UNITED STATES SECURITY AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarter period ended December 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, 406-543-1338
including area code -------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subjected to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of each of the Issuer's
Classes of Common Stock, as of the latest date is:
Class: Common Stock, Par Value $0.01 per share; Outstanding at January 31, 1999
-- 4,511,507 shares (including restricted shares)
<PAGE>
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION Page
- ------------------------------- ----
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets -- December 31, 1998 (Unaudited) and
June 30, 1998 ........................................................ - 3-
Consolidated Statements of Income -- Three and Six Month Periods Ended
December 31, 1998 and December 31, 1997 (Unaudited) .................. - 4-
Consolidated Statements of Comprehensive Income for Three and Six Month
Periods Ended December 31, 1998 and December 31, 1997 (Unaudited) .... - 5-
Consolidated Statement of Stockholders' Equity for the Six Month Period
Ended December 31, 1998 (Unaudited) .................................. - 6-
Consolidated Statements of Cash Flows for the Six Month Period Ended
December 31, 1998 and December 31, 1997 (Unaudited) .................. - 7-
Notes to Consolidated Financial Statements
1. Basis of Presentation ............................................ - 8-
2. Cash Equivalents ................................................. - 8-
3. Computation of Net Income per Share .............................. - 8-
Recently Issued Accounting Standard .............................. - 8-
4. Dividends Declared ............................................... - 8-
5. A Comparison of the Amortized Cost and Estimated Fair Value of
Investment and Mortgage-backed Securities ...................... - 9-
A Comparison of the Amortized Cost and Estimated Fair Value of
Investment Securities by Contractual Maturities ................ -10-
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
1. Forward Looking Statements ....................................... -11-
2. Changes in Financial Condition. Comparison of the Six Month
Period from June 30, 1998 to December 31, 1998 ................. -11-
3. Comparison of Operating Results for the Three Month Period
Ended December 31, 1998 and December 31, 1997 .................. -14-
4. Comparison of Operating Results for the Six Month Period Ended
December 31, 1998 and December 31, 1997 ........................ -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 -- December 31, 1998 (Unaudited) and June 30, 1998
(Dollars in thousands, except share and per share data)
(Unaudited)
December 31, June 30,
ASSETS 1998 1998
------ ------------ ----------
Cash and due from banks .............................. $ 24,294 $ 19,440
Interest-bearing due from banks ...................... 15,340 9,628
-------- ----------
Cash and cash equivalents ........................ 39,634 29,068
Interest-bearing deposits ............................ 1,885 100
Investment securities available-for-sale ............. 86,210 108,511
Investment securities, at amortized cost (estimated
market value of $12,330 at December 31, 1998 and
$16,974 at June 30, 1998) .......................... 12,225 16,847
Stock in Federal Home Loan Bank of Seattle, at cost .. 14,086 13,560
Mortgage-backed securities available-for-sale ........ 17,499 24,135
Mortgage-backed securities, at amortized cost
(estimated market value of $94,541 at December 31,
1998 and $104,962 at June 30, 1998) ................ 92,048 102,298
Loans available-for-sale ............................. 8,881 6,922
Loans receivable, net ................................ 631,271 650,371
Accrued interest receivable .......................... 6,830 7,778
Premises and equipment, net .......................... 29,670 30,089
Core deposit intangible .............................. 4,105 4,518
Goodwill ............................................. 15,429 15,762
Cash surrender value of life insurance policies ...... 6,848 6,705
Other assets ......................................... 3,960 5,472
-------- ----------
Total assets ..................................... $970,581 $1,022,136
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Deposits ........................................... $651,772 $ 636,441
Repurchase agreements .............................. 7,211 6,233
Borrowed funds ..................................... 201,869 248,953
Advances from borrowers for taxes and insurance .... 3,208 4,052
Income taxes ....................................... 2,451 2,289
Accrued interest payable ........................... 5,624 4,480
Accrued expenses and other liabilities ............. 7,812 9,988
-------- ----------
Total liabilities ................................ 879,947 912,436
-------- ----------
Stockholders' Equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized; none outstanding ..................... -- --
Common stock, $.01 par value, 10,000,000 shares
authorized; 4,511,507 shares outstanding at
December 31, 1998 and 5,585,303 outstanding at
June 30, 1998 .................................... 56 56
Additional paid-in capital ......................... 69,169 68,923
Common stock acquired by ESOP/RRP .................. (2,347) (2,520)
Treasury stock, at cost ............................ (25,265) (3,461)
Net unrealized gain on securities available-for-sale 87 23
Retained earnings, substantially restricted ........ 48,934 46,679
-------- ----------
Total stockholders' equity ....................... $ 90,634 $ 109,700
-------- ----------
Total liabilities and stockholders' equity ..... $970,581 $1,022,136
======== ==========
Book value per share ............................. $ 20.09 $ 19.64
======== ==========
Tangible book value per share .................... $ 15.76 $ 16.01
======== ==========
See accompanying notes to consolidated financial statements.
-3-
<PAGE>
Consolidated Statements of Income -- Three and Six Month Periods
Ended December 31, 1998 and December 31, 1997 (Unaudited).
<TABLE>
<CAPTION>
(Dollars in thousands, except share and per share data)
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income:
Loans receivable ............................ $ 13,604 $ 14,211 $ 27,670 $ 28,018
Mortgage-backed securities available-for-sale 272 540 627 1,119
Mortgage-backed securities .................. 1,588 1,950 3,293 3,940
Investment securities available-for-sale .... 1,797 1,203 3,666 2,421
Investment securities ....................... 214 612 471 1,127
Interest-bearing deposits ................... 273 167 361 310
Other ....................................... 80 81 160 158
---------- ---------- ---------- ----------
Total interest income ................... 17,828 18,764 36,248 37,093
---------- ---------- ---------- ----------
Interest expense:
NOW and money market demand ................. 792 847 1,673 1,664
Savings ..................................... 557 671 1,177 1,361
Certificates of deposit ..................... 5,312 5,468 10,738 10,859
Advances from FHLB-Seattle and other
borrowed funds ............................ 3,204 3,665 6,842 7,099
---------- ---------- ---------- ----------
Total interest expense .................. 9,865 10,651 20,430 20,983
---------- ---------- ---------- ----------
Net interest income ..................... 7,963 8,113 15,818 16,110
Provision for loan losses ..................... (270) (256) (510) (420)
---------- ---------- ---------- ----------
Net interest income after provision for
loan losses ........................... 7,693 7,857 15,308 15,690
---------- ---------- ---------- ----------
Non-interest income:
Loan origination fees ....................... 742 476 1,429 1,004
Service fees ................................ 1,180 1,161 2,392 2,286
Net gain on sale of loans and securities
available-for-sale ........................ 325 267 581 489
Other ....................................... 130 91 302 179
---------- ---------- ---------- ----------
Total non-interest income ............... 2,377 1,995 4,704 3,958
---------- ---------- ---------- ----------
Non-interest expenses:
Compensation and employee benefits .......... 3,234 2,978 6,592 6,448
Net occupancy expense of premises ........... 519 532 1,035 1,064
Equipment and furnishings expense ........... 542 381 1,095 770
Data processing expenses .................... 402 396 815 776
Federal insurance premium ................... 83 90 171 180
Intangibles amortization .................... 373 331 746 662
Marketing and advertising ................... 219 106 373 362
Other ....................................... 1,613 1,601 3,127 3,006
---------- ---------- ---------- ----------
Total non-interest expense .............. 6,985 6,415 13,954 13,268
---------- ---------- ---------- ----------
Income before income taxes .................... 3,085 3,437 6,058 6,380
Income taxes .................................. (1,256) (1,339) (2,475) (2,473)
---------- ---------- ---------- ----------
Net income .............................. $ 1,829 $ 2,098 $ 3,583 $ 3,907
========== ========== ========== ==========
Net income per share:
Basic ..................................... $ 0.35 $ 0.40 $ 0.67 $ 0.74
========== ========== ========== ==========
Diluted ................................... $ 0.33 $ 0.37 $ 0.64 $ 0.70
========== ========== ========== ==========
Dividends per share ........................... $ 0.140 $ 0.120 $ 0.275 $ 0.235
========== ========== ========== ==========
Dividend payout ratio -- basic ................ 40.00% 30.00% 41.04% 31.75%
========== ========== ========== ==========
Average common and common equivalent
shares outstanding
Basic ..................................... 5,294,511 5,300,264 5,332,611 5,292,615
========== ========== ========== ==========
Diluted ................................... 5,565,944 5,621,237 5,620,681 5,610,129
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE>
Consolidated Statements of Comprehensive Income -- Three and Six Month Periods
Ended December 31, 1998 and December 31, 1997 (Unaudited).
<TABLE>
<CAPTION>
(Dollars in thousands)
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
------------------ ----------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income .......................................... $1,829 $2,098 $3,583 $3,907
------ ------ ------ ------
Other comprehensive income (loss):
Unrealized gains (losses) on investment securities:
Realized and unrealized holding gains (losses)
arising during the period ..................... (640) (107) 103 463
Less: reclassification adjustment for gains
included in net income ........................ -- (8) -- (8)
------ ------ ------ ------
Other comprehensive income (loss), before tax ....... (640) (115) 103 455
Income tax benefit (expense) related to items of
other comprehensive income ........................ 243 44 (39) (173)
------ ------ ------ ------
Other comprehensive income (loss), after tax ........ (397) (71) 64 282
------ ------ ------ ------
Comprehensive income ................................ $1,432 $2,027 $3,647 $4,189
====== ====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
-5-
<PAGE>
Consolidated Statement of Stockholders' Equity for the Six Month Period Ended
December 31, 1998 (Unaudited).
<TABLE>
<CAPTION>
(Dollars in thousands, except share and per share data)
Net
Unrealized
Gain on
Additional Securities
Common Paid-In ESOP/ Treasury Retained Available for
Stock Capital RRP Stock Earnings Sale Total
------ ---------- ------- -------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1998 ....... $ 56 $68,923 $(2,520) $ (3,461) $46,679 $ 23 $109,700
Net income ..................... -- -- -- -- 3,583 -- 3,583
Change in net unrealized gain on
securities available-for-sale -- -- -- -- -- 64 64
ESOP shares committed to
be released .................. -- 144 114 -- -- -- 258
Amortization of award of
RRP stock .................... -- -- 59 -- -- -- 59
Purchase of treasury stock,
at cost -- 1,082,854 shares .. -- -- -- (21,804) -- -- (21,804)
Stock options exercised
(9,060 shares) ............... -- 102 -- -- -- -- 102
Cash dividends declared
($0.275 per share) ........... -- -- -- -- (1,328) -- (1,328)
---- ------- ------- -------- ------- ---- --------
Balance at December 31, 1998 ... $ 56 $69,169 $(2,347) $(25,265) $48,934 $ 87 $ 90,634
==== ======= ======= ======== ======= ==== ========
</TABLE>
See accompanying notes to consolidated financial statements.
-6-
<PAGE>
Consolidated Statements of Cash Flows for the Six Month Period Ended
December 31, 1998 and December 31, 1997 (Unaudited)
(Dollars in thousands)
(Unaudited)
Six Months Ended
December 31,
------------------
1998 1997
-------- --------
Net cash provided by operating activities .................. $ 17,308 $ 10,044
-------- --------
Cash flows from investing activities:
Net change in interest-bearing deposits .................. (1,785) 1,900
Principal payments on mortgage-backed securities ......... 10,352 6,408
Purchases of mortgage-backed securities available-for-sale (914) (4,998)
Principal payments on mortgage-backed securities
available-for-sale ..................................... 7,444 4,817
Purchases of investment securities ....................... -- (5,483)
Proceeds from maturities of investment securities ........ 4,636 15,076
Proceeds from maturities of investment securities
available-for-sale ..................................... 93,195 27,995
Proceeds from sale of investment securities
available-for-sale ..................................... -- 6,008
Purchase of investment securities available-for-sale ..... (70,566) (70,543)
Principal payments on investment securities
available-for-sale ..................................... 167 227
Net change in loans receivable ........................... 18,945 (37,919)
Purchases of premises and equipment ...................... (807) (3,172)
Proceeds from sale of premises and equipment ............. 12 --
Purchase of Federal Home Loan Bank stock ................. -- (990)
-------- --------
Net cash provided (used) by investing activities ........... 60,679 (60,674)
-------- --------
Cash flows from financing activities:
Net change in deposits excluding interest credited ....... 2,967 801
Net change in repurchase agreements ...................... 978 (116)
Proceeds from borrowings ................................. 99,000 252,165
Payments on borrowings ................................... (146,116) (189,162)
Net change in advances from borrowers for taxes
and insurance .......................................... (844) (183)
Proceeds from exercise of options ........................ 102 444
Payments to acquire treasury stock ....................... (21,804) (380)
Dividends paid to stockholders ........................... (1,704) (1,419)
-------- --------
Net cash (used) provided by financing activities ........... (67,421) 62,150
-------- --------
Net increase in cash and cash equivalents .................. 10,566 11,520
Cash and cash equivalents at beginning of period ........... 29,068 17,159
-------- --------
Cash and cash equivalents at end of period ................. $ 39,634 $ 28,679
======== ========
Supplemental disclosure of cash flow information:
Payments during the period for:
Interest ............................................... $ 6,719 $ 6,426
Income taxes, net ...................................... 2,325 2,430
======== ========
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 six month periods ended December 31,
1998 are not necessarily indicative of the results anticipated for the year
ending June 30, 1999. For additional information, refer to the consolidated
financial statements and footnotes thereto included in WesterFed Financial
Corporation's (the "Company") annual report for the year ended June 30,
1998.
2. CASH EQUIVALENTS
For purposes of the Consolidated Statements of Cash Flows, the Company
considers all cash, daily interest demand deposits, non-interest bearing
deposits with banks, and interest bearing deposits having original
maturities of three months or less to be cash equivalents.
3. COMPUTATION OF NET INCOME PER SHARE
Basic earnings per share excludes any dilutive effects of options,
warrants, and convertible securities. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share.
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
(Dollars in thousands, except share and per share data)
(Unaudited) (Unaudited)
For the Three Month Period For the Six Month Period
Ended December 31, Ended December 31,
-------------------------- ------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numbers of shares on which basic earnings
per share is calculated:
Average outstanding shares during the period .... 5,294,511 5,300,264 5,332,611 5,292,615
Add: Incremental shares under stock option plans. 268,856 294,589 286,477 291,978
Incremental shares related to RRPs ......... 2,577 26,384 1,593 25,536
---------- ---------- ---------- ----------
Number of shares on which diluted earnings
per share is calculated ........................... 5,565,944 5,621,237 5,620,681 5,610,129
---------- ---------- ---------- ----------
Net income applicable to common stockholders ........ $ 1,829 $ 2,098 $ 3,583 $ 3,907
========== ========== ========== ==========
Basic earnings per share ............................ $ 0.35 $ 0.40 $ 0.67 $ 0.74
========== ========== ========== ==========
Diluted earnings per share .......................... $ 0.33 $ 0.37 $ 0.64 $ 0.70
========== ========== ========== ==========
</TABLE>
Stock options to purchase 57,085 shares as of December 31, 1998 were
outstanding, but were not included in the computation of diluted earnings
per share because the options' exercise price was greater than the average
market price of the common shares and, therefore, the effect would be
anti-dilutive. No stock options were excluded from the computation of
diluted earnings per share in 1997.
4. DIVIDENDS DECLARED
On January 20, 1999 the Board of Directors of the Company declared a
quarterly cash dividend of $0.14 per share, payable on February 24, 1999 to
stockholders of record on February 10, 1999.
-8-
<PAGE>
5. A COMPARISON OF THE AMORTIZED COST AND ESTIMATED FAIR VALUE OF INVESTMENT
AND MORTGAGE-BACKED SECURITIES AT THE DATES INDICATED IS AS FOLLOWS:
HELD-TO-MATURITY
(Dollars in Thousands)
<TABLE>
<CAPTION>
(Unaudited)
December 31, 1998 June 30, 1998
-------------------------------------------- --------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
--------- ---------- ---------- --------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal Agency obligations .... $ 2,998 $ 11 $ -- $ 3,009 $ 2,994 $ 27 $ -- $ 3,021
U.S. Government obligations ... -- -- -- -- 100 -- -- 100
Corporate obligations ......... 6,979 81 -- 7,060 11,473 87 -- 11,560
Other investments ............. 2,248 13 -- 2,261 2,280 13 -- 2,293
-------- ------ ---- -------- -------- ----- ---- --------
Total investment securities . 12,225 105 -- 12,330 16,847 127 -- 16,974
Mortgage-backed securities .... 92,048 2,534 (41) 94,541 102,298 2,695 (31) 104,962
-------- ------ ---- -------- -------- ----- ---- --------
$104,273 $2,639 $(41) $106,871 $119,145 $2,822 $(31) $121,936
======== ====== ==== ======== ======== ====== ==== ========
</TABLE>
AVAILABLE-FOR-SALE
(Dollars in Thousands)
<TABLE>
<CAPTION>
(Unaudited)
December 31, 1998 June 30, 1998
-------------------------------------------- --------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
--------- ---------- ---------- --------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal Agency obligations .... $ 68,504 $203 $(209) $ 68,498 $ 89,792 $100 $(111) $ 89,781
Corporate obligations ......... 17,524 102 (3) 17,623 18,658 62 -- 18,720
Other investments ............. 3 86 -- 89 3 7 -- 10
-------- ---- ----- -------- -------- ---- ----- --------
Total investment securities . 86,031 391 (212) 86,210 108,453 169 (111) 108,511
Mortgage-backed securities .... 17,538 97 (136) 17,499 24,156 165 (186) 24,135
-------- ---- ----- -------- -------- ---- ----- --------
$103,569 $488 $(348) $103,709 $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 DECEMBER 31, 1998 IS AS FOLLOWS:
HELD-TO-MATURITY
(Dollars in Thousands)
(Unaudited)
December 31, 1998
----------------------
Amortized Estimated
Cost Fair Value
--------- ----------
Due in one year or less ....................... $ 38 $ 38
Due after one year through 5 years ............ 9,976 10,068
Due after 5 years through 10 years ............ 237 237
Due after 10 years ............................ 1,974 1,987
------- -------
$12,225 $12,330
======= =======
AVAILABLE-FOR-SALE
(Dollars in Thousands)
(Unaudited)
December 31, 1998
----------------------
Amortized Estimated
Cost Fair Value
--------- ----------
Due in one year or less ....................... $39,972 $40,111
Due after one year through 5 years ............ 42,097 42,187
Due after 5 years through 10 years ............ 2,000 1,998
Other ......................................... 1,003 1,087
SBA loans contractually due after 5 years ..... 959 827
------- -------
$86,031 $86,210
======= =======
Expected maturities of mortgage-backed securities will differ from
contractual maturities because borrowers may have the right to prepay
obligations with or without penalties.
-10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
1. FORWARD LOOKING STATEMENTS
When used in this Form 10-Q or future filings made by the Company with
the Securities and Exchange Commission, in the Company's press releases or
other public shareholder communications, or in oral statements made with
the approval of an authorized executive officer, the words or phrases "will
likely result," "are expected to," "will continue," "is anticipated,"
"estimate," "project" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company wishes to caution readers not to
place undue reliance on any forward-looking statements, which speak only as
of the date made, and to advise readers that various factors - including
regional and national economic conditions, changes in levels of market
interest rates, credit risks of lending activities and competitive and
regulatory factors - could affect the Bank's financial performance and
could cause the Bank's actual results for future periods to differ
materially from those anticipated or projected.
The Company does not undertake, and specifically disclaims, any
obligation to publicly release the result of any revisions which may be
made to any forward-looking statements to reflect the occurrence of
anticipated or unanticipated events or circumstances after the date of such
statements.
2. CHANGES IN FINANCIAL CONDITION. COMPARISON OF THE SIX MONTH PERIOD FROM
JUNE 30, 1998 TO DECEMBER 31, 1998.
General - Total assets decreased $51.4 million to $970.6 million at
December 31, 1998 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 $17.1 million, a decrease in mortgage-backed
securities of $16.9 million and a decrease in investment securities,
Federal Home Loan Bank of Seattle (FHLB) stock and all other interest
earning assets of $18.8 million. Total deposits increased $15.4 million
while borrowed funds decreased $46.1 million and stockholders' equity
decreased $19.1 million.
Loans Receivable and Loans Available-for-Sale - Loans receivable and
loans available-for-sale decreased $17.1 million to $640.2 million at
December 31, 1998 from $657.3 million at June 30, 1998. One- to four-family
and consumer real estate loans decreased $24.5 million and $9.6 million
respectively while commercial, agricultural and other consumer loans
increased $17.0 million. The decrease in loans receivable was primarily the
result of principal repayments of $143.7 million and the sale of loans
available-for-sale of $66.6 million, partially offset by loan originations
of $192.8 million. Because of the interest rate risk concerns incurred with
long term lending associated with fixed-rate one-to four family loans
(generally with terms of thirty years) in the current low interest rate
environment management has decided not to reinvest the proceeds of the sale
of such loans at this time and has instead used the proceeds to pay down
borrowed funds and to repurchase common stock.
Mortgage-Backed Securities - Mortgage-backed securities decreased
$16.9 million to $109.5 million at December 31, 1998 from $126.4 million at
June 30, 1998 primarily as a result of principal pay downs of $17.8
million.
Investment Securities, FHLB Stock and Other Interest Earning Assets -
Investment securities, FHLB stock and other interest earning assets
decreased $18.8 million to $136.6 million at December 31, 1998 from $155.4
million at June 30, 1998. The $18.8 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.
-11-
<PAGE>
Goodwill and Core Deposit Intangible - Goodwill is being amortized
over 25 years, or approximately $666,000 per year. The core deposit
intangible is amortized on an accelerated basis over its estimated economic
life of seven years, or approximately $777,000 in the current fiscal year.
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.
The Bank may be a party to financial instruments with
off-balance-sheet risk in the normal course of business to reduce its own
exposure to fluctuations in interest rates. These financial instruments may
include interest rate cap and interest rate swap agreements. These
instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of amounts recognized in the consolidated balance
sheets. The contract or notional amounts of these instruments reflect the
extent of involvement the Bank has in particular classes of financial
instruments. For interest rate cap and interest rate swap agreements, the
contract or notional amounts do not represent exposure to credit loss. The
Bank controls the credit risk of those instruments through credit approval,
limits and monitoring procedures.
Interest Rate Caps - Interest rate caps entitle the Bank to receive
various interest payments in exchange for payment of a premium, provided
the three-month LIBOR exceeds an agreed upon interest rate. Transaction
fees paid in connection with interest rate cap agreements are amortized to
interest expense as an adjustment of the interest cost of liabilities.
Because the Bank receives various interest payments if the three-month
LIBOR exceeds the agreed upon interest rate, the Bank is generally at risk
to the extent of the unamortized premium paid if the three-month LIBOR does
not exceed the agreed upon interest rate. At December 31, 1998, the amount
of the unamortized premiums paid related to the interest rate cap
transactions was $79,000. Interest rate cap agreements are used to manage
interest rate risk by synthetically extending the life of interest-bearing
liabilities.
The following summarizes interest rate cap agreements at December 31,
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 December 31, 1998 the Bank did
not have any interest rate swap agreements in place.
-12-
<PAGE>
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.
At December 31, 1998 the Bank had no structured notes.
Deposits - Deposits increased $15.4 to $651.8 million at December 31,
1998 from $636.4 million at June 30, 1998. Checking and money market
accounts increased $25.8 million while passbook accounts and certificates
of deposit decreased $10.4 million.
Borrowed Funds and Repurchase Agreements - Borrowed funds and
repurchase agreements decreased $46.1 million to $209.1 million at December
31, 1998 from $255.2 million at June 30, 1998. There were new borrowings of
$24.6 million with maturities of less than one year and $25.8 million of
advances maturing in one or more years. The increase from new borrowings
was more than offset by principal repayments and maturities of $96.5
million.
Stockholders' Equity - Stockholders' equity decreased $19.1 million to
$90.6 million at December 31, 1998 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 for a total of $21.8 million. This decrease was partially offset
by increases in equity resulting from net income for the six month period
of $3.6 million, $317,000 related to contributions to the Employee Stock
Ownership Plan and shares earned and issued under the Recognition and
Retention Plan, $64,000 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 9,060 new common shares with a recorded value
of $102,000 related to exercised stock options. Stockholders' equity was
also reduced $1.3 million for dividends declared during the six month
period.
-13-
<PAGE>
3. COMPARISON OF OPERATING RESULTS FOR THE THREE MONTH PERIOD ENDED DECEMBER
31, 1998 AND DECEMBER 31, 1997
RESULTS OF OPERATIONS
Three Months Ended
December 31,
(Unaudited)
-----------------------------
1998 1997
Amount Change Amount
------- ------ -------
(In Thousands)
Total interest income ........................ $17,828 $(936) $18,764
Total interest expense ....................... 9,865 (786) 10,651
------- ----- -------
Net interest income ...................... 7,963 (150) 8,113
Provision for loan losses .................... (270) (14) (256)
------- ----- -------
Net interest income after provision
for loan losses ........................ 7,693 (164) 7,857
------- ----- -------
Fees and service charges ..................... 1,922 285 1,637
Gain on sale of loans, mortgage-backed
securities and investment securities ....... 325 58 267
Other non-interest income .................... 130 39 91
------- ----- -------
Total non-interest income ................ 2,377 382 1,995
------- ----- -------
Income before non-interest expense ........... 10,070 218 9,852
Total non-interest expense ................... 6,985 570 6,415
------- ----- -------
Income before income taxes ............... 3,085 (352) 3,437
Income taxes ................................. (1,256) (83) (1,339)
------- ----- -------
Net income ............................... $ 1,829 $(269) $ 2,098
======= ===== =======
-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)
--------------------------------------------------------------
December 31, 1998 December 31, 1997
------------------------------ ------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance (5) Paid Rate Balance (5) Paid Rate
----------- -------- ------ ----------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans receivable(1)(2) ................. $642,972 $13,604 8.46% $666,589 $14,211 8.53%
Mortgage-backed securities(2) .......... 112,678 1,860 6.60 144,993 2,490 6.87
Investments(2) ......................... 124,358 2,011 6.47 107,738 1,815 6.74
Other interest-earning assets(3) ....... 21,241 273 5.14 6,131 167 10.90
Cash surrender value of life insurance . 6,824 80 4.69 6,522 81 4.97
-------- ------- ------ -------- ------- ------
Total Interest-Earning Assets ............ 908,073 17,828 7.85 931,973 18,764 8.05
======== ======= ====== ======== ======= ======
INTEREST-BEARING LIABILITIES:
Certificates of deposits ............... $376,463 $ 5,312 5.64% $378,825 $ 5,468 5.77%
Passbook deposits ...................... 90,831 557 2.45 97,108 671 2.76
Demand and NOW accounts ................ 116,539 205 0.70 108,517 322 1.19
Money market accounts .................. 60,763 587 3.86 52,213 525 4.02
-------- ------- ------ -------- ------- ------
Total deposits ..................... 644,596 6,661 4.13 636,663 6,986 4.39
Borrowed funds ......................... 219,277 3,204 5.84 245,277 3,665 5.98
-------- ------- ------ -------- ------- ------
Total Interest-Bearing Liabilities . $863,873 $ 9,865 4.57% $881,940 $10,651 4.83%
======== ======= ====== ======== ======= ======
Net interest income ...................... $ 7,963 $ 8,113
======= =======
Net interest rate spread ................. 3.28% 3.22%
====== ======
Net interest earning assets .............. $ 44,200 $ 50,033
======== ========
Net interest margin(4) ................... 3.51% 3.48%
====== ======
Average interest-earning assets to average
interest-bearing liabilities ........... 105.12% 105.67%
======= =======
</TABLE>
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves
(2) Includes held and available-for-sale categories
(3) Includes primarily short-term liquid assets
(4) Net interest income divided by average interest earning assets
(5) Based on average monthly balances
-15-
<PAGE>
General - Net income decreased $269,000 to $1.8 million for the
quarter ended December 31, 1998 as compared to $2.1 million for the same
period last year, due primarily to an increase in non-interest expense. Net
interest income after provision for loan losses decreased $164,000 and
non-interest income increased $382,000 while non-interest expense increased
$570,000 and income tax expense decreased $83,000. The net interest margin
(net interest income divided by average interest-earning assets) increased
to 3.51% during the quarter ended December 31, 1998 from 3.48% during the
same period last year. The interest rate spread increased to 3.28% at
December 31, 1998 as compared to 3.22% at December 31, 1997.
Interest Income - Interest income decreased $936,000 to $17.8 million
for the three month period ended December 31, 1998 from $18.8 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 7.85% during the
quarter ended December 31, 1998 from 8.05% during the same period last year
and a decrease in the average balance of interest earning assets of $23.9
million to $908.1 million during the quarter ended December 31, 1998 from
$932.0 million during the same period last year.
Interest earned on loans receivable decreased $607,000 due primarily
to a $23.6 million decrease in the average balance of loans receivable to
$643.0 million during the three month period ended December 31, 1998 from
$666.6 million for the same period last year. In addition, the average
yield on loans receivable decreased to 8.46% during the three month period
ended December 31, 1998 from 8.53% for the same period last year.
Interest earned on mortgage-backed securities decreased $630,000 due
primarily to a $32.3 million decrease in the average balance of
mortgage-backed securities outstanding to $112.7 million for the three
month period ended December 31, 1998 from $145.0 million during the same
period last year.
Interest earned on investment securities, FHLB stock and other
interest earning assets increased $301,000 primarily due to an increase in
the average balance of these securities of $32.0 million to $152.4 million
during the quarter ended December 31, 1998 from $120.4 million during the
same period last year. The average yield decreased to 6.21% during the
quarter ended December 31, 1998 from 6.85% for the same period last year.
Interest Expense - Total interest expense decreased $786,000 to $9.9
million for the three month period ended December 31, 1998 from $10.7
million for the same period last year. Interest expense on deposits
decreased $325,000 due primarily due to a decrease in the average rate paid
on deposits to 4.13% during the quarter ended December 31, 1998 from 4.39%
for the same period last year. The average balance of deposits increased
$7.9 million to $644.6 million during the three month period ended December
31, 1998 from $636.7 million during the same period last year. Interest
expense on borrowed funds decreased $461,000 due both to a decrease in the
average balance of borrowed funds of $26.0 million to $219.3 million during
the three month period ended December 31, 1998 from $245.3 million for the
same period last year and a decrease in the average rate paid on borrowed
funds to 5.84% during the quarter ended December 31, 1998 from 5.98% during
the same period last year.
Provisions for Loan Losses - The provision for loan losses increased
$14,000 to $270,000 for the three month period ended December 31, 1998 as
compared to a $256,000 provision for the same period last year.
The provision for loan losses is determined by management as the
amount to be added to the allowance for loan losses after net charge-offs
have been deducted to bring the allowance to a level which is considered
adequate to absorb losses inherent in the loan portfolio in accordance with
generally accepted accounting principles. At December 31, 1998 the Company
had $4.6 million of non-performing assets (representing 0.47% of total
assets) compared to $5.0 million at June 30, 1998 (representing 0.49% of
total assets). At December 31, 1998 the Company had an allowance for loan
losses to non-performing assets of 105.78% 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."
-16-
<PAGE>
Non-Interest Income - Non-interest income increased $382,000 to $2.4
million for the quarter ended December 31, 1998 from $2.0 million for the
same quarter last year. Fees, service charges and other income increased
$324,000 and net gain on sale of loans and securities available-for-sale
increased $58,000. The current low interest rate environment has produced
strong mortgage loan refinance activity which resulted in $1.1 million of
loan origination fees on loans sold and gain on sale of loans
available-for-sale during the quarter ended December 31, 1998.
Non-Interest Expense - Non-interest expense increased $570,000 to $7.0
million for the quarter ended December 31, 1998 from $6.4 million for the
same quarter last year. The $570,000 increase was primarily the result of
increases in marketing, equipment and furnishings, and compensation and
employee benefit costs of $113,000, $161,000 and $260,000 respectively. The
quarter ended December 31, 1998 included expenses incurred related to the
testing of the year 2000 issues and additional professional fees of
approximately $200,000.
Income Taxes - Income tax expense decreased $83,000 due primarily to
the $352,000 decrease in income before income taxes.
-17-
<PAGE>
4. COMPARISON OF OPERATING RESULTS FOR THE SIX MONTH PERIOD ENDED DECEMBER 31,
1998 AND DECEMBER 31, 1997.
RESULTS OF OPERATIONS
Six Months Ended
December 31,
(Unaudited)
-----------------------------
1998 1997
Amount Change Amount
------- ------ -------
(In Thousands)
Total interest income ........................ $36,248 $(845) $37,093
Total interest expense ....................... 20,430 (553) 20,983
------- ----- -------
Net interest income ...................... 15,818 (292) 16,110
Provision for loan losses .................... (510) (90) (420)
------- ----- -------
Net interest income after provision
for loan losses ........................ 15,308 (382) 15,690
------- ----- -------
Fees and service charges ..................... 3,821 531 3,290
Gain on sale of loans, mortgage-backed
securities and investment securities ....... 581 92 489
Other non-interest income .................... 302 123 179
------- ----- -------
Total non-interest income ................ 4,704 746 3,958
------- ----- -------
Income before non-interest expense ........... 20,012 364 19,648
Total non-interest expense ............... 13,954 686 13,268
------- ----- -------
Income before income taxes ............... 6,058 (322) 6,380
Income taxes ................................. (2,475) (2) (2,473)
------- ----- -------
Net income ................................... $ 3,583 $(324) $ 3,907
======= ===== =======
-18-
<PAGE>
Net Interest Income Analysis -- The following table presents for the
periods indicated the total dollar amount of interest income from average
interest-earning assets and the resultant yields, as well as the interest
expense on average interest-bearing liabilities, expressed both in dollars
and rates. No tax equivalent adjustments were made. Non-accruing loans have
been included in the table as loans carrying a zero yield.
<TABLE>
<CAPTION>
Six Month Period Ended
(Unaudited)
--------------------------------------------------------------
December 31, 1998 December 31, 1997
------------------------------ ------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance (5) Paid Rate Balance (5) Paid Rate
----------- -------- ------ ----------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans receivable(1)(2) ................. $650,235 $27,670 8.51% $657,501 $28,018 8.52%
Mortgage-backed securities(2) .......... 116,978 3,920 6.70 148,060 5,059 6.83
Investments(2) ......................... 128,496 4,137 6.44 103,762 3,548 6.84
Other interest-earning assets(3) ....... 13,163 361 5.49 7,504 310 8.26
Cash surrender value of life insurance . 6,789 160 4.71 6,439 158 4.91
-------- ------- ------ -------- ------- ------
Total Interest-Earning Assets ............ 915,661 36,248 7.92 923,266 37,093 8.04
======== ======= ====== ======== ======= ======
INTEREST-BEARING LIABILITIES:
Certificates of deposits ............... $377,251 $10,738 5.69% $377,265 $10,859 5.76%
Passbook deposits ...................... 91,179 1,177 2.58 98,921 1,361 2.75
Demand and NOW accounts ................ 112,876 491 0.87 105,947 640 1.21
Money market accounts .................. 59,213 1,182 3.99 51,069 1,024 4.01
-------- ------- ------ -------- ------- ------
Total deposits ..................... 640,519 13,588 4.24 633,202 13,884 4.39
Borrowed funds ......................... 226,623 6,842 6.04 239,038 7,099 5.94
-------- ------- ------ -------- ------- ------
Total Interest-Bearing Liabilities . $867,142 $20,430 4.71% $872,240 $20,983 4.81%
======== ======= ====== ======== ======= ======
Net interest income ...................... $15,818 $16,110
======= =======
Net interest rate spread ................. 3.21% 3.23%
====== ======
Net interest earning assets .............. $ 48,519 $ 51,026
======== ========
Net interest margin(4) ................... 3.45% 3.49%
====== ======
Average interest-earning assets to average
interest-bearing liabilities ........... 105.60% 105.85%
======= =======
</TABLE>
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves
(2) Includes held and available-for-sale categories
(3) Includes primarily short-term liquid assets
(4) Net interest income divided by average interest earning assets
(5) Based on average monthly balances
-19-
<PAGE>
General -- Net income decreased $324,000 to $3.6 million for the six
month period ending December 31, 1998 as compared to $3.9 million for the
same period last year. Net interest income after provision for loan losses
decreased $382,000 and non-interest income increased $746,000 while
non-interest expense increased $686,000. The net interest margin (net
interest income divided by average interest-earning assets) decreased to
3.45% during the six months ended December 31, 1998 from 3.49% during the
same period last year. The interest rate spread at December 31, 1998 was
3.21% as compared to 3.23% at December 31, 1997.
Interest Income -- Interest income decreased $845,000 to $36.2 million
for the six month period ended December 31, 1998 from $37.1 million for the
same period last year. The decrease was the result of a decrease in the
yield on earning assets to 7.92% during the six months ended December 31,
1998 from 8.04% during the same period last year and a $7.6 million
decrease in average interest earning assets to $915.7 million during the
six month period ended December 31, 1998 from $923.3 million during the
same period last year.
Interest earned on loans receivable decreased $348,000 due primarily
to a $7.3 million decrease in the average balance of loans receivable to
$650.2 million during the six month period ended December 31, 1998 from
$657.5 million for the same period last year. In addition, the average
yield on loans decreased slightly to 8.51% during the six month period
ended December 31, 1998 from 8.52% for the same period last year.
Interest earned on mortgage-backed securities decreased $1.1 million
due primarily to a $31.1 million decrease in the average balance of
mortgage-backed securities outstanding to $117.0 million for the six month
period ended December 31, 1998 from $148.1 million during the same period
last year.
Interest earned on investment securities, FHLB stock and other
interest earning assets increased $642,000 primarily due to an increase in
the average balance of these securities of $30.7 million to $148.4 million
during the six months ended December 31, 1998 from $117.7 million during
the same period last year. The average yield decreased to 6.28% during the
six months ended December 31, 1998 from 6.82% for the same period last
year.
Interest Expense -- Total interest expense decreased $553,000 to $20.4
million for the six month period ended December 31, 1998 from $21.0 million
for the same period last year. Interest expense on deposits decreased
$296,000 due primarily to a decrease in the average rate paid on deposits
to 4.24% during the six month period ended December 31, 1998 from 4.39%
during the same period last year. The average balance of deposits increased
$7.3 million to $640.5 million during the six month period ended December
31, 1998 from $633.2 million during the same period last year. Interest
expense on borrowed funds decreased $257,000 due primarily to an decrease
in the average balance of borrowed funds of $12.4 million to $226.6 million
during the six month period ended December 31, 1998 from $239.0 million for
the same period last year.
Provisions for Loan Losses -- The provision for loan losses increased
$90,000 to $510,000 for the six month period ended December 31, 1998 as
compared to a $420,000 provision for the same period last year.
Non-Interest Income -- Non-interest income increased $746,000 to $4.7
million for the six months ended December 31, 1998 from $4.0 million for
the same six months last year. Fees, service charges and other income
increased $654,000 and net gain on sale of loans and securities
available-for-sale increased $92,000.
-20-
<PAGE>
Non-Interest Expense -- Non-interest expense increased $686,000 to
$14.0 million for the six months ended December 31, 1998 from $13.3 million
for the same six months last year. The $746,000 increase was primarily the
result of increases in equipment and furnishings, other operating and
compensation and employee benefit costs of $325,000, $276,000 and $148,000
respectively. The six months ended December 31, 1998 included $295,000 in
expenses related to the testing of the year 2000 issues and other
professional fees. The six months ended December 31, 1997 included
approximately $240,000 in professional fees and other expenses related to
the consolidation of data processing systems.
Income Taxes -- Income tax expense increased $2,000 while income
before income taxes decreased $322,000. This was the result of a higher
effective tax rate in the current year due to the exclusion of non-tax
deductible items from the current fiscal year calculations as compared to
not being excluded in the same period last year.
-21-
<PAGE>
Loan Quality -- The following table sets forth the amounts and
categories of non-performing assets in the Company's loan portfolio. At
December 31, 1998 and June 30, 1998 the Company did not have any loans
termed troubled debt restructuring which involved forgiving a portion of
interest or principal on any loans or making loans at a rate materially
less than market rates. Foreclosed assets include assets acquired in
settlement of loans, and are recorded at the lower of the related loan
balance, less any specific allowance for loss, or fair value at the date of
foreclosure.
<TABLE>
<CAPTION>
(Unaudited)
----------------------
December 31, June 30,
1998 1998
------------ --------
(In Thousands)
<S> <C> <C>
Non-accruing loans:
Real Estate:
One-to-four family ................................... $1,164 $1,967
Multi-family ......................................... -- 89
Commercial ........................................... 267 35
Construction ......................................... 112 362
Commercial - non real estate ........................... 107 32
Consumer ............................................... 1,455 1,504
------ ------
Total .............................................. 3,105 3,989
------ ------
Accruing loans delinquent 90 days or more:
Real Estate:
One-to-four family ................................... 725 442
Multi-family ......................................... -- --
Construction ......................................... -- --
Commercial - non real estate ........................... -- 10
Consumer ............................................... 242 174
------ ------
Total .............................................. 967 626
------ ------
Foreclosed Assets:
Real Estate:
One-to-four family ................................... 234 279
Multi-family ......................................... -- --
Commercial ........................................... 26 28
Construction ......................................... -- --
Consumer ............................................... 249 114
------ ------
Total .............................................. 509 421
------ ------
Total non-performing assets ............................ $4,581 $5,036
====== ======
Total as a percentage of total assets .................. 0.47% 0.49%
====== ======
Total allowance for loan losses to assets non-performing
loans (exclusive of foreclosed assets) ............... 119.01% 106.33%
====== ======
Total allowance for loan losses to total
non-performing assets ................................ 105.78% 97.44%
====== ======
</TABLE>
Non-Performing Assets - Total non-performing assets decreased $455,000
to $4.6 million at December 31, 1998 from $5.0 million at June 30, 1998.
The $455,000 decrease in non-performing assets was primarily the result of
a $520,000 decrease in non-performing one-to-four family loans. Total
non-performing assets as a percentage of total assets decreased to 0.47% at
December 31, 1998 as compared to 0.49% at June 30, 1998. The 0.47% is less
than the national composite for thrifts non-performing assets as a
percentage of assets of 0.80% at September 30, 1998 which is the latest
available information as reported by the Office of Thrift Supervision. In
addition to the non-performing loans and foreclosed assets set forth in the
preceding table, as of December 31, 1998, there were nine agricultural
loans to three different borrowers totaling $4.4 million and one commercial
real estate loan of $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.
-22-
<PAGE>
At December 31, 1998 the recorded investment in impaired loans was
$3.1 million, all of which were on non-accrual status. The Company has not
established a specific impairment allowance for these loans. The amount of
interest income recognized on impaired loans during this period was
insignificant.
The following table sets forth an analysis of the Bank's allowance for
loan losses.
<TABLE>
<CAPTION>
For the Three Month For the Six Month
Period Ended Period Ended
December 31, December 31,
------------------- -----------------
1998 1997 1998 1997
------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period ..................... $4,880 $4,743 $4,907 $4,651
------ ------ ------ ------
Charge-Offs:
Real Estate:
One- to four-family .............................. (130) -- (130) --
Commercial ....................................... -- -- -- --
Other:
Commercial ....................................... (45) -- (48)
Consumer ......................................... (152) (72) (438) (153)
------ ------ ------ ------
Total charge-offs .................................. (327) (72) (616) (153)
------ ------ ------ ------
Recoveries:
Other:
Commercial ....................................... -- 3 -- 3
Consumer ......................................... 23 12 45 21
------ ------ ------ ------
Total recoveries ................................... 23 15 45 24
------ ------ ------ ------
Net charge-offs .................................... (304) (57) (571) (129)
Provisions charged to operations ................... 270 256 510 420
------ ------ ------ ------
Balance at end of period ........................... $4,846 $4,942 $4,846 $4,942
====== ====== ====== ======
Ratio of net charge-offs during the period to
average loans outstanding during the period ...... 0.05% 0.01% 0.09% 0.02%
====== ====== ====== ======
Ratio of net charge-offs during the period to
average non-performing assets during the period .. 6.23% 1.43% 11.70% 3.23%
====== ====== ====== ======
</TABLE>
-23-
<PAGE>
Regulatory Capital -- At December 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 December 31,
1998.
<TABLE>
<CAPTION>
Minimum to be Minimum to be well
adequately capitalized capitalized under prompt
under prompt corrective corrective actions
Actual actions provision provision
---------------- ----------------------- ------------------------
As of December 31, 1998: Amount Ratio Amount Ratio Amount Ratio
- ------------------------ ------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk-weighted assets) $71,521 11.66% $49,060 8.00% $61,326 10.00%
Core (Tier 1) capital (to risk-weighted assets) 66,737 10.88 24,530 4.00 36,795 6.00
Core (Tier 1) capital (to adjusted assets) 66,737 7.06 37,823 4.00 47,278 5.00
Tangible capital (to tangible assets) 66,737 7.06 14,184 1.50 14,184 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;
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<PAGE>
o Built an internal tracking database for application and vendor
software;
o Developed compliance plans and schedules for all lines of
business;
o Initiated vendor compliance verification;
o Began awareness and education activities for employees through
existing internal communication channels;
o Developed 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 March 31, 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 March 31, 1999 for all mission
critical systems. During the validation testing process to date, no
significant Y2K problems have been identified relating to any modified or
upgraded mission critical systems.
Implementation Phase. The Bank's plan calls for putting Y2K-ready
systems into production before having actually completed Y2K validation
testing. Y2K-ready modified or upgraded versions have been installed or are
to be installed and placed into production with respect to all mission
critical systems as received from vendors or suppliers and is expected to
be completed by March 31, 1999.
Bank Resources Invested. The Bank's Y2K project team has been assigned
the task of ensuring that all systems across the Bank are identified,
analyzed for Y2K compliance, corrected, if necessary, tested and changes
put into service by March 31, 1999. The Y2K project team members represent
all functional areas of the Bank, including data processing, loan
administration, accounting, item processing and operations, compliance,
internal audit, human resources, and marketing. The team is headed by an
Executive Vice President who is a member of the Bank's senior management
team. The Bank's Board of Directors oversees the Y2K plan and provides
guidance and resources to, and receives monthly updates from the Y2K
project team.
The Bank expenses all costs associated with the required system
changes as those costs are incurred, and such costs are being funded
through operating cash flows. The total cost of the Y2K conversion project
for the Bank is estimated not to exceed $210,000. 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 February 2,
1999 to report the quarterly earnings release and a dividend
declaration of $0.14 per share and February 9, 1999 to report a
correction of earnings release dated January 20, 1999.
-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 ______________________ /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
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 DECEMBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-31-1998
<CASH> 39,634
<INT-BEARING-DEPOSITS> 1,885
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 103,709
<INVESTMENTS-CARRYING> 118,359
<INVESTMENTS-MARKET> 120,957
<LOANS> 640,152
<ALLOWANCE> 4,846
<TOTAL-ASSETS> 970,581
<DEPOSITS> 651,772
<SHORT-TERM> 124,864
<LIABILITIES-OTHER> 19,095
<LONG-TERM> 77,005
0
0
<COMMON> 56
<OTHER-SE> 90,578
<TOTAL-LIABILITIES-AND-EQUITY> 970,581
<INTEREST-LOAN> 27,670
<INTEREST-INVEST> 8,418
<INTEREST-OTHER> 160
<INTEREST-TOTAL> 36,248
<INTEREST-DEPOSIT> 13,588
<INTEREST-EXPENSE> 20,430
<INTEREST-INCOME-NET> 15,818
<LOAN-LOSSES> 510
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,127
<INCOME-PRETAX> 6,058
<INCOME-PRE-EXTRAORDINARY> 3,583
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,583
<EPS-PRIMARY> .67
<EPS-DILUTED> .64
<YIELD-ACTUAL> 0
<LOANS-NON> 3,105
<LOANS-PAST> 967
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 5,500
<ALLOWANCE-OPEN> 4,907
<CHARGE-OFFS> 616
<RECOVERIES> 45
<ALLOWANCE-CLOSE> 4,846
<ALLOWANCE-DOMESTIC> 4,846
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 430
</TABLE>
<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 DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> DEC-31-1997
<CASH> 22,382
<INT-BEARING-DEPOSITS> 6,397
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 119,981
<INVESTMENTS-CARRYING> 142,424
<INVESTMENTS-MARKET> 145,531
<LOANS> 673,010
<ALLOWANCE> 4,942
<TOTAL-ASSETS> 1,035,096
<DEPOSITS> 644,807
<SHORT-TERM> 103,914
<LIABILITIES-OTHER> 20,452
<LONG-TERM> 150,568
0
0
<COMMON> 56
<OTHER-SE> 107,629
<TOTAL-LIABILITIES-AND-EQUITY> 1,035,096
<INTEREST-LOAN> 28,018
<INTEREST-INVEST> 8,917
<INTEREST-OTHER> 158
<INTEREST-TOTAL> 37,093
<INTEREST-DEPOSIT> 13,884
<INTEREST-EXPENSE> 20,983
<INTEREST-INCOME-NET> 16,110
<LOAN-LOSSES> 420
<SECURITIES-GAINS> 5
<EXPENSE-OTHER> 3,006
<INCOME-PRETAX> 6,380
<INCOME-PRE-EXTRAORDINARY> 3,907
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,907
<EPS-PRIMARY> 0.74
<EPS-DILUTED> 0.70
<YIELD-ACTUAL> 0
<LOANS-NON> 3,003
<LOANS-PAST> 576
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,651
<CHARGE-OFFS> 153
<RECOVERIES> 24
<ALLOWANCE-CLOSE> 4,942
<ALLOWANCE-DOMESTIC> 4,942
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 671
</TABLE>
