-----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, KTOh8G0r9fDfNm7NcTIjFpnPHf2lbW6jgDC5dz9YODnQOgwrfc2kqMnhSl/POXKI bhemmNBNa3u+bw+PktfvWA== 0000950164-98-000085.txt : 19980515 0000950164-98-000085.hdr.sgml : 19980515 ACCESSION NUMBER: 0000950164-98-000085 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980514 SROS: NASD 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: 98620346 BUSINESS ADDRESS: STREET 1: PO BOX 5388 STREET 2: 110 EAST BROADWAY CITY: MISSOULA STATE: MT ZIP: 59802 BUSINESS PHONE: 4067215254 10-Q 1 FORM 10-Q UNITED STATES SECURITY AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended March 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission file number 0 -22772 WESTERFED FINANCIAL CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in this charter) DELAWARE 81-0487794 - ---------------------------------------- ------------------- (State or other jurisdiction of (IRS Employer ID #) incorporation or organization) 110 East Broadway, Missoula, Montana 59802 - ---------------------------------------- ------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 406-721-5254 ------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subjected to such filing requirements for the past 90 days. Yes [X] No [ ] The number of shares outstanding of each of the Issuer's Classes of Common Stock, as of the latest date is: Class: Common Stock, Par Value $0.01 per share; Outstanding at April 30, 1998 -- 5,585,303 shares (including restricted shares) Page 1 TABLE OF CONTENTS PART I -- FINANCIAL INFORMATION Page ---- ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets - March 31, 1998 (Unaudited) and June 30, 1997........................................... - 3- Consolidated Statements of Income - Three and Nine Month Periods Ended March 31, 1998 and March 31, 1997 (Unaudited).......................................... - 4- Consolidated Statement of Stockholders' Equity for the Nine Month Period Ended March 31, 1998 (Unaudited).............................................. - 5- Consolidated Statements of Cash Flows for the Nine Month Period Ended March 31, 1998 and March 31, 1997 (Unaudited) ................................... - 6- Notes to Consolidated Financial Statements 1. Basis of Presentation........................................... - 7- 2. Cash Equivalents................................................ - 7- 3. Computation of Net Income per Share............................. - 7- 4. Dividends Declared.............................................. - 8- 5. Completed Acquisition........................................... - 8- 6. A Comparison of the Amortized Cost and Estimated Fair Value of Investment and Mortgage-backed Securities ................................... - 9- A Comparison of the Amortized Cost and Estimated Fair Value of Investment Securities by Contractual Maturities.......................... -10- ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 1. Forward Looking Statements...................................... -11- 2. Changes in Financial Condition. Comparison of the Nine Month Period from June 30, 1997 to March 31, 1998............................................... -11- 3. Comparison of Operating Results for the Three Month Period Ended March 31, 1998 and March 31, 1997.................................................. -14- 4. Comparison of Operating Results for the Nine Month Period Ended March 31, 1998 and March 31, 1997.................................................. -18- ITEM 3. Quantitative and Qualitative Disclosures about Market Risk................................................ -24- PART II -- OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS................................................. -25- ITEM 2 CHANGE IN SECURITIES.............................................. -25- ITEM 3 DEFAULTS UPON SENIOR SECURITIES................................... -25- ITEM 4 SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.................................................. -25- ITEM 5 OTHER INFORMATION................................................. -25- ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K.................................. -25- SIGNATURES Page 2 ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets - March 31, 1998 (Unaudited) and June 30, 1997
(Dollars in thousands, except share and per share data) (Unaudited) March 31, June 30, 1998 1997 ---- ---- ASSETS Cash and due from banks .............................................. $ 16,994 16,999 Interest-bearing due from banks ...................................... 17,199 160 ----------- ----------- Cash and cash equivalents ..................................... 34,193 17,159 Interest-bearing deposits ............................................ 100 2,000 Investment securities available-for-sale ............................. 80,623 51,683 Investment securities, at amortized cost (estimated market value of $16,999 at March 31, 1998 and $27,728 at June 30, 1997) .......... 16,881 27,466 Stock in Federal Home Loan Bank of Seattle, at cost .................. 13,303 11,456 Mortgage-backed securities available-for-sale ........................ 28,209 31,388 Mortgage-backed securities, at amortized cost (estimated market value of $110,637 at March 31, 1998 and $119,193 at June 30, 1997) 107,768 117,781 Loans available-for-sale ............................................. 9,008 3,700 Loans receivable, net ................................................ 661,642 626,577 Accrued interest receivable .......................................... 7,537 6,957 Premises and equipment, net .......................................... 30,735 29,291 Core deposit intangible .............................................. 4,725 5,276 Goodwill ............................................................. 16,833 15,562 Cash surrender value of life insurance policies ...................... 6,633 6,120 Other assets ......................................................... 4,984 3,223 ----------- ----------- Total assets .................................................. $ 1,023,174 $ 955,639 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits .......................................................... $ 644,560 $ 630,869 Repurchase agreements ............................................. 9,017 7,786 Borrowed funds .................................................... 236,848 191,450 Advances from borrowers for taxes and insurance ................... 4,806 3,753 Income taxes ...................................................... 2,492 3,504 Accrued interest payable .......................................... 4,212 3,593 Accrued expenses and other liabilities ............................ 12,545 10,425 ----------- ----------- Total liabilities ............................................. 914,480 851,380 ----------- ----------- Stockholders' Equity: Preferred stock, $.01 par value, 5,000,000 shares authorized; none outstanding ............................................... -- -- Common stock, $.01 par value, 10,000,000 shares authorized; 5,583,968 shares outstanding at March 31, 1998 5,564,904 outstanding at June 30, 1997 ......................... 56 56 Additional paid-in capital ....................................... 68,793 67,941 Common stock acquired by ESOP/RRP ................................ (2,585) (2,936) Treasury stock, at cost .......................................... (3,461) (3,081) Net unrealized gain/(loss) on securities available-for-sale ...... 238 (35) Retained earnings ................................................ 45,653 42,314 ----------- ----------- Total stockholders' equity .................................... 108,694 104,259 ----------- ----------- Total liabilities and stockholders' equity ................ $ 1,023,174 $ 955,639 =========== =========== Book value per share .......................................... $ 19.47 $ 18.74 =========== =========== Tangible book value per share ................................. $ 15.60 $ 14.99 =========== ===========
See accompanying notes to consolidated financial statements. Page 3 Consolidated Statements of Income - Three and Nine Month Periods Ended March 31, 1998 and March 31, 1997 (Unaudited).
(Dollars in thousands, except share and per share data) (Unaudited) (Unaudited) Three Months Ended Nine Months Ended March 31, March 31, ---------------------- ----------------------- 1998 1997 1998 1997 ---- ---- ---- ---- Interest income: Loans receivable .......................................... $ 14,171 $ 9,288 $ 42,189 $ 24,832 Mortgage-backed securities available-for-sale ............. 476 748 1,595 2,145 Mortgage-backed securities ................................ 1,891 1,308 5,831 3,346 Investment securities available-for-sale .................. 1,699 694 4,120 2,141 Investment securities ..................................... 325 134 1,452 348 Interest-bearing deposits ................................. 210 357 520 846 Other ..................................................... 94 56 252 148 ---------- ---------- ---------- ---------- Total interest income ................................. 18,866 12,585 55,959 33,806 ---------- ---------- ---------- ---------- Interest expense: NOW and money market demand ............................... 817 488 2,481 1,237 Savings ................................................... 651 553 2,012 1,493 Certificates of deposit ................................... 5,489 3,732 16,348 9,734 Advances from FHLB-Seattle and other borrowed funds ....... 3,886 2,156 10,985 6,320 ---------- ---------- ---------- ---------- Total interest expense ................................ 10,843 6,929 31,826 18,784 ---------- ---------- ---------- ---------- Net interest income ................................... 8,023 5,656 24,133 15,022 Provision for loan losses ................................... 210 61 630 103 ---------- ---------- ---------- ---------- Net interest income after provision for loan losses ... 7,813 5,595 23,503 14,919 ---------- ---------- ---------- ---------- Non-interest income: Loan origination fees ..................................... 598 121 1,602 345 Service fees .............................................. 1,096 761 3,382 1,891 Net gain on sale of loans and securities available-for-sale 212 86 701 400 Other ..................................................... 217 52 396 122 ---------- ---------- ---------- ---------- Total non-interest income ............................. 2,123 1,020 6,081 2,758 ---------- ---------- ---------- ---------- Non-interest expenses: Compensation and employee benefits ........................ 3,538 2,357 9,985 5,951 Net occupancy expense of premises ......................... 541 356 1,605 834 Equipment and furnishings expense ......................... 478 257 1,248 622 Data processing expenses .................................. 441 241 1,218 574 Federal insurance premium ................................. 88 60 268 425 SAIF special assessment ................................... -- -- -- 2,297 Intangibles amortization .................................. 356 123 1,018 123 Marketing and advertising ................................. 264 129 626 361 Other ..................................................... 1,875 1,083 4,881 2,601 ---------- ---------- ---------- ---------- Total non-interest expense ............................ 7,581 4,606 20,849 13,788 ---------- ---------- ---------- ---------- Income before income taxes .................................. 2,355 2,009 8,735 3,889 Income taxes ................................................ 995 814 3,468 1,521 ---------- ---------- ---------- ---------- Net income(1) ............................................... $ 1,360 $ 1,195 $ 5,267 $ 2,368 ========== ========== ========== ========== Net income per share: Basic ..................................................... $ 0.26 $ 0.27 $ 0.99 $ 0.57 ========== ========== ========== ========== Diluted ................................................... $ 0.24 $ 0.25 $ 0.94 $ 0.54 ========== ========== ========== ========== Dividends per share ......................................... 0.125 0.105 0.360 0.300 ========== ========== ========== ========== Dividend payout ratio before SAIF assessment - diluted ...... 52.08% 42.00% 38.30% 34.88% ========== ========== ========== ========== Average common and common equivalent shares outstanding Basic ..................................................... 5,323,395 4,450,880 5,302,875 4,189,856 ========== ========== ========== ========== Diluted ................................................... 5,627,401 4,702,738 5,613,335 4,398,688 ========== ========== ========== ==========
- -------------- (1) The nine months ended March 31, 1997 includes approximately $1,414, or $0.32 per share diluted, special SAIF assessment net of tax at 38.5%. See accompanying notes to consolidated financial statements. Page 4 Consolidated Statement of Stockholders' Equity for the Nine Month Period Ended March 31, 1998 (Unaudited). (Dollars in thousands, except share and per share data)
Net Unrealized Gain (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 ........................ -- -- -- -- 5,267 -- 5,267 Change in net unrealized gain (loss) on securities available-for-sale ........... -- -- -- -- -- 273 273 ESOP Shares committed to be released .................... -- 318 170 -- -- -- 488 Amortization of award of RRP stock .................... -- -- 180 -- -- -- 180 Purchase of treasury stock ........ -- -- -- (380) -- -- (380) Shares forfeited by RRP participants (75 shares) ..... -- -- 1 -- -- -- 1 Stock options exercised (35,753 shares) .............. -- 534 -- -- -- -- 534 Cash dividends declared ($0.360 per share) ........... -- -- -- -- (1,928) -- (1,928) ------ -------- -------- ------- -------- ------- -------- Balance at March 31, 1998 ......... $ 56 $ 68,793 $ (2,585) $(3,461) $ 45,653 $ 238 $108,694 ====== ======== ======== ======= ======== ======= ========
See accompanying notes to consolidated financial statements. Page 5 Consolidated Statements of Cash Flows for the Nine Month Period Ended March 31, 1998 and March 31, 1997 (Unaudited) (Dollars in thousands except share and per share data)
(Unaudited) Nine Months Ended March 31, ----------------------- 1998 1997 ---- ---- Net cash provided by operating activities .......................... $ 19,563 $ 7,987 --------- --------- Cash flows from investing activities: Net change in interest-bearing deposits ............................ 1,900 3,000 Principal payments on mortgage-backed securities ................... 8,027 5,942 Purchases of mortgage-backed securities available-for-sale ......... (4,998) (983) Principal payments on mortgage-backed securities available-for-sale 10,139 10,466 Proceeds from sale of mortgage-backed securities available-for-sale 331 6,856 Purchases of investment securities ................................. (5,483) (5,978) Proceeds from maturities of investment securities .................. 16,276 9,352 Proceeds from maturities of investment securities available-for-sale 59,445 57,789 Proceeds from sale of investment securities available-for-sale ..... 11,020 -- Purchase of investment securities available-for-sale ............... (99,274) (51,723) Principal payments on investment securities available-for-sale ..... 292 301 Net change in loans receivable ..................................... (35,222) (13,313) Purchases of premises and equipment ................................ (5,478) (1,342) Proceeds from sale of premises and equipment ....................... 925 -- Purchase of Federal Home Loan Bank stock ........................... (1,129) -- Acquisition of Security Bancorp, net of cash equivalents acquired of $16,607 ............................................ -- (10,776) --------- --------- Net cash provided (used) by investing activities ..................... (43,229) 9,591 --------- --------- Cash flows from financing activities: Net change in deposits excluding interest credited ................. (5,828) (3,789) Net change in repurchase agreements ................................ 1,231 -- Proceeds from borrowings ........................................... 290,165 38,475 Payments on borrowings ............................................. (244,818) (40,371) Net change in advances from borrowers for taxes and insurance ...... 1,053 3,802 Proceeds from exercise of options .................................. 534 -- Payments to acquire treasury stock ................................. (380) -- Dividends paid to stockholders ..................................... (1,257) (806) --------- --------- Net cash (used) provided by financing activities ............... 40,700 (2,689) --------- --------- Net increase (decrease) in cash and cash equivalents ................. 17,034 14,889 Cash and cash equivalents at beginning of period ..................... 17,159 13,299 --------- --------- Cash and cash equivalents at end of period ........................... $ 34,193 $ 28,188 ========= ========= Supplemental disclosure of cash flow information: Payments during the period for: Interest ....................................................... $ 10,136 $ 6,988 Income taxes, net .............................................. 3,641 981 ========= =========
See accompanying notes to consolidated financial statements. Page 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 and nine month periods ended March 31, 1998 are not necessarily indicative of the results anticipated for the year ending June 30, 1998. For additional information, refer to the consolidated financial statements and footnotes thereto included in WesterFed Financial Corporation's (the "Company") annual report for the year ended June 30, 1997. 2. CASH EQUIVALENTS For purposes of the Consolidated Statements of Cash Flows, the Company considers all cash, daily interest demand deposits, non-interest bearing deposits with banks, and interest bearing deposits having original maturities of three months or less to be cash equivalents. 3. COMPUTATION OF NET INCOME PER SHARE In 1997 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. Statement 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where necessary restated, to conform to the Statement 128 requirements. Page 7 The following table sets forth the computation of basic and diluted earnings per share:
(Dollars in thousands, except share and per share data) For the Three Month Period For the Nine Month Period Ended March 31, Ended March 31, -------------------------- ------------------------- 1998 1997 1998 1997 ---- ---- ---- ---- Numerator: Net income - numeration for basic earnings per share and diluted earnings per share - income available to common stockholder ................................. $ 1,360 $ 1,195 $ 5,267 $ 2,368 ========== ========== ========== ========== Denominator: Denomination for basic earnings per share- weighted-average share ........................ 5,323,395 4,450,880 5,302,875 4,189,856 Effect of dilutive securities: Employee stock options ........................ 302,646 232,316 293,919 180,762 RRP shares not vested ......................... 1,360 19,542 16,541 28,070 ---------- ---------- ---------- ---------- Denomination for diluted earnings per share- adjusted weighted-averageshares and assumed conversions ................................... 5,627,401 4,702,738 5,613,335 4,398,688 ========== ========== ========== ========== Basic earnings per share .......................... $ 0.26 $ 0.27 $ 0.99 $ 0.57 Diluted earnings per share ........................ $ 0.24 $ 0.25 $ 0.94 $ 0.54
4. DIVIDENDS DECLARED On April 21, 1998 the Board of Directors of the Company declared a quarterly cash dividend of $0.125 per share, payable on May 21, 1998 to stockholders of record on May 7, 1998. 5. COMPLETED ACQUISITION On February 28, 1997, the Company completed its Acquisition of Security Bancorp (the "Acquisition"). The Acquisition was accounted for as a purchase transaction and accordingly, the consolidated statement of income includes the results of operations of Security Bancorp commencing March 1, 1997. Under this method of accounting, assets and liabilities of Security Bancorp are adjusted to their estimated fair value and combined with the historical recorded book value of the assets and liabilities of the Company. The Company issued 1,150,175 shares of WesterFed Common Stock, options to acquire 94,696 common shares and paid $25,995,480 in cash for all of the outstanding shares of Security Bancorp Common Stock, for total consideration (based on the $18.49 per share average closing price of WesterFed Common Stock as reported on the NASDAQ National Market System for the twenty business days from January 16, 1997 through February 12, 1997) of $48.7 million. In addition, as of such date, Security Bank, a federally chartered stock savings bank and wholly owned subsidiary of Security Bancorp, merged with and into Western Security Bank (the "Bank"). At the time of the merger, Security Bancorp had assets on a consolidated basis of $372.6 million, deposits of $286.5 million and stockholders equity of $30.8 million. Unless the context otherwise requires, reference herein to the company includes WesterFed, Western Security Bank and its subsidiaries on a consolidated basis. In addition, after having received regulatory approval, the name of Western Federal Savings Bank was changed to Western Security Bank in February, 1998. Page 8 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) March 31, 1998 June 30, 1997 ------------------------------------------- ------------------------------------------ Gross Gross Estimated Gross Gross Estimated Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair Cost Gains Losses Value Cost Gains Losses Value ---- ----- ------ ----- ---- ----- ------ ----- Federal Agency obligations ..... $ 2,993 $ 35 $ -- $ 3,028 $ 18,804 $ 184 $ -- $ 18,988 U.S. Government obligations .... 99 -- -- 99 297 1 -- 298 Corporate obligations .......... 11,470 82 (9) 11,543 5,980 66 -- 6,046 Other investments .............. 2,319 15 (5) 2,329 2,385 13 (2) 2,396 -------- ------- ------- -------- -------- ------- ------- -------- Total investment securities .. 16,881 132 (14) 16,999 27,466 264 (2) 27,728 Mortgage-backed securities ..... 107,768 2,902 (33) 110,637 117,781 1,698 (286) 119,193 -------- ------- ------- -------- -------- ------- ------- -------- $124,649 $ 3,034 $ (47) $127,636 $145,247 $ 1,962 $ (288) $146,921 ======== ======= ======= ======== ======== ======= ======= ========
AVAILABLE-FOR-SALE (Dollars in Thousands) (Unaudited) March 31, 1998 June 30, 1997 ------------------------------------------- ------------------------------------------ Gross Gross Estimated Gross Gross Estimated Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair Cost Gains Losses Value Cost Gains Losses Value ---- ----- ------ ----- ---- ----- ------ ----- Federal Agency obligations ..... $ 60,730 $ 145 $ (45) $ 60,830 $ 46,067 $ 113 $ (211) $ 45,969 Corporate obligations .......... 19,729 32 (7) 19,754 5,622 54 (1) 5,675 Other investments .............. 3 36 -- 39 3 36 -- 39 -------- ------- ------- -------- -------- ------- ------- -------- Total investment securities .. 80,462 213 (52) 80,623 51,692 203 (212) 51,683 Mortgage-backed securities ..... 27,942 447 (180) 28,209 31,434 220 (266) 31,388 -------- ------- ------- -------- -------- ------- ------- -------- $108,404 $ 660 $ (232) $108,832 83,126 $ 423 $ (478) $ 83,071 ======== ======= ======= ======== ======== ======= ======= ========
Page 9 A COMPARISON OF THE AMORTIZED COST AND ESTIMATED FAIR VALUE OF INVESTMENT SECURITIES BY CONTRACTUAL MATURITIES AT MARCH 31, 1998 IS AS FOLLOWS: HELD-TO-MATURITY (Dollars in Thousands) (Unaudited) March 31, 1998 Amortized Estimated Cost Fair Value ---- ---------- Due in one year or less ........................... $ 99 $ 99 Due after one year through 5 years ................. 14,534 14,645 Due after 5 years through 10 years ................. 236 234 Due after 10 years ................................. 2,012 2,021 Other .............................................. -- -- ------- ------- 16,881 16,999 ======= ======= AVAILABLE-FOR-SALE (Dollars in Thousands) (Unaudited) March 31, 1998 Amortized Estimated Cost Fair Value ---- ---------- Due in one year or less ........................... $16,996 $16,995 Due after one year through 5 years ................. 35,588 35,645 Due after 5 years through 10 years ................. 26,597 26,655 Other .............................................. 3 36 SBA loans contractually due after 5 years .......... 1,278 1,292 ------- ------- 80,462 80,623 ======= ======= Expected maturities of mortgage-backed securities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without penalties. Page 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 1. FORWARD LOOKING STATEMENTS When used in this Form 10-Q or future filings made by the Company with the Securities and Exchange Commission, in the Company's press releases or other public shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The Company wishes to caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date made, and to advise readers that various factors - including regional and national economic conditions, changes in levels of market interest rates, credit risks of lending activities and competitive and regulatory factors - could affect the Bank's financial performance and could cause the Bank's actual results for future periods to differ materially from those anticipated or projected. The Company does not undertake, and specifically disclaims, any obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. 2. CHANGES IN FINANCIAL CONDITION. COMPARISON OF THE NINE MONTH PERIOD FROM JUNE 30, 1997 TO MARCH 31, 1998. General - Total assets increased $67.5 million to $1.0 billion at March 31, 1998 from $955.6 million at June 30, 1997. The increase in assets was primarily the result of increases in loans receivable and loans available-for-sale of $40.3 million and an increase in investment securities, Federal Home Loan Bank of Seattle (FHLB) stock and all other interest earning assets of $35.8 million, partially offset by a decrease in mortgage-backed securities of $13.2 million. Loans Receivable and Loans Available-for-Sale - Loans receivable and loans available-for-sale increased $40.3 million to $670.6 million at March 31, 1998 from $630.3 million at June 30, 1997. Loans secured by real estate increased by $9.3 million and non-real estate commercial business loans, agricultural loans and consumer loans increased $31.0 million. The increase in loans receivable was primarily the result of loan originations of $285.7 million, partially offset by principal repayments of $183.1 million and the sale of loans available-for-sale of $63.2 million. Mortgage-Backed Securities - Mortgage-backed securities decreased $13.2 million to $136.0 million at March 31, 1998 from $149.2 million at June 30, 1997 and the proceeds were generally used to fund the growth in loans receivable. Investment Securities, FHLB Stock and Other Interest Earning Assets - Investment securities, FHLB stock and other interest earning assets increased $35.8 million to $134.7 million at March 31, 1998 from $98.9 million at June 30, 1997. The $35.8 million increase was primarily the result of increases in interest-bearing due from banks and interest-bearing deposits of $15.1 million and the balance of investment securities of $18.4 million. Goodwill and Core Deposit Intangible - Goodwill is being amortized over 25 years, or approximately $704,000 per year. The core deposit intangible is amortized on an accelerated basis over its estimated economic life of seven years, or approximately $758,000 in the current fiscal year. Final market valuations of fixed assets acquired and other additional costs associated with the Acquisition increased goodwill $1.7 million during the quarter ending March 31, 1998. Page 11 From time to time, Western Security Bank (the "Bank"), the regulated thrift institution subsidiary of the Company, may, in order to reduce interest rate risk, purchase financial instruments that lock in a spread between interest-earning assets and interest-bearing liabilities. While these types of financial instruments limit risk, they also reduce the Bank's ability to maximize profits during periods of favorable interest rate trends. At March 31, 1998 the Bank had one structured note totaling $700,000 wherein the interest rate is based upon a fraction of the increase or decrease in a specified index. The security has a variable interest rate and was purchased to enable the Bank to increase its interest income when interest rates increase. The market value of the security at March 31, 1998 was $700,000 and will mature in May, 1998. The Bank may be a party to financial instruments with off-balance-sheet risk in the normal course of business to reduce its own exposure to fluctuations in interest rates. These financial instruments may include interest rate cap and interest rate swap agreements. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of amounts recognized in the consolidated balance sheets. The contract or notional amounts of these instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. For interest rate cap and interest rate swap agreements, the contract or notional amounts do not represent exposure to credit loss. The Bank controls the credit risk of those instruments through credit approval, limits and monitoring procedures. Interest Rate Caps - Interest rate caps entitle the Bank to receive various interest payments in exchange for payment of a premium, provided the three-month LIBOR exceeds an agreed upon interest rate. Transaction fees paid in connection with interest rate cap agreements are amortized to interest expense as an adjustment of the interest cost of liabilities. Because the Bank receives various interest payments if the three-month LIBOR exceeds the agreed upon interest rate, the Bank is generally at risk to the extent of the unamortized premium paid if the three-month LIBOR does not exceed the agreed upon interest rate. At March 31, 1998, the amount of the unamortized premiums paid related to the interest rate cap transactions was $162,000. Interest rate cap agreements are used to manage interest rate risk by synthetically extending the life of interest-bearing liabilities. The following summarizes interest rate cap agreements at March 31, 1998: Notional principal Agreement amount termination Cap ------ ----------- --- (in thousands) $ 5,000 July, 1999 6.5% 5,000 July, 1999 7.0% 5,000 July, 2000 6.0% ------- $15,000 ======= Interest Rate Swaps - Interest rate swap agreements involve the exchange of fixed and floating rate payments without the exchange of the underlying principal amounts. Estimated amounts to be received or paid on the swap settlement dates are accrued when realized. The net swap settlements are reflected in interest expense. Interest rate swap agreements are used to manage interest rate risk by synthetically extending the life of interest-bearing liabilities. At March 31, 1998 the Bank did not have any interest rate swap agreements in place. The counter parties to the interest rate cap agreements are the FHLB of Seattle in the amount of $10.0 million and Merrill Lynch in the amount of $5.0 million. The interest rate cap agreements are not collateralized. Interest rate swaps would be collateralized by stock in FHLB, certificates of deposit issued by the FHLB, securities issued by the U.S. Government or agency thereof, mortgage-backed securities, or qualifying first mortgage loans not otherwise pledged. Page 12 Deposits - Deposits increased $13.7 million to $644.6 million at March 31, 1998 from $630.9 million at June 30, 1997. Checking and money market accounts increased $10.5 million and certificates of deposit increased $9.7 million while savings accounts decreased $6.5 million. Borrowed Funds and Repurchase Agreements - Borrowed funds and repurchase agreements increased $46.7 million to $245.9 million at March 31, 1998 from $199.2 million at June 30, 1997. Repurchase agreements increased $1.2 million while there were other new borrowings, consisting primarily of FHLB advances, of $163.0 million with maturities of less than one year and $127.0 million of other borrowings maturing in one or more years. The increase in borrowings were reduced by principal repayments and maturities of $244.5 million. Stockholders' Equity - Stockholders' equity increased $4.4 million to $108.7 million at March 31, 1998 from $104.3 million at June 30, 1997. This increase was due to net income for the nine month period of $5.3 million, $668,000 related to contributions to the Employee Stock Ownership Plan and shares earned and issued under the Recognition and Retention Plan, $273,000 related to the change in unrealized gains associated with assets classified as available-for-sale being adjusted to market value in accordance with Statement of Financial Accounting Standards No. 115, and the issuance of 35,753 new common shares with a recorded value of $534,000 related to exercised stock options. Stockholders' equity was reduced $1.9 million for dividends declared during the nine month period and the purchase of $380,000 of treasury stock. Page 13 3. COMPARISON OF OPERATING RESULTS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1998 AND MARCH 31, 1997 RESULTS OF OPERATIONS Three Months Ended March 31, (Unaudited) --------------------------------- 1998 1997 Amount Change Amount ------ ------ ------ (In Thousands) Total interest income ................... $18,866 $ 6,281 $12,585 Total interest expense .................. 10,843 3,914 6,929 ------- ------- ------- Net interest income ................. 8,023 2,367 5,656 Provision for loan losses ............... 210 149 61 ------- ------- ------- Net interest income after provision for loan losses .......... 7,813 2,218 5,595 ------- ------- ------- Fees and service charges ................ 1,694 812 882 Gain on sale of loans, mortgage- backed securities and investment securities .............. 212 126 86 Other non-interest income ............... 217 165 52 ------- ------- ------- Total non-interest income ........... 2,123 1,103 1,020 ------- ------- ------- Income before non-interest expense ...... 9,936 3,321 6,615 Total non-interest expense .............. 7,581 2,975 4,606 ------- ------- ------- Income before income taxes .......... 2,355 346 2,009 Income taxes ............................ 995 181 814 ------- ------- ------- Net income .......................... $ 1,360 $ 165 $ 1,195 ======= ======= ======= Page 14 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) March 31, 1998 March 31, 1997 ------------------------------ ------------------------------ Average Interest Average Interest Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Balance(5) Paid Rate Balance(5) Paid Rate ---------- ---- ---- ---------- ---- ---- INTEREST EARNING ASSETS: Loans receivable (1) (2) ................... $674,817 $ 14,171 8.40% $444,314 $ 9,288 8.36% Mortgage-backed securities (2) ............. 138,388 2,367 6.84 117,521 2,056 7.00 Investments (2) ............................ 115,674 2,024 7.00 52,087 828 6.36 Other interest-earning assets (3) .......... 14,305 210 5.87 21,641 357 6.60 Cash surrender value of life insurance ..... 6,599 94 5.70 4,200 56 5.33 -------- -------- ---- -------- -------- ----- Total Interest-Earning Assets ................ 949,783 18,866 7.95 $639,763 $ 12,585 7.87% ======== ======== ==== ======== ======== ===== INTEREST-BEARING LIABILITIES: Certificates of deposits ................... 386,531 5,489 5.68 $265,287 $ 3,732 5.63% Passbook deposits .......................... 95,469 651 2.73 77,233 553 2.86 Demand and NOW accounts .................... 108,329 285 1.05 66,330 214 1.29 Money market accounts ...................... 53,513 531 3.97 31,656 274 3.46 -------- -------- ---- -------- -------- ----- Total deposits .......................... 643,842 6,956 4.32 440,506 4,773 4.33 FHLB advances and notes payable ............ 254,781 3,851 6.05 136,360 2,120 6.22 Collateralized mortgage obligations ........ 566 36 25.44 925 36 15.57 -------- -------- ----- -------- -------- ----- Total Interest-Bearing Liabilities ........ $899,189 $ 10,843 4.82% $577,791 $ 6,929 4.80% ======== ======== ===== ======== ======== ===== Net interest income .......................... $ 8,023 $ 5,656 ======== ======== Net interest rate spread ..................... 3.13% 3.07% ==== ===== Net interest earning assets .................. $ 50,594 $ 61,972 ======== ======== Net interest margin (4) ...................... 3.38% 3.54% ==== ===== Average interest-earning assets to average interest-bearing liabilities ............. 105.63% 110.73% ====== ======
- --------------- (1) Calculated net of deferred loan fees, loan discounts, loans in process and loss reserves (2) Includes held and available-for-sale categories (3) Includes primarily short-term liquid assets (4) Net interest income divided by average interest earning assets (5) Based on average monthly balances Page 15 General -- Net income increased $165,000 to $1.4 million for the three month period ended March 31, 1998 from $1.2 million for the same period last year. Net interest income after provision for loan losses increased $2.4 million and non-interest income increased $1.1 million while non-interest expense and income tax expense increased $3.0 million and $181,000 respectively. The net interest margin (net interest income divided by average interest-earning assets) decreased to 3.38% during the quarter ended March 31, 1998 from 3.54% during the same period last year. The interest rate spread at March 31, 1998 was 3.13% as compared to 3.07% at March 31, 1997. Interest Income -- Interest income increased $6.3 million to $18.9 million for the three month period ended March 31, 1998 from $12.6 million for the same period last year. The increase was primarily the result of a $310.0 million increase in average total interest-earning assets to $949.8 million during the three month period ended March 31, 1998 from $639.8 million during the same period last year. In addition, the average yield on interest-earning assets increased to 7.95% during the quarter ended March 31, 1998 from 7.87% during the same period last year due primarily to the Acquisition. Interest earned on loans receivable increased $4.9 million due primarily to a $230.5 million increase in the average balance of loans receivable to $674.8 million during the three month period ended March 31, 1998 from $444.3 million for the same period last year. In addition, the average yield on loans increased to 8.40% during the three month period ended March 31, 1998 from 8.36% for the same period last year. The increase in the average balance of loans receivable was primarily the result of the loans acquired in the Acquisition. Interest earned on mortgage-backed securities increased $311,000 due primarily to a $20.9 million increase in the average balance of mortgage-backed securities outstanding to $138.4 million for the three month period ended March 31, 1998 from $117.5 million during the same period last year. The increase was primarily the result of the mortgage-backed securities acquired in the Acquisition. Interest earned on investment securities, FHLB stock and other interest earning assets increased $1.1 million primarily due to an increase in the average balance of these securities of $58.7 million to $136.6 million during the quarter ended March 31, 1998 from $77.9 million during the same period last year. The average yield increased to 6.82% during the quarter ended March 31, 1998 from 6.37% for the same period last year. The increase in average balance is the result of both the investment securities acquired in the Acquisition and the purchase of additional investment securities for the purpose of increasing interest income. The increase in the average yield earned on other interest earning assets during the quarter ended March 31, 1998 was due primarily to increased earnings from discounts amortized to income on investments called during the quarter. Interest Expense -- Total interest expense increased $3.9 million to $10.8 million for the three month period ended March 31, 1998 from $6.9 million for the same period last year. Interest expense on deposits increased $2.2 million due to an increase in the average balance of deposits of $203.3 million to $643.8 million during the three month period ended March 31, 1998 from $440.5 million during the same period last year. The increase in the average balance of deposits was primarily the result of deposits acquired in the Acquisition. The average rate paid on deposits decreased to 4.32% during the quarter ended March 31, 1998 from 4.33% for the same period last year as the Bank increased the amount of non-interest bearing demand accounts as a result of the Acquisition. Interest expense on borrowed funds increased $1.7 million due primarily to an increase in the average balance of borrowed funds of $118.0 million to $255.3 million during the three month period ended March 31, 1998 from $137.3 million for the same period last year. The increase was primarily the result of the Acquisition and increased borrowings to fund the growth in the loan and investment securities portfolios. Provisions for Loan Losses -- The provision for loan losses increased $149,000 to $210,000 for the three month period ended March 31, 1998 as compared to a $61,000 provision for the same period last year. Page 16 The provision for loan losses is determined by management as the amount to be added to the allowance for loan losses after net charge-offs have been deducted to bring the allowance to a level which is considered adequate to absorb losses inherent in the loan portfolio in accordance with generally accepted accounting principles. At March 31, 1998 the Company had $6.6 million of non-performing assets (representing 0.64% of total assets) compared to $2.4 at June 30, 1997 (representing 0.25% of total assets). At March 31, 1998 the Company had an allowance for loan losses to non-performing assets of 76.94% as compared to 191.01% at June 30, 1997. Future additions to the Company's allowance for loan losses and any change in the related ratio of the allowance for loan losses to non-performing loans are dependent upon the performance and composition of the Company's loan portfolio, the economy, inflation, changes in real estate values and interest rates and the view of the regulatory authorities toward adequate reserve levels. For additional information, see "NonPerforming Assets." Non-Interest Income -- Non-interest income increased $1.1 million to $2.1 million for the quarter ended March 31, 1998 from $1.0 million for the same quarter last year. Fees and service charges increased $812,000, net gain on sale of loans and securities available-for-sale increased $126,000, while other non-interest income increased $165,000. The increase in fees and service charges were due primarily to the increase in fees associated with checking accounts which increased as a result of the Acquisition and an increase in loan origination fees as a result of increased loan originations. Non-Interest Expense -- Non-interest expense increased $3.0 million to $7.6 million for the quarter ended March 31, 1998 from $4.6 million for the same quarter last year. The increase was due primarily to the Acquisition and a change in data processing systems. Included in the non-interest expense for the quarter ended March 31, 1998 was $356,000 related to the amortization of intangibles resulting from the Acquisition as compared to $123,000 for the same period last year which included only one month of amortization expense. This was comprised of $166,000 for the amortization of goodwill and $189,000 for the amortization of the core deposit intangible. Additionally, two new branch facilities were opened in the Billings market area since May, 1997 which have increased non-interest expense. The consolidation of facilities in three market areas prior to June 30, 1998 will partially offset the increased costs related to the new facilities. In addition, during the quarter the Bank completed its conversion to a single, commercial bank oriented, data processing system. This allows the Bank to continue its emphasis on adding commercial banking to its traditional thrift business. The quarter just ended included approximately $700,000 in professional fees, overtime, marketing costs, and other expenses related to the consolidation of data processing systems and changes in name to Western Security Bank. In addition, $3.0 million of additional capital expenditures were made in converting to the consolidated data center and the addition of technology to position the Bank to meet increasing competition and the demand for new customer and commercial banking services. In addition, the conversion from a real-time savings and loan data processing environment to a batch-processing commercial bank data processing environment has increased on-going data processing related costs. Management believes that the conversion to the new data processing system will address the most significant Year 2000 compliance and operational issues and the costs currently being incurred during this fiscal year related to the data center conversion comprise a substantial portion of the costs to be incurred related to Year 2000 compliance issues. Income Taxes -- Income tax expense increased $181,000 due primarily to the $346,000 increase in income before income taxes. Page 17 4. COMPARISON OF OPERATING RESULTS FOR THE NINE MONTH PERIOD ENDED MARCH 31, 1998 AND MARCH 31, 1997. RESULTS OF OPERATIONS Nine Months Ended March 31, (Unaudited) -------------------------------- 1998 1997 Amount Change Amount ------ ------ ------ (In Thousands) Total interest income ................... $55,959 $22,153 $33,806 Total interest expense .................. 31,826 13,042 18,784 ------- ------- ------- Net interest income ................ 24,133 9,111 15,022 Provision for loan losses ............... 630 527 103 ------- ------- ------- Net interest income after provision for loan losses ........ 23,503 8,584 14,919 ------- ------- ------- Fees and service charges ................ 4,984 2,748 2,236 Gain on sale of loans, mortgage- backed securities and investment securities ................ 701 301 400 Other non-interest income ............... 396 274 122 ------- ------- ------- Total non-interest income .......... 6,081 3,323 2,758 ------- ------- ------- Income before non-interest expense ...... 29,584 11,907 17,677 Total non-interest expense .............. 20,849 7,061 13,788 ------- ------- ------- Income before income taxes ......... 8,735 4,846 3,889 Income taxes ............................ 3,468 1,947 1,521 ------- ------- ------- Net income ......................... $ 5,267 $ 2,899 $ 2,368 ======= ======= ======= Page 18 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.
Nine Month Period Ended (Unaudited) March 31, 1998 March 31, 1997 ------------------------------------- ------------------------------------- Average Interest Average Interest Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Balance(5) Paid Rate Balance(5) Paid Rate ---------- ---- ---- ---------- ---- ---- INTEREST EARNING ASSETS: Loans receivable (1) (2) ................... $663,273 $ 42,188 8.48% $395,336 $ 24,832 8.37% Mortgage-backed securities (2) ............. 144,836 7,426 6.84 104,941 5,491 6.98 Investments (2) ............................ 107,733 5,573 6.90 52,799 2,489 6.29 Other interest-earning assets (3) .......... 9,771 520 7.10 17,028 846 6.62 Cash surrender value of life insurance ..... 6,492 252 5.18 3,551 148 5.56 ----- --- ---- ----- --- ---- Total Interest-Earning Assets ................ 932,105 55,959 8.00 $573,655 $ 33,806 7.86% ======= ====== ==== ======== ======== ==== INTEREST-BEARING LIABILITIES: Certificates of deposits ................... 380,354 16,348 5.73 $227,740 $ 9,734 5.70% Passbook deposits .......................... 97,770 2,012 2.74 67,966 1,493 2.93 Demand and NOW accounts .................... 106,741 925 1.16 54,304 557 1.37 Money market accounts ...................... 51,884 1,555 4.00 26,274 680 3.45 ------ ----- ---- ------ --- ---- Total deposits .......................... 636,749 20,840 4.36 376,284 12,464 4.42 FHLB advances and notes payable ............ 243,810 10,886 5.95 131,181 6,197 6.30 Collateralized mortgage obligations ........ 664 100 20.09 1,009 123 16.26 --- --- ----- ----- --- ----- Total Interest-Bearing Liabilities ........ $881,223 $ 31,826 4.82% $508,474 $ 18,784 4.93% ======== ======== ==== ======== ======== ==== Net interest income .......................... $ 24,133 $ 15,022 ======== ======== Net interest rate spread ..................... 3.18% 2.93% ==== ==== Net interest earning assets .................. $ 50,882 $ 65,181 ======== ======== Net interest margin (4) ...................... 3.45% 3.49% ==== ==== Average interest-earning assets to average interest-bearing liabilities ............. 105.77% 112.82% ====== ======
- ---------------- (1) Calculated net of deferred loan fees, loan discounts, loans in process and loss reserves (2) Includes held and available-for-sale categories (3) Includes primarily short-term liquid assets (4) Net interest income divided by average interest earning assets (5) Based on average monthly balances Page 19 General - Net income increased $2.9 million to $5.3 million for the nine month period ended March 31, 1998 from $2.4 million for the same period last year. Net interest income after provision for loan losses increased $8.6 million and non-interest income increased $3.3 million while non-interest expense and income tax expense increased $7.0 million and $2.0 million respectively. The net interest margin decreased to 3.45% during the nine months ended March 31, 1998 from 3.49% during the same period last year. The interest rate spread at March 31, 1998 was 3.18% as compared to 2.93% at March 31, 1997. The increase in net income is primarily the result of a combination of the increased earnings as a result of the Acquisition of Security Bancorp in February, 1997 and a one-time after tax charge to earnings of $1.4 million, levied on all thrift institutions, to recapitalize the Savings Association Insurance Fund ("SAIF") during the September 30, 1996 quarter. Interest Income - Interest income increased $22.2 million to $56.0 million for the nine month period ended March 31, 1998 from $33.8 million for the same period last year. The increase was primarily the result of a $358.4 million increase in average total interest-earning assets to $932.1 million during the nine month period ended March 31, 1998 from $573.7 million during the same period last year. In addition, the average yield on interest-earning assets increased to 8.00% during the nine months ended March 31, 1998 from 7.86% during the same period last year due primarily to the Acquisition. Interest earned on loans receivable increased $17.4 million due primarily to a $268.0 million increase in the average balance of loans receivable to $663.3 million during the nine month period ended March 31, 1998 from $395.3 million for the same period last year. In addition, the average yield on loans increased to 8.48% during the nine month period ended March 31, 1998 from 8.37% for the same period last year. The increase in the average balance of loans receivable was primarily the result of the loans acquired in the Acquisition. Interest earned on mortgage-backed securities increased $1.9 million due primarily to a $39.9 million increase in the average balance of mortgage-backed securities outstanding to $144.8 million for the nine month period ended March 31, 1998 from $104.9 million during the same period last year. The increase was primarily the result of the Acquisition. Interest earned on investment securities, FHLB stock and other interest earning assets increased $2.8 million primarily due to an increase in the average balance of these securities of $50.6 million to $124.0 million during the nine month period ended March 31, 1998 from $73.4 million during the same period last year. The average yield increased to 6.82% during the nine months ended March 31, 1998 from 6.33% for the same period last year. The increase in average balance is the result of both the Acquisition and the purchase of additional investment securities for the purpose of increasing interest income. Interest Expense - Total interest expense increased $13.0 million to $31.8 million for the nine month period ended March 31, 1998 from $18.8 million for the same period last year. Interest expense on deposits increased $8.3 million due to an increase in the average balance of deposits of $260.4 million to $636.7 million during the nine month period ended March 31, 1998 from $376.3 million during the same period last year. The increase in the average balance of deposits was primarily the result of the Acquisition. The average rate paid on deposits decreased to 4.36% during the nine month period ended March 31, 1998 from 4.42% for the same period last year as the Bank increased the amount of non-interest bearing demand accounts as a result of the Acquisition. Interest expense on borrowed funds increased $4.7 million due primarily to an increase in the average balance of borrowed funds of $112.3 million to $244.5 million during the nine month period ended March 31, 1998 from $132.2 million for the same period last year. The increase was the result of the Acquisition and increased borrowings to fund the growth in the loan and investment securities portfolios. Page 20 Provisions for Loan Losses - The provision for loan losses increased $527,000 to $630,000 for the nine month period ended March 31, 1998 as compared to a $103,000 provision for the same period last year. Non-Interest Income - Non-interest income increased $3.3 million to $6.1 million for the nine months ended March 31, 1998 from $2.8 million for the same period last year. Fees and service charges increased $2.7 million and net gain on sale of loans and securities available-for-sale increased $301,000, while other non-interest income increased $274,000. The increase in fees and service charges were due primarily to the increase in fees associated with checking accounts which increased as a result of the Acquisition and an increase in loan origination fees as a result of increased loan originations and increased sales of loans to the secondary market. Non-Interest Expense - Non-interest expense increased $7.0 million to $20.8 million for the nine months ended March 31, 1998 from $13.8 million for the same period last year. The increase was due primarily to the Acquisition and a change in data processing systems. Included in the non-interest expense for the period ended March 31, 1998, which was not included in the same period last year, was $1.0 million related to the amortization of intangibles resulting from the Acquisition as compared to $123,000 for the same period last year which included one month of amortization expense. This was comprised of $466,000 for the amortization of goodwill and $551,000 for the amortization of the core deposit intangible. The nine months just ended included approximately $1.0 million in professional fees, marketing and other expenses related to the consolidation of data processing systems and the change in name to Western Security Bank. Income Taxes - Income tax expense increased $1.9 million due to the $4.8 million increase in income before income taxes. Page 21 Loan Quality -- The following table sets forth the amounts and categories of non-performing assets in the Company's loan portfolio. At March 31, 1998 and June 30, 1997 the Company had no loans termed troubled debt restructuring which involves forgiving a portion of interest or principal on any loans or making loans at a rate materially less than market rates. Foreclosed assets include assets acquired in settlement of loans, and are recorded at the lower of the related loan balance, less any specific allowance for loss, or fair value at the date of foreclosure. (Unaudited) March 31, June 30, 1998 1997 ---------- ------- Non-accruing loans: (In Thousands) Real Estate: One- to four-family .............................. $2,590 $ 842 Multi-family ..................................... 89 -- Commercial ....................................... -- -- Construction ..................................... 288 -- Agriculture .......................................... 10 -- Commercial - non real estate ......................... 155 102 Consumer ............................................. 1,652 573 ------ ------ Total ......................................... 4,784 1,517 ------ ------ Accruing loans delinquent 90 days or more: Real Estate: One-to-four family ............................... 668 231 Multi-family ..................................... -- -- Commercial ....................................... -- -- Construction ..................................... 112 -- Agriculture .......................................... -- -- Commercial - non real estate ......................... -- -- Consumer ............................................. 503 605 ------ ------ Total ......................................... 1,283 836 ------ ------ Foreclosed Assets: Real Estate: One-to-four family ............................... 420 -- Multi-family ..................................... -- -- Commercial ....................................... -- -- Construction ..................................... -- -- Consumer ............................................. 69 82 ------ ------ Total ......................................... 489 82 ------ ------ Total non-performing assets .......................... $6,556 $2,435 ====== ====== Non-Performing Assets -- Total non-performing assets increased $4.2 million to $6.6 million at March 31, 1998 from $2.4 million at June 30, 1997. The $4.2 million increase from June 30, 1997 to March 31, 1998 was due primarily to an increase in non-performing one - to four-family, construction, consumer and foreclosed assets of $2.2 million, $400,000, $977,000 and $407,000 respectively. In the merger of Security, and in conjunction with the data center conversion, the Bank implemented a uniform methodology as to the classification of assets for non-performing loan classification. This change in classification accounted for approximately $960,000 in the preceding increases in one-to four-family loans. One- to four- family loans are considered non-accruing after 120 days and all other loans are automatically placed on non-accrual status after 90 days. As a result of this change, interest income decreased approximately $125,000 because additional loans were considered to be non-accrual. Total non-performing assets as a percentage of total assets increased to 0.64% at March 31, 1998 from 0.25% at June 30, 1997. The comparable national composite rate for thrifts non-performing assets as a percentage of total assets was 1.00% at December 31, 1997, which is the latest available information as reported by the Office of Thrift Supervision. In addition to the non-performing loans and Page 22 foreclosed assets set forth in the preceding table, as of March 31, 1998, there were no other of loans identified by the Company with respect to which information known about the possible credit problems of the borrowers or of the cash flows of the security properties have caused management to have some concerns as to the ability of the borrowers to comply with present loan repayment terms and which may result in the future inclusion of such items in the non-performing asset categories. At March 31, 1998 the recorded investment in impaired loans was $4.8 million, all of which were on non-accrual status. The Company has not established a specific impairment allowance for these loans. The amount of interest income recognized on impaired loans during this period was insignificant. The following table sets forth an analysis of the Bank's allowance for loan losses.
For the Three Month For the Nine Month Period Ended Period Ended March 31, March 31, ---------------- --------------- 1998 1997 1998 1997 ---- ---- ---- ---- (Dollars in Thousands) Balance at beginning of period............................ $4,942 $2,001 $4,651 $2,005 ------ ------ ------ ------ Charge-Offs: Real Estate: One- to four-family.................................. -- -- -- -- Commercial .......................................... -- (16) -- (16) Other: Commercial........................................... -- -- -- -- Consumer............................................. (110) (37) (264) (85) ------ ------ ------ ------ Total charge-offs......................................... (110) (53) (264) (101) ------ ------ ------ ------ Recoveries: Other: Commercial........................................... -- -- 3 -- Consumer............................................. 2 6 24 8 ------ ------ ------ ------ Total recoveries.......................................... 2 6 27 8 ------ ------ ------ ------ Net charge-offs........................................... (108) (47) (237) (93) Provisions charged to operations.......................... 210 61 630 103 Reserves acquired......................................... -- 2,481 -- 2,481 ------ ------ ------ ------ Balance at end of period.................................. $5,044 $4,496 $5,044 $4,496 ====== ====== ====== ====== Ratio of net charge-offs during the period to average loans outstanding during the period........................ 0.02% 0.01% 0.04% 0.02% ==== ==== ==== ==== Ratio of net charge-offs during the period to average non- performing assets during the period ................. 2.06% 2.73% 4.89% 6.81% ==== ==== ==== ==== Ratio of allowance for loan losses to loans receivable, net 0.76% 0.71% 0.76% 0.71% ==== ==== ==== ====
Page 23 Regulatory Capital -- At March 31, 1998 the Bank met all applicable regulatory capital requirements, including the fully phased-in risk based capital requirements. The following table provides information on an unconsolidated basis indicating the extent to which the Bank exceeds the minimum capital requirements under federal regulations as of March 31, 1998. Approximate (Dollars in Thousands) Actual Requirement Excess ------- ------------ ------- Tangible Capital: Dollar Amount ............................. $78,665 $14,881 $63,784 Percent of tangible assets ................ 7.93% 1.50% 6.43% Core Capital: Dollar Amount ............................. $78,665 $39,682 $38,983 Percent of adjusted tangible assets ....... 7.93% 3.00% 4.93% Risk-based Capital: Dollar Amount ............................. $83,558 $50,828 $32,730 Percent of risk-weighted assets ........... 13.15% 8.00% 5.15% The OTS has adopted, but temporarily postponed implementation until further notice, a final rule that requires every savings association with more than normal interest rate risk to deduct from its total capital an amount equal to 50% of its interest-rate risk exposure multiplied by the present value of its assets when calculating and determining compliance with risk-based capital requirements. This exposure is a measure of the potential decline in the net portfolio value of a savings association, greater than 2% of the present value of its assets, based upon a hypothetical 200 basis point increase or decrease in interest rates (whichever results in a greater decline). Net portfolio value is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts. The rule provides for a two quarter lag between calculating interest rate risk and recognizing any deduction from capital. The amount to be deducted from capital is the lowest interest rate risk component reported in an institution's exposure reports to the OTS for the six most recent quarters. Based upon interest-rate risk exposure calculations as provided by the OTS for the period ended December 31, 1997, the most recent date such information is available from the OTS, the deduction from the Bank's total capital would be $613,000 under this rule. Based on the Bank's excess risk-based capital of $32.7 million at March 31, 1998, not withstanding this $613,000 deduction from capital, the Bank would continue to exceed its risk-based capital requirement. The OTS has amended its regulatory capital regulations to exclude from regulatory capital the unrealized gains and losses, net of income taxes, as required by FASB accounting standard SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities". At March 31, 1998 the Bank had $247,000 of unrealized gains, net of income taxes, that were deducted from capital for purposes of determining regulatory capital. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Management believes there has been no material change in interest rate risk since June 30, 1997. For additional information, see Management's Discussion and Analysis of Financial Condition and Results of Operations included herein in Item 2 and refer to the Interest Rate Risk Management discussion included in WesterFed Financial Corporation's Annual Report for the fiscal year ended June 30, 1997. Page 24 PART II -- OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS Neither the registrant or its subsidiaries are part to any legal proceedings, other than routine litigation arising in the normal course of its business. While the ultimate outcome of these various legal proceedings cannot be predicted with certainty, it is the opinion of management that the resolution of these legal actions should not have a material effect on the Company's consolidated financial position or results of operations. ITEM 2 CHANGE IN SECURITIES -- None ITEM 3 DEFAULTS UPON SENIOR SECURITIES -- None ITEM 4 SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS -- None ITEM 5 OTHER INFORMATION -- None ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K A. Form 8-K The registrant filed reports on Form 8-K on May 5, 1998 to report the quarterly earnings release and a dividend declaration of $0.125 per share. Page 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized: WESTERFED FINANCIAL CORPORATION Date /s/ Lyle R. Grimes ------------------------------- -------------------------------- Lyle R. Grimes Chairman of the Board/President and Chief Executive Officer (Duly Authorized Officer) Date /s/ James A. Salisbury -------------------------------- --------------------------------- James A. Salisbury Treasurer and Chief Financial Officer (Principal Finance and Accounting Officer) Page 26 EX-27 2 FINANCIAL DATA SCHEDULE
9 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL REPORT ON FORM 10-Q FOR THE FISCAL QUARTER ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS JUN-30-1997 MAR-31-1998 34,193 100 0 0 108,832 137,952 140,939 670,650 5,044 1,023,174 644,560 95,320 24,055 141,528 56 0 0 108,638 1,023,174 42,189 13,518 252 55,959 20,841 31,826 24,133 630 6 4,881 8,735 5,267 0 0 5,267 0.99 0.94 0 4,784 1,283 0 0 4,651 264 27 5,044 5,044 0 609
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