-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UAA8HlN5Jspy6mZcqcOMl2EuuGIxJp+tuY6UkxYkGwcwbJ0mvilapCxFrnN6ldiV O/fiY90VRvuAlYxKkuCxzQ== 0000950116-97-002105.txt : 19971117 0000950116-97-002105.hdr.sgml : 19971117 ACCESSION NUMBER: 0000950116-97-002105 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: WESTERFED FINANCIAL CORP CENTRAL INDEX KEY: 0000912428 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 813899950 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22772 FILM NUMBER: 97720773 BUSINESS ADDRESS: STREET 1: PO BOX 5388 STREET 2: 110 EAST BROADWAY CITY: MISSOULA STATE: MT ZIP: 59802 BUSINESS PHONE: 4067215254 10-Q 1 UNITED STATES SECURITY AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF ------- THE SECURITIES EXCHANGE ACT OF 1934 For the quarter period ended September 30, 1997 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF ------- THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission file number 0-22772 -------- WESTERFED FINANCIAL CORPORATION ------------------------------------------------------------------------------ (Exact name of registrant as specified in this charter) DELAWARE 81-0487794 ------------------------------- ------------------- (State or other jurisdiction of (IRS Employer ID #) incorporation or organization) 110 East Broadway, Missoula, Montana 59802 - -------------------------------------- --------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, 406-721-5254 including area code ------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subjected to such filing requirements for the past 90 days. Yes X No ---------- ------------ The number of shares outstanding of each of the Issuer's Classes of Common Stock, as of the latest date is: Class: Common Stock, Par Value $0.01 per share; Outstanding at October 31, 1997 -- 5,577,127 shares (including restricted shares) - 1 - TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION Page ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets - September 30, 1997 (Unaudited) and June 30, 1997........................- 3 - Consolidated Statements of Income - Three Month Period Ended September 30, 1997 and September 30, 1996 (Unaudited)....................................................................- 4 - Consolidated Statement of Stockholders' Equity for the Three Month Period Ended September 30, 1997 (Unaudited)....................................................................- 5 - Consolidated Statements of Cash Flows for the Three Month Period Ended September 30, 1997 and September 30, 1996 (Unaudited) .........................................................- 6 - Notes to Consolidated Financial Statements 1. Basis of Presentation........................................................................- 7 - 2. Cash Equivalents.............................................................................- 7 - 3. Computation of Net Income per Share..........................................................- 7 - Recently Issued Accounting Standard..........................................................- 8 - 4. Dividends Declared...........................................................................- 8 - 5. Completed Acquisition........................................................................- 8 - 6. A Comparison of the Amortized Cost and Estimated Fair Value of Investment and Mortgage-backed Securities ..............................................................- 9 - A Comparison of the Amortized Cost and Estimated Fair Value of Investment Securities by Contractual Maturities....................................................- 10 - ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 1. Changes in Financial Condition. Comparison of the Three Month Period from June 30, 1997 to September 30, 1997.....................................................- 11 - 2. Comparison of Operating Results for the Three Month Period Ended September 30, 1997 and September 30, 1996............................................................- 13 - ITEM 3. Quantitative and Qualitative Disclosures about Market Risk..................................- 19 - PART II -- OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS.......................................................................- 20 - ITEM 2 CHANGE IN SECURITIES....................................................................- 20 - ITEM 3 DEFAULTS UPON SENIOR SECURITIES.........................................................- 20 - ITEM 4 SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.......................................- 20 - ITEM 5 OTHER INFORMATION.......................................................................- 20 - ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K........................................................- 20 - SIGNATURES
- 2 - ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets - September 30, 1997 (Unaudited) and June 30, 1997
(Unaudited) September 30, June 30, (Dollars in thousands, except share and per share data) 1997 1997 ---------------- ---------------- ASSETS Cash and due from banks $ 17,132 $ 16,999 Interest-bearing due from banks 4,160 160 ----------------- ---------------- Cash and cash equivalents 21,292 17,159 Interest-bearing deposits 2,000 2,000 Investment securities available-for-sale 57,166 51,683 Investment securities, at amortized cost (estimated market value of $32,248 at September 30, 1997 and $27,728 at June 30, 1997) 31,945 27,466 Stock in Federal Home Loan Bank of Seattle, at cost 11,687 11,456 Mortgage-backed securities available-for-sale 34,451 31,388 Mortgage-backed securities, at amortized cost (estimated market value of $117,423 at September 30, 1997 and $119,193 at June 30, 1996) 114,833 117,781 Loans available-for-sale 8,260 3,700 Loans receivable, net 647,381 626,577 Accrued interest receivable 7,789 6,957 Premises and equipment, net 30,777 29,291 Core deposit intangible 5,095 5,276 Goodwill 15,421 15,562 Cash surrender value of life insurance policies 6,474 6,120 Other assets 4,632 3,223 ----------------- ---------------- Total assets $ 999,203 $ 955,639 ================= ================ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits $ 630,638 $ 630,869 Repurchase agreements 7,481 7,786 Borrowed funds 230,462 191,450 Advances from borrowers for taxes and insurance 7,227 3,753 Income taxes 4,539 3,504 Accrued interest payable 3,836 3,593 Accrued expenses and other liabilities 8,872 10,425 ----------------- ----------------- Total liabilities 893,055 851,380 ----------------- ----------------- Stockholders' Equity: Preferred stock, $.01 par value, 5,000,000 shares authorized; none outstanding --- --- Common stock, $.01 par value, 10,000,000 shares authorized; 5,577,127 shares outstanding at September 30, 1997 and 5,564,904 outstanding at June 30, 1997 56 56 Additional paid-in capital 68,482 67,941 Common stock acquired by ESOP/RRP (2,756) (2,936) Treasury stock, at cost (3,461) (3,081) Net unrealized gain on securities available-for-sale 318 (35) Retained earnings, substantially restricted 43,509 42,314 ----------------- ----------------- Total stockholders' equity $ 106,148 $ 104,259 ----------------- ---------------- Total liabilities and stockholders' equity $ 999,203 $ 955,639 ================= ================ Book value per share $ 19.03 $ 18.74 ================= ================
See accompanying notes to consolidated financial statements. - 3 - Consolidated Statements of Income - Three Month Period Ended September 30, 1997 and September 30, 1996 (Unaudited).
(Dollars in thousands, except share and per share data) (Unaudited) Three Months Ended September 30, 1997 1996 ----------- ----------- Interest income: Loans receivable $ 13,807 $ 7,710 Mortgage-backed securities available-for-sale 579 729 Mortgage-backed securities 1,990 1,037 Investment securities available-for-sale 1,218 690 Investment securities 515 153 Interest-bearing deposits 143 228 Other 77 46 ----------- ----------- Total interest income 18,329 10,593 ----------- ----------- Interest expense: NOW and money market demand 817 382 Savings 690 474 Certificates of deposit 5,391 3,009 Advances from FHLB-Seattle and other borrowed funds 3,434 2,085 ----------- ----------- Total interest expense 10,332 5,950 ----------- ----------- Net interest income 7,997 4,643 Provision for loan losses 164 15 ----------- ----------- Net interest income after provision for loan losses 7,833 4,628 ----------- ----------- Non-interest income: Loan origination fees 529 125 Service fees 1,125 566 Net gain on sale of loans and securities available-for-sale 221 109 Other 88 35 ----------- ----------- Total non-interest income 1,963 835 ----------- ----------- Non-interest expenses: Compensation and employee benefits 3,469 1,887 Net occupancy expense of premises 532 223 Equipment and furnishings expense 389 192 Data processing expenses 380 165 Federal insurance premium 90 211 SAIF special assessment -- 2,297 Intangible amortization 331 -- Marketing and advertising 257 36 Other 1,405 720 ----------- ----------- Total non-interest expense 6,853 5,731 ----------- ----------- Income (loss) before income taxes 2,943 (268) Income taxes 1,134 (89) ----------- ----------- Net income (loss) (1) $ 1,809 $ (179) ----------- ----------- Net income (loss) per share $ 0.32 $ (0.04) ----------- ----------- Dividends per share $ 0.115 $ 0.095 =========== =========== Dividend payout ratio before SAIF assessment 35.94% 32.76% =========== =========== Weighted average common shares outstanding for earnings per share 5,622,429 4,260,452 =========== ===========
(1) September 1996 includes approximately $1,414 special SAIF assessment net of tax at 38.5%. See accompanying notes to consolidated financial statements. - 4 - Consolidated Statement of Stockholders' Equity for the Three Month Period Ended September 30, 1997 (Unaudited). (Dollars in thousands, except share and per share data)
Net Unrealized Loss on Additional Securities Common Paid-In ESOP/ Treasury Retained Available Stock Capital RRP Stock Earnings for Sale Total ----- ------- --- ----- -------- -------- ----- Balance at June 30, 1997 $ 56 $ 67,941 $ (2,936) $ (3,081) $ 42,314 $ (35) $ 104,259 Net income -- -- -- -- 1,809 -- 1,809 Change in net unrealized loss on securities available-for-sale -- -- -- -- -- 353 353 ESOP shares committed to be released -- 97 57 -- -- -- 154 Amortization of award of RRP stock -- -- 123 -- -- -- 123 Purchase of treasury stock at cost - 17,500 shares -- -- -- (380) -- -- (380) Stock options exercised (29,725 shares) -- 444 -- -- -- -- 444 Cash dividends declared ($0.115 per share) -- -- -- -- (614) -- (614) - ---------------------------------------------------------------------------------------------------------------------------------- Balance at September 30, 1997 $ 56 $ 68,482 $ (2,756) $ (3,461) $ 43,509 $ 318 $ 106,148 - -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. - 5 - Consolidated Statements of Cash Flows for the Three Month Period Ended September 30, 1997 and September 30, 1996 (Unaudited) (Dollars in thousands except share and per share data)
(Unaudited) Three Months Ended September 30, 1997 1996 ----------------------------------- Net cash provided by operating activities $ (1,471) $ 4,652 ------------- ------------- Cash flows from investing activities: Net change in interest-bearing deposits --- (2,103) Principal payments on mortgage-backed securities 2,985 2,027 Purchases of mortgage-backed securities available-for-sale (4,999) (983) Principal payments on mortgage-backed securities available-for-sale 2,118 3,533 Purchases of investment securities (4,500) --- Proceeds from maturities of investment securities 40 2,500 Proceeds from maturities of investment securities available-for-sale 15,295 17,159 Purchase of investment securities available-for-sale (20,573) (21,706) Principal payments on investment securities available-for-sale 141 80 Net change in loans receivable (20,821) (2,116) Purchases of premises and equipment (1,922) (439) ------------- ------------- Net cash provided (used) by investing activities (32,236) (2,048) ------------- ------------- Cash flows from financing activities: Net change in deposits excluding interest credited (4,392) (11,073) Net change in repurchase agreements (305) --- Proceeds from borrowings 130,215 7,000 Payments on borrowings (91,217) (2,506) Net change in advances from borrowers for taxes and insurance 3,475 2,962 Proceeds from exercise of options 444 --- Payments to acquire treasury stock (380) --- ------------- ------------- Net cash (used) provided by financing activities 37,840 (3,617) ------------- ------------- Net increase (decrease) in cash and cash equivalents 4,133 (1,013) Cash and cash equivalents at beginning of period 17,159 13,299 ------------- ------------- Cash and cash equivalents at end of period $ 21,292 $ 12,286 ============= ============= Supplemental disclosure of cash flow information: Payments during the period for: Interest $ 3,021 $ 2,167 Income taxes, net 167 --- ============= =============
See accompanying notes to consolidated financial statements. - 6 - WESTERFED FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the information contained herein reflects all adjustments necessary to make the results of operations for the interim periods a fair statement of such operations. All such adjustments are of a normal recurring nature. Operating results for the three months ended September 30, 1997 are not necessarily indicative of the results anticipated for the year ending June 30, 1998. For additional information, refer to the consolidated financial statements and footnotes thereto included in WesterFed Financial Corporation's (the "Company") annual report for the year ended June 30, 1997. 2. CASH EQUIVALENTS For purposes of the Consolidated Statements of Cash Flows, the Company considers all cash, daily interest demand deposits, non-interest bearing deposits with banks, and interest bearing deposits having original maturities of three months or less to be cash equivalents. 3. COMPUTATION OF NET INCOME PER SHARE Net income per common share is based on the weighted average number of shares outstanding during the period applying the treasury stock method to common stock equivalents. The weighted average number of common and common stock equivalents for the three month period ended September 30, 1997 were 5,622,429. Stock options have been granted, under the Company's stock option and incentive plan, to purchase 543,079 shares. The adoption of an Equity Incentive Plan was ratified by the stockholders of the Company at the Special Meeting of Stockholders held on February 25, 1997. The plan provides for granting various awards to various Directors, Officers, and Employees of the Company or any of its parent or subsidiary corporations of various awards covering up to 250,000 shares of Common Stock. In addition, 195,175 shares of restricted stock have been issued in accordance with the Recognition and Retention Plan established by the Company. The common stock equivalents of these stock options and restricted stock awards are reflected in the income per share computations in the accompanying financial statements. Also there had been 354,933 shares of common stock originally issued to the Employee Stock Ownership Plan ("ESOP") trust for the benefit of the employees of the Company and its subsidiaries. ESOP shares that have been committed to be released are considered outstanding and ESOP shares that have not been committed to be released are not considered outstanding. At September 30, 1997, 121,593 ESOP shares were committed to be released and were considered in the earnings per share computations. - 7 - RECENTLY ISSUED ACCOUNTING STANDARD SFAS No. 128, Earnings per Share, was issued in February, 1997 and will replace the presentation of primary and fully dilluted earnings per share ("EPS") with a presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures. SFAS No. 128 also requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the equity. This statement will be effective for the Company commencing February 1, 1998 and earlier application is not permitted. Once effective, this statement requires restatement of all prior-period EPS data. Pro forma basic and diluted net income per share as determined under this statement does not differ from the amounts as currently reported herein. 4. DIVIDENDS DECLARED On October 24, 1997 the Board of Directors of the Company declared a quarterly cash dividend of $0.115 per share, payable on November 21, 1997 to stockholders of record on November 7, 1997. 5. COMPLETED ACQUISITION On February 28, 1997, the Company completed its acquisition of Security Bancorp (the "Acquisition"). The Acquisition was accounted for as a purchase transaction and accordingly, the consolidated statement of income includes the results of operations of Security Bancorp commencing March 1, 1997. Under this method of accounting, assets and liabilities of Security Bancorp are adjusted to their estimated fair value and combined with the historical recorded book value of the assets and liabilities of the Company. The actual revaluation of Security Bancorp's net assets acquired is subject to the completion of studies and evaluations by management. The Company issued 1,150,175 shares of WesterFed Common Stock, options to acquire 94,696 common shares and committed to pay $25,995,480 in cash for all of the outstanding shares of Security Bancorp Common Stock, for total consideration (based on the $18.49 per share average closing price of WesterFed Common Stock as reported on the NASDAQ National Market System for the twenty business days from January 16, 1997 through February 12, 1997) of $48.7 million. In addition, as of such date, Security Bank, a federally chartered stock savings bank and wholly owned subsidiary of Security Bancorp, merged with and into the Bank. At the time of the merger, Security Bancorp had assets on a consolidated basis of $372.6 million, deposits of $286.5 million and stockholders equity of $30.8 million. Unless the context otherwise requires, reference herein to the company includes WesterFed, Western Federal and its subsidiaries on a consolidated basis. - 8 - 6. 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) (Unaudited) September 30, 1997 June 30, 1997 Gross Gross Estimated Gross Gross Estimated Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair Cost Gains Losses Value Cost Gains Losses Value --------- ---------- ---------- --------- --------- ---------- ---------- --------- Federal Agency obligations $ 23,318 195 (25) 23,488 $ 18,804 184 --- 18,988 U.S. Government obligations 298 --- --- 298 297 1 --- 298 Corporate obligations 5,982 120 --- 6,102 5,980 66 --- 6,046 Other investments 2,347 16 (3) 2,360 2,385 13 (2) 2,396 ---------------------------------------------- ------------------------------------------------ Total investment securities 31,945 331 (28) 32,248 27,466 264 (2) 27,728 Mortgage-backed securities 114,833 2,619 (29) 117,423 117,781 1,698 (286) 119,193 ---------------------------------------------- ------------------------------------------------ $ 146,778 2,950 (57) 149,671 $ 145,247 1,962 (288) 146,921 ============================================== ================================================ AVAILABLE-FOR-SALE (Dollars in Thousands) (Unaudited) September 30, 1997 June 30, 1997 Gross Gross Estimated Gross Gross Estimated Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair Cost Gains Losses Value Cost Gains Losses Value --------- ---------- ---------- --------- --------- ---------- ---------- ---------- Federal Agency obligations $ 49,761 256 (14) 50,003 $ 46,067 113 (211) 45,969 Corporate obligations 7,076 48 --- 7,124 5,622 54 (1) 5,675 Other investments 3 36 --- 39 3 36 --- 39 ----------------------------------------------- ----------------------------------------------- Total investment securities 56,840 340 (14) 57,166 51,692 203 (212) 51,683 Mortgage-backed securities 34,265 400 (214) 34,451 31,434 220 (266) 31,388 ----------------------------------------------- ----------------------------------------------- $ 91,105 740 (228) 91,617 $ 83,126 423 (478) 83,071 =============================================== ===============================================
- 9 - A COMPARISON OF THE AMORTIZED COST AND ESTIMATED FAIR VALUE OF INVESTMENT SECURITIES BY CONTRACTUAL MATURITIES AT SEPTEMBER 30, 1997 IS AS FOLLOWS: HELD-TO-MATURITY (Dollars in Thousands) (Unaudited) September 30, 1997 Amortized Estimated Cost Fair Value --------- ---------- Due in one year or less $ 298 $ 298 Due after one year through 5 years 29,407 29,700 Due after 5 years through 10 years 235 234 Due after 10 years 2,005 2,016 Other --- --- --------------- --------------- 31,945 32,248 =============== =============== AVAILABLE-FOR-SALE (Dollars in Thousands) (Unaudited) September 30, 1997 Amortized Estimated Cost Fair Value --------- ---------- Due in one year or less $ 7,082 $ 7,102 Due after one year through 5 years 48,323 48,585 Other 3 36 SBA loans contractually due after 5 years 1,432 1,443 -------------- -------------- 56,840 57,166 -------------- -------------- 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 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 1. CHANGES IN FINANCIAL CONDITION. COMPARISON OF THE THREE MONTH PERIOD FROM JUNE 30, 1997 TO SEPTEMBER 30, 1997. General -- Total assets increased $43.6 million to $999.2 million at September 30, 1997 from $955.6 million at June 30, 1997. The increase in assets was primarily the result of increases in loans receivable and loans available-for-sale of $25.3 million and an increase in investment securities, Federal Home Loan Bank of Seattle (FHLB) stock and all other interest earning assets of $14.5 million. Loans Receivable and Loans Available-for-Sale -- Loans receivable and loans available-for-sale increased $25.3 million to $655.6 million at September 30, 1997 from $630.3 million at June 30, 1997. Loans secured by real estate increased by $5.4 million and non-real estate commercial business loans, agricultural loans and consumer loans increased $18.5 million. The increase in loans receivable was primarily the result of loan originations of $95.4 million, partially offset by principal repayments of $54.2 million and the sale of loans available-for-sale of $16.5 million. Mortgage-Backed Securities -- Mortgage-backed securities increased $100,000 to $149.3 million at September 30, 1997 from $149.2 million at June 30, 1997. Investment Securities, FHLB Stock and Other Interest Earning Assets -- Investment securities, FHLB stock and other interest earning assets increased $14.5 million to $113.4 million at September 30, 1997 from $98.9 million at June 30, 1997. The $14.5 million increase was primarily the result of increases in interest-bearing due from banks and interest-bearing deposits of $4.0 million and investment securities of $9.9 million. Goodwill and Core Deposit Intangible - Goodwill is being amortized over 25 years, or approximately $600,000 per year. The core deposit intangible is amortized on an accelerated basis over its estimated economic life of seven years, or approximately $724,000 in the current fiscal year. From time to time, Western Federal Savings Bank (the "Bank"), the regulated thrift institution subsidiary of the Company, may, in order to reduce interest rate risk, purchase financial instruments that lock in a spread between interest-earning assets and interest-bearing liabilities. While these types of financial instruments limit risk, they also reduce the Bank's ability to maximize profits during periods of favorable interest rate trends. At September 30, 1997 the Bank had three structured notes totaling $4.7 million wherein their interest rate is based upon a fraction of the increase or decrease in a specified index. These securities have variable interest rates and were purchased to enable the Bank to increase its interest income when interest rates increase. The market value of these securities at September 30, 1997 was $4.7 million and they will mature in 1998. The Bank may be a party to financial instruments with off-balance-sheet risk in the normal course of business to reduce its own exposure to fluctuations in interest rates. These financial instruments may include interest rate cap and interest rate swap agreements. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of amounts recognized in the consolidated balance sheets. The contract or notional amounts of these instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. For interest rate cap and interest rate swap agreements, the contract or notional amounts do not represent exposure to credit loss. The Bank controls the credit risk of those instruments through credit approval, limits and monitoring procedures. - 11 - Interest Rate Caps -- Interest rate caps entitle the Bank to receive various interest payments in exchange for payment of a premium, provided the three-month LIBOR exceeds an agreed upon interest rate. Transaction fees paid in connection with interest rate cap agreements are amortized to interest expense as an adjustment of the interest cost of liabilities. Because the Bank receives various interest payments if the three-month LIBOR exceeds the agreed upon interest rate, the Bank is generally at risk to the extent of the unamortized premium paid if the three-month LIBOR does not exceed the agreed upon interest rate. At September 30, 1997, the amount of the unamortized premiums paid related to the interest rate cap transactions was $218,000. Interest rate cap agreements are used to manage interest rate risk by synthetically extending the life of interest-bearing liabilities. The following summarizes interest rate cap agreements at September 30, 1997: Notional principal Agreement amount termination Cap ------------------ ----------- --- (in thousands) $ 5,000 July, 1999 6.5% 5,000 July, 1999 7.0% 5,000 July, 2000 6.0% -------- $15,000 ======== Interest Rate Swaps -- Interest rate swap agreements involve the exchange of fixed and floating rate payments without the exchange of the underlying principal amounts. Estimated amounts to be received or paid on the swap settlement dates are accrued when realized. The net swap settlements are reflected in interest expense. Interest rate swap agreements are used to manage interest rate risk by synthetically extending the life of interest-bearing liabilities. At September 30, 1997 the Bank did not have any interest rate swap agreements in place. The counter parties to the interest rate cap agreements are the FHLB of Seattle in the amount of $10.0 million and Merrill Lynch in the amount of $5.0 million. The agreements are not collateralized. Interest rate swaps would be collateralized by stock in FHLB, certificates of deposit issued by the FHLB, securities issued by the U.S. Government or agency thereof, mortgage-backed securities, or qualifying first mortgage loans not otherwise pledged. Deposits -- Deposits decreased $300,000 to $630.6 million at September 30, 1997 from $630.9 million at June 30, 1997. Checking and money market accounts increased $2.7 million while passbook accounts and certificates of deposit decreased $3.0 million. Borrowed Funds and Repurchase Agreements -- Borrowed funds and repurchase agreements increased $38.7 million to $237.9 million at September 30, 1997 from $199.2 million at June 30, 1997. There were new borrowings of $91.9 million with maturities of less than one year and $10.0 million of advances maturing in one or more years. The increase in borrowings were reduced by principal repayments and maturities of $63.7 million. Stockholders' Equity -- Stockholders' equity increased $1.8 million to $106.1 million at September 30, 1997 from $104.3 million at June 30, 1997. This increase was due to net income for the three month period of $1.8 million, $630,000 related to contributions to the Employee Stock Ownership Plan and shares earned and issued under the Recognition and Retention Plan, $353,000 related to the change in unrealized gains - 12 - associated with assets classified as available-for-sale being adjusted to market value in accordance with Statement of Financial Accounting Standards No. 115, and the issuance of 29,725 new common shares with a recorded value of $444,000 related to exercised stock options. Stockholders' equity was reduced $614,000 for dividends declared during the three month period and the purchase of $380,000 of treasury stock. 2. COMPARISON OF OPERATING RESULTS FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
RESULTS OF OPERATIONS Three Months Ended September 30, (Unaudited) 1997 1996 Amount Change Amount ------------- ------ ------ (In Thousands) Total interest income $ 18,329 $ 7,736 $ 10,593 Total interest expense 10,332 4,382 5,950 ------------- ------------- ------------ Net interest income 7,997 3,354 4,643 Provision for loan losses 164 149 15 ------------- ------------- ------------ Net interest income after provision for loan losses 7,833 3,205 4,628 ------------- ------------- ------------ Fees and service charges 1,654 963 691 Gain on sale of loans, mortgage-backed securities and investment securities 221 112 109 Other non-interest income 88 53 35 ------------- ------------- ------------ Total non-interest income 1,963 1,128 835 ------------- ------------- ------------ Income before non-interest expense 9,796 4,333 5,463 Total non-interest expense 6,853 1,122 5,731 ------------- ------------- ------------ Income before income taxes 2,943 3,211 (268) Income taxes 1,134 1,223 (89) ------------- ------------- ------------ Net income $ 1,809 $ 1,988 $ (179) ============= ============= ============
- 13 - 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.
Three Month Period Ended (Unaudited) September 30, 1997 September 30, 1996 ---------------------------------------------------------------------------------------- Average Interest Average Interest Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Balance (5) Paid Rate Balance (5) Paid Rate ----------- ---- ---- ----------- ---- ---- INTEREST EARNING ASSETS: Loans receivable (1) (2) $ 648,412 $ 13,806 8.52% $ 370,941 $ 7,710 8.31% Mortgage-backed securities (2) 151,127 2,569 6.80 102,177 1,766 6.91 Investments (2) 99,786 1,734 6.95 54,495 843 6.19 Other interest-earning assets (3) 8,876 143 6.44 10,583 228 8.62 Cash surrender value of life insurance 6,356 77 4.85 3,208 46 5.74 ---------- ------------ ---- ----------- ----------- ---- Total Interest-Earning Assets 914,557 18,329 8.02 541,404 10,593 7.83 ========== ============ ==== =========== =========== ==== INTEREST-BEARING LIABILITIES: Certificates of deposits 375,705 5,391 5.74 209,740 3,009 5.74 Passbook deposits 100,734 690 2.74 63,715 474 2.98 Demand and NOW accounts 103,377 318 1.23 48,902 177 1.45 Money market accounts 49,925 499 4.00 23,776 205 3.45 ---------- ------------ ---- ----------- ----------- ---- Total deposits 629,741 6,898 4.38 346,133 3,865 4.47 FHLB advances and notes payable 232,042 3,401 5.86 128,424 2,039 6.35 Collateralized mortgage obligations 756 33 17.46 1,097 46 16.77 ---------- ------------ ---- ----------- ----------- ---- Total Interest-Bearing Liabilities $ 862,539 $ 10,332 4.79% $ 475,654 $ 5,950 5.00% ========== ============ ==== =========== =========== ==== Net interest income $ 7,997 $ 4,643 ============ =========== Net interest rate spread 3.23% 2.83% ==== ==== Net interest earning assets $ 52,018 $ 65,750 ========== =========== Net interest margin (4) 3.50% 3.43% ==== ==== Average interest-earning assets to average interest-bearing liabilities 106.03% 113.82% ============ ===========
(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 - 14 - General -- Net income increased $2.0 million to $1.8 million for the three month period ended September 30, 1997 from a loss of $179,00 for the same period last year. Net interest income after provision for loan losses increased $3.2 million and non-interest income increased $1.1 million while non-interest expense and income tax expense increased $1.1 million and $1.2 million respectively. The net interest margin (net interest income divided by average interest-earning assets) increased to 3.50% during the quarter ended September 30, 1997 from 3.43% during the same period last year. The interest rate spread at September 30, 1997 was 3.15% as compared to 2.70% at September 30, 1996. The increase in net income is primarily the result of a combination of the increased earnings as a result of the acquisition of Security Bancorp in February, 1997 and a one-time after tax charge to earnings of $1.4 million, levied on all thrift institutions, to recapitalize the Savings Association Insurance Fund ("SAIF") during the September 30, 1997 quarter. Interest Income -- Interest income increased $7.7 million to $18.3 million for the three month period ended September 30, 1997 from $10.6 million for the same period last year. The increase was primarily the result of a $373.2 million increase in average total interest-earning assets to $914.6 million during the three month period ended September 30, 1997 from $541.4 million during the same period last year. In addition, the average yield on interest-earning assets increased to 8.02% during the quarter ended September 30, 1997 from 7.83% during the same period last year due primarily to the Acquisition. Interest earned on loans receivable increased $6.1 million due primarily to a $277.5 million increase in the average balance of loans receivable to $648.4 million during the three month period ended September 30, 1997 from $370.9 million for the same period last year. In addition, the average yield on loans increased to 8.52% during the three month period ended September 30, 1997 from 8.31% for the same period last year. The increase in the average balance of loans receivable was primarily the result of the loans acquired in the Acquisition. Interest earned on mortgage-backed securities increased $803,000 due primarily to a $48.9 million increase in the average balance of mortgage-backed securities outstanding to $151.1 million for the three month period ended September 30, 1997 from $102.2 million during the same period last year. The increase was primarily the result of the Acquisition. Interest earned on investment securities, FHLB stock and other interest earning assets increased $837,000 primarily due to an increase in the average balance of these securities of $46.7 million to $115.0 million during the quarter ended September 30, 1997 from $68.3 million during the same period last year. The average yield increased to 6.80% during the quarter ended September 30, 1997 from 6.54% for the same period last year. The increase in average balance is the result of both the Acquisition and the purchase of additional investment securities for the purpose of increasing interest income. Interest Expense -- Total interest expense increased $4.4 million to $10.3 million for the three month period ended September 30, 1997 from $5.9 million for the same period last year. Interest expense on deposits increased $3.0 million due to an increase in the average balance of deposits of $283.6 million to $629.7 million during the three month period ended September 30, 1997 from $346.1 million during the same period last year. The increase in the average balance of deposits was the result of the Acquisition. The average rate paid on deposits decreased to 4.79% during the quarter ended September 30, 1997 from 5.00% for the same period last year as the Bank increased the amount of non-interest bearing demand accounts as a result of the Acquisition. Interest expense on borrowed funds increased $1.3 million due primarily to an increase in the average balance of borrowed funds of $103.3 million to $232.8 million during the three month period ended September 30, 1997 from $129.5 million for the same period last year. The increase was the result of the Acquisition and increased borrowings to fund the growth in the loan and investment securities portfolios. - 15 - Provisions for Loan Losses -- The provision for loan losses increased $149,000 to $164,000 for the three month period ended September 30, 1997 as compared to a $15,000 provision for the same period last year. The provision for loan losses is determined by management as the amount to be added to the allowance for loan losses after net charge-offs have been deducted to bring the allowance to a level which is considered adequate to absorb losses inherent in the loan portfolio in accordance with generally accepted accounting principles. At September 30, 1997 the Company had $4.1 million of non-performing assets (representing 0.41% of total assets) compared to $2.4 at June 30, 1997 (representing 0.25% of total assets). There were no foreclosed real estate loans at September 30, 1997. At September 30, 1997 the Company had an allowance for loan losses to non-performing assets of 116.74% as compared to 191.01% at June 30, 1997. Future additions to the Company's allowance for loan losses and any change in the related ratio of the allowance for loan losses to non-performing loans are dependent upon the performance and composition of the Company's loan portfolio, the economy, inflation, changes in real estate values and interest rates and the view of the regulatory authorities toward adequate reserve levels. For additional information, see "Non-Performing Assets". Non-Interest Income -- Non-interest income increased $1.1 million to $2.0 million for the quarter ended September 30, 1997 from $835,000 for the same quarter last year. Fees and service charges increased $963,000 and net gain on sale of loans and securities available-for-sale increased $112,000. The increase in fees and service charges were due primarily to the Acquisition. Non-Interest Expense -- Non-interest expense increased $1.1 million to $6.8 million for the quarter ended September 30, 1997 from $5.7 million for the same quarter last year. The increase was due primarily to the Acquisition. Included in the non-interest expense for the quarter ended September 30, 1997, which was not included in the same quarter last year, was $331,000 related to the amortization of intangibles related to the Acquisition. This was comprised of $150,000 for the amortization of goodwill and $181,000 for the amortization of the core deposit intangible. The non-interest expense for the quarter ended September 30, 1996 included a one-time special assessment related to the recapitlization of the SAIF in the amount of $2.3 million. One new branch facility is being constructed in Billings, Montana. The facility is anticipated to open in December 1997 while another new facility was recently opened in the Billings market in the prior quarter ended June 30, 1997. These new facilities have or will add additional non-interest expense. The consolidation of facilities in three market areas prior to June 30, 1998 will partially offset the increased costs related to the new facilities. In addition, the Bank is in the process of converting to a single, commercial bank oriented, data processing system. This will allow the Bank to continue its emphasis on adding commercial banking to its traditional thrift business. The Bank will continue to incur significant conversion costs and the inefficiencies of operating dual data processing systems will remain until the conversion is completed in February, 1998. The quarter just ended included approximately $200,000 in professional fees and other expenses related to the consolidation of data processing systems. In addition, approximately $2.6 million of additional capital expenditures will be made in converting to a consolidated data center and the addition of technology to position the Bank to meet increasing competition and the demand for new customer services. Income Taxes -- Income tax expense increased $1.2 million due to the $3.2 million increase in income before income taxes. - 16 - Loan Quality -- The following table sets forth the amounts and categories of non-performing assets in the Company's loan portfolio. At September 30, 1997 and June 30, 1997 the Company had no loans termed troubled debt restructuring which involves forgiving a portion of interest or principal on any loans or making loans at a rate materially less than market rates. Foreclosed assets include assets acquired in settlement of loans, and are recorded at the lower of the related loan balance, less any specific allowance for loss, or fair value at the date of foreclosure.
(Unaudited) September 30, June 30, 1997 1997 ------------------ ----------------- Non-accruing loans: (In Thousands) Real Estate: One-to-four family $ 1,188 $ 842 Multi-family --- --- Commercial --- --- Construction --- --- Commercial - non real estate 94 102 Consumer 1,052 573 ------------------ ----------------- Total 2,334 1,517 ------------------ ----------------- Accruing loans delinquent 90 days or more: Real Estate: One-to-four family 913 231 Multi-family --- --- Commercial --- --- Construction --- --- Commercial - non real estate --- --- Consumer 748 605 ------------------ ----------------- Total 1,661 836 ------------------ ----------------- Foreclosed Assets: Real Estate: --- --- One-to-four family --- --- Multi-family --- --- Commercial --- --- Construction --- --- Consumer 68 82 ------------------ ----------------- Total 68 82 ------------------ ----------------- Total non-performing assets $ 4,063 $ 2,435 ================== =================
Non-Performing Assets -- Total non-performing assets increased $1.7 million to $4.1 million at September 30, 1997 from $2.4 million at June 30, 1997. The $1.7 million increase in non-performing assets was primarily the result of a $1.0 million increase in non-performing one-to-four family loans and a $622,000 increase in non-performing consumer loans. Total non-performing assets as a percentage of total assets was 0.41% at September 30, 1997 as compared to 0.25% at June 30, 1997. In addition to the non-performing loans and foreclosed assets set forth in the preceding table, as of September 30, 1997, there were no other of loans identified by the Company with respect to which information known about the possible credit problems of the borrowers or of the cash flows of the security properties have caused management to have some concerns as to the ability of the borrowers to comply with present loan repayment terms and which may result in the future inclusion of such items in the non-performing asset categories. - 17 - At September 30, 1997 the recorded investment in impaired loans was $2.3 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. Regulatory Capital -- At September 30, 1997 the Bank met all applicable regulatory capital requirements, including the fully phased-in risk based capital requirements. The following table provides information on an unconsolidated basis indicating the extent to which the Bank exceeds the minimum capital requirements under federal regulations as of September 30, 1997.
Approximate (Dollars in Thousands) Actual Requirement Excess - ---------------------- ------ ----------- ------ Tangible Capital: Dollar Amount $ 82,081 $ 14,633 $ 67,448 Percent of tangible assets 8.41% 1.50% 6.91% Core Capital: Dollar Amount $ 82,081 $ 29,265 $ 52,816 Percent of adjusted tangible assets 8.41% 3.00% 5.41% Risk-based Capital: Dollar Amount $ 86,801 $ 48,931 $ 37,870 Percent of risk-weighted assets 14.19% 8.00% 6.19%
The OTS has adopted, but temporarily postponed implementation until further notice, a final rule that requires every savings association with more than normal interest rate risk to deduct from its total capital an amount equal to 50% of its interest-rate risk exposure multiplied by the present value of its assets when calculating and determining compliance with risk-based capital requirements. This exposure is a measure of the potential decline in the net portfolio value of a savings association, greater than 2% of the present value of its assets, based upon a hypothetical 200 basis point increase or decrease in interest rates (whichever results in a greater decline). Net portfolio value is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts. The rule provides for a two quarter lag between calculating interest rate risk and recognizing any deduction from capital. The amount to be deducted from capital is the lowest interest rate risk component reported in an institution's exposure reports to the OTS for the three most recent quarters. Based upon interest-rate risk exposure calculations as provided by the OTS for the period ended June 30, 1997, the most recent date such information is available from the OTS, the deduction from the Bank's total capital would be $2.8 million under this rule. Based on the Bank's excess risk-based capital of $37.9 million at September 30, 1997, not withstanding this $2.8 million deduction from capital, the Bank would continue to exceed its risk-based capital requirement. The OTS has amended its regulatory capital regulations to exclude from regulatory capital the unrealized gains and losses, net of income taxes, as required by FASB accounting standard SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities". At September 30, 1997 the Bank had $310,000 of unrealized gains, net of income taxes, that were deducted from capital for purposes of determining regulatory capital. - 18 - ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Management believes there has been no material change in interest rate risk since June 30, 1997. For additional information, see Management's Discussion and Analysis of Financial Condition and Results of Operations included herein in Item 2 and refer to the Interest Rate Risk Management discussion included in WesterFed Financial Corporation's Annual Report for the fiscal year ended June 30, 1997. - 19 - PART II -- OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS Neither the registrant or its subsidiaries are part to any legal proceedings, other than routine litigation arising in the normal course of its business. While the ultimate outcome of these various legal proceedings cannot be predicted with certainty, it is the opinion of management that the resolution of these legal actions should not have a material effect on the Company's consolidated financial position or results of operations. ITEM 2 CHANGE IN SECURITIES -- None ITEM 3 DEFAULTS UPON SENIOR SECURITIES -- None ITEM 4 SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS On October 28, 1997 the annual meeting of the stockholders was held to elect two directors of the Company and to ratify the appointment of KPMG Peat Marwick LLP as auditors of the Company for the fiscal year ended June 30, 1998. The voting results are listed below:
Proposal 1 - Election of Directors For Against Abstain Robert F. Burke 5,132,574 21,483 -0- Dr. Marvin P. Reynolds 5,130,792 23,265 -0- Proposal 2 - Ratify the appointment of KPMG Peat Marwick LLP as independent public accountants 5,126,121 7,741 14,648
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 November 4, 1997 to report the quarterly earnings release and a dividend declaration of $0.115 per share. - 20 - 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 October 14, 1997 /s/ Lyle R. Grimes ---------------- ------------------------------------ Lyle R. Grimes Chairman of the Board/President and Chief Executive Officer (Duly Authorized Officer) Date October 14, 1997 /s/ James A. Salisbury ---------------- ---------------------------------------- James A. Salisbury Treasurer and Chief Financial Officer (Principal Finance and Accounting Officer) - 21 - EX-27 2
9 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL REPORT ON FORM 10-Q FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS JUN-30-1997 SEP-30-1997 17,132 6,160 0 0 91,617 158,465 161,358 655,641 4,743 999,203 630,638 85,602 24,474 144,860 56 0 0 106,092 999,203 13,807 4,445 77 18,329 6,898 10,332 7,997 164 0 1,405 2,943 1,809 0 0 1,809 0.32 0.32 0 2,334 1,661 0 0 4,651 82 9 4,743 4,743 0 692
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