<PAGE>
UNITED STATES SECURITY AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter period ended March 31, 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 May 9, 1997
-- 5,551,172 shares (including restricted shares)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
------
<S> <C>
PART I -- FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS............................................................. - 3 -
Consolidated Balance Sheets - March 31, 1997 (Unaudited) and June 30, 1996 ............... - 3 -
Consolidated Statements of Income - Three and Nine Month Period Ended
March 31, 1997 and March 31, 1996 (Unaudited)....................................... - 4 -
Consolidated Statement of Stockholders' Equity for the Nine Month Period Ended
March 31, 1997 (Unaudited)........................................................... - 5 -
Consolidated Statements of Cash Flows for the Nine Month Period Ended
March 31, 1997 and March 31, 1996 (Unaudited) ....................................... - 6 -
Notes to Consolidated Financial Statements................................................ - 7 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............................................. - 11 -
PART II -- OTHER INFORMATION....................................................................... - 24 -
ITEM 1 LEGAL PROCEEDINGS................................................................ - 24 -
ITEM 2 CHANGE IN SECURITIES............................................................. - 24 -
ITEM 3 DEFAULTS UPON SENIOR SECURITIES.................................................. - 24 -
ITEM 4 SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS................................ - 24 -
ITEM 5 OTHER INFORMATION................................................................ - 24 -
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K................................................. - 24 -
SIGNATURES......................................................................................... - 25 -
</TABLE>
- 2 -
<PAGE>
ITEM 1 FINANCIAL STATEMENTS
Consolidated Balance Sheets - March 31, 1997 (Unaudited) and June 30, 1996
<TABLE>
<CAPTION>
(Unaudited)
March 31, June 30,
(Dollars in thousands, except share and per share data) 1997 1996
----------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 14,629 $ 7,829
Interest-bearing due from banks 13,559 5,470
----------- ------------
Cash and cash equivalents 28,188 13,299
Interest-bearing deposits -- 3,000
Investment securities available-for-sale 32,221 35,637
Investment securities, at amortized cost (estimated market value of
$23,446 at March 31, 1997 and $9,399 at June 30, 1996) 23,470 9,347
Stock in Federal Home Loan Bank of Seattle, at cost 11,246 7,471
Mortgage-backed securities available-for-sale 59,325 44,909
Mortgage-backed securities, at amortized cost (estimated market
value of $114,588 at March 31, 1997 and $59,278 at June 30, 1996) 114,740 60,038
Loans available-for-sale 1,046 3,967
Loans receivable, net 596,111 364,226
Accrued interest receivable 6,686 3,695
Premises and equipment, net 28,892 13,758
Core deposit intangible 6,717 --
Goodwill 14,782 --
Cash surrender value of life insurance policies 6,048 3,183
Other assets 2,968 1,401
----------- ------------
Total assets $ 932,440 $ 563,931
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 634,404 $ 350,212
Borrowed funds 168,869 125,838
Advances from borrowers for taxes and insurance 7,058 3,255
Income taxes 4,559 1,961
Accrued interest payable 3,272 1,219
Accrued expenses and other liabilities 11,914 2,839
----------- ------------
Total liabilities 830,076 485,324
----------- ------------
Stockholders' Equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized;
none outstanding -- --
Common stock, $.01 par value, 10,000,000 shares authorized;
5,551,172 shares outstanding at March 31, 1997 and
4,395,204 outstanding at June 30, 1996 58 46
Additional paid-in capital 67,595 45,451
Common stock acquired by ESOP/RRP (3,032) (3,558)
Treasury stock, at cost (3,080) (3,079)
Net unrealized gain on securities available-for-sale (155) (226)
Retained earnings, substantially restricted 40,978 39,973
----------- ------------
Total stockholders' equity 102,364 78,607
----------- ------------
Total liabilities and stockholders' equity $ 932,440 $ 563,931
=========== ============
Book value per share $ 18.44 $ 17.88
=========== ============
Book value per share - tangible $ 14.57 $ 17.88
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
- 3 -
<PAGE>
Consolidated Statements of Income - Three and Nine Month Periods Ended March 31,
1997 and March 31, 1996 (Unaudited).
<TABLE>
<CAPTION>
(Dollars in thousands, except share and per share data) (Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
1997 1996 1997 1996
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Interest income:
Loans receivable $ 9,288 $ 7,359 $ 24,832 $ 21,034
Mortgage-backed securities available-for-sale 748 1,157 2,145 3,332
Mortgage-backed securities 1,308 1,191 3,346 3,824
Investment securities available-for-sale 694 646 2,141 2,264
Investment securities 134 211 348 698
Interest-bearing deposits 357 163 846 572
Other 56 46 148 135
------------- ------------- ------------ ------------
Total interest income 12,585 10,773 33,806 31,859
------------- ------------- ------------ ------------
Interest expense:
NOW and money market demand 488 438 1,237 1,326
Savings 545 478 1,484 1,463
Certificates of deposit 3,771 3,157 9,774 9,356
Advances from FHLB-Seattle and other borrowed funds 2,125 2,196 6,289 6,544
------------- ------------- ------------ ------------
Total interest expense 6,929 6,269 18,784 18,689
------------- ------------- ------------ ------------
Net interest income 5,656 4,504 15,022 13,170
Provision for loan losses 61 --- 103 ---
------------- ------------- ------------ ------------
Net interest income after provision for loan losses 5,595 4,504 14,919 13,170
------------- ------------- ------------ ------------
Non-interest income:
Loan origination fees 121 47 345 250
Service fees 761 516 1,891 1,563
Net gain on sale of loans and securities available-for-sale 86 91 400 540
Other 52 121 122 199
------------- ------------- ------------ ------------
Total non-interest income 1,020 775 2,758 2,552
------------- ------------- ------------ ------------
Non-interest expenses:
Compensation and employee benefits 2,357 1,986 5,951 5,616
Net occupancy expense of premises 356 237 834 664
Equipment and furnishings expense 257 179 622 462
Data processing expenses 241 173 574 481
Federal insurance premium 60 203 425 603
SAIF special assessment --- --- 2,297 ---
Intangible amortization 123 --- 123 ---
Marketing and advertising 129 65 361 389
Other 1,083 615 2,601 2,086
------------- ------------- ------------ ------------
Total non-interest expense 4,606 3,458 13,788 10,301
------------- ------------- ------------ ------------
Income before income taxes 2,009 1,821 3,889 5,421
Income taxes 814 703 1,521 2,090
------------- ------------- ------------ ------------
Net income $ 1,195 $ 1,118 $ 2,368 $ 3,331
============= ============= ============ ============
Net income per share $ 0.25 $ 0.26 $ 0.52 $ 0.78
============= ============= ============ ============
Dividends per share $ 0.105 $ 0.085 $ 0.300 $ 0.240
============= ============= ============ ============
Dividend payout ratio before SAIF assessment 42.00% 32.69% 57.69% 30.77%
============= ============= ============ ============
Weighted average common shares outstanding for
earnings per share 4,736,356 4,266,927 4,396,293 4,262,021
============= ============= ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
- 4 -
<PAGE>
Consolidated Statement of Stockholders' Equity for the Nine Month Period Ended
March 31, 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, 1996 $ 46 45,451 (3,558) (3,079) 39,973 (226) 78,607
Net income -- -- -- -- 2,368 -- 2,368
Change in net unrealized loss on
securities available-for-sale -- -- -- -- -- 71 71
Principal payment made
by ESOP -- 188 170 -- -- -- 358
Amortization of award of
RRP stock -- -- 376 -- -- -- 376
Shares forfeited by RRP
participants (166 shares) -- -- 1 (1) -- -- 0
RRP shares awarded
(2,118 shares) -- 21 (21) -- -- -- 0
Common stock issued
(541 shares) -- 10 -- -- -- -- 10
Security Bancorp acquisition:
Issuance of 1,150,175 shares, 12 21,052 -- -- -- -- 21,064
net of issuance costs of $200,000
Issuance of options allowing
holders to acquire 94,696 shares -- 873 -- -- -- -- 873
Cash dividends declared
($0.300 per share) -- -- -- -- (1,363) -- (1,363)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1997 $ 58 67,595 (3,032) (3,080) 40,978 (155) 102,364
===================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
- 5 -
<PAGE>
Consolidated Statements of Cash Flows for the Nine Month Period Ended March 31,
1997 and March 31, 1996 (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended
March 31,
1997 1996
------------- -------------
<S> <C> <C>
Net cash provided by operating activities $ 4,089 $ 15,767
------------- -------------
Cash flows from investing activities:
Net change in interest-bearing deposits 3,000 2,102
Purchases of mortgage-backed securities -- (990)
Principal payments on mortgage-backed securities 5,942 6,500
Proceeds from sales of mortgage-backed securities available-for-sale 6,856 9,877
Purchases of mortgage-backed securities available-for-sale (983) (19,049)
Principal payments on mortgage-backed securities available-for-sale 10,466 13,858
Purchases of investment securities (5,978) (4,795)
Proceeds from maturities of investment securities 9,352 4,500
Proceeds from maturities of investment securities available-for-sale 57,789 30,490
Purchase of investment securities available-for-sale (51,723) (19,401)
Proceeds from sales of investment securities available-for-sale -- 3,840
Principal payments on investment securities available-for-sale 301 643
Net change in loans receivable (13,313) (49,094)
Purchases of premises and equipment (1,342) (1,831)
Acquisition of Security Bancorp, net of cash equivalents
acquired of $16,607 (6,878) --
------------- -------------
Net cash provided (used) by investing activities 13,489 (23,350)
------------- -------------
Cash flows from financing activities:
Net change in deposits excluding interest credited (3,789) 333
Proceeds from borrowings 38,475 71,300
Payments on borrowings (40,371) (64,210)
Net change in advances from borrowers for taxes and insurance 3,802 2,529
Dividends paid to stockholders (806) (986)
------------- -------------
Net cash (used) provided by financing activities (2,689) 8,966
------------- -------------
Net increase in cash and cash equivalents 14,889 1,383
Cash and cash equivalents at beginning of period 13,299 15,374
------------- -------------
Cash and cash equivalents at end of period $ 28,188 $ 16,757
============= =============
Supplemental disclosure of cash flow information:
Payments during the period for:
Interest $ 6,988 $ 6,637
Income taxes, net 981 1,747
============= =============
</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
nine months ended March 31, 1997 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 nine month period ended
March 31, 1997 were 4,396,293. Stock options have been granted, under
the Company's stock option and incentive plan, to purchase 586,565
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
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, the Company exchanged options
which allow holders of the options to acquire 94,696 shares of Security
Bancorp of Billings, Montana ("Security Bancorp") at an exchange ratio
of 1.78 shares of WesterFed options for each outstanding option of
Security Bancorp. Additional options to acquire 57,085 shares were
issued to those Officers and Directors of Security Bancorp that
continued with WesterFed in March, 1997. In addition, 191,904 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. 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 March
31, 1997, 108,058 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 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 March 25, 1997 the Board of Directors of the Company declared a
quarterly cash dividend of $0.105 per share, payable on May 21, 1997 to
stockholders of record on May 7, 1997.
5. COMPLETED ACQUISITION
On February 28, 1997, the Company completed the acquisition of
Security Bancorp, 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 values 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 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 closing price of WesterFed Common Stock on the NASDAQ National
Market System on February 28, 1997) of $47.3 million. Pursuant to the
Merger Agreement, Security Bancorp stockholders were given the
opportunity to elect to receive either cash, WesterFed Common Stock or
a combination of both in exchange for Security Bancorp Common Stock. As
a result, stockholders who elected to receive cash or did not make an
election, received $30.00 for each share of Security Bancorp Common
Stock. Stockholders who elected to receive stock, or a combination of
cash and stock, exchanged approximately 46.42% of their Security
Bancorp Common Stock in exchange for WesterFed Common Stock (based on a
ratio of 1.78 shares of WesterFed Common Stock for each share of
Security Bancorp Common Stock) and the remainder in cash. Stockholders
who were due a fractional share, received cash in lieu of the
fractional share, paid on the basis of $30.00 per share. 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 Western Federal Savings Bank of Montana, a wholly owned subsidiary
of the Company.
- 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)
March 31, 1997 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 $ 14,811 -- (3) 14,808 $ 4,010 2 (7) 4,005
U.S. Government obligations 296 -- -- 296 --- -- -- --
Corporate obligations 5,979 -- (19) 5,960 5,333 22 -- 5,355
Other investments 2,384 -- (2) 2,382 4 35 -- 39
-------------------------------------------- --------------------------------------------
Total investment securities 23,470 -- (24) 23,446 9,347 59 (7) 9,399
Mortgage-backed securities 114,740 375 (527) 114,588 60,038 212 (972) 59,278
-------------------------------------------- --------------------------------------------
$ 138,210 375 (551) 138,034 $ 69,385 271 (979) 68,677
============================================ ============================================
</TABLE>
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE
(Dollars in Thousands)
(Unaudited)
March 31, 1997 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 $ 27,380 25 (221) 27,184 $ 32,841 21 (232) 32,630
Corporate obligations 2,517 1 (1) 2,517 3,000 --- (20) 2,980
Other investments 2,484 36 -- 2,520 28 --- (1) 27
--------------------------------------------- ----------------------------------------------
Total investment securities 32,381 62 (222) 32,221 35,869 21 (253) 35,637
Mortgage-backed securities 59,396 159 (230) 59,325 45,035 154 (280) 44,909
--------------------------------------------- ----------------------------------------------
$ 91,777 221 (452) 91,546 $ 80,904 175 (533) 80,546
============================================= ==============================================
</TABLE>
- 9 -
<PAGE>
A comparison of the amortized cost and estimated fair value of investment
securities by contractual maturities at March 31, 1997 is as follows:
HELD-TO-MATURITY
(Dollars in Thousands)
(Unaudited)
March 31, 1997
Amortized Estimated
Cost Fair Value
-----------------------------
Due in one year or less $ 198 $ 198
Due after one year through 5 years 21,416 21,392
Due after 5 years through 10 years 1,856 1,856
Due after 10 years -- --
Other -- --
$ $
----------- ----------
23,470 23,446
=========== ==========
AVAILABLE-FOR-SALE
(Dollars in Thousands)
(Unaudited)
March 31, 1997
Amortized Estimated
Cost Fair Value
-----------------------------
Due in one year or less $ 10,550 $ 10,539
Due after one year through 5 years 14,932 14,854
Other 2,484 2,520
SBA loans contractually due after 5 years 4,415 4,308
----------- -----------
$ 32,381 $ 32,221
=========== ===========
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 NINE MONTH PERIOD
FROM JUNE 30, 1996 TO MARCH 31, 1997.
General -- Total assets increased $368.5 million to $932.4 million
at March 31, 1997 from $563.9 million at June 30, 1996. The increase in
assets was the result of the purchase of $393.8 million of assets from
Security Bancorp on February 28, 1997 (the "Acquisition"). Loans
receivable and loans available-for-sale increased $229.0 million,
mortgage-backed securities increased $69.2 million, investment
securities, Federal Home Loan Bank of Seattle (FHLB) stock and all
other interest earning assets increased $22.4 million and other assets
increased $47.9 million.
Loans Receivable and Loans Available-for-Sale -- Loans receivable
and loans available-for-sale increased $229.0 million to $597.2 million
at March 31, 1997 from $368.2 million at June 30, 1996. Loans secured
by real estate increased by $78.5 million, commercial business loans
increased $58.2 million, agricultural loans increased $25.3 million and
consumer loans increased $71.0 million. The increase in gross loan
balances were offset by increases in unearned fees and discounts and
the reserve for loan losses of $1.5 million and $2.5 million
respectively. The increase in loans receivable was primarily the result
of the purchase of $218.3 million of loans in the Acquisition, loan
originations of $121.0 million and the purchase of loans of $1.3
million, partially offset by principal repayments of $75.8 million and
the sale of loans available-for-sale of $38.1 million.
Mortgage-Backed Securities -- Mortgage-backed securities increased
$69.2 million to $174.1 million at March 31, 1997 from $104.9 million
at June 30, 1996. The increase was the result of the purchase of $91.5
million of mortgage-backed securities associated with the Acquisition
and $1.0 million of additional purchases, partially offset by principal
repayments of $19.1 million and sales of $4.2 million.
Investment Securities, FHLB Stock and Other Interest Earning
Assets -- Investment securities, FHLB stock and other interest earning
assets increased $22.4 million to $86.5 million at March 31, 1997 from
$64.1 million at June 30, 1996. The $22.4 million increase was
comprised of net increases in interest-bearing due from banks and
interest-bearing deposits of $5.0 million, FHLB stock of $3.7 million,
cash surrender value of life insurance policies of $2.8 million and
investment securities of $10.9 million. Increases in investment
securities, FHLB stock, cash surrender value of life insurance policies
and interest-bearing due from banks related to the Acquisition were
$20.0 million, $3.3 million, $2.7 million, and $8.1 million
respectively. In addition, $58.2 million of additional investment
securities were purchased while maturities and principal payments
totaled $67.5 million.
Goodwill and Core Deposit Intangible - The acquisition of Security
Bancorp was accounted for as a purchase transaction. 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 values 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 evaluation by Management. During the quarter
ended March 31, 1997, goodwill of $14.8 million and core deposit
intangible of $6.8 million were recorded to the assets of the Company.
Goodwill is being amortized over 25 years, or $592,000 per year. The
core deposit intangible is amortized on an accelerated basis over its
estimated economic life of seven years, or $1,360,000 in the first
year.
- 11 -
<PAGE>
From time to time, Western Federal Savings Bank (the "Bank"), the
regulated thrift institution subsidiary of the Company, may, in order
to reduce interest rate risk, purchase financial instruments that lock
in a spread between interest-earning assets and interest-bearing
liabilities. While these types of financial instruments limit risk,
they also reduce the Bank's ability to maximize profits during periods
of favorable interest rate trends. At March 31, 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 March 31, 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.
Interest Rate Caps -- Interest rate caps entitle the Bank to
receive various interest payments in exchange for payment of a premium,
provided the three-month LIBOR exceeds an agreed upon interest rate.
Transaction fees paid in connection with interest rate cap agreements
are amortized to interest expense as an adjustment of the interest cost
of liabilities. Interest rate cap agreements are used to manage
interest rate risk by synthetically extending the life of
interest-bearing liabilities.
The following summarizes interest rate cap agreements at March 31,
1997:
Notional principal Agreement
amount termination Cap
------------------ ----------- ------------
(in thousands)
$ 5,000 July, 1999 6.5%
5,000 July, 1999 7.0%
--------
$ 10,000
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 March 31, 1997
the Bank did not have any interest rate swap agreements in place.
The counter party 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.
- 12 -
<PAGE>
Deposits -- Deposits increased $284.2 million to $634.4 million at
March 31, 1997 from $350.2 million at June 30, 1996. This increase was
primarily the result of the purchase of $288.0 million of deposits from
Security Bancorp. The $284.2 million increase was comprised of
increases of $53.4 million in checking and NOW accounts, $23.3 million
in money market accounts, $66.2 million in passbook accounts and $141.3
million in certificates of deposit.
Borrowed Funds -- Borrowed funds increased $43.1 million to $168.9
million at March 31, 1997 from $125.8 million at June 30, 1996. The
increase was the result of the purchase of $44.9 million of borrowed
funds from Security Bancorp. In addition to the $44.9 million of
borrowed funds from Security Bancorp, there were new borrowings of
$30.4 million with maturities of less than one year and $8.1 million of
advances maturing in two or more years. The increase in borrowings were
reduced by principal repayments and maturities of $40.3 million.
Accrued Expenses and Other Liabilities -- Accrued expenses and
other liabilities increased $9.1 million to $11.9 million at March
31,1997 from $2.8 million at June 30, 1996. The increase was primarily
the result of $4.6 million related to the addition of Security Bancorp
liabilities and $3.3 million not yet paid to former Security Bancorp
shareholders for shares purchased by the Company.
Stockholders' Equity -- Stockholders' equity increased $23.8
million to $102.4 million at March 31, 1997 from $78.6 million at June
30, 1996. This increase was due to net income for the nine month period
of $2.4 million, $734,000 related to contributions to the Employee
Stock Ownership Plan and shares earned and issued under the Recognition
and Retention Plan, $71,000 related to the change in unrealized gains
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 1,150,175 new common shares with
a recorded value of $21.9 million to acquire Security Bancorp on
February 28, 1997. Stockholders' equity was reduced $1.4 million for
dividends declared during the nine month period.
- 13 -
<PAGE>
2. COMPARISON OF OPERATING RESULTS FOR THE THREE MONTH PERIOD ENDED MARCH
31, 1997 AND MARCH 31, 1996.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(Unaudited)
1997 1996
Amount Change Amount
-------- -------- -------
(In Thousands)
<S> <C> <C> <C>
Total interest income $ 12,585 $ 1,812 $10,773
Total interest expense 6,929 660 6,269
-------- -------- -------
Net interest income 5,656 1,152 4,504
Provision for loan losses 61 61 --
-------- -------- -------
Net interest income after provision for loan losses 5,595 1,091 4,504
-------- -------- -------
Fees and service charges 882 319 563
Gain on sale of loans, mortgage-backed securities and
investment securities 86 (5) 91
Other non-interest income 52 (69) 121
-------- -------- -------
Total non-interest income 1,020 245 775
-------- -------- -------
Income before non-interest expense 6,615 1,336 5,279
Total non-interest expense 4,606 1,148 3,458
-------- -------- -------
Income before income taxes 2,009 188 1,821
Income taxes 814 111 703
-------- -------- -------
Net income $ 1,195 $ 77 $ 1,118
======== ======== =======
</TABLE>
- 14 -
<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)
March 31, 1997 March 31, 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) $ 444,314 $ 9,288 8.36% $ 356,823 $ 7,360 8.25%
Mortgage-backed securities (2) 117,521 2,056 7.00 135,618 2,347 6.92
Investments (2) 52,087 828 6.36 47,659 857 7.19
Other interest-earning assets (3) 21,641 357 6.60 15,512 163 4.20
Cash surrender value of life insurance 4,200 56 5.33 3,077 46 5.98
---------- ------------ ----- ----------- ----------- -----
Total Interest-Earning Assets $ 639,763 $ 12,585 7.87% $ 558,689 $ 10,773 7.71%
========== ============ ===== =========== =========== =====
INTEREST-BEARING LIABILITIES:
Certificates of deposits $ 257,087 $ 3,771 5.87% $ 216,527 $ 3,157 5.83%
Passbook deposits 85,433 545 2.55 64,721 478 2.95
Demand and NOW accounts 66,330 214 1.29 47,277 225 1.90
Money market accounts 31,656 274 3.46 24,884 213 3.42
---------- ------------ ----- ----------- ----------- -----
Total deposits 440,506 4,804 4.36 353,409 4,073 4.61
FHLB advances and notes payable 136,360 2,089 6.13 137,968 2,142 6.21
Collateralized mortgage obligations 925 36 15.57 1,324 54 16.31
---------- ------------ ----- ----------- ----------- -----
Total Interest-Bearing Liabilities $ 577,791 $ 6,929 4.80% $ 492,701 $ 6,269 5.09%
========== ============ ===== =========== =========== =====
Net interest income $ 5,656 $ 4,504
============ ===========
Net interest rate spread 3.07% 2.62%
===== =====
Net interest earning assets $ 61,972 $ 65,988
========== ===========
Net interest margin (4) 3.54% 3.22%
===== =====
Average interest-earning assets to average
interest-bearing liabilities 110.73% 113.39%
============ ===========
</TABLE>
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves
(2) Includes held and available-for-sale categories
(3) Includes primarily short-term liquid assets
(4) Net interest income divided by average interest earning assets
(5) Based on average monthly balances
- 15 -
<PAGE>
General -- Net income increased $77,000, or 9.1%, to $1.2 million for
the three month period ended March 31, 1997 from $1.1 million for the same
period last year. Net interest income after provision for loan losses
increased $1.1 million and non-interest income increased $245,000 while
non-interest expense and income tax expense increased $1.1 million and
$111,000 respectively. The net interest margin (net interest income divided
by average interest-earning assets) increased to 3.54% during the quarter
ended March 31, 1997 from 3.22% during the same period last year. The
interest rate spread at March 31, 1997 was 3.07% as compared to 2.62% at
March 31, 1996.
Interest Income -- Interest income increased $1.8 million to $12.6
million for the three month period ended March 31, 1997 from $10.8 million
for the same period last year. The increase was primarily the result of a
$81.1 million increase in average total interest-earning assets to $639.8
million during the three month period ended March 31, 1997 from $558.7
million during the same period last year. In addition, the average yield on
interest-earning assets increased to 7.87% during the quarter ended March
31, 1997 from 7.71% during the same period last year as the Company
increased the amount of higher yielding loans in portfolio as compared to
the amount of lower yielding mortgage-backed securities.
Interest earned on loans receivable increased $1.9 million due
primarily to a $87.5 million increase in the average balance of loans
receivable to $444.3 million during the three month period ended March 31,
1997 from $356.8 million for the same period last year. In addition, the
average yield on loans increased to 8.36% during the three month period
ended March 31, 1997 from 8.25% for the same period last year as the
Company increased the amount of higher yielding non-residential loans in
its portfolio. 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 decreased $291,000
million due primarily to a $18.1 million decrease in the average balance of
mortgage-backed securities outstanding to $117.5 million for the three
month period ended March 31, 1997 from $135.6 million during the same
period last year. The decrease in the average balance was the result of
management's decision during the fiscal year to use a portion of the
proceeds received upon maturities of mortgage-backed securities 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 increased $175,000 primarily due to an increase in the
average balance of these securities of $11.7 million to $77.9 million
during the quarter ended March 31, 1997 from $66.2 million during the same
period last year. The average yield decreased to 6.37% during the quarter
ended March 31, 1997 from 6.43% for the same period last year.
Interest Expense -- Total interest expense increased $660,000 to $6.9
million for the three month period ended March 31, 1997 from $6.3 million
for the same period last year. Interest expense on deposits increased
$731,000 due to an increase in the average balance of deposits of $87.1
million to $440.5 million during the three month period ended March 31,
1997 from $353.4 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 4.36% during the quarter ended
March 31, 1997 from 4.61% for the same period last year as the Company
increased the amount of non-interest bearing demand accounts as a result of
the Acquisition. Interest expense on borrowed funds also decreased $71,000
due primarily to a decrease in cost of funds and a decrease in average
balance of borrowed funds of $2.0 million to $137.3 million during the
three month period ended March 31, 1997 from $139.3 million for the same
period last year.
- 16 -
<PAGE>
Provisions for Loan Losses -- The provision for loan losses increased
to $61,000 for the three month period ended March 31, 1997 as compared to
no provision for the same period last year. The Company increased the
provision for loan losses due to the increase in non-residential 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 March 31, 1997 the Company had
$2.0 million of non-performing assets (representing 0.22% of total assets)
compared to $715,000 at June 30, 1996 (representing 0.13% of total assets).
There were no foreclosed real estate loans at March 31, 1997. At March 31,
1997 the Company had an allowance for loan losses to non-performing assets
of 222.9% as compared to 280.4% 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. For
additional information, see "Non-Performing Assets".
Non-Interest Income -- Non-interest income increased $245,000 to
$1,020,000 for the quarter ended March 31, 1997 from $775,000 for the same
quarter last year. This was primarily the result of fees and service
charges increasing $319,000 due primarily to the Acquisition.
Non-Interest Expense -- Non-interest expense increased $1.1 million to
$4.6 million for the quarter ended March 31, 1997 from $3.5 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 March 31, 1997
was $123,000 related to one month's amortization of intangibles related to
the Acquisition. This was comprised of $40,000 for the amortization of
goodwill and $83,000 for the amortization of the core deposit intangible.
Two new branch facilities are being constructed in Billings, Montana. One
facility is anticipated to open in June 1997 and the other by December
1997. These new facilities will add additional non-interest expense.
Income Taxes -- Income tax expense increased $111,000 due to the
$188,000 increase in income before income taxes, which is tax affected for
$32,000 of non-tax deductible compensation associated with the ESOP and
$40,000 of non-tax deductible goodwill amortization.
- 17 -
<PAGE>
3. COMPARISON OF OPERATING RESULTS FOR THE NINE MONTH PERIOD ENDED MARCH 31,
1997 AND MARCH 31, 1996.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
(Unaudited)
1997 1996
Amount Change Amount
---------- ---------- ---------
(In Thousands)
<S> <C> <C> <C>
Total interest income $ 33,806 $ 1,947 $ 31,859
Total interest expense 18,784 95 18,689
---------- ---------- ---------
Net interest income 15,022 1,852 13,170
Provision for loan losses 103 103 --
---------- ---------- ---------
Net interest income after provision for loan losses 14,919 1,749 13,170
---------- ---------- ---------
Fees and service charges 2,236 423 1,813
Gain on sale of loans, mortgage-backed securities and
investment securities 400 (140) 540
Other non-interest income 122 (77) 199
---------- ---------- ---------
Total non-interest income 2,758 206 2,552
---------- ---------- ---------
Income before non-interest expense 17,677 1,955 15,722
Total non-interest expense 13,788 3,487 10,301
---------- ---------- ---------
Income before income taxes 3,889 (1,532) 5,421
Income taxes 1,521 (569) 2,090
---------- ---------- ---------
Net income $ 2,368 $ (963) $ 3,331
========== ========== =========
</TABLE>
- 18 -
<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>
Nine Month Period Ended
(Unaudited)
March 31, 1997 March 31, 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) $ 395,336 $ 24,832 8.37% $ 340,173 $ 21,034 8.24%
Mortgage-backed securities (2) 104,941 5,491 6.98 138,738 7,155 6.88
Investments (2) 52,799 2,489 6.29 54,457 2,962 7.25
Other interest-earning assets (3) 17,028 846 6.62 16,261 572 4.69
Cash surrender value of life insurance 3,551 148 5.56 3,021 136 6.00
---------- --------- ----- ----------- -------- -----
Total Interest-Earning Assets $ 573,655 $ 33,806 7.86% $ 552,650 $ 31,859 7.69%
========== ========= ===== =========== ======== =====
INTEREST-BEARING LIABILITIES:
Certificates of deposits $ 225,007 $ 9,773 5.79% $ 212,532 $ 9,356 5.87%
Passbook deposits 70,699 1,485 2.80 64,850 1,463 3.01
Demand and NOW accounts 54,304 557 1.37 47,163 681 1.93
Money market accounts 26,274 680 3.45 24,895 645 3.45
---------- --------- ----- ----------- -------- -----
Total deposits 376,284 12,495 4.43 349,440 12,145 4.63
FHLB advances and notes payable 131,181 6,166 6.27 135,894 6,384 6.26
Collateralized mortgage obligations 1,009 123 16.26 1,437 160 14.85
---------- --------- ----- ----------- -------- -----
Total Interest-Bearing Liabilities $ 508,474 $ 18,784 4.93% $ 486,771 $ 18,689 5.12%
========== ========= ===== =========== ======== =====
Net interest income $ 15,022 $ 13,170
========= ========
Net interest rate spread 2.93% 2.57%
===== =====
Net interest earning assets $ 65,181 $ 65,879
========== ===========
Net interest margin (4) 3.49% 3.18%
===== =====
Average interest-earning assets to average
interest-bearing liabilities 112.82% 113.53%
========= ========
</TABLE>
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves
(2) Includes held and available-for-sale categories
(3) Includes primarily short-term liquid assets
(4) Net interest income divided by average interest earning assets
(5) Based on average monthly balances
- 19 -
<PAGE>
General -- Net income decreased $900,000 to $2.4 million for the nine
month period ended March 31, 1997 from $3.3 million for the same period
last year. The $963,000 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 a $3.5
million increase in non-interest expense, which includes a $2.3 million
pre-tax SAIF assessment, while increases in net interest income after
provision for loan losses and other non-interest income of $1.7 million and
$206,000 respectively and a decrease in income tax expense of $569,000
partially offset the decreases to net income.
Interest Income -- Interest income increased $1.9 million to $33.8
million for the nine month period ended March 31, 1997 from $31.9 million
for the same period last year. The increase resulted from both an increase
in the average yield on interest-earning assets to 7.86% during the nine
month period ended March 31, 1997 from 7.69% during the same period last
year, and a $21.0 million increase in the average balance of
interest-earning assets to $573.6 million during the nine month period
ended March 31, 1997 from $552.6 million during the same period last year.
Interest earned on loans receivable increased $3.8 million, or 18.1%,
to $24.8 million for the nine month period ended March 31, 1997 from $21.0
million for the same period last year, due primarily to a $55.1 million
increase in the average balance of loans receivable to $395.3 million
during the nine month period ended March 31, 1997 from $340.2 million for
the same period last year. In addition, the average yield on loans
increased to 8.37% during the nine month period ended March 31, 1997 from
8.24% for the same period last year as the Company increased the amount of
higher yielding non-residential loans in its portfolio. 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 as well as the increase in loans acquired in the
Acquisition.
Interest earned on mortgage-backed securities decreased $1.7 million
due primarily to a $33.8 million decrease in the average balance of
mortgage-backed securities outstanding to $104.9 million for the nine month
period ended March 31, 1997 from $138.7 million during the same period last
year. The decrease in the average balance was the result of management's
decision during the fiscal year to use a portion of the proceeds received
upon the maturities of the mortgage-backed securities 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 $187,000 due primarily to a decrease of $300,000
in average balances to $73.4 million during the nine month period ended
March 31, 1997 from $73.7 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.
Interest Expense -- Total interest expense increased $95,000 to $11.8
million for the nine month period ended March 31, 1997 from $18.7 million
for the same period last year. Interest expense on deposits increased
$350,000 due primarily to an increase in the average balance of deposits of
$26.9 million to $376.3 million during the nine month period ended March
31, 1997 from $349.4 million during the same period last year. The average
rate paid on deposits decreased to 4.43% during the nine month period ended
March 31, 1997 from 4.63% during the same period last year primarily as the
result of the decrease in rate paid on NOW accounts. The increase in the
average balance of deposits was the result of the Acquisition. Interest
expense on borrowed funds also decreased $255,000 due primarily to a
decrease in average balances of $5.1 million to $132.2 million during the
nine month period ended March 31, 1997 from $137.3 million for the same
period last year.
- 20 -
<PAGE>
Provisions for Loan Losses -- The provision for loan losses increased
to $103,000 for the nine month period ended March 31, 1997 as compared to
no provision for the same period last year. The Company has increased the
provision for loan losses due to the increase in non-residential loans held
in the loan portfolio.
Non-Interest Income -- Non-interest income increased $206,000 to $2.8
million for the nine month period ended March 31, 1997 from $2.6 million
for the same period last year. Gain on sale of loans, mortgage-backed
securities, and investment securities decreased $140,000 and other
non-interest income decreased $77,000 while fees and service charges
increased $423,000. The $423,000 increase in service fees was primarily the
result of the Acquisition.
Non-Interest Expense -- Non-interest expense increased $3.5 million to
$13.8 million for the nine month period ended March 31, 1997 from $10.3
million for the same period last year. The primary reason for the increase
was a $2.3 million one-time special assessment to recapitalize the SAIF and
the Acquisition.
The deposits of savings associations, such as the 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"). Prior to September 30, 1996, financial
institutions that were members of the BIF were experiencing substantially
lower deposit insurance premiums because the BIF had achieved its required
level of reserves while the SAIF had 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 required 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 fully recapitalized the SAIF fund so that
commercial bank and thrift deposits are 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. The FICO assessment for the SAIF insured
institutions will be 6.48 cents per $100 of deposits while BIF insured
institutions will pay 1.30 cents per $100 of deposits until the year 2000
when the assessment will be imposed at the same rate on all FDIC insured
institutions.
Income Taxes -- Income tax expense decreased $569,000 due primarily to
a reduction in income before income taxes of $1.5 million.
- 21 -
<PAGE>
Loan Quality -- The following table sets forth the amounts and
categories on non-performing assets in the Company's loan portfolio. At
March 31, 1997 the Company had two loans totaling $291,000 subject to
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. At March 31, 1997, both of these loans were performing
satisfactorily. At June 30, 1996, the Company did not have any troubled
debt restructuring. 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)
March 31, June 30,
1997 1996
----------- --------
Non-accruing loans: (In Thousands)
Real Estate:
One-to-four family $ 254 $ 21
Multi-family -- --
Commercial 129 --
Construction -- --
Commercial - non real estate 117 --
Consumer 258 383
--------- --------
Total 758 404
--------- --------
Accruing loans delinquent 90 days or more:
Real Estate:
One-to-four family 651 288
Multi-family -- --
Commercial 199 --
Construction 122 --
Commercial - non real estate -- --
Consumer 226 23
--------- --------
Total 1,198 311
--------- --------
Foreclosed Assets:
Real Estate: -- --
One-to-four family -- --
Multi-family -- --
Commercial -- --
Construction -- --
Consumer 61 --
--------- --------
Total 61 --
--------- --------
Total non-performing assets $ 2,017 $ 715
========= ========
Non-Performing Assets -- Total non-performing assets increased $1.3
million to $2.0 million at March 31, 1997 from $715,000 at fiscal year end
June 30, 1996. The $1.3 million increase in non-performing assets was
primarily the result of a $596,000 increase in non-performing one-to-four
family loans, a $328,000 increase in non-performing commercial real estate
loans, a $117,000 increase in non-performing commercial business loans and
a $78,000 increase in non-performing consumer loans. The primary reason for
the increase in non-performing loans was the inclusion of $613,000 of
non-performing loans at March 31, 1997 as a result of the Acquisition and a
$482,000 increase in non-performing one-to-four family loans not related to
the Acquisition. Total non-performing assets as a percentage of total
assets was 0.22% at March 31, 1997 as compared to 0.13% at June 30, 1996.
In addition to the non-performing loans and foreclosed assets set forth in
the preceding table, as of March 31, 1997, there were $355,184 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
- 22 -
<PAGE>
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 March 31, 1997 the recorded investment in impaired loans was
$758,000, 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 March 31, 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 March 31,
1997.
Approximate
(Dollars in Thousands) Actual Requirement Excess
- ---------------------- ------ ----------- ------
Tangible Capital:
Dollar Amount $ 77,072 $ 13,586 $ 63,486
Percent of tangible assets 8.51% 1.50% 7.01%
Core Capital:
Dollar Amount $ 77,072 $ 29,725 $ 47,347
Percent of adjusted tangible assets 8.51% 3.00% 5.51%
Risk-based Capital:
Dollar Amount $ 81,540 $ 43,597 $ 37,943
Percent of risk-weighted assets 14.96% 8.00% 6.96%
The OTS has adopted, but temporarily postponed implementation until
further notice, a final rule that requires every savings association with
more than normal interest rate risk to deduct from its total capital an
amount equal to 50% of its interest-rate risk exposure multiplied by the
present value of its assets when calculating and determining compliance
with risk-based capital requirements. This exposure is a measure of the
potential decline in the net portfolio value of a savings association,
greater than 2% of the present value of its assets, based upon a
hypothetical 200 basis point increase or decrease in interest rates
(whichever results in a greater decline). Net portfolio value is the
present value of expected cash flows from assets, liabilities and off-
balance sheet contracts. The rule provides for a two quarter lag between
calculating interest rate risk and recognizing any deduction from capital.
The amount to be deducted from capital is the lowest interest rate risk
component reported in an institution's exposure reports to the OTS for the
three most recent quarters. Based upon interest-rate risk exposure
calculations as provided by the OTS for the period ended December 31, 1996,
the most recent date such information is available from the OTS, the
deduction from the Bank's total capital would be $1.5 million under this
rule. Based on the Bank's excess risk-based capital of $37.9 million at
March 31, 1997, not withstanding this $1.5 million deduction from capital,
the Bank would continue to exceed its risk-based capital requirement.
The OTS has amended its regulatory capital regulations to exclude from
regulatory capital the unrealized gains and losses, net of income taxes, as
required by FASB accounting standard SFAS No. 115 , "Accounting for Certain
Investments in Debt and Equity Securities". At March 31, 1997 the Bank had
$158,000 of unrealized losses, net of income taxes, that were added to
capital for purposes of determining regulatory capital.
- 23 -
<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 -- None
ITEM 5 OTHER INFORMATION -- None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
A. The following exhibits are included herein:
Exhibit (3) (ii) Amendment Number Two to the Company's ByLaws.
B. Reports on Form 8-K
1. The registrant filed current reports on Form 8-K on March
3, 1997 to report the completion of the acquisition of
Security Bancorp on February 28, 1997 and the approval of
the acquisition by shareholders on February 25, 1997.
2. The registrant filed current reports on Form 8-K on April
25, 1997 to report the quarterly earnings released and a
dividend declaration of $0.105 per share.
- 24 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
WESTERFED FINANCIAL CORPORATION
Date May 15, 1997 /s/ Lyle R. Grimes
-------------------------- -----------------------------------------
Lyle R. Grimes
Chairman of the Board/President and
Chief Executive Officer
(Duly Authorized Officer)
Date May 15, 1997 /s/ James A. Salisbury
-------------------------- -----------------------------------------
James A. Salisbury
Treasurer and Chief Financial Officer
(Principal Finance and Accounting Officer)
- 25 -
<PAGE>
EXHIBIT 3ii
RESOLUTIONS OF THE BOARD OF DIRECTORS OF
WESTERFED FINANCIAL CORPORATION
RELATING TO AN AMENDMENT TO THE BY-LAWS
WHEREAS, the Board of Directors of WesterFed Financial Corporation (the
"Company") met and discussed its intention that the Company continue to be
highly sensitive to the needs of the communities it serves; and
WHEREAS, the community the company and its subsidiaries currently
serves is primarily Montana (the "primary market area");
WHEREAS, substantially all of the Company's loans are secured by
property located within its primary market area and substantially all of its
deposits are obtained from individuals or entities located in its primary market
area; and
WHEREAS, the Board of Directors has determined that in order to
adequately assess and best serve the needs of the Company's primary market area,
a director must be knowledgeable of and actively involved in the communities the
Company serves; and
WHEREAS, the Board of Directors believes, based upon the foregoing,
that it would be appropriate and in the best interest of the Company and its
shareholders to amend its Bylaws to require that all directors be domiciled in
the Company's primary market area; and
WHEREAS, the Board of Directors has considered the size and diversity
of the population base of its primary market area and believes that, if
necessary or desired, there is a sufficient pool of potentially qualified
individuals located therein who would be available for consideration for
nomination as a director of the Company; and
NOW THEREFORE, BE IT
RESOLVED, that the Board of Directors of the Company hereby approves
the adoption of an amendment to Article II of the By-laws by adding the
following new Section 10, as follows:
Section 10. Qualifications. Any member of the Board of
Directors shall, in order to qualify as such, be domiciled in Montana.
BE IT FURTHER RESOLVED, that the appropriate officers of the Company be
and hereby are authorized and directed to take all action necessary or
appropriate to implement the foregoing resolutions and any actions previously
taken by such officers be and hereby are approved, ratified and confirmed.
<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 MARCH 31, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> MAR-31-1997
<CASH> 14,629
<INT-BEARING-DEPOSITS> 13,559
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 91,546
<INVESTMENTS-CARRYING> 149,456
<INVESTMENTS-MARKET> 149,280
<LOANS> 597,157
<ALLOWANCE> 4,496
<TOTAL-ASSETS> 932,440
<DEPOSITS> 634,404
<SHORT-TERM> 32,657
<LIABILITIES-OTHER> 26,803
<LONG-TERM> 136,212
0
0
<COMMON> 58
<OTHER-SE> 102,306
<TOTAL-LIABILITIES-AND-EQUITY> 932,440
<INTEREST-LOAN> 24,832
<INTEREST-INVEST> 8,826
<INTEREST-OTHER> 148
<INTEREST-TOTAL> 33,806
<INTEREST-DEPOSIT> 12,495
<INTEREST-EXPENSE> 18,784
<INTEREST-INCOME-NET> 15,022
<LOAN-LOSSES> 103
<SECURITIES-GAINS> (18)
<EXPENSE-OTHER> 2,601
<INCOME-PRETAX> 3,889
<INCOME-PRE-EXTRAORDINARY> 2,368
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,368
<EPS-PRIMARY> .52
<EPS-DILUTED> .52
<YIELD-ACTUAL> 0
<LOANS-NON> 758
<LOANS-PAST> 1,198
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 355
<ALLOWANCE-OPEN> 2,005
<CHARGE-OFFS> 100
<RECOVERIES> 8
<ALLOWANCE-CLOSE> 4,496
<ALLOWANCE-DOMESTIC> 4,496
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,044
</TABLE>
