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 March 31, 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, including area code 406-721-5254
-------------------
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 April 30, 1998
-- 5,585,303 shares (including restricted shares)
Page 1
<PAGE>
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION Page
----
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - March 31, 1998
(Unaudited) and June 30, 1997........................................... - 3-
Consolidated Statements of Income - Three and
Nine Month Periods Ended March 31, 1998
and March 31, 1997 (Unaudited).......................................... - 4-
Consolidated Statement of Stockholders' Equity
for the Nine Month Period Ended
March 31, 1998 (Unaudited).............................................. - 5-
Consolidated Statements of Cash Flows for the
Nine Month Period Ended March 31,
1998 and March 31, 1997 (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 Nine Month Period from June 30, 1997
to March 31, 1998............................................... -11-
3. Comparison of Operating Results for the Three
Month Period Ended March 31, 1998 and
March 31, 1997.................................................. -14-
4. Comparison of Operating Results for the Nine
Month Period Ended March 31, 1998 and
March 31, 1997.................................................. -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-
SIGNATURES
Page 2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - March 31, 1998 (Unaudited) and June 30, 1997
<TABLE>
<CAPTION>
(Dollars in thousands, except share and per share data) (Unaudited)
March 31, June 30,
1998 1997
---- ----
ASSETS
<S> <C> <C>
Cash and due from banks .............................................. $ 16,994 16,999
Interest-bearing due from banks ...................................... 17,199 160
----------- -----------
Cash and cash equivalents ..................................... 34,193 17,159
Interest-bearing deposits ............................................ 100 2,000
Investment securities available-for-sale ............................. 80,623 51,683
Investment securities, at amortized cost (estimated market value of
$16,999 at March 31, 1998 and $27,728 at June 30, 1997) .......... 16,881 27,466
Stock in Federal Home Loan Bank of Seattle, at cost .................. 13,303 11,456
Mortgage-backed securities available-for-sale ........................ 28,209 31,388
Mortgage-backed securities, at amortized cost (estimated market
value of $110,637 at March 31, 1998 and $119,193 at June 30, 1997) 107,768 117,781
Loans available-for-sale ............................................. 9,008 3,700
Loans receivable, net ................................................ 661,642 626,577
Accrued interest receivable .......................................... 7,537 6,957
Premises and equipment, net .......................................... 30,735 29,291
Core deposit intangible .............................................. 4,725 5,276
Goodwill ............................................................. 16,833 15,562
Cash surrender value of life insurance policies ...................... 6,633 6,120
Other assets ......................................................... 4,984 3,223
----------- -----------
Total assets .................................................. $ 1,023,174 $ 955,639
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits .......................................................... $ 644,560 $ 630,869
Repurchase agreements ............................................. 9,017 7,786
Borrowed funds .................................................... 236,848 191,450
Advances from borrowers for taxes and insurance ................... 4,806 3,753
Income taxes ...................................................... 2,492 3,504
Accrued interest payable .......................................... 4,212 3,593
Accrued expenses and other liabilities ............................ 12,545 10,425
----------- -----------
Total liabilities ............................................. 914,480 851,380
----------- -----------
Stockholders' Equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized;
none outstanding ............................................... -- --
Common stock, $.01 par value, 10,000,000 shares authorized;
5,583,968 shares outstanding at March 31, 1998
5,564,904 outstanding at June 30, 1997 ......................... 56 56
Additional paid-in capital ....................................... 68,793 67,941
Common stock acquired by ESOP/RRP ................................ (2,585) (2,936)
Treasury stock, at cost .......................................... (3,461) (3,081)
Net unrealized gain/(loss) on securities available-for-sale ...... 238 (35)
Retained earnings ................................................ 45,653 42,314
----------- -----------
Total stockholders' equity .................................... 108,694 104,259
----------- -----------
Total liabilities and stockholders' equity ................ $ 1,023,174 $ 955,639
=========== ===========
Book value per share .......................................... $ 19.47 $ 18.74
=========== ===========
Tangible book value per share ................................. $ 15.60 $ 14.99
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3
<PAGE>
Consolidated Statements of Income - Three and Nine Month Periods Ended March 31,
1998 and March 31, 1997 (Unaudited).
<TABLE>
<CAPTION>
(Dollars in thousands, except share and per share data) (Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------- -----------------------
1998 1997 1998 1997
---- ---- ---- ----
Interest income:
<S> <C> <C> <C> <C>
Loans receivable .......................................... $ 14,171 $ 9,288 $ 42,189 $ 24,832
Mortgage-backed securities available-for-sale ............. 476 748 1,595 2,145
Mortgage-backed securities ................................ 1,891 1,308 5,831 3,346
Investment securities available-for-sale .................. 1,699 694 4,120 2,141
Investment securities ..................................... 325 134 1,452 348
Interest-bearing deposits ................................. 210 357 520 846
Other ..................................................... 94 56 252 148
---------- ---------- ---------- ----------
Total interest income ................................. 18,866 12,585 55,959 33,806
---------- ---------- ---------- ----------
Interest expense:
NOW and money market demand ............................... 817 488 2,481 1,237
Savings ................................................... 651 553 2,012 1,493
Certificates of deposit ................................... 5,489 3,732 16,348 9,734
Advances from FHLB-Seattle and other borrowed funds ....... 3,886 2,156 10,985 6,320
---------- ---------- ---------- ----------
Total interest expense ................................ 10,843 6,929 31,826 18,784
---------- ---------- ---------- ----------
Net interest income ................................... 8,023 5,656 24,133 15,022
Provision for loan losses ................................... 210 61 630 103
---------- ---------- ---------- ----------
Net interest income after provision for loan losses ... 7,813 5,595 23,503 14,919
---------- ---------- ---------- ----------
Non-interest income:
Loan origination fees ..................................... 598 121 1,602 345
Service fees .............................................. 1,096 761 3,382 1,891
Net gain on sale of loans and securities available-for-sale 212 86 701 400
Other ..................................................... 217 52 396 122
---------- ---------- ---------- ----------
Total non-interest income ............................. 2,123 1,020 6,081 2,758
---------- ---------- ---------- ----------
Non-interest expenses:
Compensation and employee benefits ........................ 3,538 2,357 9,985 5,951
Net occupancy expense of premises ......................... 541 356 1,605 834
Equipment and furnishings expense ......................... 478 257 1,248 622
Data processing expenses .................................. 441 241 1,218 574
Federal insurance premium ................................. 88 60 268 425
SAIF special assessment ................................... -- -- -- 2,297
Intangibles amortization .................................. 356 123 1,018 123
Marketing and advertising ................................. 264 129 626 361
Other ..................................................... 1,875 1,083 4,881 2,601
---------- ---------- ---------- ----------
Total non-interest expense ............................ 7,581 4,606 20,849 13,788
---------- ---------- ---------- ----------
Income before income taxes .................................. 2,355 2,009 8,735 3,889
Income taxes ................................................ 995 814 3,468 1,521
---------- ---------- ---------- ----------
Net income(1) ............................................... $ 1,360 $ 1,195 $ 5,267 $ 2,368
========== ========== ========== ==========
Net income per share:
Basic ..................................................... $ 0.26 $ 0.27 $ 0.99 $ 0.57
========== ========== ========== ==========
Diluted ................................................... $ 0.24 $ 0.25 $ 0.94 $ 0.54
========== ========== ========== ==========
Dividends per share ......................................... 0.125 0.105 0.360 0.300
========== ========== ========== ==========
Dividend payout ratio before SAIF assessment - diluted ...... 52.08% 42.00% 38.30% 34.88%
========== ========== ========== ==========
Average common and common equivalent shares outstanding
Basic ..................................................... 5,323,395 4,450,880 5,302,875 4,189,856
========== ========== ========== ==========
Diluted ................................................... 5,627,401 4,702,738 5,613,335 4,398,688
========== ========== ========== ==========
</TABLE>
- --------------
(1) The nine months ended March 31, 1997 includes approximately $1,414, or
$0.32 per share diluted, special SAIF assessment net of tax at 38.5%. See
accompanying notes to consolidated financial statements.
Page 4
<PAGE>
Consolidated Statement of Stockholders' Equity for the Nine Month Period Ended
March 31, 1998 (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
----- ------- ----- ----- -------- -------- -----
<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 ........................ -- -- -- -- 5,267 -- 5,267
Change in net unrealized gain
(loss) on securities
available-for-sale ........... -- -- -- -- -- 273 273
ESOP Shares committed to be
released .................... -- 318 170 -- -- -- 488
Amortization of award of
RRP stock .................... -- -- 180 -- -- -- 180
Purchase of treasury stock ........ -- -- -- (380) -- -- (380)
Shares forfeited by RRP
participants (75 shares) ..... -- -- 1 -- -- -- 1
Stock options exercised
(35,753 shares) .............. -- 534 -- -- -- -- 534
Cash dividends declared
($0.360 per share) ........... -- -- -- -- (1,928) -- (1,928)
------ -------- -------- ------- -------- ------- --------
Balance at March 31, 1998 ......... $ 56 $ 68,793 $ (2,585) $(3,461) $ 45,653 $ 238 $108,694
====== ======== ======== ======= ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 5
<PAGE>
Consolidated Statements of Cash Flows for the Nine Month Period Ended March 31,
1998 and March 31, 1997 (Unaudited)
(Dollars in thousands except share and per share data)
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended
March 31,
-----------------------
1998 1997
---- ----
<S> <C> <C>
Net cash provided by operating activities .......................... $ 19,563 $ 7,987
--------- ---------
Cash flows from investing activities:
Net change in interest-bearing deposits ............................ 1,900 3,000
Principal payments on mortgage-backed securities ................... 8,027 5,942
Purchases of mortgage-backed securities available-for-sale ......... (4,998) (983)
Principal payments on mortgage-backed securities available-for-sale 10,139 10,466
Proceeds from sale of mortgage-backed securities available-for-sale 331 6,856
Purchases of investment securities ................................. (5,483) (5,978)
Proceeds from maturities of investment securities .................. 16,276 9,352
Proceeds from maturities of investment securities available-for-sale 59,445 57,789
Proceeds from sale of investment securities available-for-sale ..... 11,020 --
Purchase of investment securities available-for-sale ............... (99,274) (51,723)
Principal payments on investment securities available-for-sale ..... 292 301
Net change in loans receivable ..................................... (35,222) (13,313)
Purchases of premises and equipment ................................ (5,478) (1,342)
Proceeds from sale of premises and equipment ....................... 925 --
Purchase of Federal Home Loan Bank stock ........................... (1,129) --
Acquisition of Security Bancorp, net of cash equivalents
acquired of $16,607 ............................................ -- (10,776)
--------- ---------
Net cash provided (used) by investing activities ..................... (43,229) 9,591
--------- ---------
Cash flows from financing activities:
Net change in deposits excluding interest credited ................. (5,828) (3,789)
Net change in repurchase agreements ................................ 1,231 --
Proceeds from borrowings ........................................... 290,165 38,475
Payments on borrowings ............................................. (244,818) (40,371)
Net change in advances from borrowers for taxes and insurance ...... 1,053 3,802
Proceeds from exercise of options .................................. 534 --
Payments to acquire treasury stock ................................. (380) --
Dividends paid to stockholders ..................................... (1,257) (806)
--------- ---------
Net cash (used) provided by financing activities ............... 40,700 (2,689)
--------- ---------
Net increase (decrease) in cash and cash equivalents ................. 17,034 14,889
Cash and cash equivalents at beginning of period ..................... 17,159 13,299
--------- ---------
Cash and cash equivalents at end of period ........................... $ 34,193 $ 28,188
========= =========
Supplemental disclosure of cash flow information:
Payments during the period for:
Interest ....................................................... $ 10,136 $ 6,988
Income taxes, net .............................................. 3,641 981
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 6
<PAGE>
WESTERFED FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the information contained
herein reflects all adjustments necessary to make the results of operations for
the interim periods a fair statement of such operations. All such adjustments
are of a normal recurring nature. Operating results for the three and nine month
periods ended March 31, 1998 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.
Page 7
<PAGE>
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
(Dollars in thousands, except share and per share data)
For the Three Month Period For the Nine Month Period
Ended March 31, Ended March 31,
-------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net income - numeration for basic
earnings per share and diluted earnings
per share - income available to common
stockholder ................................. $ 1,360 $ 1,195 $ 5,267 $ 2,368
========== ========== ========== ==========
Denominator:
Denomination for basic earnings per share-
weighted-average share ........................ 5,323,395 4,450,880 5,302,875 4,189,856
Effect of dilutive securities:
Employee stock options ........................ 302,646 232,316 293,919 180,762
RRP shares not vested ......................... 1,360 19,542 16,541 28,070
---------- ---------- ---------- ----------
Denomination for diluted earnings per share-
adjusted weighted-averageshares and assumed
conversions ................................... 5,627,401 4,702,738 5,613,335 4,398,688
========== ========== ========== ==========
Basic earnings per share .......................... $ 0.26 $ 0.27 $ 0.99 $ 0.57
Diluted earnings per share ........................ $ 0.24 $ 0.25 $ 0.94 $ 0.54
</TABLE>
4. DIVIDENDS DECLARED
On April 21, 1998 the Board of Directors of the Company declared a
quarterly cash dividend of $0.125 per share, payable on May 21, 1998 to
stockholders of record on May 7, 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 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 Western Security Bank (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 Security Bank and its subsidiaries on a consolidated
basis. In addition, after having received regulatory approval, the name of
Western Federal Savings Bank was changed to Western Security Bank in February,
1998.
Page 8
<PAGE>
6. A COMPARISON OF THE AMORTIZED COST AND ESTIMATED FAIR VALUE OF INVESTMENT
AND MORTGAGE-BACKED SECURITIES AT THE DATES INDICATED IS AS FOLLOWS:
<TABLE>
<CAPTION>
HELD-TO-MATURITY
(Dollars in Thousands)
(Unaudited)
March 31, 1998 June 30, 1997
------------------------------------------- ------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
---- ----- ------ ----- ---- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal Agency obligations ..... $ 2,993 $ 35 $ -- $ 3,028 $ 18,804 $ 184 $ -- $ 18,988
U.S. Government obligations .... 99 -- -- 99 297 1 -- 298
Corporate obligations .......... 11,470 82 (9) 11,543 5,980 66 -- 6,046
Other investments .............. 2,319 15 (5) 2,329 2,385 13 (2) 2,396
-------- ------- ------- -------- -------- ------- ------- --------
Total investment securities .. 16,881 132 (14) 16,999 27,466 264 (2) 27,728
Mortgage-backed securities ..... 107,768 2,902 (33) 110,637 117,781 1,698 (286) 119,193
-------- ------- ------- -------- -------- ------- ------- --------
$124,649 $ 3,034 $ (47) $127,636 $145,247 $ 1,962 $ (288) $146,921
======== ======= ======= ======== ======== ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE
(Dollars in Thousands)
(Unaudited)
March 31, 1998 June 30, 1997
------------------------------------------- ------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
---- ----- ------ ----- ---- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal Agency obligations ..... $ 60,730 $ 145 $ (45) $ 60,830 $ 46,067 $ 113 $ (211) $ 45,969
Corporate obligations .......... 19,729 32 (7) 19,754 5,622 54 (1) 5,675
Other investments .............. 3 36 -- 39 3 36 -- 39
-------- ------- ------- -------- -------- ------- ------- --------
Total investment securities .. 80,462 213 (52) 80,623 51,692 203 (212) 51,683
Mortgage-backed securities ..... 27,942 447 (180) 28,209 31,434 220 (266) 31,388
-------- ------- ------- -------- -------- ------- ------- --------
$108,404 $ 660 $ (232) $108,832 83,126 $ 423 $ (478) $ 83,071
======== ======= ======= ======== ======== ======= ======= ========
</TABLE>
Page 9
<PAGE>
A COMPARISON OF THE AMORTIZED COST AND ESTIMATED FAIR VALUE OF INVESTMENT
SECURITIES BY CONTRACTUAL MATURITIES AT MARCH 31, 1998 IS AS FOLLOWS:
HELD-TO-MATURITY
(Dollars in Thousands)
(Unaudited)
March 31, 1998
Amortized Estimated
Cost Fair Value
---- ----------
Due in one year or less ........................... $ 99 $ 99
Due after one year through 5 years ................. 14,534 14,645
Due after 5 years through 10 years ................. 236 234
Due after 10 years ................................. 2,012 2,021
Other .............................................. -- --
------- -------
16,881 16,999
======= =======
AVAILABLE-FOR-SALE
(Dollars in Thousands)
(Unaudited)
March 31, 1998
Amortized Estimated
Cost Fair Value
---- ----------
Due in one year or less ........................... $16,996 $16,995
Due after one year through 5 years ................. 35,588 35,645
Due after 5 years through 10 years ................. 26,597 26,655
Other .............................................. 3 36
SBA loans contractually due after 5 years .......... 1,278 1,292
------- -------
80,462 80,623
======= =======
Expected maturities of mortgage-backed securities will differ from contractual
maturities because borrowers may have the right to prepay obligations with or
without penalties.
Page 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 NINE MONTH PERIOD FROM
JUNE 30, 1997 TO MARCH 31, 1998.
General - Total assets increased $67.5 million to $1.0 billion at March
31, 1998 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 $40.3 million and an increase in investment securities,
Federal Home Loan Bank of Seattle (FHLB) stock and all other interest earning
assets of $35.8 million, partially offset by a decrease in mortgage-backed
securities of $13.2 million.
Loans Receivable and Loans Available-for-Sale - Loans receivable and
loans available-for-sale increased $40.3 million to $670.6 million at March 31,
1998 from $630.3 million at June 30, 1997. Loans secured by real estate
increased by $9.3 million and non-real estate commercial business loans,
agricultural loans and consumer loans increased $31.0 million. The increase in
loans receivable was primarily the result of loan originations of $285.7
million, partially offset by principal repayments of $183.1 million and the sale
of loans available-for-sale of $63.2 million.
Mortgage-Backed Securities - Mortgage-backed securities decreased $13.2
million to $136.0 million at March 31, 1998 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
$35.8 million to $134.7 million at March 31, 1998 from $98.9 million at June 30,
1997. The $35.8 million increase was primarily the result of increases in
interest-bearing due from banks and interest-bearing deposits of $15.1 million
and the balance of investment securities of $18.4 million.
Goodwill and Core Deposit Intangible - Goodwill is being amortized over
25 years, or approximately $704,000 per year. The core deposit intangible is
amortized on an accelerated basis over its estimated economic life of seven
years, or approximately $758,000 in the current fiscal year. Final market
valuations of fixed assets acquired and other additional costs associated with
the Acquisition increased goodwill $1.7 million during the quarter ending March
31, 1998.
Page 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 March 31,
1998 the Bank had one structured note totaling $700,000 wherein the interest
rate is based upon a fraction of the increase or decrease in a specified index.
The security has a variable interest rate and was purchased to enable the Bank
to increase its interest income when interest rates increase. The market value
of the security at March 31, 1998 was $700,000 and will mature in May, 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 March 31, 1998, the amount of the unamortized premiums paid related to
the interest rate cap transactions was $162,000. 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 March 31, 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 March 31, 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 interest rate cap 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.
Page 12
<PAGE>
Deposits - Deposits increased $13.7 million to $644.6 million at March
31, 1998 from $630.9 million at June 30, 1997. Checking and money market
accounts increased $10.5 million and certificates of deposit increased $9.7
million while savings accounts decreased $6.5 million.
Borrowed Funds and Repurchase Agreements - Borrowed funds and
repurchase agreements increased $46.7 million to $245.9 million at March 31,
1998 from $199.2 million at June 30, 1997. Repurchase agreements increased $1.2
million while there were other new borrowings, consisting primarily of FHLB
advances, of $163.0 million with maturities of less than one year and $127.0
million of other borrowings maturing in one or more years. The increase in
borrowings were reduced by principal repayments and maturities of $244.5
million.
Stockholders' Equity - Stockholders' equity increased $4.4 million to
$108.7 million at March 31, 1998 from $104.3 million at June 30, 1997. This
increase was due to net income for the nine month period of $5.3 million,
$668,000 related to contributions to the Employee Stock Ownership Plan and
shares earned and issued under the Recognition and Retention Plan, $273,000
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 35,753 new common
shares with a recorded value of $534,000 related to exercised stock options.
Stockholders' equity was reduced $1.9 million for dividends declared during the
nine month period and the purchase of $380,000 of treasury stock.
Page 13
<PAGE>
3. COMPARISON OF OPERATING RESULTS FOR THE THREE MONTH PERIOD ENDED MARCH 31,
1998 AND MARCH 31, 1997
RESULTS OF OPERATIONS
Three Months Ended
March 31,
(Unaudited)
---------------------------------
1998 1997
Amount Change Amount
------ ------ ------
(In Thousands)
Total interest income ................... $18,866 $ 6,281 $12,585
Total interest expense .................. 10,843 3,914 6,929
------- ------- -------
Net interest income ................. 8,023 2,367 5,656
Provision for loan losses ............... 210 149 61
------- ------- -------
Net interest income after
provision for loan losses .......... 7,813 2,218 5,595
------- ------- -------
Fees and service charges ................ 1,694 812 882
Gain on sale of loans, mortgage-
backed securities and
investment securities .............. 212 126 86
Other non-interest income ............... 217 165 52
------- ------- -------
Total non-interest income ........... 2,123 1,103 1,020
------- ------- -------
Income before non-interest expense ...... 9,936 3,321 6,615
Total non-interest expense .............. 7,581 2,975 4,606
------- ------- -------
Income before income taxes .......... 2,355 346 2,009
Income taxes ............................ 995 181 814
------- ------- -------
Net income .......................... $ 1,360 $ 165 $ 1,195
======= ======= =======
Page 14
<PAGE>
Net Interest Income Analysis -- The following table presents for the
periods indicated the total dollar amount of interest income from average
interest-earning assets and the resultant yields, as well as the interest
expense on average interest-bearing liabilities, expressed both in dollars and
rates. No tax equivalent adjustments were made. Non-accruing loans have been
included in the table as loans carrying a zero yield.
<TABLE>
<CAPTION>
Three Month Period Ended
(Unaudited)
March 31, 1998 March 31, 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) ................... $674,817 $ 14,171 8.40% $444,314 $ 9,288 8.36%
Mortgage-backed securities (2) ............. 138,388 2,367 6.84 117,521 2,056 7.00
Investments (2) ............................ 115,674 2,024 7.00 52,087 828 6.36
Other interest-earning assets (3) .......... 14,305 210 5.87 21,641 357 6.60
Cash surrender value of life insurance ..... 6,599 94 5.70 4,200 56 5.33
-------- -------- ---- -------- -------- -----
Total Interest-Earning Assets ................ 949,783 18,866 7.95 $639,763 $ 12,585 7.87%
======== ======== ==== ======== ======== =====
INTEREST-BEARING LIABILITIES:
Certificates of deposits ................... 386,531 5,489 5.68 $265,287 $ 3,732 5.63%
Passbook deposits .......................... 95,469 651 2.73 77,233 553 2.86
Demand and NOW accounts .................... 108,329 285 1.05 66,330 214 1.29
Money market accounts ...................... 53,513 531 3.97 31,656 274 3.46
-------- -------- ---- -------- -------- -----
Total deposits .......................... 643,842 6,956 4.32 440,506 4,773 4.33
FHLB advances and notes payable ............ 254,781 3,851 6.05 136,360 2,120 6.22
Collateralized mortgage obligations ........ 566 36 25.44 925 36 15.57
-------- -------- ----- -------- -------- -----
Total Interest-Bearing Liabilities ........ $899,189 $ 10,843 4.82% $577,791 $ 6,929 4.80%
======== ======== ===== ======== ======== =====
Net interest income .......................... $ 8,023 $ 5,656
======== ========
Net interest rate spread ..................... 3.13% 3.07%
==== =====
Net interest earning assets .................. $ 50,594 $ 61,972
======== ========
Net interest margin (4) ...................... 3.38% 3.54%
==== =====
Average interest-earning assets to average
interest-bearing liabilities ............. 105.63% 110.73%
====== ======
</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
Page 15
<PAGE>
General -- Net income increased $165,000 to $1.4 million for the three
month period ended March 31, 1998 from $1.2 million for the same period last
year. Net interest income after provision for loan losses increased $2.4 million
and non-interest income increased $1.1 million while non-interest expense and
income tax expense increased $3.0 million and $181,000 respectively. The net
interest margin (net interest income divided by average interest-earning assets)
decreased to 3.38% during the quarter ended March 31, 1998 from 3.54% during the
same period last year. The interest rate spread at March 31, 1998 was 3.13% as
compared to 3.07% at March 31, 1997.
Interest Income -- Interest income increased $6.3 million to $18.9
million for the three month period ended March 31, 1998 from $12.6 million for
the same period last year. The increase was primarily the result of a $310.0
million increase in average total interest-earning assets to $949.8 million
during the three month period ended March 31, 1998 from $639.8 million during
the same period last year. In addition, the average yield on interest-earning
assets increased to 7.95% during the quarter ended March 31, 1998 from 7.87%
during the same period last year due primarily to the Acquisition.
Interest earned on loans receivable increased $4.9 million due
primarily to a $230.5 million increase in the average balance of loans
receivable to $674.8 million during the three month period ended March 31, 1998
from $444.3 million for the same period last year. In addition, the average
yield on loans increased to 8.40% during the three month period ended March 31,
1998 from 8.36% 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 $311,000 due
primarily to a $20.9 million increase in the average balance of mortgage-backed
securities outstanding to $138.4 million for the three month period ended March
31, 1998 from $117.5 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 $1.1 million primarily due to an increase in the
average balance of these securities of $58.7 million to $136.6 million during
the quarter ended March 31, 1998 from $77.9 million during the same period last
year. The average yield increased to 6.82% during the quarter ended March 31,
1998 from 6.37% 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 March 31, 1998 was due primarily to
increased earnings from discounts amortized to income on investments called
during the quarter.
Interest Expense -- Total interest expense increased $3.9 million to
$10.8 million for the three month period ended March 31, 1998 from $6.9 million
for the same period last year. Interest expense on deposits increased $2.2
million due to an increase in the average balance of deposits of $203.3 million
to $643.8 million during the three month period ended March 31, 1998 from $440.5
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 4.32% during the quarter ended March
31, 1998 from 4.33% 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 $1.7 million due primarily to an
increase in the average balance of borrowed funds of $118.0 million to $255.3
million during the three month period ended March 31, 1998 from $137.3 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.
Provisions for Loan Losses -- The provision for loan losses increased
$149,000 to $210,000 for the three month period ended March 31, 1998 as compared
to a $61,000 provision for the same period last year.
Page 16
<PAGE>
The provision for loan losses is determined by management as the amount
to be added to the allowance for loan losses after net charge-offs have been
deducted to bring the allowance to a level which is considered adequate to
absorb losses inherent in the loan portfolio in accordance with generally
accepted accounting principles. At March 31, 1998 the Company had $6.6 million
of non-performing assets (representing 0.64% of total assets) compared to $2.4
at June 30, 1997 (representing 0.25% of total assets). At March 31, 1998 the
Company had an allowance for loan losses to non-performing assets of 76.94% 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 "NonPerforming
Assets."
Non-Interest Income -- Non-interest income increased $1.1 million to
$2.1 million for the quarter ended March 31, 1998 from $1.0 million for the same
quarter last year. Fees and service charges increased $812,000, net gain on sale
of loans and securities available-for-sale increased $126,000, while other
non-interest income increased $165,000. 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 $3.0 million to
$7.6 million for the quarter ended March 31, 1998 from $4.6 million for the same
quarter last year. The increase was due primarily to the Acquisition and a
change in data processing systems. Included in the non-interest expense for the
quarter ended March 31, 1998 was $356,000 related to the amortization of
intangibles resulting from the Acquisition as compared to $123,000 for the same
period last year which included only one month of amortization expense. This was
comprised of $166,000 for the amortization of goodwill and $189,000 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, during the quarter the Bank completed its
conversion to a single, commercial bank oriented, data processing system. This
allows the Bank to continue its emphasis on adding commercial banking to its
traditional thrift business. The quarter just ended included approximately
$700,000 in professional fees, overtime, marketing costs, and other expenses
related to the consolidation of data processing systems and changes in name to
Western Security Bank. In addition, $3.0 million of additional capital
expenditures were made in converting to the consolidated data center and the
addition of technology to position the Bank to meet increasing competition and
the demand for new customer and commercial banking services. In addition, the
conversion from a real-time savings and loan data processing environment to a
batch-processing commercial bank data processing environment has increased
on-going data processing related costs. Management believes that the conversion
to the new data processing system will address the most significant Year 2000
compliance and operational 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 $181,000 due primarily to
the $346,000 increase in income before income taxes.
Page 17
<PAGE>
4. COMPARISON OF OPERATING RESULTS FOR THE NINE MONTH PERIOD ENDED MARCH 31,
1998 AND MARCH 31, 1997.
RESULTS OF OPERATIONS
Nine Months Ended
March 31,
(Unaudited)
--------------------------------
1998 1997
Amount Change Amount
------ ------ ------
(In Thousands)
Total interest income ................... $55,959 $22,153 $33,806
Total interest expense .................. 31,826 13,042 18,784
------- ------- -------
Net interest income ................ 24,133 9,111 15,022
Provision for loan losses ............... 630 527 103
------- ------- -------
Net interest income after
provision for loan losses ........ 23,503 8,584 14,919
------- ------- -------
Fees and service charges ................ 4,984 2,748 2,236
Gain on sale of loans, mortgage-
backed securities and
investment securities ................ 701 301 400
Other non-interest income ............... 396 274 122
------- ------- -------
Total non-interest income .......... 6,081 3,323 2,758
------- ------- -------
Income before non-interest expense ...... 29,584 11,907 17,677
Total non-interest expense .............. 20,849 7,061 13,788
------- ------- -------
Income before income taxes ......... 8,735 4,846 3,889
Income taxes ............................ 3,468 1,947 1,521
------- ------- -------
Net income ......................... $ 5,267 $ 2,899 $ 2,368
======= ======= =======
Page 18
<PAGE>
Net Interest Income Analysis -- The following table presents for the
periods indicated the total dollar amount of interest income from average
interest-earning assets and the resultant yields, as well as the interest
expense on average interest-bearing liabilities, expressed both in dollars and
rates. No tax equivalent adjustments were made. Non-accruing loans have been
included in the table as loans carrying a zero yield.
<TABLE>
<CAPTION>
Nine Month Period Ended
(Unaudited)
March 31, 1998 March 31, 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) ................... $663,273 $ 42,188 8.48% $395,336 $ 24,832 8.37%
Mortgage-backed securities (2) ............. 144,836 7,426 6.84 104,941 5,491 6.98
Investments (2) ............................ 107,733 5,573 6.90 52,799 2,489 6.29
Other interest-earning assets (3) .......... 9,771 520 7.10 17,028 846 6.62
Cash surrender value of life insurance ..... 6,492 252 5.18 3,551 148 5.56
----- --- ---- ----- --- ----
Total Interest-Earning Assets ................ 932,105 55,959 8.00 $573,655 $ 33,806 7.86%
======= ====== ==== ======== ======== ====
INTEREST-BEARING LIABILITIES:
Certificates of deposits ................... 380,354 16,348 5.73 $227,740 $ 9,734 5.70%
Passbook deposits .......................... 97,770 2,012 2.74 67,966 1,493 2.93
Demand and NOW accounts .................... 106,741 925 1.16 54,304 557 1.37
Money market accounts ...................... 51,884 1,555 4.00 26,274 680 3.45
------ ----- ---- ------ --- ----
Total deposits .......................... 636,749 20,840 4.36 376,284 12,464 4.42
FHLB advances and notes payable ............ 243,810 10,886 5.95 131,181 6,197 6.30
Collateralized mortgage obligations ........ 664 100 20.09 1,009 123 16.26
--- --- ----- ----- --- -----
Total Interest-Bearing Liabilities ........ $881,223 $ 31,826 4.82% $508,474 $ 18,784 4.93%
======== ======== ==== ======== ======== ====
Net interest income .......................... $ 24,133 $ 15,022
======== ========
Net interest rate spread ..................... 3.18% 2.93%
==== ====
Net interest earning assets .................. $ 50,882 $ 65,181
======== ========
Net interest margin (4) ...................... 3.45% 3.49%
==== ====
Average interest-earning assets to average
interest-bearing liabilities ............. 105.77% 112.82%
====== ======
</TABLE>
- ----------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves
(2) Includes held and available-for-sale categories
(3) Includes primarily short-term liquid assets
(4) Net interest income divided by average interest earning assets
(5) Based on average monthly balances
Page 19
<PAGE>
General - Net income increased $2.9 million to $5.3 million for the
nine month period ended March 31, 1998 from $2.4 million for the same period
last year. Net interest income after provision for loan losses increased $8.6
million and non-interest income increased $3.3 million while non-interest
expense and income tax expense increased $7.0 million and $2.0 million
respectively. The net interest margin decreased to 3.45% during the nine months
ended March 31, 1998 from 3.49% during the same period last year. The interest
rate spread at March 31, 1998 was 3.18% as compared to 2.93% at March 31, 1997.
The increase in net income is primarily the result of a combination of the
increased earnings as a result of the Acquisition of Security Bancorp in
February, 1997 and a one-time after tax charge to earnings of $1.4 million,
levied on all thrift institutions, to recapitalize the Savings Association
Insurance Fund ("SAIF") during the September 30, 1996 quarter.
Interest Income - Interest income increased $22.2 million to $56.0
million for the nine month period ended March 31, 1998 from $33.8 million for
the same period last year. The increase was primarily the result of a $358.4
million increase in average total interest-earning assets to $932.1 million
during the nine month period ended March 31, 1998 from $573.7 million during the
same period last year. In addition, the average yield on interest-earning assets
increased to 8.00% during the nine months ended March 31, 1998 from 7.86% during
the same period last year due primarily to the Acquisition.
Interest earned on loans receivable increased $17.4 million due
primarily to a $268.0 million increase in the average balance of loans
receivable to $663.3 million during the nine month period ended March 31, 1998
from $395.3 million for the same period last year. In addition, the average
yield on loans increased to 8.48% during the nine month period ended March 31,
1998 from 8.37% 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 $1.9 million
due primarily to a $39.9 million increase in the average balance of
mortgage-backed securities outstanding to $144.8 million for the nine month
period ended March 31, 1998 from $104.9 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 $2.8 million primarily due to an increase in the
average balance of these securities of $50.6 million to $124.0 million during
the nine month period ended March 31, 1998 from $73.4 million during the same
period last year. The average yield increased to 6.82% during the nine months
ended March 31, 1998 from 6.33% 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 $13.0 million to
$31.8 million for the nine month period ended March 31, 1998 from $18.8 million
for the same period last year. Interest expense on deposits increased $8.3
million due to an increase in the average balance of deposits of $260.4 million
to $636.7 million during the nine month period ended March 31, 1998 from $376.3
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 4.36% during the nine month period ended March 31, 1998
from 4.42% 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 $4.7 million due primarily to an increase in
the average balance of borrowed funds of $112.3 million to $244.5 million during
the nine month period ended March 31, 1998 from $132.2 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.
Page 20
<PAGE>
Provisions for Loan Losses - The provision for loan losses increased
$527,000 to $630,000 for the nine month period ended March 31, 1998 as compared
to a $103,000 provision for the same period last year.
Non-Interest Income - Non-interest income increased $3.3 million to
$6.1 million for the nine months ended March 31, 1998 from $2.8 million for the
same period last year. Fees and service charges increased $2.7 million and net
gain on sale of loans and securities available-for-sale increased $301,000,
while other non-interest income increased $274,000. 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 $7.0 million to
$20.8 million for the nine months ended March 31, 1998 from $13.8 million for
the same period last year. The increase was due primarily to the Acquisition and
a change in data processing systems. Included in the non-interest expense for
the period ended March 31, 1998, which was not included in the same period last
year, was $1.0 million related to the amortization of intangibles resulting from
the Acquisition as compared to $123,000 for the same period last year which
included one month of amortization expense. This was comprised of $466,000 for
the amortization of goodwill and $551,000 for the amortization of the core
deposit intangible. The nine months just ended included approximately $1.0
million in professional fees, marketing and other expenses related to the
consolidation of data processing systems and the change in name to Western
Security Bank.
Income Taxes - Income tax expense increased $1.9 million due to the
$4.8 million increase in income before income taxes.
Page 21
<PAGE>
Loan Quality -- The following table sets forth the amounts and
categories of non-performing assets in the Company's loan portfolio. At March
31, 1998 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)
March 31, June 30,
1998 1997
---------- -------
Non-accruing loans: (In Thousands)
Real Estate:
One- to four-family .............................. $2,590 $ 842
Multi-family ..................................... 89 --
Commercial ....................................... -- --
Construction ..................................... 288 --
Agriculture .......................................... 10 --
Commercial - non real estate ......................... 155 102
Consumer ............................................. 1,652 573
------ ------
Total ......................................... 4,784 1,517
------ ------
Accruing loans delinquent 90 days or more:
Real Estate:
One-to-four family ............................... 668 231
Multi-family ..................................... -- --
Commercial ....................................... -- --
Construction ..................................... 112 --
Agriculture .......................................... -- --
Commercial - non real estate ......................... -- --
Consumer ............................................. 503 605
------ ------
Total ......................................... 1,283 836
------ ------
Foreclosed Assets:
Real Estate:
One-to-four family ............................... 420 --
Multi-family ..................................... -- --
Commercial ....................................... -- --
Construction ..................................... -- --
Consumer ............................................. 69 82
------ ------
Total ......................................... 489 82
------ ------
Total non-performing assets .......................... $6,556 $2,435
====== ======
Non-Performing Assets -- Total non-performing assets increased $4.2
million to $6.6 million at March 31, 1998 from $2.4 million at June 30, 1997.
The $4.2 million increase from June 30, 1997 to March 31, 1998 was due primarily
to an increase in non-performing one - to four-family, construction, consumer
and foreclosed assets of $2.2 million, $400,000, $977,000 and $407,000
respectively. In the merger of Security, and in conjunction with the data center
conversion, the Bank implemented a uniform methodology as to the classification
of assets for non-performing loan classification. This change in classification
accounted for approximately $960,000 in the preceding increases in one-to
four-family loans. One- to four- family loans are considered non-accruing after
120 days and all other loans are automatically placed on non-accrual status
after 90 days. As a result of this change, interest income decreased
approximately $125,000 because additional loans were considered to be
non-accrual. Total non-performing assets as a percentage of total assets
increased to 0.64% at March 31, 1998 from 0.25% at June 30, 1997. The comparable
national composite rate for thrifts non-performing assets as a percentage of
total assets was 1.00% at December 31, 1997, which is the latest available
information as reported by the Office of Thrift Supervision. In addition to the
non-performing loans and
Page 22
<PAGE>
foreclosed assets set forth in the preceding table, as of March 31, 1998, 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.
At March 31, 1998 the recorded investment in impaired loans was $4.8
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 Nine Month
Period Ended Period Ended
March 31, March 31,
---------------- ---------------
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period............................ $4,942 $2,001 $4,651 $2,005
------ ------ ------ ------
Charge-Offs:
Real Estate:
One- to four-family.................................. -- -- -- --
Commercial .......................................... -- (16) -- (16)
Other:
Commercial........................................... -- -- -- --
Consumer............................................. (110) (37) (264) (85)
------ ------ ------ ------
Total charge-offs......................................... (110) (53) (264) (101)
------ ------ ------ ------
Recoveries:
Other:
Commercial........................................... -- -- 3 --
Consumer............................................. 2 6 24 8
------ ------ ------ ------
Total recoveries.......................................... 2 6 27 8
------ ------ ------ ------
Net charge-offs........................................... (108) (47) (237) (93)
Provisions charged to operations.......................... 210 61 630 103
Reserves acquired......................................... -- 2,481 -- 2,481
------ ------ ------ ------
Balance at end of period.................................. $5,044 $4,496 $5,044 $4,496
====== ====== ====== ======
Ratio of net charge-offs during the period to average loans
outstanding during the period........................ 0.02% 0.01% 0.04% 0.02%
==== ==== ==== ====
Ratio of net charge-offs during the period to average non-
performing assets during the period ................. 2.06% 2.73% 4.89% 6.81%
==== ==== ==== ====
Ratio of allowance for loan losses to loans receivable, net 0.76% 0.71% 0.76% 0.71%
==== ==== ==== ====
</TABLE>
Page 23
<PAGE>
Regulatory Capital -- At March 31, 1998 the Bank met all applicable
regulatory capital requirements, including the fully phased-in risk based
capital requirements. The following table provides information on an
unconsolidated basis indicating the extent to which the Bank exceeds the minimum
capital requirements under federal regulations as of March 31, 1998.
Approximate
(Dollars in Thousands) Actual Requirement Excess
------- ------------ -------
Tangible Capital:
Dollar Amount ............................. $78,665 $14,881 $63,784
Percent of tangible assets ................ 7.93% 1.50% 6.43%
Core Capital:
Dollar Amount ............................. $78,665 $39,682 $38,983
Percent of adjusted tangible assets ....... 7.93% 3.00% 4.93%
Risk-based Capital:
Dollar Amount ............................. $83,558 $50,828 $32,730
Percent of risk-weighted assets ........... 13.15% 8.00% 5.15%
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 December 31, 1997, the most recent date such
information is available from the OTS, the deduction from the Bank's total
capital would be $613,000 under this rule. Based on the Bank's excess risk-based
capital of $32.7 million at March 31, 1998, not withstanding this $613,000
deduction from capital, the Bank would continue to exceed its risk-based capital
requirement.
The OTS has amended its regulatory capital regulations to exclude from
regulatory capital the unrealized gains and losses, net of income taxes, as
required by FASB accounting standard SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". At March 31, 1998 the Bank had
$247,000 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.
Page 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 May 5, 1998 to report
the quarterly earnings release and a dividend declaration of
$0.125 per share.
Page 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)
Page 26
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-Q FOR THE FISCAL QUARTER ENDED MARCH 31, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> MAR-31-1998
<CASH> 34,193
<INT-BEARING-DEPOSITS> 100
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 108,832
<INVESTMENTS-CARRYING> 137,952
<INVESTMENTS-MARKET> 140,939
<LOANS> 670,650
<ALLOWANCE> 5,044
<TOTAL-ASSETS> 1,023,174
<DEPOSITS> 644,560
<SHORT-TERM> 95,320
<LIABILITIES-OTHER> 24,055
<LONG-TERM> 141,528
<COMMON> 56
0
0
<OTHER-SE> 108,638
<TOTAL-LIABILITIES-AND-EQUITY> 1,023,174
<INTEREST-LOAN> 42,189
<INTEREST-INVEST> 13,518
<INTEREST-OTHER> 252
<INTEREST-TOTAL> 55,959
<INTEREST-DEPOSIT> 20,841
<INTEREST-EXPENSE> 31,826
<INTEREST-INCOME-NET> 24,133
<LOAN-LOSSES> 630
<SECURITIES-GAINS> 6
<EXPENSE-OTHER> 4,881
<INCOME-PRETAX> 8,735
<INCOME-PRE-EXTRAORDINARY> 5,267
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,267
<EPS-PRIMARY> 0.99
<EPS-DILUTED> 0.94
<YIELD-ACTUAL> 0
<LOANS-NON> 4,784
<LOANS-PAST> 1,283
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,651
<CHARGE-OFFS> 264
<RECOVERIES> 27
<ALLOWANCE-CLOSE> 5,044
<ALLOWANCE-DOMESTIC> 5,044
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 609
</TABLE>
