UNITED STATES SECURITY AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarter period ended September 30, 1998
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, 406-543-1338
including area code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subjected to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of each of the Issuer's Classes
of Common Stock, as of the latest date is:
Class: Common Stock, Par Value $0.01 per share; Outstanding at October 31, 1998
-- 5,594,362 shares (including restricted shares)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I -- FINANCIAL INFORMATION Page
- ------------------------------- ----
ITEM 1. FINANCIAL STATEMENTS
<S> <C>
Consolidated Balance Sheets - September 30, 1998 (Unaudited) and June 30, 1998............................................- 3 -
Consolidated Statements of Income - Three Month Period Ended September 30, 1998 and
September 30, 1997 (Unaudited)........................................................................................- 4 -
Consolidated Statements of Comprehensive Income - Three Month Period Ended
September 30, 1998 and September 30, 1997 (Unaudited).................................................................- 5 -
Consolidated Statement of Stockholders' Equity for the Three Month Period Ended
September 30, 1998 (Unaudited)........................................................................................- 6 -
Consolidated Statements of Cash Flows for the Three Month Period Ended September 30,
1998 and September 30, 1997 (Unaudited) .............................................................................- 7 -
Notes to Consolidated Financial Statements
1. Basis of Presentation............................................................................................- 8 -
2. Cash Equivalents.................................................................................................- 8 -
3. Computation of Net Income per Share..............................................................................- 8 -
4. Dividends Declared...............................................................................................- 9 -
5. 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 Three Month Period from
June 30, 1998 to September 30, 1998.........................................................................- 11 -
3. Comparison of Operating Results for the Three Month Period Ended September 30,
1998 and September 30, 1997................................................................................- 14 -
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk......................................................- 20 -
PART II -- OTHER INFORMATION
- ----------------------------
ITEM 1 LEGAL PROCEEDINGS...........................................................................................- 23 -
ITEM 2 CHANGE IN SECURITIES........................................................................................- 23 -
ITEM 3 DEFAULTS UPON SENIOR SECURITIES.............................................................................- 23 -
ITEM 4 SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS...........................................................- 23 -
ITEM 5 OTHER INFORMATION...........................................................................................- 23 -
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K............................................................................- 23 -
SIGNATURES
</TABLE>
- 2 -
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - September 30, 1998 (Unaudited) and June 30, 1998
<TABLE>
<CAPTION>
(Unaudited)
September 30, June 30,
1998 1998
---- ----
(Dollars in thousands, except share and per share data)
<S> <C> <C>
ASSETS
------
Cash and due from banks $ 18,504 $ 19,440
Interest-bearing due from banks 10,174 9,628
----------- -----------
Cash and cash equivalents 28,678 29,068
Interest-bearing deposits -- 100
Investment securities available-for-sale 102,957 108,511
Investment securities, at amortized cost
(estimated market value of $12,439 at
September 30, 1998 and $16,974 at June 30, 1998) 12,254 16,847
Stock in Federal Home Loan Bank of Seattle, at cost 13,817 13,560
Mortgage-backed securities available-for-sale 21,612 24,135
Mortgage-backed securities, at amortized cost
(estimated market value of $100,486 at
September 30, 1998 and $104,962 at June 30, 1998) 97,161 102,298
Loans available-for-sale 6,250 6,922
Loans receivable, net 646,327 650,371
Accrued interest receivable 8,849 7,778
Premises and equipment, net 29,809 30,089
Core deposit intangible 4,312 4,518
Goodwill 15,596 15,762
Cash surrender value of life insurance policies 6,776 6,705
Other assets 5,197 5,472
----------- -----------
Total assets $ 999,595 $ 1,022,136
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Deposits $ 636,599 $ 636,441
Repurchase agreements 7,210 6,233
Borrowed funds 219,779 248,953
Advances from borrowers for taxes and insurance 7,260 4,052
Income taxes 3,620 2,289
Accrued interest payable 4,936 4,480
Accrued expenses and other liabilities 8,745 9,988
----------- -----------
Total liabilities 888,149 912,436
----------- -----------
Stockholders' Equity:
Preferred stock, $.01 par value, 5,000,000
shares authorized; none outstanding -- --
Common stock, $.01 par value, 10,000,000
shares authorized; 5,588,862 shares
outstanding at September 30, 1998 and
5,585,303 outstanding at June 30, 1998 56 56
Additional paid-in capital 69,052 68,923
Common stock acquired by ESOP/RRP (2,391) (2,520)
Treasury stock, at cost (3,461) (3,461)
Net unrealized gain on securities
available-for-sale 484 23
Retained earnings, substantially restricted 47,706 46,679
----------- -----------
Total stockholders' equity 111,446 109,700
----------- -----------
Total liabilities and stockholders' equity 999,595 1,022,136
=========== ===========
Book value per share $ 19.94 $ 19.64
=========== ===========
Tangible book value per share $ 16.38 $ 16.01
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
- 3 -
<PAGE>
Consolidated Statements of Income - Three Month Period Ended September 30, 1998
and September 30, 1997 (Unaudited).
(Unaudited)
Three Months Ended
September 30,
------------------------
1998 1997
---- ----
(Dollars in thousands, except share and per share data)
Interest income:
Loans receivable ................................. $ 14,066 $ 13,807
Mortgage-backed securities available-for-sale .... 355 579
Mortgage-backed securities ....................... 1,706 1,990
Investment securities available-for-sale ......... 1,869 1,218
Investment securities ............................ 257 515
Interest-bearing deposits ....................... 87 143
Other ............................................ 80 77
---------- ----------
Total interest income ........................ 18,420 18,329
---------- ----------
Interest expense:
NOW and money market demand ...................... 881 817
Savings .......................................... 621 690
Certificates of deposit .......................... 5,425 5,391
Advances from FHLB-Seattle and other
borrowed funds ................................. 3,638 3,434
---------- ----------
Total interest expense ....................... 10,565 10,332
---------- ----------
Net interest income .......................... 7,855 7,997
Provision for loan losses .......................... 240 164
---------- ----------
Net interest income after provision
for loan losses ............................. 7,615 7,833
---------- ----------
Non-interest income:
Loan origination fees on loans sold .............. 687 529
Service fees ..................................... 1,212 1,125
Net gain on sale of loans and securities
available-for-sale .............................. 256 221
Other ............................................ 172 88
---------- ----------
Total non-interest income .................... 2,327 1,963
---------- ----------
Non-interest expenses:
Compensation and employee benefits ............... 3,357 3,469
Net occupancy expense of premises ................ 516 532
Equipment and furnishings expense ................ 553 389
Data processing expenses ......................... 413 380
Federal insurance premium ........................ 88 90
Intangibles amortization ......................... 373 331
Marketing and advertising ........................ 154 257
Other ............................................ 1,515 1,405
---------- ----------
Total non-interest expense ................... 6,969 6,853
---------- ----------
Income before income taxes ................... 2,973 2,943
Income taxes ....................................... 1,219 1,134
---------- ----------
Net income ....................................... $ 1,754 $ 1,809
========== ==========
Net income per share:
Basic ........................................... $ 0.33 $ 0.34
========== ==========
Diluted ......................................... $ 0.31 $ 0.32
========== ==========
Dividends per share ................................ $ 0.135 $ 0.115
========== ==========
Dividend payout ratio - diluted .................... 43.55% 35.94%
========== ==========
Average common and common equivalent
shares outstanding:
Basic ............................................ 5,371,863 5,284,967
========== ==========
Diluted .......................................... 5,676,569 5,593,069
========== ==========
See accompanying notes to consolidated financial statements.
- 4 -
<PAGE>
Consolidated Statements of Comprehensive Income - Three Month Period Ended
September 30, 1998 and September 30, 1997 (Unaudited).
(Dollars in thousands)
(Unaudited)
Three Months Ended
September 30,
---------------------
1998 1997
---- ----
Net income ........................................... $ 1,754 $ 1,809
Other comprehensive income:
Unrealized gains on investment securities:
Realized and unrealized holding gains
arising during period ......................... 744 569
Add: reclassification adjustment for
losses included in net income ................. -- --
------- -------
Other comprehensive income, before tax ............... 744 569
Income tax benefit (expense) related to
items of other comprehensive income ................. (283) (216)
------- -------
Other comprehensive income, after tax ................ 461 353
------- -------
Comprehensive income ................................. $ 2,215 $ 2,162
======= =======
See accompanying notes to consolidated financial statements.
- 5 -
<PAGE>
Consolidated Statement of Stockholders' Equity for the Three Month Period Ended
September 30, 1998 (Unaudited).
(Dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
Additional Net Unrealized
Common Paid-In ESOP Treasury Retained Gain on Securities
Stock Capital / RRP Stock Earnings Available-for-Sale Total
----- ------- ----- ----- -------- ------------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1998 ............. $ 56 $ 68,923 $ (2,520) $ (3,461) $ 46,679 $ 23 $ 109,700
Net income ........................ -- -- -- -- 1,754 -- 1,754
Change in net unrealized gain on
securities available-for-sale ... -- -- -- -- -- 461 461
ESOP shares committed to
be released ..................... -- 82 57 -- -- -- 139
Amortization of award of
RRP stock ....................... -- -- 72 -- -- -- 72
Stock options exercised
(3,560 shares) .................. -- 47 -- -- -- -- 47
Cash dividends declared
($0.135 per share) .............. -- -- -- -- (727) -- (727)
------- --------- --------- -------- -------- --------- ---------
Balance at September 30, 1998 ........ $ 56 $ 69,052 $ (2,391) $ (3,461) $ 47,706 $ 484 $ 111,446
======= ========= ========= ======== ======== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
- 6 -
<PAGE>
Consolidated Statements of Cash Flows for the Three Month Period Ended September
30, 1998 and September 30, 1997 (Unaudited)
(Dollars in thousands)
(Unaudited)
Three Months Ended
September 30,
---------------------
1998 1997
---- ----
Net cash provided by operating activities $ 9,372 $ (657)
Cash flows from investing activities:
Net change in interest-bearing deposits ............ 100 --
Principal payments on mortgage-backed securities ... 5,188 2,985
Purchases of mortgage-backed securities
available-for-sale ............................... -- (4,999)
Principal payments on mortgage-backed securities
available-for-sale ............................... 2,665 2,118
Purchases of investment securities ................. -- (4,500)
Proceeds from maturities of investment securities .. 4,600 40
Proceeds from maturities of investment securities
available-for-sale ............................... 33,500 15,295
Purchase of investment securities available-for-sale (27,309) (20,573)
Principal payments on investment securities
available-for-sale ............................... 86 141
Net change in loans receivable ..................... 3,985 (20,821)
Purchases of premises and equipment ................ (328) (1,922)
Proceeds from sale of premises and equipment ....... 5 --
--------- ---------
Net cash provided (used) by investing activities ..... 22,492 (32,236)
--------- ---------
Cash flows from financing activities:
Net change in deposits excluding interest credited . (6,313) (4,392)
Net change in repurchase agreements ................ 977 (305)
Proceeds from borrowings ........................... 97,900 130,215
Payments on borrowings ............................. (127,096) (91,217)
Net change in advances from borrowers for
taxes and insurance .............................. 3,208 3,475
Proceeds from exercise of options .................. 47 444
Dividends paid to stockholders ..................... (977) (814)
Payments to acquire treasury stock ................. -- (380)
--------- ---------
Net cash (used) provided by financing activities (32,254) 37,026
--------- ---------
Net increase (decrease) in cash and cash equivalents . (390) 4,133
Cash and cash equivalents at beginning of period ..... 29,068 17,159
--------- ---------
Cash and cash equivalents at end of period ........... $ 28,678 $ 21,292
========= =========
Supplemental disclosure of cash flow
information: Payments during the period for:
Interest ....................................... $ 3,532 $ 3,021
Income taxes, net .............................. 1,235 167
========= =========
See accompanying notes to consolidated financial statements.
- 7 -
<PAGE>
WESTERFED FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the information contained
herein reflects all adjustments necessary to make the results of operations for
the interim periods a fair statement of such operations. All such adjustments
are of a normal recurring nature. Operating results for the three months ended
September 30, 1998 are not necessarily indicative of the results anticipated for
the year ending June 30, 1999. 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, 1998.
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
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.
The following table sets forth the compilation of basic and diluted
earnings per share:
(Unaudited)
For the Three
Month Period
Ended September 30,
-----------------------
(Dollars in thousands, except share and per share data)
1998 1997
---- ----
Numbers of shares on which basic earnings
per share is calculated:
Average outstanding shares during the
fiscal year ..................................... 5,371,863 5,284,967
Add: Incremental shares under stock option plans 304,098 284,522
Incremental shares related to RRPs ......... 608 23,580
---------- ----------
Number of shares on which diluted earnings
per share is calculated ............................. 5,676,569 5,593,069
---------- ----------
Net income applicable to common stockholders ......... $ 1,754 $ 1,809
========== ==========
Basic earnings per share ............................. $ 0.33 $ 0.34
========== ==========
Diluted earnings per share ........................... $ 0.31 $ 0.32
========== ==========
Stock options to purchase 57,085 shares as of September 30, 1998 were
outstanding, but were not included in the computation of diluted earnings per
share because the options' exercise price was greater than the average market
price of the common shares and, therefore, the effect would be anti-dilutive. No
stock options were excluded from the computation of diluted earnings per share
in 1997.
- 8 -
<PAGE>
4. DIVIDENDS DECLARED
On September 22, 1998 the Board of Directors of the Company approved a
quarterly cash dividend of $0.135 per share, payable on November 24, 1998 to
stockholders of record on November 10, 1998.
5. A COMPARISON OF THE AMORTIZED COST AND ESTIMATED FAIR VALUE OF INVESTMENT AND
MORTGAGE-BACKED SECURITIES AT THE DATES INDICATED IS AS FOLLOWS:
HELD-TO-MATURITY
(Dollars in Thousands)
<TABLE>
<CAPTION>
(Unaudited)
September 30, 1998 June 30, 1998
------------------------------------------------- --------------------------------------------------
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 $ 2,996 $ 29 $ -- $ 3,025 $ 2,994 $ 27 $ -- $ 3,021
U.S. Government obligations -- -- -- -- 100 -- -- 100
Corporate obligations 6,976 141 -- 7,117 11,473 87 -- 11,560
Other investments 2,282 15 -- 2,297 2,280 13 -- 2,293
----------------------------------------------- ------------------------------------------------
Total investment securities 12,254 185 -- 12,439 16,847 127 -- 16,974
Mortgage-backed securities 97,161 3,355 (30) 100,486 102,298 2,695 (31) 104,962
----------------------------------------------- ------------------------------------------------
$ 109,415 $ 3,540 $ (30) $ 112,925 $ 119,145 $ 2,822 $ (31) $121,936
=============================================== ================================================
</TABLE>
AVAILABLE-FOR-SALE
(Dollars in Thousands)
<TABLE>
<CAPTION>
(Unaudited)
September 30, 1998 June 30, 1998
------------------------------------------------- --------------------------------------------------
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 $ 87,582 $ 500 $ (63) $ 88,019 $ 89,792 $ 100 $ (111) $ 89,781
Corporate obligations 14,747 113 -- 14,860 18,658 62 -- 18,720
Other investments 3 75 -- 78 3 7 -- 10
------------------------------------------------- --------------------------------------------------
Total investment securities 102,332 688 (63) 102,957 108,453 169 (111) 108,511
Mortgage-backed securities 21,460 270 (118) 21,612 24,156 165 (186) 24,135
------------------------------------------------- --------------------------------------------------
$ 123,792 $ 958 $ (181) $ 124,569 $ 132,609 $ 334 $ (297) $132,646
================================================= ==================================================
</TABLE>
- 9 -
<PAGE>
A COMPARISON OF THE AMORTIZED COST AND ESTIMATED FAIR VALUE OF INVESTMENT
SECURITIES BY CONTRACTUAL MATURITIES AT SEPTEMBER 30, 1998 IS AS FOLLOWS:
HELD-TO-MATURITY
(Dollars in Thousands)
(Unaudited)
September 30, 1998
------------------------
Amortized Estimated
Cost Fair Value
---- ----------
Due in one year or less ........................ $ -- $ --
Due after one year through 5 years .............. 10,044 10,214
Due after 5 years through 10 years .............. 237 237
Due after 10 years .............................. 1,973 1,988
------- -------
$12,254 $12,439
======= =======
AVAILABLE-FOR-SALE
(Dollars in Thousands)
(Unaudited)
September 30, 1998
------------------------
Amortized Estimated
Cost Fair Value
---- ----------
Due in one year or less ...................... $ 39,757 $ 39,906
Due after one year through 5 years ............ 57,033 57,485
Due after 5 years through 10 years ............ 4,498 4,513
Other ......................................... 3 75
SBA loans contractually due after 5 years ..... 1,041 978
-------- --------
$102,332 $102,957
======== ========
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. 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 THREE MONTH PERIOD FROM
JUNE 30, 1998 TO SEPTEMBER 30, 1998.
General - Total assets decreased $22.5 million to $999.6 million at
September 30, 1998 from $1.0 billion at June 30, 1998. The decrease in assets
was primarily the result of decreases in loans receivable and loans
available-for-sale of $4.7 million and a decrease in mortgage-backed securities
of $7.6 million and a decrease in investment securities, Federal Home Loan Bank
of Seattle (FHLB) stock and all other interest earning assets of $9.4 million.
Loans Receivable and Loans Available-for-Sale - Loans receivable and loans
available-for-sale decreased $4.7 million to $652.6 million at September 30,
1998 from $657.3 million at June 30, 1998. Loans secured by one- to four-family
real estate decreased by $13.2 million while consumer, commercial and other
non-one- to four-family loans increased $8.5 million. The activity that resulted
in the decrease in loans receivable was primarily principal repayments of $65.3
million and the sale of loans available-for-sale of $29.9 million, partially
offset by loan originations of $90.4 million. Due to the current low interest
rate environment, Management has decided not to reinvest these proceeds at this
time and instead used the proceeds to pay down borrowed funds.
Mortgage-Backed Securities - Mortgage-backed securities decreased $7.6
million to $118.8 million at September 30, 1998 from $126.4 million at June 30,
1998 due to principal repayments. The proceeds were used to pay down borrowed
funds.
Investment Securities, FHLB Stock and Other Interest Earning Assets
- --Investment securities, FHLB stock and other interest earning assets decreased
$9.4 million to $146.0 million at September 30, 1998 from $155.4 million at June
30, 1998. The $9.4 million decrease was primarily the result of investment
securities maturing or being called by the issuers. The proceeds were partially
used to pay down borrowed funds.
Goodwill and Core Deposit Intangible - Goodwill is being amortized over 25
years, or approximately $666,000 per year. The core deposit intangible is
amortized on an accelerated basis over its estimated economic life of seven
years, or approximately $777,000 in the current fiscal year.
- 11 -
<PAGE>
From time to time, Western Security Bank (the "Bank"), the regulated thrift
institution subsidiary of the Company, may, in order to reduce interest rate
risk, purchase financial instruments that lock in a spread between
interest-earning assets and interest-bearing liabilities. While these types of
financial instruments limit risk, they also reduce the Bank's ability to
maximize profits during periods of favorable interest rate trends. At September
30, 1998 the Bank had no structured notes.
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 September 30, 1998, the amount of the unamortized premiums paid related
to the interest rate cap transactions was $107,000. Interest rate cap agreements
are used to manage interest rate risk by synthetically extending the life of
interest-bearing liabilities.
The following summarizes interest rate cap agreements at September 30,
1998:
Notional principal Agreement
amount termination Cap
------ ----------- ---
(in thousands)
$ 5,000 July, 1999 6.5%
5,000 July, 1999 7.0%
5,000 July, 2000 6.0%
--------
$15,000
========
Interest Rate Swaps -- Interest rate swap agreements involve the exchange
of fixed and floating rate payments without the exchange of the underlying
principal amounts. Estimated amounts to be received or paid on the swap
settlement dates are accrued when realized. The net swap settlements are
reflected in interest expense. Interest rate swap agreements are used to manage
interest rate risk by synthetically extending the life of interest-bearing
liabilities. At September 30, 1998 the Bank did not have any interest rate swap
agreements in place.
The counter parties to the interest rate cap agreements are the FHLB of
Seattle in the amount of $10.0 million and Merrill Lynch in the amount of $5.0
million. The agreements are not collateralized. Interest rate swaps would be
collateralized by stock in FHLB, certificates of deposit issued by the FHLB,
securities issued by the U.S. Government or agency thereof, mortgage-backed
securities, or qualifying first mortgage loans not otherwise pledged.
- 12 -
<PAGE>
Deposits -- Deposits increased $158,000 to $636.6 million at September 30,
1998 from $636.4 million at June 30, 1998. Checking and money market accounts
increased $5.9 million while savings accounts and certificates of deposit
decreased $5.7 million.
Borrowed Funds and Repurchase Agreements - Borrowed funds and repurchase
agreements decreased $28.2 million to $227.0 million at September 30, 1998 from
$255.2 million at June 30, 1998. There were new borrowings of $23.8 million with
maturities of less than one year and $25.4 million of borrowings maturing in one
or more years. The increase from new borrowings was more than offset by
principal repayments and maturities of $77.4 million. Borrowed funds are
comprised primarily of FHLB advances.
Stockholders' Equity - Stockholders' equity increased $1.7 million to
$111.4 million at September 30, 1998 from $109.7 million at June 30, 1998. This
increase was due to net income for the three month period of $1.8 million,
$211,000 related to contributions to the Employee Stock Ownership Plan and
shares earned and issued under the Recognition and Retention Plan, $461,000
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 3,560 new common
shares with a recorded value of $47,000 related to exercised stock options.
Stockholders' equity was reduced $727,000 for dividends declared during the
three month period.
- 13 -
<PAGE>
3. COMPARISON OF OPERATING RESULTS FOR THE THREE MONTH PERIOD ENDED SEPTEMBER
30, 1998 AND SEPTEMBER 30, 1997
RESULTS OF OPERATIONS
Three Months Ended
September 30,
(Unaudited)
--------------------------------
1998 1997
Amount Change Amount
------ ------ ------
(In Thousands)
Total interest income ..................... $18,420 $ 91 $18,329
Total interest expense .................... 10,565 233 10,332
------- ------- -------
Net interest income .................. 7,855 (142) 7,997
Provision for loan losses ................. 240 76 164
------- ------- -------
Net interest income after
provision for loan losses ........... 7,615 (218) 7,833
------- ------- -------
Fees and service charges .................. 1,899 245 1,654
Gain on sale of loans, mortgage-
backed securities and investment
securities ............................... 256 35 221
Other non-interest income ................. 172 84 88
------- ------- -------
Total non-interest income ............ 2,327 364 1,963
------- ------- -------
Income before non-interest expense ........ 9,942 146 9,796
Total non-interest expense ................ 6,969 116 6,853
------- ------- -------
Income before income taxes ........... 2,973 30 2,943
Income taxes .............................. 1,219 85 1,134
------- ------- -------
Net income ........................... $ 1,754 $ (55) $ 1,809
======= ======= =======
- 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)
September 30, 1998 September 30, 1997
-------------------------------------- -------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance(5) Paid Rate Balance(5) Paid Rate
---------- ---- ---- ---------- ---- ----
INTEREST EARNING ASSETS:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable (1) (2) $ 657,497 $ 14,066 8.56% $648,412 $ 13,806 8.52%
Mortgage-backed securities (2) 121,277 2,061 6.80 151,127 2,569 6.80
Investments (2) 132,634 2,126 6.41 99,786 1,734 6.95
Other interest-earning assets (3) 5,084 87 6.85 8,876 143 6.44
Cash surrender value of life insurance 6,753 80 4.74 6,356 77 4.85
----- -- ---- ----- -- ----
Total Interest-Earning Assets 923,245 18,420 7.98 914,557 18,329 8.02
======= ====== ==== ======= ====== ====
INTEREST-BEARING LIABILITIES:
Certificates of deposits 378,038 5,425 5.74 375,705 5,391 5.74
Passbook deposits 91,526 621 2.71 100,734 690 2.74
Demand and NOW accounts 109,213 286 1.05 103,377 318 1.23
Money market accounts 57,662 595 4.13 49,925 499 4.00
------ --- ---- ------ --- ----
Total deposits 636,439 6,927 4.35 629,741 6,898 4.38
Borrowed funds & repurchase agreements 233,968 3,638 6.22 232,798 3,434 5.90
------- ----- ---- ------- ----- ----
Total Interest-Bearing Liabilities $ 870,407 $ 10,565 4.86% $862,539 $ 10,332 4.79%
========== ========= ==== ======== ======== ====
Net interest income $ 7,855 $ 7,997
========= ========
Net interest rate spread 3.12% 3.23%
==== ====
Net interest earning assets $ 52,838 $ 52,018
========== ========
Net interest margin (4) 3.40% 3.50%
Average interest-earning assets to average ==== ====
interest-bearing liabilities 106.07% 106.03%
====== ======
</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 remained relatively stable, decreasing $55,000 for
the three month period ending September 30, 1998 compared to the same period
last year. Net interest income before provision for loan losses decreased
$142,000 and non-interest income increased $364,000 while provision for loan
losses, non-interest expense and income tax expense increased $76,000, $116,000
and $85,000 respectively. The net interest margin (net interest income divided
by average interest-earning assets) decreased to 3.40% during the quarter ended
September 30, 1998 from 3.50% during the same period last year. The interest
rate spread at September 30, 1998 was 3.12% as compared to 3.23% at September
30, 1997 and 2.99% at June 30, 1998.
Interest Income -- Interest income increased $91,000 to $18.4 million for
the three month period ended September 30, 1998 from $18.3 million for the same
period last year. The increase was primarily the result of a $8.6 million
increase in interest earning assets to $923.2 million during the three month
period ended September 30, 1998 from $914.6 million during the same period last
year. The average yield on interest-earning assets decreased to 7.98% during the
quarter ended September 30, 1998 from 8.02% during the same period last year.
Interest earned on loans receivable increased $260,000 due primarily to a
$9.1 million increase in the average balance of loans receivable to $657.5
million during the three month period ended September 30, 1998 from $648.4
million for the same period last year. In addition, the average yield on loans
increased to 8.56% during the three month period ended September 30, 1998 from
8.52% for the same period last year. Even though the current interest rate
environment was lower during the current period than during the same period last
year on loans, the average yield of the loan portfolio has increased due to
higher yielding non-one- to four-family loans comprising a larger portion of the
loan portfolio.
Interest earned on mortgage-backed securities decreased $508,000 due
primarily to a $29.8 million decrease in the average balance of mortgage-backed
securities outstanding to $121.3 million for the three month period ended
September 30, 1998 from $151.1 million during the same period last year. The
current low interest rate environment has resulted in substantial increases in
the prepayments on mortgage-backed securities.
Interest earned on investment securities, FHLB stock and other interest
earning assets increased $339,000 primarily due to an increase in the average
balance of these securities of $29.5 million to $144.5 million during the
quarter ended September 30, 1998 from $115.0 million during the same period last
year. The average yield decreased to 6.35% during the quarter ended September
30, 1998 from 6.80% for the same period last year. The decrease in average rates
is due to the lower interest rate environment during the current period as
compared to the prior period.
Interest Expense -- Total interest expense increased $233,000 to $10.6
million for the three month period ended September 30, 1998 from $10.3 million
for the same period last year. Interest expense on deposits increased $29,000
due to an increase in the average balance of deposits of $6.7 million to $636.4
million during the three month period ended September 30, 1998 from $629.7
million during the same period last year. The average rate paid on deposits
decreased to 4.35% during the quarter ended September 30, 1998 from 4.38% for
the same period last year as the Bank increased the amount of non-interest
bearing demand accounts and the lower interest rate environment this period
versus the prior period. Interest expense on borrowed funds and repurchase
agreements increased $204,000 due primarily to an increase in the average
balance of borrowed funds of $1.2 million to $234.0 million during the three
month period ended September 30, 1998 from $232.8 million for the same period
last year.
- 16 -
<PAGE>
Provisions for Loan Losses -- The provision for loan losses increased
$76,000 to $240,000 for the three month period ended September 30, 1998 as
compared to a $164,000 provision for the same period last year.
The provision for loan losses is determined by management as the amount to
be added to the allowance for loan losses after net charge-offs have been
deducted to bring the allowance to a level which is considered adequate to
absorb losses inherent in the loan portfolio in accordance with generally
accepted accounting principles. At September 30, 1998 the Company had $5.2
million of non-performing assets (representing 0.52% of total assets) compared
to $5.0 million at June 30, 1998 (representing 0.49% of total assets). There
were foreclosed real estate loans totaling $332,000 at September 30, 1998 as
compared to $307,000 at June 30, 1998. At September 30, 1998 the Company had an
allowance for loan losses to non-performing assets of 94.24% as compared to
97.44% at June 30, 1998. 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 $364,000 to $2.3
million for the quarter ended September 30, 1998 from $2.0 million for the same
quarter last year. Fees and service charges increased $245,000, net gain on sale
of loans and securities available-for-sale increased $35,000 and other income
increased $84,000.
Non-Interest Expense -- Non-interest expense increased $116,000, or 1.7%,
to $7.0 million for the quarter ended September 30, 1998 from $6.9 million for
the same quarter last year. The primary reason for the $116,000 increase was
equipment and furnishings expenses increasing $164,000 due to increased
depreciation expenses related to new computer equipment purchased during the
quarter ended March 31, 1998 as well as other expense increasing $110,000. These
increases were partially offset by decreases in compensation and employee
benefits, and marketing and advertising, of $112,000 and $103,000 respectively.
Income Taxes -- Income tax expense increased $85,000 due to the $30,000
increase in income before income taxes and a higher effective tax rate of 41.0%
during the quarter ended September 30, 1998 as compared to 38.5% during the same
period last year.
- 17 -
<PAGE>
Loan Quality -- The following table sets forth the amounts and categories
of non-performing assets in the Company's loan portfolio. At September 30, 1998
and June 30, 1998 the Company did not have any loans termed troubled debt
restructuring which involved forgiving a portion of interest or principal on any
loans or making loans at a rate materially less than market rates. Foreclosed
assets include assets acquired in settlement of loans, and are recorded at the
lower of the related loan balance, less any specific allowance for loss, or fair
value at the date of foreclosure.
(Unaudited)
September 30, June 30,
1998 1998
---- ----
Non-accruing loans: (In Thousands)
Real Estate:
One-to-four family ............................... $1,670 $1,967
Multi-family ..................................... -- 89
Commercial ....................................... -- 35
Construction ..................................... 227 362
Commercial - non real estate ......................... 103 32
Consumer ............................................. 1,552 1,504
------ ------
Total ......................................... 3,552 3,989
------ ------
Accruing loans delinquent 90 days or more:
Real Estate:
One-to-four family ............................... 622 442
Multi-family ..................................... -- --
Commercial ....................................... -- --
Construction ..................................... -- --
Commercial - non real estate ......................... -- 10
Consumer ............................................. 483 174
------ ------
Total ......................................... 1,105 626
------ ------
Foreclosed Assets:
Real Estate:
One-to-four family ............................... 302 279
Multi-family ..................................... -- --
Commercial ....................................... -- --
Land ............................................. 30 28
Construction ..................................... -- --
Consumer ............................................. 189 114
------ ------
Total ......................................... 521 421
------ ------
Total non-performing assets .......................... $5,178 $5,036
====== ======
Total as a percentage of total assets ................ 0.52% 0.49%
====== ======
Total allowance for loan losses to
non-performing loans (exclusive
of foreclosed) ...................................... 104.79% 106.33%
====== ======
Total allowance for loan losses to total
non-performing assets ............................. 94.24% 97.44%
====== ======
Non-Performing Assets -- Total non-performing assets increased $142,000 to
$5.2 million at September 30, 1998 from $5.0 million at June 30, 1998 due to an
increase of $309,000 in non-performing loans secured by savings deposits. Total
non-performing assets as a percentage of total assets was 0.52% at September 30,
1998 as compared to 0.49% at June 30, 1998. The 0.52% is less than the national
composite for thrifts non-performing assets as a percentage of assets of 0.87%
at June 30, 1998, which is the latest available information as reported by the
Office of Thrift Supervision. In addition to the non-performing loans and
foreclosed assets set forth in the preceding table, as of September 30, 1998,
there were three other loans totaling $1.3 million
- 18 -
<PAGE>
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.
There were $332,000 in foreclosed real estate loans at September 30, 1998
and $189,000 in foreclosed consumer loans.
At September 30, 1998 the recorded investment in impaired loans was $4.0
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.
(Unaudited)
For the Three Month
Period Ended
September 30,
-----------------------
1998 1997
---- ----
(Dollars in Thousands)
Balance at beginning of period ..................... $ 4,907 $ 4,651
Charge-Offs:
Real Estate:
One- to four-family ........................... -- --
Commercial .................................... -- --
Other:
Commercial .................................... (3) --
Consumer ...................................... (286) (81)
------- -------
Total charge-offs .................................. (289) (81)
------- -------
Recoveries:
Other:
Commercial .................................... -- --
Consumer ...................................... 22 9
------- -------
Total recoveries ................................... 22 9
------- -------
Net charge-offs .................................... (267) (72)
Provisions charged to operations ................... 240 164
------- -------
Balance at end of period ........................... $ 4,880 $ 4,743
======= =======
Ratio of net charge-offs during the
period to average loans outstanding during
the period ........................................ 0.04% 0.01%
======= =======
Ratio of net charge-offs during the period
to average non-performing assets
during the period ................................. 5.23% 2.22%
======= =======
Ratio of allowance for loan losses to
loans receivable, net ............................. 0.74% 0.72%
======= =======
- 19 -
<PAGE>
Regulatory Capital -- At September 30, 1998 the Bank met all applicable
regulatory capital requirements. The following table provides information on an
unconsolidated basis indicating the extent to which the Bank exceeds the minimum
capital requirements under federal regulations as of September 30, 1998.
<TABLE>
<CAPTION>
Minimum to be Minimum to be well
adequately capitalized capitalized under prompt
under prompt corrective corrective actions
Actual actions provision provision
--------------------- ---------------------- -----------------------
As of September 30, 1998: Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk-weighted assets) $ 89,232 14.34% $ 49,790 8.00% $ 62,238 10.00%
Core (Tier 1) capital (to risk-weighted assets) 84,396 13.56 24,895 4.00 37,343 6.00
Core (Tier 1) capital (to adjusted assets) 84,396 8.69 38,841 4.00 48,552 5.00
Tangible capital (to tangible assets) 84,396 8.69 14,565 1.50 14,565 1.50
</TABLE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Management believes there has been no material change in interest rate risk
since June 30, 1998. 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, 1998.
Year 2000 Compliance
General. The year 2000 ("Y2K") issue confronting the Bank and its
suppliers, customers, customers' suppliers and competitors centers on the
inability of computer systems to recognize the year 2000. Many existing computer
programs and systems originally were programmed with six digit dates and that
provided only two digits to identify the calendar year in the date field. With
the impending new millennium, these programs and computers will recognize "00"
as the year 1900 rather than the year 2000.
Financial institution regulators recently have increased their focus upon
Y2K compliance issues and have issued guidance concerning the responsibilities
of senior management and directors. The Federal Financial Institution
Examination Council ("FFIEC") has issued several interagency statements on Y2K
Project Management Awareness. These statements require financial institutions
to, among other things, examine the Y2K implications of their reliance on
vendors and with respect to data exchange and the potential impact of the Y2K
issue on their customers, suppliers, and borrowers. These statements also
require each federally regulated financial institution to survey its exposure,
reassure risk and prepare a plan to address the Y2K issue. In addition, the
federal banking regulators have issued safety and soundness guidelines to be
followed by insured depository institutions, such as the Bank, to assure
resolution of any Y2K problems. The federal banking agencies have asserted that
Y2K testing and certification is a key safety and soundness issue in conjunction
with regulatory examinations and, thus, that an institution's failure to address
appropriately the Y2K issue could result in supervisory action, including the
reduction of the institution's supervisory rating , the denial of applications
for approval of mergers or acquisitions or the imposition of civil money
penalties.
Risk. Like most financial institution service providers, the Bank and its
operations may be significantly affected by the Y2K issue due to its dependence
on technology and date-sensitive data. Computer software and hardware and other
equipment, both within and outside the Bank's direct control and third parties
with whom the Bank electronically or operationally interfaces (including without
limitation its customers and third party vendors) are likely to be affected. If
- 20 -
<PAGE>
computer systems are not modified in order to be able to identify the year 2000,
many computer applications could fail or create erroneous results. As a result,
many calculations which rely on date field information such as interest,
payments or due dates and other operating functions, could generate results
which are significantly misstated, and the Bank could experience an inability to
process transactions, prepare statements or engage in similar normal business
activities. Likewise, under certain circumstances, a failure to adequately
address the Y2K issue could adversely affect the viability of the Bank's
suppliers and creditors and the creditworthiness of its borrowers. Thus, if not
adequately addressed, the Y2K issue could result in a significant adverse impact
on the Bank's operations and, in turn, its financial condition and result of
operations.
State of Readiness. During July 1997, the Bank formulated its plan to
address the Y2K issue. Since that time, the Bank has taken the following steps:
o Established senior management advisory and review responsibilities;
o Completed a Bank-wide inventory of applications and system software;
o Built an internal tracking database for application and vendor
software;
o Developed compliance plans and schedules for all lines of business;
o Initiated vendor compliance verification;
o Began awareness and education activities for employees through
existing internal communication channels;
o Developed a brochure to be made available to all customers;
o Developed a process to respond to customer inquiries to help educate
customers on the Y2K issue; and
o Converted to new certified Y2K primary data system including: 1)
loans, deposit and general ledger software; 2) data center service
provider; and 3) PC based hardware and software throughout the Bank.
The following paragraphs summarize the phases of the Bank's Y2K plan:
Awareness Phase. The Bank formally established a Y2K plan headed by a
senior manager, and a project team was assembled for management of the Y2K
project. The project team created a plan of action that includes milestones,
budget estimates, strategies, and methodologies to track and report the status
of the project. Members of the project team also received regulatory
publications and attended conferences and information sharing sessions to gain
more insight into the Y2K issue and potential strategies for addressing it. This
phase is substantially complete.
Assessment Phase. The Bank's strategies were further developed with respect
to how the objectives of the Y2K plan would be achieved, and a Y2K business risk
assessment was made to quantify the extent of the Bank's Y2K exposure. A
corporate inventory (which is periodically updated as new technology is acquired
and as systems progress through subsequent phases) was developed to identify and
monitor Y2K readiness for information systems (hardware, software, utilities and
vendors) as well as environmental systems (security systems, facilities, etc.).
Systems were prioritized based on business impact and available alternatives.
Mission critical systems supplied by vendors were researched to determine Y2K
readiness. Where Y2K-ready versions were not immediately available, the Bank is
monitoring vendor renovation progress. The Bank has begun identifying functional
replacements which are either up-gradable or currently Y2K-ready, and a formal
plan has been developed to repair, upgrade, or replace all mission critical
systems.
Beginning in August 1998, all commercial, agricultural and real estate
credit commitments greater than $250,000 were sent a questionnaire developed by
the Bank's credit administration staff to evaluate Y2K exposure. Because the
Bank's loan portfolio is primarily real estate-based and is diversified with
regard to individual borrowers and types of businesses, and the Bank's primary
market area is not significantly dependent on one employer or industry, the Bank
does not expect any significant or prolonged Y2K-related difficulties that will
affect net earnings or cash flow. As part of the current credit approval
process, all new and renewed loans are evaluated for Y2K risk.
Renovation Phase. The Bank's corporate inventory revealed that Y2K upgrades
were available and have been ordered for all vendor supplied mission critical
systems. Some of the Y2K-ready versions have been delivered and placed into
production and have entered the validation process. Renovation of the Bank's
internal corporate system is expected to be complete by December 31, 1998 with
the exception of four branch telephone systems and 20 ATM machines which are
expected to be completed by March 31, 1999. The Bank is currently working with
its third party vendors in order
- 21 -
<PAGE>
to assess their progress in completing necessary modifications for year 2000
readiness. While no assurance can be given that such vendors will be Y2K
compliant, management has been assured that such vendors are taking appropriate
steps to address the issues on a timely basis.
Validation Phase. The validation phase is designed to test the ability of
hardware and software to accurately process date sensitive data. The Bank
currently is in the process of validation testing of each mission critical
system with such testing 15% completed. The Bank's validation phase is expected
to be completed by March 31, 1999 for all mission critical systems. During the
validation testing process to date, no significant Y2K problems have been
identified relating to any modified or upgraded mission critical systems.
Implementation Phase. The Bank's plan calls for putting Y2K-ready systems
into production before having actually completed Y2K validation testing.
Y2K-ready modified or upgraded versions have been installed or are to be
installed and placed into production with respect to all mission critical
systems as received from vendors or suppliers and is expected to be completed by
March 31, 1999.
Bank Resources Invested. The Bank's Y2K project team has been assigned the
task of ensuring that all systems across the Bank are identified, analyzed for
Y2K compliance, corrected, if necessary, tested and changes put into service by
March 31, 1999. The Y2K project team members represent all functional areas of
the Bank, including data processing, loan administration, accounting, item
processing and operations, compliance, internal audit, human resources, and
marketing. The team is headed by an Executive Vice President who is a member of
the Bank's senior management team. The Bank's Board of Directors oversees the
Y2K plan and provides guidance and resources to, and receives monthly updates
from, the Y2K project team.
The Bank expenses all costs associated with the required system changes as
those costs are incurred, and such costs are being funded through operating cash
flows. The total cost of the Y2K conversion project for the Bank is estimated
not to exceed $600,000. The Bank does not expect material increases in future
data processing costs related to Y2K compliance.
Contingency Plans. During the assessment phase, the Bank began to develop
back-up or contingency plans for each of its mission critical systems. Virtually
all of the Bank's mission critical systems are dependent upon third party
vendors or service providers, therefore, contingency plans include selecting a
new vendor or service provider and converting to their system. In the event a
current vendor's system fails during the validation phase and it is determined
that the vendor is unable or unwilling to correct the failure, the Bank will
convert to a new system from a list of prospective vendors. In each such case,
realistic trigger dates will be established to allow for orderly and successful
conversions. For some systems, contingency plans may consist of using
spreadsheet software or reverting to manual systems until system problems can be
corrected. Although the Bank has been informed that each of its primary vendors,
with the exception of municipal water and sewer systems, anticipates that all
mission critical systems either are or will timely be Y2K-ready, no warranties
have been received from such vendors.
- 22 -
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
Neither the registrant or its subsidiaries are part to any legal
proceedings, other than routine litigation arising in the normal course of
its business. While the ultimate outcome of these various legal proceedings
cannot be predicted with certainty, it is the opinion of management that
the resolution of these legal actions should not have a material effect on
the Company's consolidated financial position or results of operations.
ITEM 2 CHANGE IN SECURITIES -- None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES -- None
ITEM 4 SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
On October 27, 1998 the annual meeting of the stockholders was held to
elect three directors of the Company and to ratify the appointment of KPMG
Peat Marwick LLP as auditors of the Company for the fiscal year ended June
30, 1999. The voting results are listed below:
Proposal 1 - Election of Directors For Against Abstain
--------- -------- --------
Lyle R. Grimes 4,696,663 38,503
Otto G. Klein, Jr., M.D. 4,696,650 38,516
William M. Leslie 4,692,577 42,590
Proposal 2 - Ratify the appointment
of KPMG Peat Marwick LLP as
independent public accountants 4,713,743 8,875 12,551
ITEM 5 OTHER INFORMATION -- None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
A. Form 8-K
The registrant filed current reports on Form 8-K on October 20, 1998
to report the quarterly earnings release and a dividend declaration of
$0.135 per share.
- 23 -
<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)
- 24 -
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-K FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 28,678
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 124,569
<INVESTMENTS-CARRYING> 123,232
<INVESTMENTS-MARKET> 126,742
<LOANS> 652,577
<ALLOWANCE> 4,880
<TOTAL-ASSETS> 999,595
<DEPOSITS> 636,599
<SHORT-TERM> 122,264
<LIABILITIES-OTHER> 24,561
<LONG-TERM> 97,515
<COMMON> 56
0
0
<OTHER-SE> 111,390
<TOTAL-LIABILITIES-AND-EQUITY> 999,595
<INTEREST-LOAN> 14,066
<INTEREST-INVEST> 4,274
<INTEREST-OTHER> 80
<INTEREST-TOTAL> 18,420
<INTEREST-DEPOSIT> 6,927
<INTEREST-EXPENSE> 10,565
<INTEREST-INCOME-NET> 7,855
<LOAN-LOSSES> 240
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,515
<INCOME-PRETAX> 2,973
<INCOME-PRE-EXTRAORDINARY> 1,754
<EXTRAORDINARY> 0
<CHANGES> 0
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<EPS-PRIMARY> .33
<EPS-DILUTED> .31
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<ALLOWANCE-CLOSE> 4,880
<ALLOWANCE-DOMESTIC> 4,880
<ALLOWANCE-FOREIGN> 0
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</TABLE>
