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, 1999
OR
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[ ] 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
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(Exact name of registrant as specified in this charter)
DELAWARE 81-0487794
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer ID #)
incorporation or organization)
110 East Broadway, Missoula, Montana 59802
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, 406-721-5254
including area code ------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subjected to such filing
requirements for the past 90 days.
Yes X No
----------- ------------
The number of shares outstanding of each of the Issuer's Classes of Common
Stock, as of the latest date is:
Class: Common Stock, Par Value $0.01 per share; Outstanding at April 30, 1999
4,538,559 shares (including restricted shares)
<PAGE>
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION Page
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - March 31, 1999
(Unaudited) and June 30, 1998.........................................- 3 -
Consolidated Statements of Income - Three and Nine
Month Periods Ended March 31, 1999 and
March 31, 1998 (Unaudited)............................................- 4 -
Consolidated Statements of Comprehensive Income
for Three and Nine Month Periods Ended
March 31, 1999 and March 31, 1998 (Unaudited).........................- 5 -
Consolidated Statement of Stockholders' Equity for
the Nine Month Period Ended March 31, 1999
(Unaudited)...........................................................- 6 -
Consolidated Statements of Cash Flows for the Nine
Month Period Ended March 31, 1999 and
March 31, 1998 (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...............................................- 8 -
5. A Comparison of the Amortized Cost and
Estimated Fair Value of Investment
Securities 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 Periods
from June 30, 1998 to March 31, 1999.......................- 11 -
3. Comparison of Operating Results for the
Three Month Periods Ended
March 31, 1999 and March 31, 1998..........................- 14 -
4. Comparison of Operating Results for the
Nine Month Periods Ended
March 31, 1999 and March 31, 1998..........................- 18 -
ITEM 3. Quantitative and Qualitative Disclosures
about Market Risk.................................................- 25 -
PART II -- OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS..............................................- 28 -
ITEM 2 CHANGE IN SECURITIES...........................................- 28 -
ITEM 3 DEFAULTS UPON SENIOR SECURITIES................................- 28 -
ITEM 4 SUBMISSION OF MATTERS TO VOTE
OF SECURITY HOLDERS.........................................- 28 -
ITEM 5 OTHER INFORMATION..............................................- 28 -
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K...............................- 28 -
SIGNATURES................................................................- 29 -
- 2 -
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - March 31, 1999 (Unaudited) and June 30, 1998
<TABLE>
<S> <C> <C>
(Unaudited)
March 31, June 30,
(Dollars in thousands, except share and per share data) 1999 1998
------------- -------------
ASSETS
Cash and due from banks $ 18,349 $ 19,440
Interest-bearing due from banks 1,661 9,628
----------- -----------
Cash and cash equivalents 20,010 29,068
Interest-bearing deposits 1,885 100
Investment securities available-for-sale 110,922 108,511
Investment securities, at amortized cost (estimated market value of
$12,290 at March 31, 1999 and $16,974 at June 30, 1998) 12,230 16,847
Stock in Federal Home Loan Bank of Seattle, at cost 14,355 13,560
Mortgage-backed securities available-for-sale 56,189 24,135
Mortgage-backed securities, at amortized cost (estimated market
value of $90,025 at March 31, 1999 and $104,962 at June 30, 1998) 87,358 102,298
Loans available-for-sale 2,111 6,922
Loans receivable, net 624,894 650,371
Accrued interest receivable 7,073 7,778
Premises and equipment, net 29,125 30,089
Core deposit intangible 3,911 4,518
Goodwill 15,263 15,762
Cash surrender value of life insurance policies 6,928 6,705
Other assets 4,714 5,472
----------- -----------
Total assets $ 996,968 $ 1,022,136
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 645,848 $ 636,441
Repurchase agreements 6,236 6,233
Borrowed funds 230,873 248,953
Advances from borrowers for taxes and insurance 6,660 4,052
Income taxes 2,471 2,289
Accrued interest payable 5,786 4,480
Accrued expenses and other liabilities 7,643 9,988
----------- -----------
Total liabilities 905,517 912,436
----------- -----------
Stockholders' Equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized;
none outstanding --- ---
Common stock, $.01 par value, 10,000,000 shares authorized;
4,525,209 shares outstanding at March 31, 1999 and
5,585,303 outstanding at June 30, 1998 56 56
Additional paid-in capital 69,377 68,923
Common stock acquired by ESOP/RRP (2,282) (2,520)
Treasury stock, at cost (25,319) (3,461)
Net unrealized (loss) gain on securities available-for-sale (270) 23
Retained earnings, substantially restricted 49,889 46,679
----------- -----------
Total stockholders' equity 91,451 109,700
----------- -----------
Total liabilities and stockholders' equity $ 996,968 $ 1,022,136
=========== ===========
Book value per share $ 20.21 $ 19.64
=========== ===========
Tangible book value per share $ 15.97 $ 16.01
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
- 3 -
<PAGE>
Consolidated Statements of Income - Three and Nine Month Periods Ended March 31,
1999 and March 31, 1998 (Unaudited).
<TABLE>
<CAPTION>
(Dollars in thousands, except share and per share data) (Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------------------- -----------------------------------
1999 1998 1999 1998
-------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Interest income:
Loans receivable $ 12,988 $ 14,171 $ 40,658 $ 42,189
Mortgage-backed securities available-for-sale 383 476 1,010 1,595
Mortgage-backed securities 1,481 1,891 4,774 5,831
Investment securities available-for-sale 1,781 1,699 5,446 4,120
Investment securities 214 325 685 1,452
Interest-bearing deposits 145 210 506 520
Other 90 94 251 252
------------- ------------- ------------ -------------
Total interest income 17,082 18,866 53,330 55,959
------------- ------------- ------------ -------------
Interest expense:
NOW and money market demand 837 817 2,510 2,481
Savings 518 651 1,742 2,012
Certificates of deposit 4,985 5,489 15,676 16,348
Advances from FHLB-Seattle and other borrowed funds 3,031 3,886 9,873 10,985
------------- ------------- ------------ -------------
Total interest expense 9,371 10,843 29,801 31,826
------------- ------------- ------------ -------------
Net interest income 7,711 8,023 23,529 24,133
Provision for loan losses (345) (210) (855) (630)
------------- ------------- ------------ -------------
Net interest income after provision for loan losses 7,366 7,813 22,674 23,503
------------- ------------- ------------ -------------
Non-interest income:
Loan origination fees on loans sold 560 598 1,988 1,602
Service fees 1,090 1,096 3,482 3,382
Net gain on sale of loans available-for-sale 185 210 767 695
Net gain on sale of securities available-for-sale 25 2 25 6
Other 192 217 494 396
------------- ------------- ------------ -------------
Total non-interest income 2,052 2,123 6,756 6,081
------------- ------------- ------------ -------------
Non-interest expenses:
Compensation and employee benefits 3,253 3,538 9,845 9,985
Net occupancy expense of premises 507 541 1,542 1,605
Equipment and furnishings expense 593 478 1,687 1,248
Data processing expenses 409 441 1,224 1,218
Federal insurance premium 87 88 258 268
Intangibles amortization 361 356 1,107 1,018
Marketing and advertising 119 264 491 626
Other 1,627 1,875 4,756 4,881
------------- ------------- ------------ -------------
Total non-interest expense 6,956 7,581 20,910 20,849
------------- ------------- ------------ -------------
Income before income taxes 2,462 2,355 8,520 8,735
Income taxes (878) (995) (3,353) (3,468)
------------- ------------- ------------ -------------
Net income $ 1,584 $ 1,360 $ 5,167 $ 5,267
============= ============= ============ =============
Net income per share:
Basic $ 0.37 $ 0.26 $ 1.03 $ 0.99
============= ============= ============ =============
Diluted $ 0.35 $ 0.24 $ 0.98 $ 0.94
============= ============= ============ =============
Dividends per share $ 0.145 $ 0.125 $ 0.420 $ 0.360
============= ============= ============ =============
Dividend payout ratio - basic 39.19% 48.08% 40.78% 36.36%
============= ============= ============ =============
Average common and common equivalent shares outstanding
Basic 4,308,744 5,323,395 4,998,622 5,302,875
============= ============= ============ =============
Diluted 4,568,287 5,627,401 5,277,183 5,617,315
============= ============= ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
- 4 -
<PAGE>
Consolidated Statements of Comprehensive Income - Three and Nine Month Periods
Ended March 31, 1999 and March 31, 1998 (Unaudited).
<TABLE>
<CAPTION>
(Dollars in thousands) (Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------ --------------------------
1999 1998 1999 1998
--------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Net income $ 1,584 $ 1,360 $ 5,167 $ 5,267
--------- --------- --------- ----------
Other comprehensive income (loss): Unrealized gains (losses) on investment
securities:
Realized and unrealized holding gains (losses) arising during the period (573) 25 (463) 480
Add: reclassification adjustment for gains included in net income (3) (40) (10) (40)
--------- --------- --------- ----------
Other comprehensive income (loss), before tax (576) (15) (473) 440
Income tax benefit (expense) related to items of other comprehensive income 219 6 180 (167)
--------- --------- --------- ----------
Other comprehensive income (loss), after tax (357) (9) (293) 273
--------- --------- --------- ----------
Comprehensive income $ 1,227 $ 1,351 $ 4,874 $ 5,540
========= ========= ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
- 5 -
<PAGE>
Consolidated Statement of Stockholders' Equity for the Nine Month Period Ended
March 31, 1999 (Unaudited).
(Dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
Net
Unrealized
Gain (Loss)
Additional on Securities
Common Paid-In ESOP/ Treasury Available for Retained
Stock Capital RRP Stock Sale Earnings Total
------------ -------------- ------------ ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1998 $ 56 $ 68,923 $ (2,520) $ (3,461) $ 23 $ 46,679 $ 109,700
Net income - - - - - 5,167 5,167
Change in net unrealized (loss) on
securities available-for-sale - - - - (293) - (293)
ESOP shares committed to
be released - 198 170 - - - 368
Amortization of award of
RRP stock - - 68 - - - 68
Purchase of treasury stock,
at cost (1,082,854 shares) - - - (21,858) - - (21,858)
Stock options exercised
(22,766 shares) - 256 - - - - 256
Cash dividends declared
($0.420 per share) - - - - - (1,957) (1,957)
------ ------------ ---------- ---------- ------- -------- ----------
Balance at March 31, 1999 $ 56 $ 69,377 $ (2,282) $ (25,319) $ (270) $ 49,889 $ 91,451
====== ============ ========== ========== ======= ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
- 6 -
<PAGE>
Consolidated Statements of Cash Flows for the Nine month Periods Ended March 31,
1999 and March 31, 1998
(Unaudited)
(Dollars in thousands)
(Unaudited)
Nine Months Ended
March 31,
--------------------------
1999 1998
----------- ------------
Net cash provided by operating activities $ 31,944 $ 19,563
--------- ----------
Cash flows from investing activities:
Net change in interest-bearing deposits (1,785) 1,900
Purchases of
Investment securities - (5,483)
Investment securities available-for-sale (127,761) (99,274)
Mortgage-backed securities available-for-sale (42,672) (4,998)
Proceeds from maturities of:
Investment securities 4,636 16,276
Investment securities available-for-sale 112,150 59,445
Proceeds from sale of:
Investment securities available-for-sale 13,019 11,020
Mortgage-backed securities available-for-sale - 331
Principal payments from:
Investment securities available-for-sale 423 292
Mortgage-backed securities 15,093 8,027
Mortgage-backed securities available-for-sale 10,212 10,139
Net change in loans receivable 25,137 (35,222)
Purchases of premises and equipment (900) (5,478)
Proceeds from sale of premises and equipment 12 925
Purchase of Federal Home Loan Bank stock - (1,129)
--------- ----------
Net cash provided (used) by investing activities 7,564 (43,229)
--------- ----------
Cash flows from financing activities:
Net change in deposits excluding interest credited (9,148) (5,828)
Net change in repurchase agreements 3 1,231
Proceeds from borrowings 198,000 290,165
Payments on borrowings (216,121) (244,818)
Net change in advances from borrowers for
taxes and insurance 2,608 1,053
Proceeds from exercise of options 256 534
Payments to acquire treasury stock (21,857) (380)
Dividends paid to stockholders (2,307) (1,257)
--------- ----------
Net cash (used) provided by financing activities (48,566) 40,700
--------- ----------
Net (decrease) increase in cash and cash equivalents (9,058) 17,034
Cash and cash equivalents at beginning of period 29,068 17,159
--------- ----------
Cash and cash equivalents at end of period $ 20,010 $ 34,193
========= ==========
Supplemental disclosure of cash flow information:
Payments during the period for:
Interest $ 9,642 $ 10,136
Income taxes, net 2,905 3,641
========= ==========
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 and nine month periods ended March 31, 1999 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") audited 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 common share is calculated by dividing net
income by the weighted average number of common shares outstanding
during the period less unvested RRP and unallocated ESOP shares.
Diluted earnings per common share is calculated by dividing net income
by the weighted average number of common shares used to compute basic
EPS plus the incremental amount of potential common stock determined by
the treasury stock method.
The following table sets forth the computation of basic and
diluted earnings per share:
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
For the Three Month Period For the Nine Month Period
Ended March 31, Ended March 31,
(Dollars in thousands, except share and per share data) ---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Numbers of shares on which basic earnings per share is calculated:
Average outstanding shares during the period 4,308,744 5,323,395 4,998,622 5,302,875
Add: Incremental shares under stock option plans 257,833 302,646 276,929 297,185
Incremental shares related to RRPs 1,710 1,360 1,632 17,255
--------- --------- --------- ---------
Number of shares on which diluted earnings per share is calculated 4,568,287 5,627,401 5,277,183 5,617,315
--------- --------- --------- ---------
Net income applicable to common stockholders $ 1,584 $ 1,360 $ 5,167 $ 5,267
========= ========= ========= =========
Basic earnings per share $ 0.37 $ 0.26 $ 1.03 $ 0.99
========= ========= ========= =========
Diluted earnings per share $ 0.35 $ 0.24 $ 0.98 $ 0.94
========= ========= ========= =========
</TABLE>
Stock options to purchase 57,085 shares as of March 31, 1999 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 1998.
4. DIVIDENDS DECLARED
On April 20, 1999 the Board of Directors of the Company declared a
quarterly cash dividend of $0.145 per share, payable on May 21, 1999 to
stockholders of record on May 7, 1999.
- 8 -
<PAGE>
5. A COMPARISON OF THE AMORTIZED COST AND ESTIMATED FAIR VALUE OF
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES AT THE DATES
INDICATED IS AS FOLLOWS:
<TABLE>
<CAPTION>
HELD-TO-MATURITY
(Dollars in Thousands)
(Unaudited)
March 31, 1999 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 $ 2,999 $ 2 $ - $ 3,001 $ 2,994 $ 27 $ -- $ 3,021
U.S. Government obligations - - - - 100 -- -- 100
Corporate obligations 6,982 45 - 7,027 11,473 87 -- 11,560
Other investments 2,249 13 - 2,262 2,280 13 -- 2,293
------- ------ ---- -------- -------- ------ ---- --------
Total investment securities 12,230 60 - 12,290 16,847 127 -- 16,974
Mortgage-backed securities 87,358 2,696 (29) 90,025 102,298 2,695 (31) 104,962
------- ------ ---- -------- -------- ------ ---- --------
$99,588 $2,756 $(29) $102,315 $119,145 $2,822 $(31) $121,936
======= ====== ==== ======== ======== ====== ==== ========
</TABLE>
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE
(Dollars in Thousands)
(Unaudited)
March 31, 1999 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 $ 95,200 $ 103 $ (436) $ 94,867 $ 89,792 $ 100 $ (111) $ 89,781
Corporate obligations 15,906 66 (2) 15,970 18,658 62 -- 18,720
Other investments 3 82 - 85 3 7 -- 10
-------- ------- ------ -------- -------- ----- ------ --------
Total investment securities 111,109 251 (438) 110,922 108,453 169 (111) 108,511
Mortgage-backed securities 56,438 87 (336) 56,189 24,156 165 (186) 24,135
-------- ------- ------ -------- -------- ----- ------ --------
$167,547 $ 338 $ (774) $167,111 $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 MARCH 31, 1999 IS AS FOLLOWS:
HELD-TO-MATURITY
(Dollars in Thousands)
(Unaudited)
March 31, 1999
----------------------------
Amortized Estimated
Cost Fair Value
-------------- ------------
Due in one year or less $ 38 $ 38
Due after one year through 5 years 9,981 10,028
Due after 5 years through 10 years 237 237
Due after 10 years 1,974 1,987
--------- ---------
$ 12,230 $ 12,290
========= =========
AVAILABLE-FOR-SALE
(Dollars in Thousands)
(Unaudited)
March 31, 1999
----------------------------
Amortized Estimated
Cost Fair Value
------------ -----------
Due in one year or less $ 23,516 $ 23,588
Due after one year through 5 years 84,888 84,622
Due after 5 years through 10 years - -
Other and SBA 2,705 2,712
--------- ---------
$ 111,109 $ 110,922
========= =========
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 Western Security Bank's (the "Bank")
financial performance and could cause the Company'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, 1998 TO MARCH 31, 1999.
General - Total assets decreased $25.0 million to $997.0 million
at March 31, 1999 from $1.022 billion at June 30, 1998. The decrease in
assets was primarily the result of decreases in loans receivable and
loans available-for-sale of $30.3 million, and a decrease in investment
securities, Federal Home Loan Bank of Seattle (FHLB) stock and all
other interest earning assets of $7.4 million partially offset by an
increase in mortgage-backed securities of $17.1 million. Total deposits
increased $9.4 million while borrowed funds decreased $18.1 million and
stockholders' equity decreased $18.2 million.
Loans Receivable and Loans Available-for-Sale - Loans receivable
and loans available-for-sale decreased $30.3 million to $627.0 million
at March 31, 1999 from $657.3 million at June 30, 1998. Commercial,
commercial real estate and consumer loans increased $4.1 million, $9.5
million, and $10.2 million respectively while residential, agricultural
and consumer real estate secured decreased $36.9 million, $3.6 million
and $13.6 million respectively. The decrease in loans receivable was
primarily the result of principal repayments of $212.5 million and the
sale of loans available-for-sale of $89.6 million, partially offset by
loan originations of $271.5 million. Because of the interest rate risk
incurred with long term lending associated with fixed-rate one-to four
family loans (usually thirty year), the Bank sells a substantial
portion of the thirty year loans and reinvests the proceeds in stock
repurchases, debt reduction and other types of loans and investments.
Mortgage-Backed Securities - Mortgage-backed securities increased
$17.1 million to $143.5 million at March 31, 1999 from $126.4 million
at June 30, 1998 primarily as a result of purchases of $42.7 million,
which were partially offset by principal pay-downs of $25.3 million.
Investment Securities, FHLB Stock and Other Interest Earning
Assets - Investment securities, FHLB stock and other interest earning
assets decreased $7.4 million to $148.0 million at March 31, 1999 from
- 11 -
<PAGE>
$155.4 million at June 30, 1998. The $7.4 million decrease was
primarily the result of investment securities maturing and being
called, or paid off early, by issuers in excess of new purchases of
such investments.
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 for the twelve
months ending June 30, 1999.
From time to time, 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.
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, 1999, the amount of the unamortized premiums paid related to
the interest rate cap transactions was $51,000. 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,
1999:
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
=======
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>
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, 1999
the Bank did not have any interest rate swap agreements in place.
At March 31, 1999 the Bank had no structured notes.
Deposits - Deposits increased $9.4 million to $645.8 million at
March 31, 1999 from $636.4 million at June 30, 1998. Checking and money
market accounts increased $21.3 million while savings accounts and
certificates of deposit decreased $11.9 million.
Borrowed Funds and Repurchase Agreements - Borrowed funds and
repurchase agreements decreased $18.1 million to $237.1 million at
March 31, 1999 from $255.2 million at June 30, 1998. There were new
borrowings of $134.2 million with maturities of less than one year and
$63.8 million of advances maturing in one or more years. The increase
from new borrowings was more than offset by principal repayments and
maturities of $216.1 million.
Stockholders' Equity - Stockholders' equity decreased $18.2
million to $91.5 million at March 31, 1999 from $109.7 million at June
30, 1998. This decrease was due to the repurchase of 1,082,854 shares
of common stock at $20.00 per share for a total of $21.8 million. This
decrease was partially offset by increases in equity resulting from net
income for the nine month period of $5.2 million, $436,000 related to
contributions to the Employee Stock Ownership Plan and shares earned
and issued under the Recognition and Retention Plan, and the issuance
of 22,766 new common shares with a recorded value of $256,000 related
to exercised stock options. Stockholders' equity was also reduced $2.0
million for dividends declared during the nine month period and a
decrease of $293,000 related to the change in unrealized losses
associated with assets classified as available-for-sale being adjusted
to market value in accordance with Statement of Financial Accounting
Standards No. 115.
- 13 -
<PAGE>
3. COMPARISON OF OPERATING RESULTS FOR THE THREE MONTH PERIOD ENDED
MARCH 31, 1999 AND MARCH 31, 1998
RESULTS OF OPERATIONS
Three Months Ended
March 31,
(Unaudited)
------------------------------------
1999 1998
Amount Change Amount
----------- ----------- ----------
(In Thousands)
Total interest income $ 17,082 $ (1,784) $ 18,866
Total interest expense (9,371) 1,472 (10,843)
-------- -------- --------
Net interest income 7,711 (312) 8,023
Provision for loan losses (345) (135) (210)
-------- -------- --------
Net interest income after
provision for loan losses 7,366 (447) 7,813
-------- -------- --------
Fees and service charges 1,650 (44) 1,694
Net gain on sale of loans
available-for-sale 185 (25) 210
Net gain on sale of securities
available-for-sale 25 23 2
Other non-interest income 192 (25) 217
-------- -------- --------
Total non-interest income 2,052 (71) 2,123
-------- -------- --------
Income before non-interest expense 9,418 (518) 9,936
Total non-interest expense (6,956) 625 (7,581)
-------- -------- --------
Income before income taxes 2,462 107 2,355
Income taxes (878) 117 (995)
-------- -------- --------
Net income $ 1,584 $ 224 $ 1,360
======== ======== ========
- 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, 1999 March 31, 1998
--------------------------------------- -------------------------------------
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) $ 628,784 $ 12,988 8.26% $ 674,817 $ 14,171 8.40%
Mortgage-backed securities (2) 125,787 1,864 5.93 138,388 2,367 6.84
Investment securities (2) 133,149 1,995 5.99 115,674 2,024 7.00
Other interest-earning assets (3) 5,159 145 11.24 14,305 210 5.87
Cash surrender value of life insurance 6,902 90 5.22 6,599 94 5.70
---------- --------- ------ --------- ----------- ------
Total Interest-Earning Assets $ 899,781 $ 17,082 7.59% $ 949,783 $ 18,866 7.95%
========== ========= ====== ========= =========== ======
INTEREST-BEARING LIABILITIES:
Certificates of deposits $ 373,402 $ 4,985 5.34% $ 386,531 $ 5,489 5.68%
Passbook deposits 90,543 518 2.29 95,469 651 2.73
Demand and NOW accounts 110,970 190 0.68 108,329 285 1.05
Money market accounts 68,449 647 3.78 53,513 531 3.97
---------- --------- ------ --------- ----------- ------
Total deposits 643,364 6,340 3.94 643,842 6,956 4.32
Borrowed funds 221,663 3,031 5.47 255,347 3,887 6.09
---------- --------- ------ --------- ----------- ------
Total Interest-Bearing Liabilities $ 865,027 $ 9,371 4.33% $ 899,189 $ 10,843 4.82%
========== ========= ====== ========= =========== ======
Net interest income $ 7,711 $ 8,023
========= ===========
Net interest rate spread 3.26% 3.13%
====== ======
Net interest earning assets $ 34,754 $ 50,594
========== =========
Net interest margin (4) 3.43% 3.38%
====== ======
Average interest-earning assets to average
interest-bearing liabilities 104.02% 105.63%
====== ======
<FN>
(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
</FN>
</TABLE>
- 15 -
<PAGE>
General - Net income increased $224,000 to $1.6 million for the quarter
ended March 31, 1999 as compared to $1.4 million for the same period last
year, due primarily to a decrease in non-interest expense. Net interest
income after provision for loan losses decreased $447,000 and non-interest
income decreased $71,000 while non-interest expense decreased $625,000 and
income tax expense decreased $117,000. The net interest margin (net
interest income divided by average interest-earning assets) increased to
3.43% during the quarter ended March 31, 1999 from 3.38% during the same
period last year. The interest rate spread increased to 3.26% at March 31,
1999 as compared to 3.13% at March 31, 1998.
Interest Income - Interest income decreased $1.8 million to $17.1
million for the three month period ended March 31, 1999 from $18.9 million
for the same period last year. The decrease was the result of a decrease in
the average yield on average interest earning assets to 7.59% during the
quarter ended March 31, 1999 from 7.95% during the same period last year
and a decrease in the average balance of interest earning assets of $50.0
million to $899.8 million during the quarter ended March 31, 1999 from
$949.8 million during the same period last year.
Interest earned on loans receivable decreased $1.2 million due
primarily to a $46.0 million decrease in the average balance of loans
receivable to $628.8 million during the three month period ended March 31,
1999 from $674.8 million for the same period last year. In addition, the
average yield on loans receivable decreased to 8.26% during the three month
period ended March 31, 1999 from 8.40% for the same period last year.
Interest earned on mortgage-backed securities decreased $503,000 due
primarily to a $12.6 million decrease in the average balance of
mortgage-backed securities outstanding to $125.8 million for the three
month period ended March 31, 1999 from $138.4 million during the same
period last year. The average yield decreased to 5.93% during the three
month period ended March 31, 1999 from 6.84% for the same period last year.
Interest earned on investment securities, FHLB stock and other interest
earning assets decreased $98,000 primarily due to a decrease in the average
yield to 6.14% during the quarter ended March 31, 1999 from 6.82% for the
same period last year. The average balance of these securities increased
$8.6 million to $145.2 million during the quarter ended March 31, 1999 from
$136.6 million during the same period last year.
Interest Expense - Total interest expense decreased $1.4 million to
$9.4 million for the three month period ended March 31, 1999 from $10.8
million for the same period last year. Interest expense on deposits
decreased $616,000 due primarily to a decrease in the average rate paid on
deposits to 3.94% during the quarter ended March 31, 1999 from 4.32% for
the same period last year. The average balance of deposits increased
$478,000 to $643.4 million during the three month period ended March 31,
1999 from $643.8 million during the same period last year. Interest expense
on borrowed funds decreased $856,000 due both to a decrease in the average
balance of borrowed funds of $33.6 million to $221.7 million during the
three month period ended March 31, 1999 from $255.3 million for the same
period last year and a decrease in the average rate paid on borrowed funds
to 5.47% during the quarter ended March 31, 1999 from 6.09% during the same
period last year.
Provisions for Loan Losses - The provision for loan losses increased
$135,000 to $345,000 for the three month period ended March 31, 1999 as
compared to a $210,000 provision for the same period last year. Increased
provisions for loan losses related to the consumer loan dealer finance
program was the primary reason for the increase in provision for loan
losses.
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, 1999 the Company had
$3.9 million of non-performing assets (representing 0.39%
- 16 -
<PAGE>
of total assets) compared to $5.0 million at June 30, 1998 (representing
0.49% of total assets). At March 31, 1999 the Company had an allowance for
loan losses to non-performing assets of 127.4% as compared to 97.4% 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 decreased $71,000 to $2.0
million for the quarter ended March 31, 1999 from $2.1 million for the same
quarter last year. Fees, service charges and other income decreased $69,000
and net gain on sale of loans and securities available-for-sale decreased
$2,000. The current low interest rate environment has produced strong
mortgage loan refinance activity which resulted in $745,000 of loan
origination fees and gains on sale of loans available-for-sale during the
quarter ended March 31, 1999 as compared to $808,000 during the same period
last year. Seasonal fluctuations in loan volume and a decline in loan
volume due to increased interest rates could adversely affect origination
fees and gains on sale of loans available for sale.
Non-Interest Expense - Non-interest expense decreased $625,000 to $7.0
million for the quarter ended March 31, 1999 from $7.6 million for the same
quarter last year. The $625,000 decrease was primarily the result of
decreases in marketing, other operating, and compensation and employee
benefit costs of $145,000, $248,000 and $285,000 respectively. During the
quarter ended March 31, 1998 the bank incurred significant one-time
expenses as the Bank completed it's conversion to a new data processing
system and related advertising costs associated with the change in the
Bank's name.
Income Taxes - Income tax expense decreased $117,000 due primarily a
reduction in the accrual for income tax expense on a year to date basis.
- 17 -
<PAGE>
4. COMPARISON OF OPERATING RESULTS FOR THE NINE MONTH PERIOD ENDED MARCH 31,
1999 AND MARCH 31, 1998.
RESULTS OF OPERATIONS
Nine Months Ended
March 31,
(Unaudited)
----------------------------
1999 1998
Amount Change Amount
--------- -------- ---------
(In Thousands)
Total interest income $ 53,330 $(2,629) $ 55,959
Total interest expense (29,801) 2,025 (31,826)
-------- ------- --------
Net interest income 23,529 (604) 24,133
Provision for loan losses (855) (225) (630)
-------- ------- --------
Net interest income after
provision for loan losses 22,674 (829) 23,503
-------- ------- --------
Fees and service charges 5,470 486 4,984
Net gain on sale of loans available-for-sale 767 72 695
Net gain on sale of securities available-for-sale 25 19 6
Other non-interest income 494 98 396
-------- ------- --------
Total non-interest income 6,756 675 6,081
-------- ------- --------
Income before non-interest expense 29,430 (154) 29,584
Total non-interest expense (20,910) (61) (20,849)
-------- ------- --------
Income before income taxes 8,520 (215) 8,735
Income taxes (3,353) 115 (3,468)
-------- ------- --------
Net income $ 5,167 $ (100) $ 5,267
======== ======= ========
- 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, 1999 March 31, 1998
---------------------------------- --------------------------------
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) $643,084 $40,658 8.43% $663,273 $ 42,189 8.48%
Mortgage-backed securities (2) 119,914 5,784 6.43 144,836 7,426 6.84
Investment securities (2) 130,047 6,131 6.29 107,733 5,572 6.90
Other interest-earning assets (3) 10,495 506 6.43 9,771 520 7.10
Cash surrender value of life insurance 6,826 251 4.90 6,492 252 5.18
-------- ------- ------ -------- -------- ------
Total Interest-Earning Assets $910,366 $53,330 7.81% $932,105 $ 55,959 8.00%
======== ======= ====== ======== ======== =====
INTEREST-BEARING LIABILITIES:
Certificates of deposits $375,970 $15,676 5.56% $380,354 $ 16,348 5.73%
Passbook deposits 90,966 1,742 2.55 97,770 2,012 2.74
Demand and NOW accounts 112,240 681 0.81 106,741 925 1.16
Money market accounts 62,291 1,829 3.91 51,884 1,555 4.00
-------- ------- ------ -------- -------- ------
Total deposits 641,467 19,928 4.14 636,749 20,840 4.36
Borrowed funds 224,969 9,873 5.85 244,474 10,986 5.99
-------- ------- ------ -------- -------- ------
Total Interest-Bearing Liabilities $866,436 $29,801 4.59% $881,223 $ 31,826 4.82%
======== ======= ====== ======== ======== =====
Net interest income $23,529 $ 24,133
======= ========
Net interest rate spread 3.22% 3.18%
====== ======
Net interest earning assets $ 43,930 $ 50,882
======== ========
Net interest margin (4) 3.45% 3.45%
====== ======
Average interest-earning assets to average
interest-bearing liabilities 105.07% 105.77%
====== ======
<FN>
(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
</FN>
</TABLE>
- 19 -
<PAGE>
General -- Net income decreased $100,000 to $5.2 million for the nine
month period ending March 31, 1999 as compared to $5.3 million for the same
period last year. Net interest income after provision for loan losses
decreased $829,000 and non-interest income increased $675,000 while
non-interest expense increased $61,000. The net interest margin (net
interest income divided by average interest-earning assets) remained stable
at 3.45% during the nine months ended March 31, 1999 and March 31, 1998.
The interest rate spread at March 31, 1999 increased to 3.22% as compared
to 3.18% at March 31, 1998.
Interest Income -- Interest income decreased $2.6 million to $53.3
million for the nine month period ended March 31, 1999 from $55.9 million
for the same period last year. The decrease was the result of a decrease in
the yield on earning assets to 7.81% during the nine months ended March 31,
1999 from 8.00% during the same period last year and a $21.7 million
decrease in average interest earning assets to $910.4 million during the
nine month period ended March 31, 1999 from $932.1 million during the same
period last year.
Interest earned on loans receivable decreased $1.5 million due
primarily to a $20.2 million decrease in the average balance of loans
receivable to $643.1 million during the nine month period ended March 31,
1999 from $663.3 million for the same period last year. In addition, the
average yield on loans decreased slightly to 8.43% during the nine month
period ended March 31, 1999 from 8.48% for the same period last year.
Interest earned on mortgage-backed securities decreased $1.6 million
due primarily to a $24.9 million decrease in the average balance of
mortgage-backed securities outstanding to $119.9 million for the nine month
period ended March 31, 1999 from $144.8 million during the same period last
year.
Interest earned on investment securities, FHLB stock and other interest
earning assets increased $543,000 primarily due to an increase in the
average balance of these securities of $23.4 million to $147.4 million
during the nine months ended March 31, 1999 from $124.0 million during the
same period last year. The average yield decreased to 6.23% during the nine
months ended March 31, 1999 from 6.82% for the same period last year.
Interest Expense -- Total interest expense decreased $2.0 million to
$29.8 million for the nine month period ended March 31, 1999 from $31.8
million for the same period last year. Interest expense on deposits
decreased $912,000 due primarily to a decrease in the average rate paid on
deposits to 4.14% during the nine month period ended March 31, 1999 from
4.36% during the same period last year. The average balance of deposits
increased $4.8 million to $641.5 million during the nine month period ended
March 31, 1999 from $636.7 million during the same period last year.
Interest expense on borrowed funds decreased $1.1 million due primarily to
an decrease in the average balance of borrowed funds of $19.5 million to
$225.0 million during the nine month period ended March 31, 1999 from
$244.5 million for the same period last year.
Provisions for Loan Losses -- The provision for loan losses increased
$225,000 to $855,000 for the nine month period ended March 31, 1999 as
compared to a $630,000 provision for the same period last year. Increased
provisions for loan losses related to the consumer loan dealer finance
program was the primary reason for the increase in provision for loan
losses.
Non-Interest Income - Non-interest income increased $675,000 to $6.8
million for the nine months ended March 31, 1999 from $6.1 million for the
same nine months last year. Fees, service charges and other income
increased $584,000 and net gain on sale of loans and securities
available-for-sale increased $91,000.
Non-Interest Expense -- Non-interest expense increased $61,000 to $20.9
million for the nine months ended March 31, 1999 from $20.8 million for the
same period last year. The nine months ended March 31, 1999 included
$295,000 in expenses related to the testing of the year 2000 issues and
other professional fees. The nine months ended March 31, 1998 includes
significant one-time expenses the Bank incurred as the Bank
- 20 -
<PAGE>
completed its conversion to a new data processing system and related
advertising costs associated with the change in the Bank's name.
Income Taxes -- Income tax expense decreased $115,000 primarily as a
result of a $215,000 decrease in income before income taxes and also due to
a reduction in the accrual for income tax expense on a year-to-date basis.
- 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, 1999 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 less
estimated disposal costs.
(Unaudited)
-------------------------
March 31, June 30,
1999 1998
--------- -----------
Non-accruing loans: (In Thousands)
Real Estate:
One-to-four family $ 886 $ 1,967
Multi-family - 89
Commercial - 35
Construction 262 362
Agricultural 689 32
Commercial - non real estate 44 -
Consumer 1,005 1,504
-------- --------
Total 2,886 3,989
-------- --------
Accruing loans delinquent 90 days or more:
Real Estate:
One-to-four family 294 442
Multi-family - -
Construction - -
Agricultural - 10
Commercial - non real estate 42 -
Consumer 114 174
-------- --------
Total 450 626
-------- --------
Foreclosed Assets:
Real Estate:
One-to-four family 401 279
Multi-family - -
Commercial 26 28
Construction - -
Consumer 169 114
-------- --------
Total 596 421
-------- --------
Total non-performing assets $ 3,932 $ 5,036
======== ========
Total as a percentage of total assets 0.39% 0.49%
======== ========
Total allowance for loan losses to assets non-
performing loans (exclusive of foreclosed assets) 150.15% 106.33%
======== ========
Total allowance for loan losses to total
non-performing assets 127.39% 97.44%
======== ========
Non-Performing Assets - Total non-performing assets decreased $1.1
million to $3.9 million at March 31, 1999 from $5.0 million at June 30,
1998. The $1.1 million decrease in non-performing assets was primarily the
result of a $1.1 million decrease in non-performing one-to-four family
loans. Non-performing agriculture loans, totaling five loans increased
$647,000. Total Non-performing assets as a percentage of total assets
decreased to 0.39% at March 31, 1999 as compared to 0.49% at June 30, 1998.
The 0.39% is less than the national composite for thrifts non-performing
assets as a percentage of assets of 0.77% at December 31, 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 March 31, 1999, there were six
- 22 -
<PAGE>
agricultural loans to two different borrowers totaling $1.9 million, three
commercial real estate loans totaling $3.4 million and four commercial
loans to one borrower totaling $1.1 million 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, 1999 the recorded investment in impaired loans was $2.9
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.
For the Three Month For the Nine Month
Periods Ended Periods Ended
March 31, March 31,
---------------- ------------------
1999 1998 1999 1998
------ -------- ------- ---------
(Dollars in Thousands)
Balance at beginning of period............ $4,846 $4,942 $4,907 $4,651
------ ------ ------ ------
Charge-Offs:
Real Estate:
One- to four-family.................. -- -- (130) --
Commercial .......................... -- -- -- --
Other:
Commercial........................... (1) -- (49) --
Consumer............................. (199) (110) (637) (264)
------ ------ ------ ------
Total charge-offs......................... (200) (110) (816) (264)
------ ------ ------ ------
Recoveries:
Other:
Commercial........................... 4 -- 4 3
Consumer............................. 14 2 59 24
------ ------ ------ ------
Total recoveries.......................... 18 2 63 27
------ ------ ------ ------
Net charge-offs........................... (182) (108) (753) (237)
Provisions charged to operations.......... 345 210 855 630
Reserves acquired......................... -- -- -- --
------ ------ ------ ------
Balance at end of period.................. $5,009 $5,044 $5,009 $5,044
====== ====== ====== ======
Ratio of net charge-offs during the
period to average loans
outstanding during the period........ 0.03% 0.02% 0.12% 0.04%
====== ====== ====== ======
Ratio of net charge-offs during the
period to average non- performing
assets during the period ............ 4.28% 2.06% 16.50% 4.88%
====== ====== ====== ======
- 23 -
<PAGE>
Regulatory Capital -- At March 31, 1999 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,
1999.
<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 March 31, 1999: Amount Ratio Amount Ratio Amount Ratio
--------- -------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk-weighted assets) $73,788 12.08% $48,862 8.00% $61,078 10.00%
Core (Tier 1) capital (to risk-weighted assets) 68,820 11.27 24,431 4.00 36,647 6.00
Core (Tier 1) capital (to adjusted assets) 68,820 7.07 38,932 4.00 48,665 5.00
Tangible capital (to tangible assets) 68,820 7.07 14,600 1.50 14,600 1.50
</TABLE>
- 24 -
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Management believes there has been no material change in interest
rate risk since June 30, 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 Readiness Disclosure"
General. The year 2000 ("Y2K") issue confronting the Bank and its
suppliers, customers, customer's 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 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 assessment of applications and system
software;
- 25 -
<PAGE>
o Built an internal tracking database for application and vendor
software and validation;
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 and mailed brochures 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.
o Completed validation testing of 85% of mission critical systems.
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. An assessment of applications and software (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 assessment of applications and system
software 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 with the exception of four branch telephone systems
and 20 ATM machines which are expected to be completed by June 30, 1999.
The Bank is currently working with its third party vendors in order 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.
- 26 -
<PAGE>
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 85% completed. The Bank's validation
phase is expected to be completed by June 30, 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 June 30, 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 June 30, 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 $220,000. 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. The
Bank has been informed on mission critical systems that each of its primary
vendors are either ready, or will be timely Y2K-ready.
- 27 -
<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 current reports on Form 8-K on May 10,
1999 to report the quarterly earnings release and a dividend
declaration of $0.145 per share and April 19, 1999 to report
the hiring of Ralph K. Holliday as President/CEO of Western
Security Bank.
- 28 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
WESTERFED FINANCIAL CORPORATION
Date May 13, 1999 /s/ Lyle R. Grimes
------------------ -----------------------------------
Lyle R. Grimes
Chairman of the Board/President and
Chief Executive Officer
(Duly Authorized Officer)
Date May 13, 1999 /s/ James A. Salisbury
------------------- -----------------------------------
James A. Salisbury
Executive Vice President/Treasurer and
Chief Financial Officer
(Principal Finance and Accounting Officer)
- 29 -
<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, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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