding to $151.1 million for the three
month period ended September 30, 1997 from $102.2 million during the same
period last year. The increase was primarily the result of the
Acquisition.
Interest earned on investment securities, FHLB stock and other
interest earning assets increased $837,000 primarily due to an increase
in the average balance of these securities of $46.7 million to $115.0
million during the quarter ended September 30, 1997 from $68.3 million
during the same period last year. The average yield increased to 6.80%
during the quarter ended September 30, 1997 from 6.54% for the same
period last year. The increase in average balance is the result of both
the Acquisition and the purchase of additional investment securities for
the purpose of increasing interest income.
Interest Expense -- Total interest expense increased $4.4 million to
$10.3 million for the three month period ended September 30, 1997 from
$5.9 million for the same period last year. Interest expense on deposits
increased $3.0 million due to an increase in the average balance of
deposits of $283.6 million to $629.7 million during the three month
period ended September 30, 1997 from $346.1 million during the same
period last year. The increase in the average balance of deposits was the
result of the Acquisition. The average rate paid on deposits decreased to
4.79% during the quarter ended September 30, 1997 from 5.00% for the same
period last year as the Bank increased the amount of non-interest bearing
demand accounts as a result of the Acquisition. Interest expense on
borrowed funds increased $1.3 million due primarily to an increase in the
average balance of borrowed funds of $103.3 million to $232.8 million
during the three month period ended September 30, 1997 from $129.5
million for the same period last year. The increase was the result of the
Acquisition and increased borrowings to fund the growth in the loan and
investment securities portfolios.
- 15 -
<PAGE>
Provisions for Loan Losses -- The provision for loan losses increased
$149,000 to $164,000 for the three month period ended September 30, 1997
as compared to a $15,000 provision for the same period last year.
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, 1997 the
Company had $4.1 million of non-performing assets (representing 0.41% of
total assets) compared to $2.4 at June 30, 1997 (representing 0.25% of
total assets). There were no foreclosed real estate loans at September
30, 1997. At September 30, 1997 the Company had an allowance for loan
losses to non-performing assets of 116.74% as compared to 191.01% at June
30, 1997. 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. For additional information,
see "Non-Performing Assets".
Non-Interest Income -- Non-interest income increased $1.1 million to
$2.0 million for the quarter ended September 30, 1997 from $835,000 for
the same quarter last year. Fees and service charges increased $963,000
and net gain on sale of loans and securities available-for-sale increased
$112,000. The increase in fees and service charges were due primarily to
the Acquisition.
Non-Interest Expense -- Non-interest expense increased $1.1 million
to $6.8 million for the quarter ended September 30, 1997 from $5.7
million for the same quarter last year. The increase was due primarily to
the Acquisition. Included in the non-interest expense for the quarter
ended September 30, 1997, which was not included in the same quarter last
year, was $331,000 related to the amortization of intangibles related to
the Acquisition. This was comprised of $150,000 for the amortization of
goodwill and $181,000 for the amortization of the core deposit
intangible. The non-interest expense for the quarter ended September 30,
1996 included a one-time special assessment related to the
recapitlization of the SAIF in the amount of $2.3 million. One new branch
facility is being constructed in Billings, Montana. The facility is
anticipated to open in December 1997 while another new facility was
recently opened in the Billings market in the prior quarter ended June
30, 1997. These new facilities have or will add additional non-interest
expense. The consolidation of facilities in three market areas prior to
June 30, 1998 will partially offset the increased costs related to the
new facilities. In addition, the Bank is in the process of converting to
a single, commercial bank oriented, data processing system. This will
allow the Bank to continue its emphasis on adding commercial banking to
its traditional thrift business. The Bank will continue to incur
significant conversion costs and the inefficiencies of operating dual
data processing systems will remain until the conversion is completed in
February, 1998. The quarter just ended included approximately $200,000 in
professional fees and other expenses related to the consolidation of data
processing systems. In addition, approximately $2.6 million of additional
capital expenditures will be made in converting to a consolidated data
center and the addition of technology to position the Bank to meet
increasing competition and the demand for new customer services.
Income Taxes -- Income tax expense increased $1.2 million due to the
$3.2 million increase in income before income taxes.
- 16 -
<PAGE>
Loan Quality -- The following table sets forth the amounts and
categories of non-performing assets in the Company's loan portfolio. At
September 30, 1997 and June 30, 1997 the Company had no loans termed
troubled debt restructuring which involves 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.
<TABLE>
<CAPTION>
(Unaudited)
September 30, June 30,
1997 1997
------------------ -----------------
Non-accruing loans: (In Thousands)
<S> <C> <C>
Real Estate:
One-to-four family $ 1,188 $ 842
Multi-family --- ---
Commercial --- ---
Construction --- ---
Commercial - non real estate 94 102
Consumer 1,052 573
------------------ -----------------
Total 2,334 1,517
------------------ -----------------
Accruing loans delinquent 90 days or more:
Real Estate:
One-to-four family 913 231
Multi-family --- ---
Commercial --- ---
Construction --- ---
Commercial - non real estate --- ---
Consumer 748 605
------------------ -----------------
Total 1,661 836
------------------ -----------------
Foreclosed Assets:
Real Estate: --- ---
One-to-four family --- ---
Multi-family --- ---
Commercial --- ---
Construction --- ---
Consumer 68 82
------------------ -----------------
Total 68 82
------------------ -----------------
Total non-performing assets $ 4,063 $ 2,435
================== =================
</TABLE>
Non-Performing Assets -- Total non-performing assets increased $1.7
million to $4.1 million at September 30, 1997 from $2.4 million at June
30, 1997. The $1.7 million increase in non-performing assets was
primarily the result of a $1.0 million increase in non-performing
one-to-four family loans and a $622,000 increase in non-performing
consumer loans. Total non-performing assets as a percentage of total
assets was 0.41% at September 30, 1997 as compared to 0.25% at June 30,
1997. In addition to the non-performing loans and foreclosed assets set
forth in the preceding table, as of September 30, 1997, there were no
other 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.
- 17 -
<PAGE>
At September 30, 1997 the recorded investment in impaired loans was
$2.3 million, all of which were on non-accrual status. The Company has
not established a specific impairment allowance for these loans. The
amount of interest income recognized on impaired loans during this period
was insignificant.
Regulatory Capital -- At September 30, 1997 the Bank 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, 1997.
<TABLE>
<CAPTION>
Approximate
(Dollars in Thousands) Actual Requirement Excess
- ---------------------- ------ ----------- ------
<S> <C> <C> <C>
Tangible Capital:
Dollar Amount $ 82,081 $ 14,633 $ 67,448
Percent of tangible assets 8.41% 1.50% 6.91%
Core Capital:
Dollar Amount $ 82,081 $ 29,265 $ 52,816
Percent of adjusted tangible assets 8.41% 3.00% 5.41%
Risk-based Capital:
Dollar Amount $ 86,801 $ 48,931 $ 37,870
Percent of risk-weighted assets 14.19% 8.00% 6.19%
</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 June
30, 1997, the most recent date such information is available from the
OTS, the deduction from the Bank's total capital would be $2.8 million
under this rule. Based on the Bank's excess risk-based capital of $37.9
million at September 30, 1997, not withstanding this $2.8 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,
1997 the Bank had $310,000 of unrealized gains, net of income taxes, that
were deducted from capital for purposes of determining regulatory
capital.
- 18 -
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Management believes there has been no material change in
interest rate risk since June 30, 1997. For additional
information, see Management's Discussion and Analysis of
Financial Condition and Results of Operations included herein in
Item 2 and refer to the Interest Rate Risk Management discussion
included in WesterFed Financial Corporation's Annual Report for
the fiscal year ended June 30, 1997.
- 19 -
<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 28, 1997 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, 1998. The voting results are
listed below:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Proposal 1 - Election of Directors For Against Abstain
Robert F. Burke 5,132,574 21,483 -0-
Dr. Marvin P. Reynolds 5,130,792 23,265 -0-
Proposal 2 - Ratify the appointment
of KPMG Peat Marwick LLP as
independent public accountants 5,126,121 7,741 14,648
</TABLE>
ITEM 5 OTHER INFORMATION -- None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
A. Form 8-K
The registrant filed current reports on Form 8-K on November
4, 1997 to report the quarterly earnings release and a
dividend declaration of $0.115 per share.
- 20 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
WESTERFED FINANCIAL CORPORATION
Date October 14, 1997 /s/ Lyle R. Grimes
---------------- ------------------------------------
Lyle R. Grimes
Chairman of the Board/President and
Chief Executive Officer
(Duly Authorized Officer)
Date October 14, 1997 /s/ James A. Salisbury
---------------- ----------------------------------------
James A. Salisbury
Treasurer and Chief Financial Officer
(Principal Finance and Accounting Officer)
- 21 -
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-Q FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 17,132
<INT-BEARING-DEPOSITS> 6,160
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 91,617
<INVESTMENTS-CARRYING> 158,465
<INVESTMENTS-MARKET> 161,358
<LOANS> 655,641
<ALLOWANCE> 4,743
<TOTAL-ASSETS> 999,203
<DEPOSITS> 630,638
<SHORT-TERM> 85,602
<LIABILITIES-OTHER> 24,474
<LONG-TERM> 144,860
<COMMON> 56
0
0
<OTHER-SE> 106,092
<TOTAL-LIABILITIES-AND-EQUITY> 999,203
<INTEREST-LOAN> 13,807
<INTEREST-INVEST> 4,445
<INTEREST-OTHER> 77
<INTEREST-TOTAL> 18,329
<INTEREST-DEPOSIT> 6,898
<INTEREST-EXPENSE> 10,332
<INTEREST-INCOME-NET> 7,997
<LOAN-LOSSES> 164
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,405
<INCOME-PRETAX> 2,943
<INCOME-PRE-EXTRAORDINARY> 1,809
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,809
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.32
<YIELD-ACTUAL> 0
<LOANS-NON> 2,334
<LOANS-PAST> 1,661
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,651
<CHARGE-OFFS> 82
<RECOVERIES> 9
<ALLOWANCE-CLOSE> 4,743
<ALLOWANCE-DOMESTIC> 4,743
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 692
</TABLE>
