<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 ended December 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 January 31, 1998
-- 5,581,852 shares (including restricted shares)
- 1 -
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
PART I -- FINANCIAL INFORMATION Page
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - December 31, 1997 (Unaudited) and June 30, 1997.....................- 3 -
Consolidated Statements of Income - Three and Six Month Periods Ended December 31, 1997
and December 31, 1996 (Unaudited).............................................................- 4 -
Consolidated Statement of Stockholders' Equity for the Six Month Period Ended
December 31, 1997 (Unaudited).................................................................- 5 -
Consolidated Statements of Cash Flows for the Six Month Period Ended December 31,
1997 and December 31, 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 -
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. Forward Looking Statements................................................................- 11 -
2. Changes in Financial Condition. Comparison of the Six Month Period from
June 30, 1997 to December 31, 1997......................................................- 11 -
3. Comparison of Operating Results for the Three Month Period Ended December 31,
1997 and December 31, 1996..............................................................- 14 -
4. Comparison of Operating Results for the Six Month Period Ended December 31,
1997 and December 31, 1996..............................................................- 18 -
ITEM 3.Quantitative and Qualitative Disclosures about Market Risk....................................- 24 -
PART II -- OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS.............................................................................- 25 -
ITEM 2 CHANGE IN SECURITIES..........................................................................- 25 -
ITEM 3 DEFAULTS UPON SENIOR SECURITIES...............................................................- 25 -
ITEM 4 SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.............................................- 25 -
ITEM 5 OTHER INFORMATION.............................................................................- 25 -
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K..............................................................- 25 -
</TABLE>
SIGNATURES
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<PAGE>
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - December 31, 1997 (Unaudited) and June 30, 1997
<TABLE>
<CAPTION>
(Unaudited)
December 31, June 30,
(Dollars in thousands, except share and per share data) 1997 1997
--------------- ---------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 22,382 $ 16,999
Interest-bearing due from banks 6,297 160
--------------- ---------------
Cash and cash equivalents 28,679 17,159
Interest-bearing deposits 100 2,000
Investment securities available-for-sale 88,332 51,683
Investment securities, at amortized cost (estimated market value of
$18,241 at December 31, 1997 and $27,728 at June 30, 1997) 18,061 27,466
Stock in Federal Home Loan Bank of Seattle, at cost 12,915 11,456
Mortgage-backed securities available-for-sale 31,649 31,388
Mortgage-backed securities, at amortized cost (estimated market
value of $114,375 at December 31, 1997 and $119,193 at June 30, 1996) 111,448 117,781
Loans available-for-sale 8,584 3,700
Loans receivable, net 664,426 626,577
Accrued interest receivable 7,775 6,957
Premises and equipment, net 31,551 29,291
Core deposit intangible 4,914 5,276
Goodwill 15,274 15,562
Cash surrender value of life insurance policies 6,546 6,120
Other assets 4,842 3,223
Total assets ----------------- ---------------
$ 1,035,096 $ 955,639
================= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 644,807 $ 630,869
Repurchase agreements 7,670 7,786
Borrowed funds 254,482 191,450
Advances from borrowers for taxes and insurance 3,569 3,753
Income taxes 3,573 3,504
Accrued interest payable 4,165 3,593
Accrued expenses and other liabilities 9,145 10,425
--------------- ---------------
Total liabilities 927,411 851,380
--------------- ---------------
Stockholders' Equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized;
none outstanding -- --
Common stock, $.01 par value, 10,000,000 shares authorized;
5,577,052 shares outstanding at December 31, 1997 and
5,564,904 outstanding at June 30, 1997 56 56
Additional paid-in capital 68,530 67,941
Common stock acquired by ESOP/RRP (2,650) (2,936)
Treasury stock, at cost (3,461) (3,081)
Net unrealized gain/(loss) on securities available-for-sale 247 (35)
Retained earnings, substantially restricted 44,963 42,314
---------------- ---------------
Total stockholders' equity $ 107,685 $ 104,259
---------------- ---------------
Total liabilities and stockholders' equity $ 1,035,096 $ 955,639
================= ===============
Book value per share $ 19.31 $ 18.74
================= ===============
See accompanying notes to consolidated financial statements.
</TABLE>
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Consolidated Statements of Income - Three and Six Month Periods Ended December
31, 1997 and December 31, 1996 (Unaudited).
<TABLE>
<CAPTION>
(Dollars in thousands, except share and per share data) (Unaudited) (Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
1997 1996 1997 1996
------------ -------------- ------------- ------------
<S> <C> <C> <C> <C>
Interest income:
Loans receivable $ 14,211 $ 7,834 $ 28,018 $ 15,544
Mortgage-backed securities available-for-sale 540 668 1,119 1,396
Mortgage-backed securities 1,950 1,001 3,940 2,038
Investment securities available-for-sale 1,203 757 2,421 1,448
Investment securities 612 61 1,127 214
Interest-bearing deposits 167 261 310 489
Other 81 46 158 92
------------ ------------- ------------ ------------
Total interest income 18,764 10,628 37,093 21,221
------------ ------------- ------------ ------------
Interest expense:
NOW and money market demand 847 367 1,664 749
Savings 671 465 1,361 939
Certificates of deposit 5,468 2,994 10,859 6,003
Advances from FHLB-Seattle and other borrowed funds 3,665 2,079 7,099 4,164
------------ ------------- ------------ ------------
Total interest expense 10,651 5,905 20,983 11,855
------------ ------------- ------------ ------------
Net interest income 8,113 4,723 16,110 9,366
Provision for loan losses 256 27 420 42
------------ ------------- ------------ ------------
Net interest income after provision for loan losses 7,857 4,696 15,690 9,324
------------ ------------- ------------ ------------
Non-interest income:
Loan origination fees 476 98 1,004 223
Service fees 1,161 565 2,286 1,131
Net gain on sale of loans and securities available-for-sale 267 205 489 314
Other 91 35 179 70
------------ ------------- ------------ ------------
Total non-interest income 1,995 903 3,958 1,738
------------ ------------- ------------ ------------
Non-interest expenses:
Compensation and employee benefits 2,978 1,706 6,448 3,593
Net occupancy expense of premises 532 256 1,064 478
Equipment and furnishings expense 381 173 770 364
Data processing expenses 396 168 776 333
Federal insurance premium 90 155 180 366
SAIF special assessment -- -- -- 2,297
Intangibles amortization 331 -- 662 232
Marketing and advertising 106 196 362 2
Other 1,601 797 3,006 1,517
------------ ------------- ------------ ------------
Total non-interest expense 6,415 3,451 13,268 9,182
------------ ------------- ------------ ------------
Income before income taxes 3,437 2,148 6,380 1,880
Income taxes (1,339) (796) (2,473) (707)
------------ ------------- ------------ ------------
Net income(1) $ 2,098 $ 1,352 $ 3,907 $ 1,173
============= ============= ============ ============
Net income per share:
Basic $ 0.40 $ 0.33 $ 0.74 $ 0.29
============= ============= ============ ============
Diluted $ 0.37 $ 0.32 $ 0.70 $ 0.28
============= ============= ============ ============
Dividends per share $ 0.120 $ 0.100 $ 0.235 $ 0.195
============= ============= ============ ============
Dividend payout ratio before SAIF assessment - diluted 32.43% 31.25% 33.57% 31.97%
============= ============= ============ ============
Average common and common equivalent shares outstanding
Basic 5,300,264 4,057,260 5,292,615 4,059,345
============= ============= ============ ============
Diluted 5,621,237 4,265,920 5,610,129 4,244,240
============= ============= ============ ============
(1)December 1996 includes approximately $1,414 special SAIF assessment net of
tax at 38.5%.
</TABLE>
See accompanying notes to consolidated financial statements.
- 4 -
<PAGE>
Consolidated Statement of Stockholders' Equity for the Six Month Period Ended
December 31, 1997 (Unaudited).
(Dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
Net
Unrealized
Gain (Loss) on
Additional Securities
Common Paid-In ESOP/ Treasury Retained Available
Stock Capital RRP Stock Earnings for Sale Total
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<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 -- -- -- -- 3,907 -- 3,907
Change in net unrealized gain
on securities available-for-
sale -- -- -- -- -- 282 282
ESOP Shares committed to be
released -- 145 114 -- -- -- 259
Amortization of award of
RRP stock -- -- 171 -- -- -- 171
Purchase of treasury stock -- -- -- (380) -- -- (380)
Shares forfeited by RRP
participants (75 shares) -- -- 1 -- -- -- 1
Stock options exercised
(29,725 shares) -- 444 -- -- -- -- 444
Cash dividends declared
($0.235 per share) -- -- -- -- (1,258) -- (1,258)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ 56 $ 68,530 $ (2,650) $ (3,461) $ 44,963 $ 247 $ 107,685
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
Consolidated Statements of Cash Flows for the Six Month Period Ended December
31, 1997 and December 31, 1996 (Unaudited)
(Dollars in thousands except share and per share data)
<TABLE>
<CAPTION>
(Unaudited)
Six Months Ended
December 31,
1997 1996
-----------------------------------
Net cash provided by operating activities $ 10,044 $ 11,670
------------- -------------
<S> <C> <C>
Cash flows from investing activities:
Net change in interest-bearing deposits 1,900 2,810
Principal payments on mortgage-backed securities 6,408 3,933
Purchases of mortgage-backed securities available-for-sale (4,998) (983)
Principal payments on mortgage-backed securities available-for-sale 4,817 7,246
Proceeds from sale of mortgage-backed securities available-for-sale -- 3,207
Purchases of investment securities (5,483) --
Proceeds from maturities of investment securities 15,076 7,502
Proceeds from maturities of investment securities available-for-sale 27,995 30,663
Proceeds from sale of investment securities available-for-sale 6,008 --
Purchase of investment securities available-for-sale (70,543) (42,723)
Principal payments on investment securities available-for-sale 227 109
Net change in loans receivable (37,919) (831)
Purchases of premises and equipment (3,172) (1,076)
Purchase of Federal Home Loan Bank stock (990) --
------------- -------------
Net cash provided (used) by investing activities (60,674) 9,857
------------- -------------
Cash flows from financing activities:
Net change in deposits excluding interest credited 801 (13,950)
Net change in repurchase agreements (116) --
Proceeds from borrowings 252,165 10,320
Payments on borrowings (189,162) (5,480)
Net change in advances from borrowers for taxes and insurance (183) (408)
Proceeds from exercise of options 444 --
Payments to acquire treasury stock (380) --
Dividends paid to stockholders (1,419) (900)
------------- -------------
Net cash (used) provided by financing activities 62,150 (10,418)
------------- -------------
Net increase (decrease) in cash and cash equivalents 11,520 11,109
Cash and cash equivalents at beginning of period 17,159 13,299
------------- -------------
Cash and cash equivalents at end of period $ 28,679 $ 24,408
============= =============
Supplemental disclosure of cash flow information:
Payments during the period for:
Interest $ 6,426 $ 4,288
Income taxes, net 2,430 11
============= =============
See accompanying notes to consolidated financial statements.
</TABLE>
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<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 and six month periods ended December 31, 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
In 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. Statement
128 replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants, and convertible securities. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented, and where
necessary restated, to conform to the Statement 128 requirements.
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<PAGE>
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
For the Three Month Period For the Six Month Period
(Dollars in thousands, except share and per share data) Ended December 31, Ended December 31,
-------------------------- ------------------------
1997 1996 1997 1996
-------------------------- ------------------------
<S> <C> <C> <C> <C>
Numeration:
Net income - numeration for basis earnings per share and
diluted earnings per share - income available to common
stockholder................................................... $ 2,098 $ 1,352 $ 3,907 $ 1,173
Denominations:
Denomination for basic earnings per share -
weighted-average share........................................ 5,300,264 4,057,260 5,292,615 4,059,345
Effect of dilutive securities:
Employee stock options........................................ 294,589 169,490 291,978 151,216
RRP shares not vested......................................... 26,384 39,170 25,536 33,679
---------- ---------- ---------- ----------
Denomination for diluted earnings per share - adjusted
weighted-average shares and assumed conversions............... 5,621,237 4,265,920 5,610,129 4,244,240
========== ========== ========== ==========
Basic earnings per share.......................................... $ 0.40 $ 0.33 $ 0.74 $ 0.29
Diluted earnings per share........................................ $ 0.37 $ 0.32 $ 0.70 $ 0.28
</TABLE>
4. DIVIDENDS DECLARED
On January 21, 1998 the Board of Directors of the Company declared a
quarterly cash dividend of $0.12 per share, payable on February 20, 1998 to
stockholders of record on February 6, 1998.
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 paid $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 Savings Bank of Montana (the
"Bank") 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)
December 31, 1997 June 30, 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 $ 8,482 $ 51 $(15) $ 8,518 $ 18,804 $ 184 $ -- $ 18,988
U.S. Government obligations 299 -- (1) 298 297 1 -- 298
Corporate obligations 6,967 138 (4) 7,101 5,980 66 -- 6,046
Other investments 2,313 16 (5) 2,324 2,385 13 (2) 2,396
----------------------------------------------- ------------------------------------------------
Total investment securities 18,061 205 (25) 18,241 27,466 264 (2) 27,728
Mortgage-backed securities 111,448 2,961 (34) 114,375 117,781 1,698 (286) 119,193
----------------------------------------------- ------------------------------------------------
$129,509 $ 3,166 $ (59) $ 132,616 $ 145,247 $ 1,962 $ (288) $ 146,921
=============================================== ================================================
AVAILABLE-FOR-SALE
(Dollars in Thousands)
(Unaudited)
December 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
----------------------------------------------- ------------------------------------------------
Federal Agency obligations $ 79,357 $ 233 $ (65) $ 79,525 $ 46,067 $ 113 $ (211) $ 45,969
Corporate obligations 8,699 69 -- 8,768 5,622 54 (1) 5,675
Other investments 3 36 -- 39 3 36 -- 39
----------------------------------------------- ------------------------------------------------
Total investment securities 88,059 338 (65) 88,332 51,692 203 (212) 51,683
Mortgage-backed securities 31,523 311 (185) 31,649 31,434 220 (266) 31,388
----------------------------------------------- ------------------------------------------------
$ 119,582 $ 649 $ (250) $ 119,981 $ 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 DECEMBER 31, 1997 IS AS FOLLOWS:
HELD-TO-MATURITY
(Dollars in Thousands)
(Unaudited)
December 31, 1997
Amortized Estimated
Cost Fair Value
--------------------------------
Due in one year or less $ 299 $ 298
Due after one year through 5 years 15,520 15,693
Due after 5 years through 10 years 236 234
Due after 10 years 2,006 2,016
Other -- --
----------- -----------
18,061 18,241
=========== ===========
AVAILABLE-FOR-SALE
(Dollars in Thousands)
(Unaudited)
December 31, 1997
Amortized Estimated
Cost Fair Value
---------------------------------
Due in one year or less $ 11,708 $ 11,729
Due after one year through 5 years 75,010 75,202
Other 3 36
SBA loans contractually due after 5 years 1,338 1,365
-- --
------------- --------------
$ 88,059 $ 88,332
============= ==============
Expected maturities of mortgage-backed securities will differ from contractual
maturities because borrowers may have the right to prepay obligations with or
without penalties.
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<PAGE>
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
1. FORWARD LOOKING STATEMENTS
When used in this Form 10-Q or future filings made by the Company with
the Securities and Exchange Commission, in the Company's press releases or
other public shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "will
likely result," "are expected to," "will continue," "is anticipated,"
"estimate," "project" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company wishes to caution readers not to
place undue reliance on any forward-looking statements, which speak only as
of the date made, and to advise readers that various factors - including
regional and national economic conditions, changes in levels of market
interest rates, credit risks of lending activities and competitive and
regulatory factors - could affect the Bank's financial performance and could
cause the Bank's actual results for future periods to differ materially from
those anticipated or projected.
The Company does not undertake, and specifically disclaims, any
obligation to publicly release the result of any revisions which may be made
to any forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
2. CHANGES IN FINANCIAL CONDITION. COMPARISON OF THE SIX MONTH PERIOD FROM JUNE
30, 1997 TO DECEMBER 31, 1997.
General -- Total assets increased $79.5 million to $1.0 billion at
December 31, 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 $42.7 million and an increase in investment securities,
Federal Home Loan Bank of Seattle (FHLB) stock and all other interest earning
assets of $33.4 million.
Loans Receivable and Loans Available-for-Sale -- Loans receivable and
loans available-for-sale increased $42.7 million to $673.0 million at
December 31, 1997 from $630.3 million at June 30, 1997. Loans secured by real
estate increased by $10.9 million and non-real estate commercial business
loans, agricultural loans and consumer loans increased $32.5 million. The
increase in loans receivable was primarily the result of loan originations of
$201.1 million, partially offset by principal repayments of $120.6 million
and the sale of loans available-for-sale of $38.8 million.
Mortgage-Backed Securities -- Mortgage-backed securities decreased $6.1
million to $143.1 million at December 31, 1997 from $149.2 million at June
30, 1997 and the proceeds were generally used to fund the growth in loans
receivable.
Investment Securities, FHLB Stock and Other Interest Earning Assets --
Investment securities, FHLB stock and other interest earning assets increased
$33.4 million to $132.3 million at December 31, 1997 from $98.9 million at
June 30, 1997. The $33.4 million increase was primarily the result of
increases in interest-bearing due from banks and interest-bearing deposits of
$4.2 million and the balance of investment securities of $27.2 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. Preliminary
market valuations of fixed assets acquired in the Acquisition indicates that
goodwill will increase approximately $1.4 million during the quarter ending
March 31, 1998.
- 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 December 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
December 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. 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 December 31, 1997, the amount of the unamortized
premiums paid related to the interest rate cap transactions was $190,000.
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 December 31,
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 December 31, 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
- 12 -
<PAGE>
U.S. Government or agency thereof, mortgage-backed securities, or
qualifying first mortgage loans not otherwise pledged.
Deposits -- Deposits increased $13.9 million to $644.8 million at
December 31, 1997 from $630.9 million at June 30, 1997. Checking and money
market accounts increased $11.7 million and passbook accounts and
certificates of deposit increased $2.2 million.
Borrowed Funds and Repurchase Agreements -- Borrowed funds and
repurchase agreements increased $63.0 million to $262.2 million at December
31, 1997 from $199.2 million at June 30, 1997. There were new borrowings of
$153.2 million with maturities of less than one year and $99.0 million of
advances maturing in one or more years. The increase in borrowings were
reduced by principal repayments and maturities of $189.2 million.
Stockholders' Equity -- Stockholders' equity increased $3.4 million to
$107.7 million at December 31, 1997 from $104.3 million at June 30, 1997.
This increase was due to net income for the six month period of $3.9 million,
$430,000 related to contributions to the Employee Stock Ownership Plan and
shares earned and issued under the Recognition and Retention Plan, $282,000
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
29,725 new common shares with a recorded value of $444,000 related to
exercised stock options. Stockholders' equity was reduced $1.3 million for
dividends declared during the six month period and the purchase of $380,000
of treasury stock.
- 13 -
<PAGE>
3. COMPARISON OF OPERATING RESULTS FOR THE THREE MONTH PERIOD ENDED December 31,
1997 AND DECEMBER 31, 1996
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
December 31,
(Unaudited)
1997 1996
Amount Change Amount
------------- -------------- ------------
(In Thousands)
<S> <C> <C> <C>
Total interest income $ 18,764 $ 8,136 $ 10,628
Total interest expense 10,651 4,746 5,905
------------- -------------- ------------
Net interest income 8,113 3,390 4,723
Provision for loan losses 256 229 27
------------- -------------- ------------
Net interest income after provision for loan losses 7,857 3,161 4,696
------------- -------------- ------------
Fees and service charges 1,637 974 663
Gain on sale of loans, mortgage-backed securities and
investment securities 267 62 205
Other non-interest income 91 56 35
------------- -------------- ------------
Total non-interest income 1,995 1,092 903
------------- -------------- ------------
Income before non-interest expense 9,852 4,253 5,599
Total non-interest expense 6,415 2,964 3,451
------------- -------------- ------------
Income before income taxes 3,437 1,289 2,148
Income taxes (1,339) (543) (796)
------------- -------------- ------------
Net income $ 2,098 $ 746 $ 1,352
============= ============== ============
</TABLE>
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.
- 14 -
<PAGE>
<TABLE>
<CAPTION>
Three Month Period Ended
(Unaudited)
December 31, 1997 December 31, 1996
--------------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Average Interest Average Interest
Outstanding Earned Yield/ Outstanding Earned/ Yield/
Balance (5) Paid Rate Balance(5) Paid Rate
-------------------------------------- ------------------------------------------
INTEREST EARNING ASSETS:
Loans receivable (1) (2) $ 666,589 $ 14,211 8.53% $ 370,753 $ 7,834 8.45%
Mortgage-backed securities (2) 144,993 2,490 6.87 95,124 1,669 7.02
Investments (2) 107,738 1,815 6.74 51,815 818 6.31
Other interest-earning assets (3) 6,131 167 10.90 18,861 261 5.54
Cash surrender value of life insurance 6,522 81 4.97 3,245 46 5.67
---------- ------------ ------ ----------- ----------- -----
Total Interest-Earning Assets 931,973 18,764 8.05 539,798 10,628 7.88
========== ============ ====== =========== =========== =====
INTEREST-BEARING LIABILITIES:
Certificates of deposits 378,825 5,468 5.77 208,193 2,994 5.75
Passbook deposits 97,108 671 2.76 62,949 465 2.96
Demand and NOW accounts 108,517 322 1.19 47,681 166 1.39
Money market accounts 52,213 525 4.02 23,389 201 3.44
---------- ------------ ------ ----------- ----------- -----
Total deposits 636,663 6,986 4.39 342,212 3,826 4.47
FHLB advances and notes payable 244,608 3,634 5.94 128,760 2,038 6.33
Collateralized mortgage obligations 669 31 18.54 1,004 41 16.33
---------- ------------ ------ ----------- ----------- -----
Total Interest-Bearing Liabilities $ 881,940 $ 10,651 4.83% $ 471,976 $ 5,905 5.00%
========== ============ ====== =========== =========== ======
Net interest income $ 8,113 $ 4,723
============ ===========
Net interest rate spread 3.22% 2.88%
====== ======
Net interest earning assets $ 50,033 $ 67,822
========== ===========
Net interest margin (4) 3.48% 3.50%
====== ======
Average interest-earning assets to average
interest-bearing liabilities 105.67% 114.37%
=========== ===========
(1)Calculated net of deferred loan fees, loan discounts, loans in process andloss 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
</TABLE>
- 15 -
<PAGE>
General -- Net income increased $746,000 to $2.1 million for the three
month period ended December 31, 1997 from $1.4 million 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 $3.0 million and $543,000 respectively. The net
interest margin (net interest income divided by average interest-earning assets)
decreased to 3.48% during the quarter ended December 31, 1997 from 3.50% during
the same period last year. The interest rate spread at December 31, 1997 was
3.22% as compared to 2.88% at December 31, 1996. The increase in net income is
primarily the result of the increased earnings as a result of the Acquisition of
Security Bancorp in February, 1997.
Interest Income -- Interest income increased $8.2 million to $18.8
million for the three month period ended December 31, 1997 from $10.6 million
for the same period last year. The increase was primarily the result of a $392.2
million increase in average total interest-earning assets to $932.0 million
during the three month period ended December 31, 1997 from $539.8 million during
the same period last year. In addition, the average yield on interest-earning
assets increased to 8.05% during the quarter ended December 31, 1997 from 7.88%
during the same period last year due primarily to the Acquisition.
Interest earned on loans receivable increased $6.4 million due
primarily to a $295.8 million increase in the average balance of loans
receivable to $666.6 million during the three month period ended December 31,
1997 from $370.8 million for the same period last year. In addition, the average
yield on loans increased to 8.53% during the three month period ended December
31, 1997 from 8.45% 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 $821,000 due
primarily to a $49.9 million increase in the average balance of mortgage-backed
securities outstanding to $145.0 million for the three month period ended
December 31, 1997 from $95.1 million during the same period last year. The
increase was primarily the result of the mortgage-backed securities acquired in
the Acquisition.
Interest earned on investment securities, FHLB stock and other interest
earning assets increased $938,000 primarily due to an increase in the average
balance of these securities of $46.5 million to $120.4 million during the
quarter ended December 31, 1997 from $73.9 million during the same period last
year. The average yield increased to 6.85% during the quarter ended December 31,
1997 from 6.09% for the same period last year. The increase in average balance
is the result of both the investment securities acquired in the Acquisition and
the purchase of additional investment securities for the purpose of increasing
interest income. The increase in the average yield earned on other interest
earning assets during the quarter ended December 31, 1997 was due primarily to
increased earnings from discounts amortized to income on investments called
during the quarter.
Interest Expense -- Total interest expense increased $4.8 million to
$10.7 million for the three month period ended December 31, 1997 from $5.9
million for the same period last year. Interest expense on deposits increased
$3.2 million due to an increase in the average balance of deposits of $294.5
million to $636.7 million during the three month period ended December 31, 1997
from $342.2 million during the same period last year. The increase in the
average balance of deposits was primarily the result of deposits acquired in the
Acquisition. The average rate paid on deposits decreased to 4.39% during the
quarter ended December 31, 1997 from 4.47% 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 $1.6 million due
primarily to an increase in the average balance of borrowed funds of $115.5
million to $245.3 million during the three month period ended December 31, 1997
from $129.8 million for the same period last year. The increase was primarily
the result of the Acquisition and increased borrowings to fund the growth in the
loan and investment securities portfolios.
- 16 -
<PAGE>
Provisions for Loan Losses -- The provision for loan losses increased
$229,000 to $256,000 for the three month period ended December 31, 1997 as
compared to a $27,000 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 December 31, 1997 the Company had $3.6
million of non-performing assets (representing 0.35% of total assets) compared
to $2.4 at June 30, 1997 (representing 0.25% of total assets). At December 31,
1997 the Company had an allowance for loan losses to non-performing assets of
136.97% 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 December 31, 1997 from $903,000 for the same
quarter last year. Fees and service charges increased $974,000 and net gain on
sale of loans and securities available-for-sale increased $62,000. The increase
in fees and service charges were due primarily to the increase in fees
associated with checking accounts which increased as a result of the Acquisition
and an increase in loan origination fees as a result of increased loan
originations.
Non-Interest Expense -- Non-interest expense increased $2.9 million to
$6.4 million for the quarter ended December 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 December 31, 1997,
which was not included in the same quarter last year, was $331,000 related to
the amortization of intangibles resulting from the Acquisition. This was
comprised of $150,000 for the amortization of goodwill and $181,000 for the
amortization of the core deposit intangible. Additionally, two new branch
facilities were opened in the Billings market area since May, 1997 which have
increased 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 $150,000 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. Changing
from a real-time savings and loan data processing environment to a batch
processing commercial bank data processing environment will also significantly
increase on-going data processing costs. Management believes that the conversion
to the new data processing system will address the most significant Year 2000
compliance issues and the costs currently being incurred during this fiscal year
related to the data center conversion comprise a substantial portion of the
costs to be incurred related to Year 2000 compliance issues.
Income Taxes -- Income tax expense increased $543,000 due to the $1.3
million increase in income before income taxes.
- 17 -
<PAGE>
4. COMPARISON OF OPERATING RESULTS FOR THE SIX MONTH PERIOD ENDED DECEMBER 31,
1997 AND DECEMBER 31, 1996.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
December 31,
(Unaudited)
1997 1996
Amount Change Amount
------------- ------------- ------------
(In Thousands)
<S> <C> <C> <C>
Total interest income $ 37,093 $ 15,872 $ 21,221
Total interest expense 20,983 9,128 11,855
------------- ------------- ------------
Net interest income 16,110 6,744 9,366
Provision for loan losses 420 378 42
------------- ------------- ------------
Net interest income after provision for loan losses 15,690 6,366 9,324
------------- ------------- ------------
Fees and service charges 3,290 1,936 1,354
Gain on sale of loans, mortgage-backed securities and
investment securities 489 175 314
Other non-interest income 179 109 70
------------- ------------- ------------
Total non-interest income 3,958 2,220 1,738
------------- ------------- ------------
Income before non-interest expense 19,648 8,586 11,062
Total non-interest expense 13,268 4,086 9,182
------------- ------------- ------------
Income before income taxes 6,380 4,500 1,880
Income taxes (2,473) (1,766) (707)
------------- ------------- ------------
Net income $ 3,907 $ 2,734 $ 1,173
============= ============= ============
</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>
Six Month Period Ended
(Unaudited)
December 31, 1997 December 31, 1996
--------------------------------------- --------------------------------------
Average Interest Average Yield/
Outstanding Earned/ Yield/ Outstanding Earned/ Rate
Balance Paid Rate Balance-(5) Paid
--------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans receivable (1) (2) $ 657,501 $ 28,018 8.52% $ 370,847 $ 15,544 8.38%
Mortgage-backed securities (2) 148,060 5,059 6.83 98,651 3,435 6.96
Investments (2) 103,762 3,548 6.84 53,155 1,661 6.25
Other interest-earning assets (3) 7,504 310 8.26 14,722 489 6.64
Cash surrender value of life insurance 6,439 158 4.91 3,227 92 5.70
---------- ------------ ------ ----------- ----------- -----
Total Interest-Earning Assets 923,266 37,093 8.04 540,602 21,221 7.85
========== ============ ====== =========== =========== =====
INTEREST-BEARING LIABILITIES:
Certificates of deposits 377,265 10,859 5.76 208,967 6,003 5.74
Passbook deposits 98,921 1,361 2.75 63,332 939 2.97
Demand and NOW accounts 105,947 640 1.21 48,292 343 1.42
Money market accounts 51,069 1,024 4.01 23,583 406 3.44
---------- ------------ ------ ----------- ----------- -----
Total deposits 633,202 13,884 4.39 344,174 7,691 4.47
FHLB advances and notes payable 238,325 7,035 5.90 128,592 4,077 6.34
Collateralized mortgage obligations 713 64 17.95 1,051 87 16.56
---------- ------------ ------ ----------- ----------- -----
Total Interest-Bearing Liabilities $ 872,240 $ 20,983 4.81% $ 473,817 $ 11,855 5.00%
========== ============ ====== =========== =========== =====
Net interest income $ 16,110 $ 9,366
============ ===========
Net interest rate spread 3.23% 2.85%
====== =====
Net interest earning assets $ 51,026 $ 66,785
========== ===========
Net interest margin (4) 3.49% 3.47%
====== =====
Average interest-earning assets to average
interest-bearing liabilities 105.85% 114.10%
============ ==========
</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 averageinterest earning assets
(5) Based on average monthly balances
- 19 -
<PAGE>
General -- Net income increased $2.7 million to $3.9 million for the
six month period ended December 31, 1997 from $1.2 million for the same period
last year. Net interest income after provision for loan losses increased $6.4
million and non-interest income increased $2.2 million while non-interest
expense and income tax expense increased $4.1 million and $1.8 million
respectively. The net interest margin increased to 3.49% during the six months
ended December 31, 1997 from 3.47% during the same period last year. The
interest rate spread at December 31, 1997 was 3.23% as compared to 2.85% at
December 31, 1996. The increase in net income is primarily the result of a
combination of the increased earnings as a result of the Acquisitionof 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, 1996 quarter.
Interest Income -- Interest income increased $15.9 million to $37.1
million for the six month period ended December 31, 1997 from $21.2 million for
the same period last year. The increase was primarily the result of a $382.7
million increase in average total interest-earning assets to $923.3 million
during the six month period ended December 31, 1997 from $540.6 million during
the same period last year. In addition, the average yield on interest-earning
assets increased to 8.04% during the six months ended December 31, 1997 from
7.85% during the same period last year due primarily to the Acquisition.
Interest earned on loans receivable increased $12.5 million due
primarily to a $286.7 million increase in the average balance of loans
receivable to $657.5 million during the six month period ended December 31, 1997
from $370.8 million for the same period last year. In addition, the average
yield on loans increased to 8.52% during the six month period ended December 31,
1997 from 8.38% 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 $1.7 million
due primarily to a $49.4 million increase in the average balance of
mortgage-backed securities outstanding to $148.1 million for the six month
period ended December 31, 1997 from $98.7 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 $1.8 million primarily due to an increase in the
average balance of these securities of $46.6 million to $117.7 million during
the quarter ended December 31, 1997 from $71.1 million during the same period
last year. The average yield increased to 6.83% during the six months ended
December 31, 1997 from 6.31% 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 $9.1 million to
$21.0 million for the six month period ended December 31, 1997 from $11.9
million for the same period last year. Interest expense on deposits increased
$6.2 million due to an increase in the average balance of deposits of $289.0
million to $633.2 million during the six month period ended December 31, 1997
from $344.2 million during the same period last year. The increase in the
average balance of deposits was primarily the result of the Acquisition. The
average rate paid on deposits decreased to 4.39% during the six month period
ended December 31, 1997 from 4.47% 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 $2.9 million due
primarily to an increase in the average balance of borrowed funds of $109.4
million to $239.0 million during the six month period ended December 31, 1997
from $129.6 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.
- 20 -
<PAGE>
Provisions for Loan Losses -- The provision for loan losses increased
$378,000 to $420,000 for the six month period ended December 31, 1997 as
compared to a $42,000 provision for the same period last year.
Non-Interest Income -- Non-interest income increased $2.2 million to
$4.0 million for the six months ended December 31, 1997 from $1.8 million for
the same period last year. Fees and service charges increased $1.9 million and
net gain on sale of loans and securities available-for-sale increased $175,000.
The increase in fees and service charges were due primarily to the increase in
fees associated with checking accounts which increased as a result of the
Acquisition and an increase in loan origination fees as a result of increased
loan originations and increased sales of loans to the secondary market.
Non-Interest Expense -- Non-interest expense increased $4.1 million to
$13.3 million for the six months ended December 31, 1997 from $9.2 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 December 31, 1997,
which was not included in the same quarter last year, was $662,000 related to
the amortization of intangibles resulting from the Acquisition. This was
comprised of $300,000 for the amortization of goodwill and $362,000 for the
amortization of the core deposit intangible. The six months just ended included
approximately $240,000 in professional fees and other expenses related to the
consolidation of data processing systems.
Income Taxes -- Income tax expense increased $1.8 million due to the
$4.5 million increase in income before income taxes.
- 21 -
<PAGE>
Loan Quality -- The following table sets forth the amounts and
categories of non-performing assets in the Company's loan portfolio. At December
31, 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.
(Unaudited)
December 31, June 30,
1997 1997
------------- -------------
Non-accruing loans: (In Thousands)
Real Estate:
One-to-four family $ 1,110 $ 842
Multi-family -- --
Commercial -- --
Construction 60 --
Commercial - non real estate 179 102
Consumer 1,654 573
------------ -------------
Total 3,003 1,517
------------ -------------
Accruing loans delinquent 90 days or more:
Real Estate:
One-to-four family -- 231
Multi-family -- --
Commercial -- --
Construction -- --
Commercial - non real estate -- --
Consumer 576 605
------------ -------------
Total 576 836
------------ -------------
Foreclosed Assets:
Real Estate: -- --
One-to-four family -- --
Multi-family -- --
Commercial -- --
Construction -- --
Consumer 29 82
------------ -------------
Total 29 82
------------ -------------
Total non-performing assets $ 3,608 $ 2,435
============ =============
Non-Performing Assets -- Total non-performing assets increased $1.2
million to $3.6 million at December 31, 1997 from $2.4 million at June 30, 1997.
The $1.2 million increase in non-performing assets was primarily the result of a
$1.0 million increase in non-performing consumer loans. Total non-performing
assets as a percentage of total assets was 0.35% at December 31, 1997 as
compared to 0.41% at September 30, 1997 and 0.25% at June 30, 1997. In addition
to the non-performing loans and foreclosed assets set forth in the preceding
table, as of December 31, 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. The 0.35% total
non-performing assets as a percentage of total assets is substantially less than
the Bank's per group average of 0.81% at September 30, 1997 which is the latest
available information as reported by the Office of Thrift Supervision.
- 22 -
<PAGE>
At December 31, 1997 the recorded investment in impaired loans was $3.0
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.
The following table sets forth an analysis of the Bank's allowance for
loan losses.
<TABLE>
<CAPTION>
For the Three Month For the Six Month
Period Ended Period Ended
December 31, December 31,
--------------------- -------------------
1997 1996 1997 1996
--------------------- -------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period............................ $4,743 $2,001 $4,651 $2,005
--------- --------- ------- -------
Charge-Offs:
Real Estate:
One- to four-family.................................. -- -- -- --
Commercial .......................................... -- -- -- --
Other:
Commercial........................................... --
Consumer............................................. (72) (28) (153) (48)
--------- --------- ------- -------
Total charge-offs......................................... (72) (28) (153) (48)
--------- --------- ------- --------
Recoveries:
Other:
Commercial........................................... 3 -- 3 --
Consumer............................................. 12 1 21 2
-------- --------- --------- ---------
Total recoveries.......................................... 15 1 24 2
-------- --------- --------- ---------
Net charge-offs........................................... (57) (27) (129) (46)
Provisions charged to operations.......................... 256 27 420 42
Reserves acquired......................................... -- -- -- --
------- -------- -------- --------
Balance at end of period.................................. $4,942 $2,001 $4,942 $2,001
======== ======== ======== ========
Ratio of net charge-offs during the period to average loans
outstanding during the period........................ 0.01% 0.01% 0.02% 0.01%
======== ======== ======== ========
Ratio of net charge-offs during the period to average non-
performing assets during the period ................. 1.49% 1.99% 4.27% 4.29%
======= ======= ======= =======
</TABLE>
Regulatory Capital -- At December 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 December 31, 1997.
<TABLE>
<CAPTION>
Approximate
(Dollars in Thousands) Actual Requirement Excess
-------------- -------------- -------------
<S> <C> <C> <C>
Tangible Capital:
Dollar Amount $ 78,017 $ 15,088 $ 62,929
Percent of tangible assets 7.75% 1.50% 6.25%
Core Capital:
Dollar Amount $ 78,017 $ 30,176 $ 47,841
Percent of adjusted tangible assets 7.75% 3.00% 4.75%
Risk-based Capital:
Dollar Amount $ 82,894 $ 50,389 $ 32,505
Percent of risk-weighted assets 13.16% 8.00% 5.16%
</TABLE>
- 23 -
<PAGE>
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 six most recent
quarters. Based upon interest-rate risk exposure calculations as provided by the
OTS for the period ended September 30, 1997, the most recent date such
information is available from the OTS, the deduction from the Bank's total
capital would be $1.8 million under this rule. Based on the Bank's excess
risk-based capital of $33.3 million at December 31, 1997, not withstanding this
$1.8 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 December 31, 1997 the Bank had
$243,000 of unrealized gains, net of income taxes, that were deducted from
capital for purposes of determining regulatory capital.
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.
- 24 -
<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. Form 8-K
The registrant filed reports on Form 8-K on January 30, 1998 to report
the quarterly earnings release and a dividend declaration of $0.12 per
share. The registrant also reported the name change of its wholly
owned subsidiary, effective February 2, 1998, to be "Western Security
Bank."
- 25 -
<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 /s/ Lyle R. Grimes
- ----------------------------- --------------------------------------
Lyle R. Grimes
Chairman of the Board/President and
Chief Executive Officer
(Duly Authorized Officer)
Date /s/ James A. Salisbury
- ----------------------------- ---------------------------------------
James A. Salisbury
Treasurer and Chief Financial Officer
(Principal Finance and Accounting Officer)
- 26 -
<TABLE> <S> <C>
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<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-Q FOR THE FISCAL QUARTER ENDED DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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