<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
----------------- ----------------
COMMISSION FILE NUMBER 0-22772
WESTERFED FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 81-0187794
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
110 East Broadway, Missoula, Montana 59802-4511
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (406) 721-5254
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
-----------------------------------------------------------
(Title of class)
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 subject to such
requirements for the past 90 days. YES X NO .
------- -------
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, computed by reference to the closing price of such stock on the
NASDAQ National Market System as of September 15, 1996, was $56.6 million. (The
exclusion from such amount of the market value of the shares owned by any person
shall not be deemed an admission by the registrant that such person is an
affiliate of the registrant.)
As of September 17, 1996, there were issued and outstanding 4,396,146
shares of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and IV of Form 10-K - Portions of the Annual Report to Stockholders for
the fiscal year ended June 30, 1996.
Part III of Form 10-K - Portions of the Proxy Statement for 1996 Annual
Meeting of Stockholders.
<PAGE>
PART I
Item 1. Business
General
WesterFed Financial Corporation (the "Company"), a Delaware
corporation, is a unitary savings and loan holding company which was organized
in 1994 at the direction of Western Federal Savings Bank of Montana ("Western
Federal" or the "Bank") for the purpose of owning all of the outstanding stock
of the Bank to be issued in connection with the Bank's conversion from mutual to
stock form (the "Conversion"). The Conversion was completed on January 6, 1994
at which time the Company issued a total of 4,436,657 shares of its common
stock. At June 30, 1996, the Company had total assets of $563.9 million,
deposits of $350.2 million and stockholders' equity of $78.6 million (13.9% of
total assets).
Western Federal, founded in 1911, is a federally chartered bank. The
Bank serves the financial needs of families and local businesses in its primary
market areas through its main office located at 100 E. Broadway, Missoula,
Montana, and 19 branch offices and one loan administration office located in the
communities of Missoula, Billings, Helena, East Helena, Great Falls, Bozeman,
Hamilton, Conrad, Lewistown, Miles City and Hardin, Montana. Its deposits are
insured up to applicable limits by the Federal Deposit Insurance Corporation
("FDIC").
As a community-oriented financial institution, Western Federal seeks to
serve the financial needs of the communities throughout its market areas.
Western Federal is principally engaged in the business of attracting deposits
from the general public and using such deposits to originate residential loans
in its primary market areas. Western Federal originates loans to enable
borrowers to construct, purchase, refinance, or improve residential real estate
and, to a lesser extent, other types of real estate. It also offers consumer
loan programs and an in-house VISA credit card program to supplement its other
financial services. In addition, the Bank seeks to address its liquidity needs
and to enhance investment yields by holding investment securities,
mortgage-backed securities, certificates of deposit and other short-term liquid
assets.
The Company's main office is located at 110 East Broadway, Missoula,
Montana 59802-4511 and its telephone number at that address is (406) 721-5254.
On September 24, 1996, WesterFed entered into a definitive agreement
pursuant to which Security Bancorp ("Security"), Billings, Montana, the holding
company for Security Bank, FSB, will be merged with WesterFed. Upon the
consummation of the merger, each Security stockholder will become entitled to
receive, at his or her election for each share of Security Common Stock held,
either $30.00 in cash or a number of shares of WesterFed Common Stock equal to
the "Exchange Ratio." The Exchange Ratio is $30.00 divided by the average
closing price of WesterFed Common Stock for the 20 trading days commencing 20
trading days prior to the closing, but the ratio shall be no greater than 2.2989
or less than 1.8809. Under certain circumstances, persons electing to receive
one form of consideration may be required to receive the alternative form of
consideration. As of June 30, 1996, Security had total consolidated assets of
$372.2 million, deposits of $289.2 million and stockholders' equity of $30.7
million. The transaction is subject to the approval of stockholders of both
WesterFed and Security as well as approval of various regulatory authorities.
WesterFed anticipates closing the transaction during the first quarter of 1997.
Forward-Looking Statements
When used in this Form 10-K or future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or 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 such forward-looking statements, which speak only as of the date made, and
to advise readers that various factors--including regional
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and national economic conditions, substantial changes in levels of market
interest rates, credit and other risks of lending and investment activities and
competitive and regulatory factors--could affect the Company's financial
performance and could cause the Company's actual results for future periods to
differ materially from those anticipated or projected.
The Company does not undertake--and specifically disclaims any
obligation--to update any forward-looking statements to reflect occurrence of
anticipated or unanticipated events or circumstances after the date of such
statements.
Market Areas
The Bank conducts operations through its main office in Missoula,
Montana and its 19 branch offices and one administrative office in ten diverse
counties located throughout the State.
Missoula. In Missoula the Bank operates four branch offices which
accounted for a total of $129.7 million of Missoula County's June 30, 1995
deposits, or a 15.3% market share. Missoula County's non-farm basic industries
are trade center activity, wood and paper products, motor carriers, Federal
government, and the University of Montana. Major employers include Missoula
Community Hospital, St. Patrick's Hospital, Stone Container (a paper mill),
Louisiana Pacific (particle board), the University of Montana and the U.S.
Forest Service.
Billings. Western Federal operates two branches in the city of
Billings, located in Yellowstone County. Total deposits held by those branches
represented $56.3 million of the county's total June 30, 1995 deposits, or a
3.9% market share. Leading non-farm basic industries in Yellowstone County are
trade center activity, transportation, oil and gas, and Federal government. In
Billings, expansion of trade center activities continues and tends to counter
balance declines in other basic industries.
Helena. Four Western Federal offices are in Helena and East Helena,
which is located in Lewis and Clark County. The four branches there have total
deposits of $45.0 million, which accounts for 6.8% of the county's total June
30, 1995 deposits. Lewis and Clark County's basic leading non-farm industries
are state government, Federal government, and trade center activity. Helena
continues to be a regional health and financial services center. A new branch
facility was completed in December 1995 to service the north side of Helena.
Great Falls. Western Federal operates three branches in the city of
Great Falls, located in Cascade County. These branches hold $39.1 million in
deposits which is 4.8% of the county's total June 30, 1995 deposits. In Great
Falls, the leading non-farm basic industries are Malmstrom Air Force Base, and
trade center activity. Agriculture has a major influence on the economy of Great
Falls with the surrounding counties being the State's leading wheat producers.
Bozeman. Western Federal has one office located in the city of Bozeman
in Gallatin County. Deposits in the branch are $15.7 million for a 3.1% market
share of the county's June 30, 1995 total deposits. Leading non-farm basic
industries in Gallatin County are Montana State University, selected
manufacturing, and non-resident travel. The county's economy continues to
benefit from growth in non-resident travel.
Hamilton. Western Federal has one branch office in Hamilton, located in
Ravalli County, where it holds deposits of $16.6 million of the county's June
30, 1995 deposits for a 5.9% market share. Ravalli County has benefitted
recently from an influx of retirees. A new branch facility was completed in May
1996 and replaced the existing Hamilton branch office.
Conrad. One Bank office is located in the city of Conrad in Pondera
County. This branch has $7.3 million in deposits and a 9.0% market share of the
county's total June 30, 1995 deposits. The local economy is primarily
agricultural in nature.
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Lewistown. Western Federal has one office in the city of Lewistown,
located in Fergus County. The branch has $13.9 million in deposits for an 8.5%
market share of the county's total June 30, 1995 deposits. The local economy is
primarily agricultural in nature.
Miles City. In Custer County, Western Federal has one branch located in
Miles City, which has $13.6 million in deposits for a 6.9% market share of the
county's June 30, 1995 total deposits. Ranching is an important segment of the
local economy.
Hardin. Western Federal has one branch located in the city of Hardin,
in Big Horn County. The branch has $7.0 million in deposits for a 9.8% market
share of the county's June 30, 1995 total deposits. The local economy is
primarily agricultural in nature.
Lending Activities
General. The principal lending activity of the Bank is originating for
its portfolio and for sale first mortgage loans, secured by owner occupied, one-
to four-family residential properties located in its primary market areas. In
addition, in order to increase the yield and interest rate sensitivity of its
portfolio and in order to provide more comprehensive financial services to
communities in the Bank's market areas, Western Federal also originates
commercial real estate, consumer, multi-family, and construction loans. The Bank
is also a major originator of Federal Housing Administration/Veterans
Administration ("FHA/VA") loans, which are subsequently purchased by the Montana
Board of Housing.
When fixed-rate conventional mortgage loans with terms over 15 years
are routinely sold into the secondary market, Western Federal generally retains
the servicing rights on these loans, except for those loans sold pursuant to
loan correspondent agreements. See "- Originations, Purchases and Sales of Loans
and Mortgage-Backed Securities." At June 30, 1996, Western Federal serviced
loans with principal balances of approximately $183.3 million for others. The
loan servicing fees earned provided a supplement to the Bank's earnings.
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Loan Portfolio Composition. The following table sets forth information
regarding the composition of the Bank's loan portfolio in dollar amounts and in
percentages (before deductions for loans in process, deferred fees and discounts
and allowances for losses) as of the dates indicated.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------------
1996 1995 1994
------------------- -------------------- ------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family(1)............. $280,853 74.69% $247,331 76.94% $230,700 81.85%
Multi-family....................... 19,939 5.30 18,985 5.91 14,430 5.12
Commercial......................... 18,318 4.87 12,399 3.86 11,300 4.01
Construction....................... 12,977 3.45 10,742 3.34 7,866 2.79
-------- ------ -------- ------ -------- ------
Total real estate loans........ 332,087 88.31 289,457 90.05 264,296 93.77
-------- ------ -------- ------ -------- ------
Consumer Loans:
Deposit account................... 2,337 0.62 2,138 0.67 2,034 0.72
Student........................... --- --- --- --- --- ---
Automobile........................ 7,236 1.92 3,224 1.00 1,339 0.48
Home improvement.................. 9,917 2.64 7,504 2.33 2,100 0.75
Other loans(2).................... 24,491 6.51 19,141 5.95 12,098 4.28
-------- ------ -------- ------ -------- ------
Total consumer loans........... 43,981 11.69 32,007 9.95 17,571 6.23
-------- ------ -------- ------ -------- ------
Total gross loans.............. 376,068 100.00% 321,464 100.00% 281,867 100.00%
====== ====== ======
Less:
Unearned fees and discounts........ (1,625) (1,344) (1,301)
Undisbursed loan funds............. (4,245) (4,988) (3,696)
Allowance for losses............... (2,005) (2,011) (2,030)
-------- -------- --------
Total loans receivable, net........ $368,193 $313,121 $274,840
======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At June 30,
-------------------------------------
1993 1992
------------------ ----------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family(1)............. $192,950 79.75% $194,311 79.79%
Multi-family....................... 11,801 4.88 13,016 5.34
Commercial......................... 13,215 5.46 16,641 6.83
Construction....................... 8,764 3.62 4,483 1.84
-------- ------ -------- ------
Total real estate loans........ 226,730 93.71 228,451 93.80
-------- ------ -------- ------
Consumer Loans:
Deposit account................... 1,839 0.76 2,405 0.99
Student........................... 4 --- 9 ---
Automobile........................ 1,272 0.53 1,360 0.56
Home improvement.................. 1,939 0.80 1,662 0.68
Other loans(2).................... 10,162 4.20 9,663 3.97
-------- ------ -------- ------
Total consumer loans........... 15,216 6.29 15,099 6.20
-------- ------ -------- ------
Total gross loans.............. 241,946 100.00% 243,550 100.00%
====== ======
Less:
Unearned fees and discounts........ (1,017) (1,055)
Undisbursed loan funds............. (5,723) (2,118)
Allowance for losses............... (2,058) (2,096)
-------- --------
Total loans receivable, net........ $233,148 $238,281
======== ========
</TABLE>
- -----------
(1) Includes $7.5 million, $7.1 million, $8.9 million, $12.5 million and $17.8
million of FHA and VA loans at June 30, 1996, 1995, 1994, 1993 and 1992,
respectively.
(2) Includes primarily home equity loans.
5
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The following table illustrates the interest rate sensitivity of the
Bank's loan portfolio at June 30, 1996. Mortgages which have adjustable or
renegotiable interest rates are shown as maturing in the period during which the
contract matures. The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
---------------------------------------------------------------------------------------------
One- to Four-
Family Multi-Family Commercial Construction
-------------------- ------------------ ------------------ --------------------
Weighted Weighted Weighted Weighted
Due During Years Average Average Average Average
Ending June 30, Amount Rate Amount Rate Amount Rate Amount Rate
- ----------------------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in Thousands)
<C> <C> <C> <C> <C> <C> <C> <C> <C>
1997(1)................ $ 317 8.17% $ 232 9.44% $ 321 9.88% $12,265 8.87%
1998................... 258 8.95 24 9.71 171 10.80 712 9.14
1999................... 547 8.09 135 9.82 3,010 10.08 --- -.--
2000 and 2001.......... 2,378 8.75 1,281 8.93 129 9.60 --- -.--
2002 and 2006.......... 17,023 8.24 2,298 9.64 2,784 9.05 --- -.--
2007 and 2011.......... 138,019 7.43 8,313 9.32 8,210 8.96 --- -.--
2012 and following..... 122,311 7.81 7,656 8.99 3,693 9.21 --- -.--
-------- ----- ------ ----- ------ ----- -------- -----
Total............. $ 280,853 7.66% $19,939 9.21% $18,318 9.25% $12,977 8.88%
========= ===== ======= ===== ======= ===== ======= =====
</TABLE>
<TABLE>
<CAPTION>
Consumer Total
-------------------- --------------------
Weighted Weighted
Due During Years Average Average
Ending June 30, Amount Rate Amount Rate
- ----------------------- ------ -------- ------ --------
<C> <C> <C> <C> <C>
1997(1)................ $ 5,145 8.54% $ 18,280 8.76%
1998................... 2,099 9.14 3,264 9.22
1999................... 4,610 9.19 8,302 9.45
2000 and 2001.......... 12,277 9.06 16,065 9.01
2002 and 2006.......... 19,850 9.97 41,955 9.19
2007 and 2011.......... --- -.-- 154,542 7.61
2012 and following..... --- -.-- 133,660 7.92
------- ----- -------- -----
Total............. $43,981 9.44% $376,068 8.07%
======= ===== ======== ====
</TABLE>
- -------------
(1) Includes demand loans and loans having no stated maturity.
6
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The following table sets forth the dollar amount of all loans at June
30, 1996 that have fixed interest rates, those that are contractually due after
June 30, 1997 and have floating or adjustable interest rates that change after
June 30, 1997.
Floating or
Adjustable
Fixed Rates Rates Total
----------- ----------- -----
(In Thousands)
Real Estate:
One- to four-family...... $219,952 $518 $220,470
Multi-family............. 15,543 --- 15,543
Commercial............... 12,333 --- 12,333
Construction............. 353 --- 353
Consumer loans............ 36,454 --- 36,454
------- ------ --------
Total.................. $284,635 $518 $285,153
======== ==== ========
Under federal law, the aggregate amount of loans that the Bank is
permitted to make to any one borrower is generally limited to 15% of unimpaired
capital and surplus (25% if the security for such loan has a "readily
ascertainable" value or 30% for certain residential development loans). At June
30, 1996, based on the above, the Bank's regulatory loans-to-one-borrower limit
was $9.6 million. On the same date, the Bank's largest amount of loans to one
borrower was $5.7 million.
Residential real estate loans are originated by employees who are
compensated on a salary basis. In the loan approval process, Western Federal
assesses both the borrower's ability to repay the loan and the adequacy of the
proposed security. Initially, Western Federal's loan underwriters analyze the
loan application and the property involved. As part of the loan application
process, qualified outside appraisers inspect and appraise the security
property. All appraisals are subsequently reviewed by staff underwriters.
Western Federal also obtains information concerning the income, financial
condition, employment and credit history of the applicant. Western Federal's
policy is to require title, fire and extended hazard coverage on its real estate
loans.
If the loan terms and borrower meet Western Federal's established
underwriting criteria and the loan amount does not exceed $100,000, the loan may
be approved by action of two members of the loan committee. Real estate loans
that exceed $100,000 must be approved by three loan committee members, one of
which must be a loan policy committee member or one of five selected senior loan
committee members. All loans (other than conforming jumbo residential loans) in
excess of $500,000 must be approved by the Board of Directors. The loan
committee presently consists of certain branch managers, certain employee loan
originators, and the members of the loan policy committee. The loan policy
committee presently consists of four senior officers of Western Federal.
All of the Bank's lending is subject to its written underwriting
standards and loan origination procedures. Decisions on loan applications are
made on the basis of detailed applications and property valuations (consistent
with the Bank's written appraisal policy) by qualified appraisers. The loan
applications are designed primarily to determine the borrower's ability to repay
and the more significant items on the application are verified through use of
credit reports, financial statements, tax returns and/or verifications of
employment.
The Bank requires evidence of marketable title and lien position as
well as appropriate title insurance (except on certain home equity loans) on all
loans secured by real property and requires fire and extended coverage casualty
insurance in amounts at least equal to the principal amount of the loan or the
value of improvements on the property, depending on the type of loan. The Bank
may also require flood insurance to protect the property securing its interest.
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One- to Four-Family Residential Real Estate Lending
The cornerstone of the Bank's lending program has long been the
origination of long-term permanent loans secured by mortgages on owner-occupied
one- to four-family residences. At June 30, 1996, $280.9 million, or 74.7%, of
the Bank's loan portfolio consisted of permanent loans on one- to four-family
residences. Substantially all of the residential loans originated by Western
Federal are secured by properties located in the Bank's primary market areas.
Historically, Western Federal originated for retention in its own
portfolio, 30-year fixed-rate loans secured by one- to-four family residential
real estate. Beginning in 1980, in order to reduce its exposure to changes in
interest rates, Western Federal began to emphasize the origination of ARMs,
subject to market conditions and consumer preference. As a result of continued
consumer demand, particularly during periods of relatively low interest rates,
for long term fixed-rate loans, Western Federal has continued to originate loans
for sale in the secondary market in amounts and at rates which are monitored for
compliance with the Bank's asset/liability management policy.
The Bank's loans are underwritten and documented to permit their sale,
consistent with the Bank's asset/liability management objectives. Since under
the Bank's current policy, it may sell or securitize all of the newly originated
fixed-rate loans with terms of more than 15 years, the Bank's fixed-rate loans
are originated with terms which conform to secondary market standards (i.e.,
FHLMC standards). Such loans may be held for sale until they are sold or
securitized. Most of the Bank's newly originated fixed-rate residential loans
have contractual terms to maturity of 15 to 30 years. The Bank's decision to
hold or sell these loans is based on its asset/liability management policy and
goals and the market conditions for mortgages at any period in time. The Bank
typically retains the servicing of the conventional loans it originates. During
fiscal 1996, the Bank sold $12.2 million of loans with servicing retained. See
"- Originations, Purchases and Sales of Loans and Mortgage-Backed Securities"
for information regarding fees received by the Bank in connection with loans
serviced for others. At June 30, 1996, the Bank had $146.7 million of fixed-rate
one- to four-family residential loans with remaining terms of 15 years or less
and $73.0 million of fixed-rate loans with remaining terms greater than 15 years
in its loan portfolio. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Interest Rate Risk Management" in the
Annual Report.
The Bank has offered ARM loans at rates, terms and points determined in
accordance with market and competitive factors. The programs currently offered
generally meet the standards and requirements of the secondary market for
residential loans. The Bank's current one- to four-family residential ARMs are
fully amortizing loans with contractual maturities of up to 30 years. The
interest rates on the ARMs originated by Western Federal are subject to
adjustment at stated intervals based on a margin over a specified index and are
subject to lifetime adjustment limits.
Western Federal presently offers one primary ARM product. It utilizes
the weekly average yield on U.S. Treasury securities adjusted to a constant
maturity of one year plus a margin depending on property type. Most of these
loans adjust annually subject to a limitation on the annual increase to 2% and
overall life of loan limitation of 6%. Western Federal also offers various other
ARM products on a correspondent basis which are originated for immediate sale
into the secondary market. ARM products held in portfolio do not permit negative
amortization of principal and carry no prepayment restrictions. At June 30,
1996, the Bank had $60.2 million of one-to four-family ARM loans.
It is Western Federal's present policy generally not to lend more than
97% of the appraised value in the case of first mortgage loans secured by real
property. Western Federal presently requires private mortgage insurance in
specified amounts on all conventional residential loans with loan-to-value
ratios at origination exceeding 80%. The terms of the private mortgage insurance
have generally provided that Western Federal would receive a payment equal to
17% to 30%, depending on the initial loan-to-value ratio, of the outstanding
principal amount of the loan if there has been a default, plus costs of
foreclosure.
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Substantially all of Western Federal's present real estate loans
(excluding mortgage-backed securities) are secured by properties located in
Montana. In view of the prevailing level of real estate values in the Bank's
market areas, the Bank rarely originates loans in excess of $207,000 (the
Federal Home Loan Mortgage Corporation ("FHLMC") one-family maximum).
The Bank's residential mortgage loans customarily include due-on-sale
clauses giving the Bank the right to declare the loan immediately due and
payable in the event that, among other things, the borrower sells or otherwise
disposes of the property subject to the mortgage and the loan is not repaid. The
Bank has enforced due-on-sale clauses in its mortgage contracts for the purpose
of increasing its loan portfolio yield. ARM loans may be assumed provided home
buyers meet the Bank's underwriting standards and the applicable fees are paid.
Multi-Family and Commercial Real Estate Lending
Western Federal also makes real estate loans secured by multi-family
and non-residential properties. Western Federal's multi-family residential loans
are primarily secured by apartment buildings located within Western Federal's
market area.
Western Federal's current lending guidelines generally require, in the
case of loans secured by multi-family or commercial income-producing property,
that the property securing such loans generate gross cash flow of 120% of all
operating expenses, including debt service but excluding depreciation, and have
a loan-to-value ratio of no more than 75%.
The commercial real estate loans originated by Western Federal are
primarily secured by office buildings, small shopping centers, motels,
warehouses, and other income-producing properties. Commercial real estate
lending entails significant additional risks as compared with residential
property lending. Commercial real estate loans typically involve large loan
balances to single borrowers or groups of related borrowers. The payment
experience on such loans is typically dependent on the successful operation of
the real estate project and as such may be subject to a greater extent than
residential loans to adverse conditions in the economy generally. In dealing
with these risk factors, Western Federal generally limits itself to a real
estate market and/or borrowers with which it has knowledge and experience. At
June 30, 1996, $19.9 million, or 5.3% of the Bank's loan portfolio, consisted of
multi-family loans and $18.3 million, or 4.9% of the Bank's loan portfolio,
consisted of commercial real estate loans.
Western Federal is permitted to make secured and unsecured loans for
commercial, corporate, business and agricultural purposes, including issuing
letters of credit and engaging in inventory financing and commercial leasing
activities. Except for loans secured by commercial real estate, Western Federal
does not offer other secured or unsecured commercial loans. In addition, at June
30, 1996, Western Federal had no outstanding letters of credit.
Consumer Lending
Management believes that offering consumer loan products helps expand
the Bank's customer base and creates stronger ties to its existing customer
base. In addition, because consumer loans generally have shorter terms to
maturity and/or adjustable rates and carry higher rates of interest than do
residential mortgage loans, they can be valuable asset/liability management
tools. See "Management's Discussion and Analysis of Financial Condition -
Interest Rate Risk Management" in the Annual Report.
The Bank currently originates substantially all of its consumer loans
in its market areas. At June 30, 1996, the Bank's consumer loans totaled $44.0
million, or 11.7%, of the Bank's loan portfolio.
Western Federal offers a variety of consumer loans for various purposes
with terms up to fifteen years on real estate secured. The majority of lending
is for home improvement, personal vehicles, equity loans and other personal
purposes.
9
<PAGE>
In addition, Western Federal offers an in-house VISA credit card
program with the credit card receivables owned by Western Federal. The VISA
credit card is provided as an additional service to Western Federal customers.
At June 30, 1996, Western Federal had $992,000 of credit card receivables
outstanding. In addition, on such date, Western Federal had $2.5 million in
unused lines of credit available to cardholders under this program.
During fiscal 1995, Western Federal began offering an open-end equity
line of credit secured by real estate with an interest rate indexed to the prime
rate of interest. At June 30, 1996 the Bank had $2.1 million outstanding under
this program with an additional $980,000 in unused lines of credit available to
borrowers under this program.
Early in 1996, Western Federal engaged the services of a
manager/consultant to initiate a Dealer Finance Program to conduct indirect
lending activities for automobiles, trucks, and recreational vehicles and boats.
The manager/consultant hired and trained personnel in order to start operations
by May 1, 1996. As of June 30, 1996, receivables for Dealer Finance totaled $2.8
million. Western Federal, consistent with its consumer loan policies, considers
Dealer Finance an additional opportunity to expand the installment portfolio
offering better yields. New accounts are cross-sold to extend relationships and
expand customer base.
Consumer loan terms vary according to the type of collateral, term of
the loan, and credit-worthiness of the borrower. Unsecured loans are offered to
borrowers for a variety of purposes and personal needs. These are generally
fully amortizing with loan terms of 48 months or less. Unsecured lines of credit
offered through the Bank's Visa credit card program are generally limited to
$10,000 maximum. Underwriting for all unsecured lending is substantially the
same.
The Bank's secured lending for vehicles, household goods, mobile homes,
and real estate secured utilizes established loan-to-value ratios and restricted
terms to match the age and condition of the security. The underwriting standards
employed by the Bank for consumer loans include a determination of the
applicant's payment history on other debts and an assessment of the borrower's
ability to meet payments on the proposed loan along with his existing
obligations. In addition to the credit-worthiness of the applicant, the
underwriting process also includes a comparison of the value of the security, if
any, in relation to the proposed loan amount.
Consumer loans may entail greater risk than residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciable assets such as automobiles. In such cases, any repossessed
collateral for defaulted consumer loans may not provide adequate sources of
repayment for the outstanding loan balances as a result of the greater
likelihood of damage, loss or depreciation. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be affected by adverse personal circumstances.
Furthermore, the application of various Federal and state laws, including
Federal and state bankruptcy and insolvency laws, may limit the amount which can
be recovered on such loans. Although the level of delinquencies in the Bank's
consumer loan portfolio has generally been low (at June 30, 1996, $406,000, or
approximately 0.92% of the consumer loan portfolio was 90 days or more
delinquent), there can be no assurance that delinquencies will not increase in
the future.
Construction Lending
Historically, construction lending for one- to four-family residences
has always been an important part of Western Federal's commitment to the
communities it serves. Loans to individuals are either 12-month fixed-rate loans
or long-term variable rate construction/permanent loans which provide for a
six-month construction period before converting to a fully amortizing 29
1/2-year or less adjustable-rate loan. Occasionally, Western Federal originates
construction loans to builders for the speculative construction of one- to
four-family homes. Such loans are generally 12-month, fixed-rate loans and are
generally limited to one to five properties per builder. The Bank occasionally
makes acquisition and development loans to credit worthy borrowers for
residential projects within the Bank's market area. At June 30, 1996,
approximately $13.0 million, or 3.4% of the Bank's loan portfolio, consisted of
construction loans.
10
<PAGE>
Most of the Bank's construction loans have been originated with
fixed-rates of interest. Construction loans are generally made in amounts of up
to a maximum loan-to-value ratio of 90%. Prior to making a commitment to fund a
construction loan, the Bank requires an appraisal of the property. Western
Federal obtains personal guarantees for substantially all of its construction
loans. The Bank generally requires that both borrowers and guarantors provide
personal financial statements. Virtually all of Western Federal's construction
loans have been located in its primary market areas.
The Bank's construction loan agreements generally provide that loan
proceeds are disbursed in increments as construction progresses. The Bank
periodically reviews the progress of the underlying construction project.
Construction lending generally affords the Bank an opportunity to
receive interest at rates higher than those obtainable from residential lending
and to receive origination and other loan fees. In addition, such loans are
generally made for relatively short terms. Nevertheless, construction lending to
persons other than owner occupants is generally considered to involve a higher
level of credit risk than one- to four-family residential lending due to the
concentration of principal in a limited number of loans and borrowers and the
effects of general economic conditions on construction projects, real estate
developers and managers. In addition, the nature of these loans is such that
they are more difficult to evaluate and monitor. The Bank's risk of loss on a
construction loan is dependent largely upon the accuracy of the initial estimate
of the property's value upon completion of the project and the estimated cost
(including interest) of the project. If the estimate of value proves to be
inaccurate, the Bank may be confronted, at or prior to the maturity of the loan,
with a project with a value which is insufficient to assure full repayment.
Because defaults in repayment may not occur during the construction period it
may be difficult to identify problem loans at an early stage.
Originations, Purchases and Sales of Loans and Mortgage-Backed Securities
In addition to originating and purchasing loans for its own loan
portfolio, Western Federal from time to time participates in secondary mortgage
market activities by selling whole loans and participations in loans to FHLMC
and various institutional purchasers. Western Federal generally receives in
return FHLMC participation certificates or cash for non-recourse sales to the
FHLMC. During fiscal 1996, Western Federal sold or securitized $12.2 million of
loans, with servicing retained, to the FHLMC and other institutional investors
(exclusive of sales pursuant to loan correspondent agreements discussed below).
Western Federal currently has loan correspondent agreements with
mortgage banking firms under which Western Federal agrees to originate and sell
primarily conventional, FHA and VA loans to such firms. Under these programs,
Western Federal processes loan applications and originates loans in accordance
with the buyers' underwriting policies. The loans, together with all servicing
rights, are then sold to such firms and Western Federal retains any loan
origination fees and negotiates the retention of discount points. Under these
programs, the borrower locks in an interest rate, and Western Federal
concurrently obtains a purchase commitment from the correspondent that does not
require delivery unless the loan is closed. Western Federal's risk is generally
limited to its failure to comply with the agreement with the correspondent
institution or loan underwriting and documentation requirements of such
institution, which could result in rejection of the loan by the purchaser after
closing. However, under some of the correspondent agreements, Western Federal
can be required to repurchase any loan which becomes 60 days or more delinquent
within four months of the sale. During fiscal 1996, Western Federal sold $24.6
million of loans pursuant to correspondent agreements. While no prediction can
be made as to loan repurchases which may be required pursuant to correspondent
agreements in the future, as of June 30, 1996, Western Federal had never had to
repurchase a delinquent loan from a loan correspondent.
Western Federal also participates in loan programs financed by the
Montana Board of Housing ("MBOH"). Under these programs, Western Federal
originates loans according to standards, underwriting, and qualifications
prescribed by the MBOH which are then purchased by the MBOH with funds generated
by tax-exempt revenue bonds. Loans are generally priced at a discount to market
interest rates for the benefit of low- to moderate-income borrowers. Western
Federal retains servicing rights on all loans sold to the MBOH.
11
<PAGE>
Typically, when loans or participations are sold (other than in respect
of the agreements with correspondent institutions described above), Western
Federal retains responsibility for collecting and remitting loan payments,
inspecting the properties, making certain insurance and tax payments on behalf
of borrowers and otherwise servicing the loans, and receives a fee for
performing this service. Sales of whole loans, participation interests and
mortgage-backed securities generate income (or loss) at the time of sale,
produce future servicing income and provide funds for additional lending and
other purposes. Western Federal was servicing mortgage loans for others in the
amount of $183.3 million at June 30, 1996.
The contractual right to service mortgage loans that have been
originated and sold has an economic value that is not recognized in the Bank's
financial statements. The value results from the future income stream of the
servicing fees, the availability of the cash balances associated with escrow
funds collected monthly for real estate taxes and insurance, the availability of
the cash from monthly principal and interest payments from the collection date
to the remittance date, and the ability of the Bank to cross-sell other products
and services. The actual value of a servicing portfolio is dependent upon such
factors as the age, maturity, and prepayment rate of the loans in the portfolio,
the average dollar balance of the loans, the location of the collateral
property, the average amount of escrow funds held, the interest rates and
delinquency experience on the loans, the types of loans and other factors.
The marketability of loans, loan participations and mortgage-backed
securities depends on the purchasers' investment limitations, general market and
competitive conditions, mortgage loan demand, and other factors. Western
Federal's sales of loans or participation are generally "without recourse"
(i.e., without remedy against the seller by the purchaser if the borrower
defaulted on payment under the loan) against Western Federal in the event of
default, except in the case of the loan agreements with correspondence
institutions discussed above. Western Federal does have contingent liability on
sold loans under warranty of conforming origination to FHLMC.
Gains or losses on the sale of mortgage loans and loan participations
are recognized and a premium or discount is recorded at the time of sale in an
amount reflecting the difference between the contractual interest rate of the
loans sold and the current market rate of interest. Any deferred premium or
discount is amortized using an interest method.
12
<PAGE>
The following table sets forth the loan origination and mortgage-backed
security origination, purchase, and sale activity for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------
1996 1995 1994
--------- --------- ---------
(In Thousands)
<S> <C> <C> <C>
Beginning of Period:
Loans, net ........................................................ $ 313,121 $ 274,840 $ 233,148
Mortgage-backed securities, net ................................... 143,825 145,025 87,534
--------- --------- ---------
Total loans and mortgage-backed securities receivable, net, at
beginning of period ............................................. $ 456,946 $ 419,865 $ 320,682
--------- --------- ---------
Originations:
Real Estate:
One- to four-family ............................................... $ 111,355 $ 93,604 $ 190,258
Multi-family ...................................................... 1,215 -- --
Commercial ........................................................ 3,318 -- --
Construction ...................................................... 17,775 7,973 10,375
--------- --------- ---------
Total real estate loan originations .............................. 133,663 101,577 200,633
Consumer loans ..................................................... 31,884 28,178 13,785
--------- --------- ---------
Total loan originations .......................................... 165,547 129,755 214,418
--------- --------- ---------
Purchases and Conversions:
Real estate loans .................................................. 7,022 2,127 77
Mortgage-backed securities ......................................... 21,881 21,705 92,966
Mortgage loans converted to mortgage-backed securities ............. -- 3,885 58,023
--------- --------- ---------
Total real estate loans and mortgage-backed securities purchased
and converted .................................................... 28,903 27,717 151,066
--------- --------- ---------
Total real estate loans and mortgage-backed securities originated,
purchased and converted .......................................... 194,450 157,472 365,484
--------- --------- ---------
Principal Repayments and Sales:
Principal Repayments:
Loans ............................................................. 87,041 54,862 72,938
Mortgage-backed securities ........................................ 29,631 17,257 30,925
Sales:
Real estate loans ................................................. 31,186 33,463 43,721
Mortgage-backed securities ........................................ 30,723 10,031 63,057
Real estate loans converted to mortgage-backed securities ........... -- 3,885 58,023
--------- --------- ---------
Total principal repayments, sales and conversions .............. 178,581 119,498 268,664
--------- --------- ---------
Net loan and mortgage-backed securities activity .................... 15,869 37,974 96,820
--------- --------- ---------
Changes in allowance for losses, undisbursed loan funds, and unearned
fees and discounts:
Real estate loans ................................................. 730 (1,391) 1,879
Mortgage-backed securities ........................................ 498 (279) 484
Change in unrealized loss on securities available for sale .......... (903) 777 --
--------- --------- ---------
End of Period:
Loans, net ........................................................ 368,193 313,121 274,840
Mortgage-backed securities ........................................ 104,947 143,825 145,025
--------- --------- ---------
Total loans and mortgage-backed securities receivable, net,
at end of period ............................................... $ 473,140 $ 456,946 $ 419,865
========= ========= =========
</TABLE>
Non-Accruing Loans and Delinquencies
Delinquency Procedures. When a borrower fails to make a required
payment on a loan, the Bank attempts to cause the delinquency to be cured by
contacting the borrower. In the case of real estate loans, a late notice is sent
15 days after the due date. If the delinquency is not cured by the thirtieth
day, a second notice is mailed and, if appropriate, the borrower is contacted by
telephone. Additional written and verbal contacts are made with the borrower
between 60 and 90 days after the due date.
13
<PAGE>
In the event a real estate loan payment is past due for 90 days or
more, the Bank performs an in-depth review of the loan's status, the condition
of the property and circumstances of the borrower. Based upon the results of the
review, the Bank may negotiate and accept a repayment program with the Borrower,
accept a voluntary deed in lieu of foreclosure or, when deemed necessary,
initiate foreclosure proceedings. If foreclosed on, real property is sold at a
public sale and the Bank may bid on the property to protect its interest. A
decision as to whether and when to initiate foreclosure proceedings is made by
the Credit Supervisor with the consent of the Loan Servicing Manager and at
least one Loan Policy Committee member and is based on such factors as the
amount of the outstanding loan in relation to the original indebtedness, the
extent of delinquency and the borrower's ability and willingness to cooperate in
curing the delinquencies.
Consumer loans are charged off if they remain delinquent for 120 days.
The Bank's procedures for repossession and sale of consumer collateral are
subject to various requirements under Montana consumer protection laws.
Delinquencies on commercial properties are vigorously pursued at the
30-day stage and a forbearance agreement or resolution must be negotiated to
prevent further legal action.
The following table sets forth the Bank's loan delinquencies by type,
by amount and by percentage of type at June 30, 1996.
<TABLE>
<CAPTION>
Loans Delinquent For:
--------------------------------------------------------------------------
30-59 Days 60-89 Days 90 Days and Over Total Delinquent Loans
------------------------ ------------------------ ------------------------ -----------------------
Percent Percent Percent Percent
of Loan of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four-
family........ 26 $ 866 0.31% 7 $414 0.15% 11 $309 0.11% 44 $1,589 0.57%
Multi-family.... 1 238 1.19 --- --- --- --- --- --- 1 238 1.19
Commercial...... --- --- --- --- --- --- --- --- --- --- --- ---
Construction.... 2 240 1.85 --- --- --- --- --- --- 2 240 1.85
Consumer......... 48 571 1.30 52 358 0.82 47 406 0.92 147 1,335 3.04
--- ------ --- ---- --- ---- ---- ------
Total........ 77 $1,915 59 $772 58 $715 194 $3,402
=== ====== === ==== === ==== ==== ======
</TABLE>
The following table sets forth the Bank's loan delinquencies by type,
by amount and by percentage of type at June 30, 1995.
<TABLE>
<CAPTION>
Loans Delinquent For:
--------------------------------------------------------------------------
30-59 Days 60-89 Days 90 Days and Over Total Delinquent Loans
------------------------ ------------------------ ------------------------ -----------------------
Percent Percent Percent Percent
of Loan of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four-
family........ 14 $ 290 0.12% 6 $ 289 0.12% 10 $ 254 0.10% 30 $ 833 0.34%
Multi-family.... --- --- --- --- --- --- --- --- --- --- --- ---
Commercial...... --- --- --- --- --- --- 1 166 1.34 1 166 1.32
Construction.... --- --- --- --- --- --- --- --- --- --- --- ---
Consumer......... 13 89 0.28 17 50 0.16 9 153 0.48 39 292 0.92
---- ----- --- ----- ---- ----- ---- ------
Total........ 27 $ 379 23 $ 339 20 $ 573 70 $1,291
==== ===== === ===== ==== ===== ==== ======
</TABLE>
Classification of Assets. Federal regulations require that each savings
institution classify its own assets on a regular basis. In addition, in
connection with examinations of savings institutions, OTS and FDIC examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are three classifications for problem assets: Substandard,
Doubtful and Loss. Substandard assets have one or more defined weaknesses and
are characterized by the distinct possibility that the savings association will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of Substandard assets, with the additional characteristics that
the weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified
14
<PAGE>
Loss is considered uncollectible and of such little value that continuance as an
asset of the institution is not warranted. Assets classified as Substandard or
Doubtful require the institution to establish prudent general allowances for
loan losses. If an asset or portion thereof is classified as Loss, the
institution must either establish specific allowances for loan losses in the
amount of 100% of the portion of the asset classified Loss, or charge off such
amount. Western Federal internally classifies its assets on a regular basis. On
the basis of management's review of its assets, at June 30, 1996, on a net
basis, the Bank had classified $548,000 as Substandard, zero as Doubtful and
$58,000 as Loss.
The following table sets forth as of June 30, 1996 the Bank's
classified assets by type. No multi-family real estate loans or construction
loans were classified at June 30, 1996.
<TABLE>
<CAPTION>
One- to
Four-Family Commercial
Real Estate Real Estate Consumer Total
----------- ----------- -------- -----
(In Thousands)
<S> <C> <C> <C> <C>
Substandard......................... $272 $149 $127 $548
Doubtful............................ --- --- --- ---
Loss................................ --- 50 8 58
---- ---- ---- ----
Total.......................... $272 $199 $135 $606
==== ==== ==== ====
</TABLE>
Non-Performing Assets. Loans are reviewed periodically and any loan
whose collectibility is doubtful is placed on non-accrual status. Real estate
loans are placed on non-accrual status when either principal or interest is 90
days or more past due, unless, in the judgment of management, collectibility is
considered highly probable and collection efforts are in progress, in which case
interest would continue to accrue.
An allowance is established for uncollectible interest on loans that
are contractually 90 days or more past due. The allowance is established by a
charge to interest income equal to all interest previously accrued, and income
is subsequently recognized only to the extent cash payments are received until
the loans are brought less than 90 days past due with respect to both principal
and interest and when, in the judgment of management, the loans are estimated to
be fully collectible as to both principal and interest.
Real estate acquired by Western Federal as a result of foreclosure or
by deed in lieu of foreclosure is classified as real estate owned until it is
sold. When property is acquired, it is recorded at the lower of the related loan
balance, less any specific allowance for loss, or fair value at the date of
foreclosure. Any write-down resulting therefrom is charged to the allowance for
loan losses. Upon disposition, all costs incurred in maintaining the property
are expensed. Costs relating to the development and improvement of the property,
however, are capitalized to the extent of net realizable value.
The Bank considers loans as in-substance foreclosed if the borrower has
little or no equity in the property based upon its current fair value, if
repayment can be expected only to come from operation or sale of the collateral
and if the borrower has effectively abandoned control of the collateral or has
continued to retain control of the collateral but because of the current
financial status of the borrowers, it is doubtful the borrower will be able to
repay in the foreseeable future.
15
<PAGE>
The following table sets forth the amounts and categories of
non-performing assets in the Bank's loan portfolio. For all periods presented,
the Bank did not have any troubled debt restructurings (which involve forgiving
a portion of interest or principal on any loans or making loans at a rate
materially less than market rates). Foreclosed assets include assets acquired in
settlement of loans, and are recorded at the lower of the related loan balance,
less any specific allowance for loss, or fair value at the date of foreclosure.
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------
1996 1995 1994 1993 1992
----------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
Real Estate:
One- to four-family........................... $ 21 $ --- $ 119 $ 253 $ 170
Multi-family.................................. --- --- --- --- ---
Commercial.................................... --- 166 207 43 66
Construction.................................. --- --- --- --- ---
Consumer........................................ 383 153 9 109 ---
---- ------ ------ ------ ------
Total.......................................... 404 319 335 405 236
---- ------ ------ ------ ------
Accruing loans delinquent 90 days or more:
Real Estate
One- to four-family........................... 288 253 425 367 701
Multi-family.................................. --- --- --- --- ---
Commercial....................................... --- --- --- --- ---
Construction.................................. --- --- --- --- ---
Consumer........................................ 23 1 5 11 56
----- ------ ------ ------ ------
Total....................................... 311 254 430 378 757
----- ------ ------ ------ ------
Foreclosed assets:
Real Estate:
One- to four-family........................... --- --- 85 64 1,243
Multi-family..................................... --- --- --- --- 56
Commercial.................................... --- --- --- --- 1,973
Construction.................................. --- --- --- --- ---
------ ------ ------ ------ ------
Total....................................... --- --- 85 64 3,272
------ ------ ------ ------ ------
Total non-performing assets...................... $715 $ 573 $ 850 $ 847 $4,265
==== ====== ====== ====== ======
Total as a percentage of total assets............ 0.13% 0.10% 0.16% 0.21% 1.10%
==== ==== ==== ==== ====
Total allowance for loan losses to non-performing
loans (exclusive of foreclosed)................ 280.42% 350.35% 265.36% 262.84% 211.08%
====== ====== ====== ====== ======
Total allowance for loan losses to total
non-performing assets............................ 280.42% 350.35% 238.82% 242.98% 49.14%
====== ====== ====== ====== =====
</TABLE>
For the year ended June 30, 1996, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $22,000.
At June 30, 1996, Western Federal's non-accruing loans were comprised
of two one- to four-family loans totalling $21,000 and thirty-seven consumer
loans totaling $383,000. The $383,000 of non-accruing consumer loans includes
$270,000 of loans 100% secured by savings accounts. Accruing loans delinquent 90
days or more at June 30, 1996, included ten loans totalling $288,000 secured by
one- to four-family real estate and eight consumer loans totalling $23,000.
These loans continue to accrue interest due to management's belief that the
borrowers will repay these loans.
There were no foreclosed assets at June 30, 1996.
Other Loans of Concern. In addition to the classified assets and
non-performing loans and foreclosed assets set forth in the preceding tables, as
of June 30, 1996, there was also an aggregate of $358,000 in net book value of
loans identified by the Bank with respect to the majority of which known
information about the possible credit problems of the borrowers or the cash
flows of the security properties have caused management to have some doubts as
to the ability of the borrowers to comply with present loan repayment terms and
which may
16
<PAGE>
result in the future inclusion of such items in the non-performing asset
categories. The principal component of other loans of concern is one
multi-family FDIC participation loan.
Management has considered the Bank's non-performing assets and other
loans "of concern" assets in establishing its allowance for loan losses.
As of June 30, 1996, there were no other loans not included in the
table or discussed above where known information about the possible credit
problems of borrowers caused management to have doubts as to the ability of the
borrower to comply with present loan repayment terms and which may result in
disclosure of such loans in the future.
Loan Loss Reserve Analysis. The allowance for estimated loan losses is
established through a provision for losses on loans based on management's
evaluation of the risk inherent in its loan portfolio and changes in the nature
and volume of its loan activity. Such evaluation, which includes a review of all
loans of which full collectibility may not be reasonably assured, considers the
estimated net realizable value of the underlying collateral, economic
conditions, historical loan loss experience and other factors that warrant
recognition in providing for an adequate allowance for loan losses. In
determining the general reserves under these policies historical charge-offs and
recoveries, changes in the mix and levels of the various types of loans, net
realizable values, the current loan portfolio and current economic conditions
are considered. The Bank also requires additional reserves for all delinquent
loans and other loans of concern.
While management believes that it uses the best information available
to determine the allowance for loan losses, unforeseen market conditions could
result in adjustments to the allowance for loan losses, and net earnings could
be significantly affected, if circumstances differ substantially from the
assumptions used in making the final determination.
The following table sets forth an analysis of the Bank's allowance for
loan losses.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period............................ $2,011 $2,030 $2,058 $2,096 $2,172
Charge-Offs:
Real Estate:
One- to four-family................................... --- 2 15 6 14
Multi-family.......................................... --- --- --- --- ---
Non-residential....................................... --- --- --- --- 40
Consumer................................................ 11 26 22 48 90
----- ------ ------ ------ ------
Total charge-offs............................... 11 28 37 54 144
----- ------ ------ ------ ------
Recoveries:
Real Estate:
One- to four-family................................... --- --- --- --- ---
Consumer................................................ 5 9 9 16 15
------ ------ ------ ------ ------
Total recoveries................................ 5 9 9 16 15
------ ------ ------ ------ ------
Net charge-offs........................................... (6) (19) (28) (38) (129)
Additions charged to operations........................... --- --- --- --- 53
------ ------ ------ ------ ------
Balance at end of period.................................. $2,005 $2,011 $2,030 $2,058 $2,096
====== ====== ====== ====== ======
Ratio of net charge-offs during the period to average loans
outstanding during the period............................. ---% 0.01% 0.01% 0.02% 0.05%
=== ==== ==== ==== ====
Ratio of net charge-offs during the period to average non-
performing assets during the period ...................... 1.39% 2.91% 3.27% 4.73% 3.02%
==== ==== ==== ==== ====
</TABLE>
17
<PAGE>
The following table sets forth the distribution of the Bank's allowance
for loan losses at the dates indicated is summarized as follows:
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------------------
1996 1995 1994
------------------ ------------------- --------------------
Percent Percent Percent
of Loans of Loans of Loans
in Each in Each in Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four- family.......... $ 539 74.69% $ 175 76.94% $ 175 81.85%
Multi-family.................. 136 5.30 12 5.91 10 5.12
Commercial.................... 152 4.87 75 3.86 65 4.01
Construction.................. 164 3.45 5 3.34 --- 2.79
Consumer....................... 126 11.69 132 9.95 150 6.23
Unallocated.................... 888 --- 1,612 --- 1,630 ---
------ ------ ------ ------ ------ -------
Total.................... $2,005 100.00% $2,011 100.00% $2,030 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------
1993 1992
-------------------- ---------------------
Percent Percent
of Loans of Loans
in Each in Each
Category Category
to Total to Total
Amount Loans Amount Loans
------ -------- ------ ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real Estate:
One- to four- family.......... $ 175 79.75% $ 177 79.79%
Multi-family.................. 10 4.88 14 5.34
Commercial.................... 75 5.46 85 6.83
Construction.................. --- 3.62 --- 1.84
Consumer....................... 163 6.29 195 6.20
Unallocated.................... 1,635 --- 1,625 ---
------ ------ ------ ------
Total.................... $2,058 100.00% $2,096 100.00%
====== ====== ====== ======
</TABLE>
18
<PAGE>
Investment Activities
Securities. As part of its asset/liability management strategy, the
Company and the Bank invest in U.S. government and agency securities, high
quality short- and medium-term securities, primarily investment grade corporate
obligations and mutual funds and interest-bearing deposits. Neither the Company
nor the Bank has made any investments in municipal securities although it is
authorized by its general investment policy to purchase investment grade
municipal securities and, depending on market conditions, may purchase such
securities in the future. At June 30, 1996, the Company and the Bank did not own
any securities of a single issuer which exceeded 10% of the Company's
stockholders' equity, other than U.S. government or federal agency obligations.
The Bank is required by federal regulations to maintain a minimum
amount of liquid assets that may be invested in specified securities and is also
permitted to make certain other securities investments. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
- -Liquidity and Capital Resources" in the Annual Report. Cash flow projections
are regularly reviewed and updated to assure that adequate liquidity is
provided. As of June 30, 1996, the Bank's liquidity ratio (liquid assets as a
percentage of net withdrawable savings and current borrowings) was 9.3% as
compared to the OTS requirement of 5%.
The Bank will, 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 trends. See Note 14 of the Notes to Consolidated Financial
Statements in the Annual Report. At June 30, 1996 the Bank had three structured
notes totalling $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 June 30, 1996 was $4.6 million and mature in 1998.
On July 1, 1995, the Company and the Bank adopted SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." Accordingly,
investment securities not categorized as either held to maturity or trading
account securities are classified as securities available for sale. See Note 1
of the Notes to Consolidated Financial Statements in the Annual Report.
The following tables set forth the composition of the securities
portfolio at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------
1996 1995 1994
---------------- ----------------- ------------------
Book % of Book % of Book % of
Value Total Value Total Value Total
------- ------ ------- ------- -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investments held-to-maturity:
Federal agency obligations.......................... $ 4,010 8.91% $ 6,518 10.45% $ 3,076 5.85%
Corporate obligations............................... 5,333 11.86 6,272 10.06 43,675 83.08
Other investments................................... 4 0.01 4 0.01 4 0.01
------- ------ ------- ------ ------- ------
Total investment securities held-to-maturity ...... 9,347 20.78 12,794 20.52 46,755 88.94
------- ------ ------- ------- -------- ------
Investments available-for-sale:
Federal agency obligations........................... 32,630 72.54 47,557 76.25 5,814 11.06%
Corporate obligations................................ 2,980 6.62 2,020 3.23 --- ---
Other............................................... 27 0.06 --- --- --- ---
------- ------ ------- ------ ------- ------
Total investments available for sale............... 35,637 79.22 49,577 79.48 5,814 11.06
------- ------ ------- ------ ------- ------
Total investment securities.......................... $44,984 100.00% $62,371 100.00% $52,569 100.00%
======= ====== ======= ====== ======= ======
Average remaining life or term to repricing of
securities 27 mos. 42 mos. 39 mos.
</TABLE>
For information regarding the estimated market value of the securities
at June 30, 1996, see Note 4 of the Notes to Consolidated Financial Statements
in the Annual Report.
19
<PAGE>
The following table sets forth the composition and maturities of the
securities portfolio as of June 30, 1996.
<TABLE>
<CAPTION>
At June 30, 1996
--------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over 10
1 Year Years Years Years Total Securities
--------- ------ ------- ------- -------------------------
Book Value Book Value Book Value Book Value Book Value Market Value
---------- ---------- ---------- ---------- ---------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investments held-to-maturity:
U.S. government securities....................... $ --- $ --- $ --- $ --- $ --- $ ---
Federal agency obligations....................... 2,011 1,999 --- --- 4,010 4,005
Corporate obligations............................ 5,333 --- --- --- 5,333 5,355
Other investments................................ 4 --- --- --- 4 39
-------- -------- ------- -------- -------- -------
Total investment securities held-to-maturity ... 7,348 1,999 --- --- 9,347 9,399
-------- -------- ------- -------- ------ ------
Investments available-for-sale:
U.S. Government securities....................... --- --- --- --- --- ---
Federal agency obligations....................... 16,333 11,625 --- 4,672 32,630 32,630
Corporate obligations............................ 1,003 1,977 --- --- 2,980 2,980
Other investments................................ 27 --- --- --- 27 27
-------- -------- ------- -------- -------- --------
Total investments available for sale............ 17,363 13,602 --- 4,672 35,637 35,637
------ ------ ------- ------ ------ ------
Total securities.................................. 24,711 15,601 --- 4,672 44,984 45,036
======= ======= ======= ====== ====== =======
Average weighted yield............................ 6.05% 5.91% ---% 8.73% 6.25%
==== ==== === ==== ====
</TABLE>
20
<PAGE>
Mortgage-Backed Securities. The Bank purchases mortgage-backed
securities to supplement residential loan production. The type of securities
purchased is based upon the Bank's asset/liability management strategy and
balance sheet objectives. For instance, most of the mortgage-backed investments
purchased by the Bank over the last several years have had adjustable interest
rates or short or intermediate effective terms to maturity. In addition, the
Bank has purchased investment grade, fixed-rate and variable-rate Collateralized
Mortgage Obligations ("CMOs") having estimated average lives from one to twenty
years. CMOs are securities derived by reallocating cash flows from
mortgage-backed securities or from pools of mortgage loans held by a trust. The
CMOs acquired by the Bank are not interest-only or principal-only or residual
interests except for one interest-only CMO totalling $42,000 acquired in
connection with Western Federal's merger with First Federal Savings and Loan
Association of Billings. At June 30, 1996, the book value of the CMOs was $9.1
million. The book value of all the Bank's mortgage-backed securities at June 30,
1996 was $104.9 million. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Interest Rate Risk Management" in the
Annual Report. At June 30, 1996, the Bank did not own mortgage-backed securities
of a single issuer which exceeded 10% of the Company's stockholders' equity,
other than U.S. government agency obligations.
The Bank's mortgage-backed securities are classified as either
held-to-maturity or available-for-sale. Those mortgaged-backed securities
classified as held-to-maturity are carried at amortized cost in the Bank's
financial statements. While those mortage-backed securities classified as
available-for-sale are carried at face value.
All of the Bank's mortgage-backed securities are backed by federal
agencies or have received the highest rating by a nationally recognized rating
agency as of June 30, 1996.
On July 1, 1995, the Company and Bank adopted SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." Accordingly,
mortgage-backed securities not categorized as either held to maturity or trading
account securities are classified as securities available for sale. See Note 1
of the Notes to Consolidated Financial Statements in the Annual Report.
The following table sets forth the book value of the mortgage-backed
securities portfolio, net, in dollar amounts as of the dates indicated.
<TABLE>
<CAPTION>
At June 30,
----------------------------------------
1996 1995 1994
---------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Issuers:
Federal Home Loan Mortgage Corporation................................ $77,105 $106,747 $123,553
Federal National Mortgage Association................................. 16,674 17,880 14,186
Government National Mortgage Association.............................. 2,067 2,873 7,134
Collateralized Mortgage Obligations - federal agency.................. 9,101 16,217 ---
Collateralized Mortgage Obligations - private issuer.................. --- 108 152
-------- -------- --------
Total............................................................. $104,947 $143,825 $145,025
======== ======== ========
</TABLE>
21
<PAGE>
The following table sets forth the contractual maturities, without
giving effect to repricing, of the mortgage-backed securities portfolio, net, at
June 30, 1996.
<TABLE>
<CAPTION>
Market June 30,
1 - 3 3 - 5 5 - 10 10 - 15 Over 15 Value 1996
Years Years Years Years Years Adjustment Total
----- ----- ------ ------- ------- ---------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Held-to-Maturity:
Federal Home Loan Mortgage Corporation..... $ --- $ --- $ 672 $ 48,853 $ --- --- $ 49,525
Federal National Mortgage Corporation...... --- --- --- --- --- --- ---
Government National Mortgage Association... --- --- --- --- 1,412 --- 1,412
------ ------- ----- -------- --------- ------ --------
Collateralized Mortgage Obligations -
Federal Agency............................. --- --- --- 5,923 3,178 --- 9,101
------ ------- ----- -------- --------- ------ --------
--- --- 672 54,776 4,590 --- 60,038
------ ------- ----- -------- --------- ------ --------
Available for sale:
Federal Home Loan Mortgage Corporation..... --- --- --- --- 27,693 (113) 27,580
Federal National Mortgage Corporation...... --- --- --- --- 16,683 (9) 16,674
Government National Mortgage Association... --- --- --- --- 659 (4) 655
------ ------- ----- -------- --------- ------ --------
--- --- --- --- 45,035 (126) 44,909
------ ------- ----- -------- --------- ------ --------
Total............................. --- --- $ 672 $ 54,776 $ 49,625 $ (126) $104,947
====== ====== ===== ======== ========= ====== ========
</TABLE>
22
<PAGE>
The following schedule sets forth the contractual maturity and
repricing of the Bank's mortgage-backed securities portfolio, net, at June 30,
1996. Those which have adjustable or renegotiable interest rates are shown as
maturing in the period during which the contract is subject to repricing.
<TABLE>
<CAPTION>
After 1 After 2 After 3 After 5 After 10 Market
1 Year Through Through Through Through Through Over 15 Value
or Less 2 Years 3 Years 5 Years 10 Years 15 Years Years Adjustment Total
------- ------- ------- ------- -------- -------- ------- ---------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-Backed Securities
Held-to-Maturity................. $ --- $ --- $ --- $ --- $ 672 $48,853 $1,412 $ --- $50,937
Mortgage-Backed Securities
Available-for-Sale.............. 45,035 --- --- --- --- --- --- (126) 44,909
Collateralized Mortgage
Obligations..................... 9,101 --- --- --- --- --- --- --- 9,101
------- -------- -------- ------- -------- ------- ------ ------ --------
Total....................... $54,136 $ --- $ --- $ --- $ 672 $48,853 $1,412 $(126) $104,947
======= ======== ======== ======= ======== ======= ====== ===== ========
</TABLE>
23
<PAGE>
Cash Surrender Value of Life Insurance Policies. Western Federal
currently maintains Key Person Insurance coverage on certain of its executive
officers. The purpose of this insurance purchase was twofold: (1) Key Person
Insurance coverage for the Bank on those job positions and (2) funding of death
and salary continuation plan benefits for those employees. Allocating funds to
prepay premiums was considered appropriate since the interest income was
tax-exempt and indexed to the higher of the 13-week Treasury Bill or 20-year
Treasury Bond rates. Such policies were originally purchased in 1986, at which
time, coverage under such policies included 22 persons.
During 1992, due to changes in the tax laws, Western Federal reviewed
its Key Person Insurance Coverage and determined that all but five positions
should be eliminated from the Key Person Coverage. The amount of prepaid
insurance premiums and accumulated interest has diminished as a result of those
changes since reaching its peak of $5.2 million on February 29, 1992, to $3.2
million on June 30, 1996.
Sources of Funds
General. Deposit accounts have traditionally been the principal source
of the Bank's funds for use in lending and for other general business purposes.
In addition to deposits, the Bank derives funds from loan repayments and cash
flows generated from operations. Scheduled loan payments are a relatively stable
source of funds, while deposit inflows and outflows and the related cost of such
funds have varied. Other potential sources of funds available to the Bank
include borrowings from the Federal Home Loan Bank ("FHLB") of Seattle and other
borrowings.
Deposits. The Bank attracts both short-term and long-term deposits by
offering a wide assortment of accounts and rates. The Bank offers regular
passbook accounts, NOW accounts, money market accounts and fixed interest rate
certificates of deposits with varying maturities and individual retirement
accounts. In late fiscal 1995, the Bank introduced four new NOW account products
which contributed to the growth in NOW accounts in fiscal 1996. Deposit account
terms vary, according to the minimum balance required, the time period the funds
must remain on deposit and the interest rate, among other factors. Western
Federal has not actively sought deposits outside of its primary market area.
Western Federal does not have any brokered deposits at this time but may
consider the use of such funds in the future to fund loan growth. The Bank also
accepts deposits of $100,000 or more from municipalities within its market area.
The flow of deposits is influenced by general economic conditions,
changes in money market and prevailing interest rates and competition. The
variety of accounts offered by the Bank has allowed it to be competitive in
obtaining funds and to respond to changes in consumer demand. However, the Bank
has become more susceptible to short term fluctuations in deposit flows, as
customers have become more interest rate conscious. In setting rates, Western
Federal regularly evaluates (i) its internal cost of funds, (ii) the rates
offered by competing institutions, (iii) its investment and lending
opportunities, (iv) its liquidity position and (v) its asset/liability position.
In order to decrease the volatility of its deposits, Western Federal imposes
penalties on early withdrawal on its certificates of deposit.
Based on its experience, the Bank believes that the majority of its
passbook, NOW and money market accounts are relatively stable sources of
deposits. The Bank believes that a portion of passbook and money market accounts
represent certain depositors' preference for short-term investments in declining
interest rate environment while certificates of deposit are preferred by those
depositors in a rising interest rate environment. During a general decline in
interest rates in fiscal 1994, passbook and money market accounts increased $6.1
million to $108.6 million at June 30, 1994, while certificates of deposit
declined $11.9 million to $193.8 million at June 30, 1994. During a general
increase in interest rates after fiscal 1994, passbook and money market accounts
declined $19.7 million to $88.9 million at June 30, 1996 while certificates of
deposit increased $17.7 million to $211.5 million at June 30, 1996. The Bank's
ability to attract and maintain certificates of deposit, and the rates paid
thereon, has been and will continue to be significantly affected by market
rates.
24
<PAGE>
The following table sets forth the savings flows at the Bank during the
periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------
1996 1995 1994
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Opening balance................................ $344,155 $349,121 $351,447
Deposits....................................... 805,427 788,328 813,802
Withdrawals.................................... (815,161) (807,009) (829,790)
-------- -------- --------
Balance before interest credited............... 334,421 330,440 335,459
Interest credited.............................. 15,791 13,715 13,662
-------- -------- --------
Ending balance................................. $350,212 $344,155 $349,121
======== ======== ========
Net increase (decrease)........................ $ 6,057 $ (4,966) $ (2,326)
======== ======== ========
Percent increase (decrease).................... 1.76% (1.42)% (0.66)%
==== ==== ====
</TABLE>
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs offered by the Bank for the periods
indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------------------------
1996 1995 1994
--------------------- --------------------- -------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
-------- -------- ------ ---------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Transactions and Savings Deposits:
Passbook accounts (2.75 - 3.00%).............. $ 64,889 18.53% $ 65,607 19.04% $ 77,509 22.20%
NOW accounts (1.70 - 2.25%)................... 49,848 14.23 45,926 13.45 46,746 13.40
Money market accounts (2.96 - 4.17%).......... 24,018 6.86 25,923 7.52 31,067 8.90
-------- ------- -------- ------ -------- ------
Total non-certificates........................ 138,755 39.62 137,456 40.01 155,322 44.50
-------- ------- -------- ------ -------- ------
Certificates:
0.00 - 3.99%................................ $ 1,731 0.49% $ 7,043 2.04% $ 95,142 27.25%
4.00 - 5.99%................................ 159,275 45.48 131,238 38.09 82,832 23.73
6.00 - 7.99%................................ 50,447 14.41 68,381 19.85 14,843 4.25
8.00 - 9.99%................................ 4 -.-- 15 --- 955 0.26
10.00% - 11.99%............................... --- -.-- 22 0.01 27 0.01
12.00% and over............................... --- -.-- --- --- --- ---
-------- ------- -------- ------ -------- ------
Total certificates............................ 211,457 60.38 206,699 59.99 193,799 55.50
-------- ------- -------- ------ -------- ------
Total deposits................................ $350,212 100.00% $344,155 100.00% $349,121 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
25
<PAGE>
The following table sets forth the rate and maturity information for
the Bank's certificates of deposit as of June 30, 1996.
<TABLE>
<CAPTION>
0.00- 4.00- 6.00- 8.00- 10.00% or Percent
3.99% 5.99% 7.99% 9.99% Greater Total of Total
------- -------- ------- ------- --------- ------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts maturing in
quarter ending:
September 30, 1996............ $ 519 $ 48,190 $ 9,666 $ 3 $--- $ 58,378 27.62%
December 31, 1996............. 1,212 31,052 4,078 --- --- 36,342 17.19
March 31, 1997................ --- 18,350 1,798 1 --- 20,149 9.53
June 30, 1997................. --- 16,802 3,158 --- --- 19,960 9.44
September 30, 1997............ --- 15,647 9,797 --- --- 25,444 12.03
December 31, 1997............. --- 4,856 3,451 --- --- 8,307 3.93
March 31, 1998................ --- 4,766 1,186 --- --- 5,952 2.81
June 30, 1998................. --- 5,537 2,970 --- --- 8,507 4.02
September 30, 1998............ --- 1,924 2,497 --- --- 4,421 2.09
December 31, 1998............. --- 3,567 390 --- --- 3,957 1.87
March 31, 1999................ --- 3,055 3,764 --- --- 6,819 3.22
June 30, 1999................. --- 2,668 2,459 --- --- 5,127 2.42
Thereafter.................... --- 2,861 5,233 --- --- 8,094 3.83
------ -------- ------- ---- ---- -------- ------
Total...................... $1,731 $159,275 $50,447 $ 4 $--- $211,457 100.00%
====== ======== ======= ==== ==== ======== ======
Percent of total........... 0.82% 75.32% 23.86% ---% ---% 100.00%
==== ===== ===== === === ======
</TABLE>
The following table sets forth the amount of the Bank's certificates of
deposit and other deposits by time remaining until maturity as of June 30, 1996.
<TABLE>
<CAPTION>
Maturity
------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over 12
or Less Months Months Months Total
-------- -------- -------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000.... $52,586 $34,577 $38,074 $73,348 $198,585
Certificates of deposit of $100,000 or more... 4,386 1,512 2,010 3,140 11,048
Public funds(1)............................... 1,406 253 25 140 1,824
------ -------- -------- ------- ---------
Total certificates of deposit................. $58,378 $36,342 $40,109 $76,628 $211,457
======= ======= ======= ======= ========
</TABLE>
- -----------------------
(1) Deposits from governmental and other public entities.
For additional information regarding the composition of the Bank's
deposits, see Note 9 of the Notes to the Consolidated Financial Statements in
the Annual Report.
Borrowings. Western Federal's other available sources of funds include
advances from the FHLB of Seattle and other borrowings. As a member of the FHLB
of Seattle, the Bank is required to own capital stock in the FHLB of Seattle and
is authorized to apply for advances from the FHLB of Seattle. Each FHLB credit
program has its own interest rate, which may be fixed or variable, and range of
maturities. The FHLB of Seattle may prescribe the acceptable uses for these
advances, as well as limitations on the size of the advances and repayment
provisions.
The Bank borrows funds from the FHLB of Seattle under its various fixed
rate, variable rate, and amortizing advance lending programs, with terms
requiring monthly interest payments. Principal payments are due monthly under
the amortizing advance program and upon maturity for all other advance programs.
The Bank is generally required to pay a commitment fee upon application and is
normally subject to a prepayment fee if the advance is prepaid by the Bank. See
Note 10 the Notes of Consolidated Financial Statements in the Annual Report.
26
<PAGE>
The following table sets forth the maximum month-end balance and
average balance of FHLB advances and CMO's for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------
1996 1995 1994
-------- -------- ------
(In Thousands)
<S> <C> <C> <C>
Maximum Balance:
FHLB Advances................................................... $145,388 $133,119 $ 82,777
Collateralized Mortgage Obligations............................. 1,584 2,244 3,463
Average Balance:
FHLB Advances................................................... 134,211 112,343 38,469
Collateralized Mortgage Obligations............................. 1,380 1,877 2,911
</TABLE>
The following table sets forth certain information as to the Bank's
FHLB advances and CMO's at the dates indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------
1996 1995 1994
-------- -------- ------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB Advances.......................................................... $124,663 $133,119 $ 82,777
Collateralized Mortgage Obligations.................................... 1,175 1,585 2,310
-------- --------- ---------
Total Borrowings..................................................... $125,838 $134,704 $ 85,087
======== ======== ========
Weighted Average Interest Rate of FHLB Advances........................ 6.26% 6.28% 5.39%
==== ===== =====
Weighted Average Interest Rate of Collateralized Mortgage Obligations.. 11.27% 11.22% 11.11%
===== ===== =====
</TABLE>
Subsidiary Activities
General. The Company has no direct subsidiaries other than the Bank.
Western Federal has three wholly owned service corporation subsidiaries:
WesterFed Insurance Services, Inc. ("WesterFed Insurance"), WesterFed Service
Corporation ("WesterFed Service"), Service Corp. of Montana, Inc. ("Service
Corp."), and one special-purpose finance subsidiary, Monte Mac I, Inc. ("Monte
Mac"). At June 30, 1996, Western Federal's investment in the three wholly owned
service corporations totaled $2.5 million, or approximately 0.45% of
unconsolidated assets, at such date.
Federal associations generally may invest up to 2% of their assets in
service corporations, plus an additional 1% of assets for community purposes. In
addition, federal associations may invest up to 50% of their total capital in
conforming loans to their service corporations in which they own more than 10%
of the capital stock. Federal associations are also permitted to invest an
unlimited amount in operating subsidiaries engaged solely in activities which a
federal association may engage in directly.
The following is a description of Western Federal's service
corporations.
WesterFed Insurance Services, Inc. WesterFed Insurance, which was
incorporated in 1981, is an insurance agency currently engaged in the sale of
tax deferred annuities and depositor group health insurance programs, although
it may offer a wider range of insurance services in the future. This subsidiary
was acquired by Western Federal in connection with its acquisition of Home
Federal in 1983. Western Federal's investment in WesterFed Insurance was
$159,000 at June 30, 1996. This subsidiary had an after-tax profit of $5,000 for
the fiscal year ended June 30, 1996.
WesterFed Service Corporation. WesterFed Service was formed in 1978 to
engage in a leasing business under which Western Federal could utilize various
investment tax credits then allowed for federal tax purposes. As a result of
changes in federal tax law, however, such investment tax credits have been
eliminated and
27
<PAGE>
WesterFed Service is in the process of consolidating its leasing operations with
Western Federal. Western Federal's investment in WesterFed Service totaled
$224,000 at June 30, 1996.
Service Corp. of Montana, Inc. Service Corp. was acquired December
1988, in connection with the acquisition of Great Falls Federal. This service
corporation owns and operates a 30-unit apartment complex in Lewistown, Montana
and a single family residence in Hamilton, Montana. Western Federal's investment
in Service Corp. totaled $381,000 at June 30, 1996.
Monte Mac I, Inc. Monte Mac was formed in 1985 for the purpose of
participating in a collateralized mortgage obligation conduit program. Monte Mac
had participated in three series of CMO issuances. The CMOs are collateralized
by FHLMC participation certificates transferred by Western Federal to Monte Mac.
The transferred FHLMC certificates had a book value of $2.3 million at June 30,
1996. Western Federal's investment in Monte Mac as of June 30, 1996, included
approximately $1.1 million in FHLMC certificates in excess of collateralized
mortgage obligations. The payments received on the FHLMC certificates are used
to pay down the CMOs. If the CMOs are paid as originally projected, the
remaining investment in Monte Mac is expected to be minimal.
Regulation
General. The Bank is a federally chartered Bank, the deposits of which
are federally insured and backed by the full faith and credit of the United
States Government. Accordingly, the Bank is subject to broad federal regulation
and oversight extending to all of its operations. The Bank is a member of the
FHLB of Seattle and is subject to certain limited regulation by the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board"). As the
savings and loan holding company of the Bank, the Company is subject to federal
regulation and oversight. The purpose of the regulation of the Company and other
holding companies is to protect subsidiary savings associations. The Bank is a
member of the Savings Association Insurance Fund ("SAIF") and the deposits of
the Bank are insured by the Federal Deposit Insurance Corporation (the "FDIC").
As a result, the FDIC has certain regulatory and examination authority over the
Bank.
Federal Regulation of Savings Associations. The OTS has extensive
authority over the operations of savings associations. As part of this
authority, the Bank is required to file periodic reports with the OTS and is
subject to periodic examinations by the OTS and the FDIC. The last regular OTS
and FDIC examinations of the Bank were September 1995 and March 1990,
respectively.
All savings associations are subject to a semi-annual assessment, based
upon the savings association's total assets, to fund the operations of the OTS.
The Bank's OTS assessment for the fiscal year ended June 30, 1996, was
approximately $122,000. Savings associations (unlike the Bank) that are
classified as "troubled" (i.e., having a supervisory rating of "4" or "5" or
subject to a conservatorship) are required to pay higher premiums.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Bank and the Company.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of the
Bank is prescribed by federal laws, and it is prohibited from engaging in any
activities not permitted by such laws. For instance, no savings association may
invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal associations in loans secured by
non-residential real property may not exceed 400% of total capital, except with
approval of the OTS. Federal savings associations are also generally authorized
to branch nationwide. The Bank is in compliance with the noted restrictions.
28
<PAGE>
The Bank's permissible lending limit for loans to one borrower is equal
to the greater of $500,000 or 15% of unimpaired capital and surplus (except for
loans fully secured by certain readily marketable collateral, in which case this
limit is increased to 25% of unimpaired capital and surplus). At June 30, 1996,
the Bank's lending limit under this restriction was $9.6 million. The Bank is in
compliance with the loans-to-one-borrower limitation.
The OTS, as well as other federal banking agencies, adopted guidelines
establishing safety and soundness standards on such matters as loan underwriting
and documentation, internal controls and audit systems, asset quality, earnings
standards, interest rate risk exposure and compensation and other employee
benefits. Any institution which fails to comply with these standards must submit
a compliance plan. A failure to submit a plan or to comply with an approved plan
will subject the institution to further enforcement action.
Insurance of Accounts and Regulation by the FDIC. The deposits of the
Bank are presently insured by the SAIF, which together with the Bank Insurance
Fund (the "BIF") are the two insurance funds administered by the FDIC. Deposits
are insured up to applicable limits by the FDIC and such insurance is backed by
the full faith and credit of the United States Government. As insurer, the FDIC
imposes deposit insurance premiums and is authorized to conduct examinations of
and to require reporting by FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious risk to the FDIC. The FDIC also has the
authority to initiate enforcement actions against savings associations, after
giving the OTS an opportunity to take such action, and may terminate the deposit
insurance if it determines that the institution has engaged in unsafe or unsound
practices, or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums, based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or
a risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions will be made by the FDIC for each semi-annual assessment period.
For the first six months of 1996, the assessment schedule of Bank Insurance Fund
("BIF") members and SAIF members ranged from .23% to .31% of deposits.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
As is the case with the SAIF, the FDIC is authorized to adjust the
insurance premium rates for banks that are insured by the BIF of the FDIC in
order to maintain the reserve ratio of the BIF at 1.25% of BIF-insured
deposits. As a result of the BIF reaching its statutory reserve ratio, the FDIC
revised the premium schedule for BIF insured institutions to provide a range of
0.04% to 0.31% for the second half of 1996 and effective January 1, 1996 to
0.27% with an annual minimum assessment of $2,000, essentially eliminating
deposit insurance premiums for many BIF-insured institutions whose rates were
not adjusted. As a result of these adjustments, BIF insured institutions now
generally pay lower premiums than SAIF insured institutions. The FDIC has noted
that the SAIF is not expected to attain its designated reserve ratio until the
year 2002. As a result, SAIF insured members will generally be subject to higher
deposit insurance premiums than BIF insured institutions until, all things being
equal, the SAIF attains its required reserve ratio. The effect of this disparity
on the Bank and other SAIF members is uncertain at this time. In order to
eliminate this disparity, a number of proposals to recapitalize the SAIF have
been considered by the United States Congress in 1995 and 1996. One proposal
provides for a one-time assessment to be imposed on all deposits assessed at
SAIF rates, as of March 31, 1995, in order to recapitalize the SAIF and
eliminate the premium disparity. It also provides for the
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eventual merger of the BIF and the SAIF. The special assessment rate is
anticipated to be approximately 0.70%. Based on the Bank's level of SAIF
deposits at March 31, 1995, and assuming a special assessment of 0.70%, the
Bank's assessment would be approximately $2.5 million on a pre-tax basis. If
such special assessment had been recorded as of June 30, 1996, on a proforma
basis, the tangible, core, and risk-based capital ratios of the Bank would have
been 11.05%, 11.05%, and 20.86%, respectively. The final form of any such
legislation has been the subject of continuing negotiation and cannot be
assured. If the legislation is enacted, however, this special assessment would
significantly increase non-interest expense and adversely affect the Bank's
results of operations. Conversely, depending on the Bank's capital level and
supervisory rating, and assuming, although there can be no assurance, that the
insurance premium levels for BIF and SAIF members are again equalized, deposit
insurance premiums could decrease significantly to the minimum assessment for
future periods.
Regulatory Capital Requirements. Federally insured savings
associations, such as the Bank, are required to maintain a minimum level of
regulatory capital. The OTS has established capital standards, including a
tangible capital requirement, a leverage ratio (or core capital) requirement and
a risk-based capital requirement applicable to such savings associations. These
capital requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. At June 30, 1996, the Bank had no intangible assets other than
$132,000 of unamortized purchased mortgage servicing rights, $13,000 of which
was required to be deducted from tangible capital.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the Bank's level of ownership, including the assets of
includable subsidiaries in which the association has a minority interest that is
not consolidated for purposes of generally accepted accounting principles
("GAAP"). For excludable subsidiaries the debt and equity investments in such
subsidiaries are deducted from assets and capital. At June 30, 1996, the Bank
was required to deduct $538,000 of its investment in Service Corp. of Montana,
Inc. under these rules.
At June 30, 1996, the Bank had tangible capital of $62.0 million, or
11.3% of adjusted total assets, which is approximately $53.7 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings association must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio. At June 30, 1996, the Bank
had no intangibles which were subject to these tests.
At June 30, 1996, the Bank had core capital equal to $62.0 million, or
11.3% of adjusted total assets, which is $45.5 million above the minimum
leverage ratio requirement of 3% as in effect on that date.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets.
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Supplementary capital may be used to satisfy the risk-based requirement only to
the extent of core capital. The OTS is also authorized to require a savings
association to maintain an additional amount of total capital to account for
concentration of credit risk and the risk of non-traditional activities. At June
30, 1996, the Bank had no capital instruments that qualify as supplementary
capital and $1.9 million of general loss reserves, which was less than 1.25% of
risk-weighted assets.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. The Bank had $1,000, of
such exclusions from capital and assets at June 30, 1996.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight
ranging from 0% to 100% based on the risk inherent in this type of asset. For
example, the OTS has assigned risk weight of 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan-to-value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by FNMA or FHLMC.
The OTS has adopted a final rule that requires every savings
association with more than normal interest rate risk exposure to deduct from its
total capital, for purposes of determining compliance with such requirement, an
amount equal to 50% of its interest-rate risk exposure multiplied by the present
value of its assets. 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 rule provides for a two-quarter lag between calculating interest
rate risk and recognizing any deduction from capital. The rule will not become
effective until the OTS evaluates the process by which savings associations may
appeal an interest rate risk deduction determination. It is uncertain as to when
this evaluation may be completed. Any savings association with less than $300
million in assets and a total capital ratio in excess of 12% is exempt from this
requirement unless the OTS determines otherwise. Based on June 30, 1996 OTS
interest rate risk information, the Bank would be required to make a deduction
from total capital in the amount of $2.3 million in calculating its risk-based
capital requirement had such rule been in effect on June 30, 1996. Based on the
Bank's excess risk-based capital of $39.9 million at June 30, 1996,
notwithstanding this $2.3 million deduction from capital, the Bank would
continue to exceed it's risk-based capital requirement.
On June 30, 1996, the Bank had total risk-based capital of $63.9
million (including $62.0 million in core capital and $1.9 million in qualifying
supplementary capital) and risk-weighted assets of $300.7 million (including
$23,000 in converted off-balance sheet assets); or total risk-based capital of
21.2% of risk-weighted assets. This amount was $39.9 million above the current
8% requirement in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against associations that fail to meet their
capital requirements. The OTS is generally required to take action to restrict
the activities of an "undercapitalized association" (generally defined to be one
with less than either a 4% core capital ratio, a 4% Tier 1 risked-based capital
ratio or an 8% risk-based capital ratio). Any such association must submit a
capital restoration plan and until such plan is approved by the OTS may not
increase its assets, acquire another institution, establish a branch or engage
in any new activities, and generally may not make capital distributions. The OTS
is authorized to impose the additional restrictions that are applicable to
significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
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Any savings association that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized association is also
subject to other possible enforcement actions by the OTS or the FDIC including
the appointment of a receiver or conservator.
The OTS is also generally authorized to reclassify an association into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on the
Bank may have a substantial adverse effect on the Bank's operations and
profitability. If the OTS or the FDIC require an association such as the Bank,
to raise additional capital through the issuance of common stock or other
capital instruments by the Company such issuance may result in the dilution in
the percentage of ownership of existing Company stockholders since the Company's
stockholders do not have preemptive rights.
Limitations on Dividends and Other Capital Distributions. OTS
regulations impose various restrictions on savings associations with respect to
their ability to make distributions of capital which include dividends, stock
redemptions or repurchases, cash-out merger and other transactions charged to
the capital account. OTS regulations also prohibit a savings association from
declaring or paying any dividends or from repurchasing any of its stock if, as a
result, the regulatory capital of the association would be reduced below the
amount required to be maintained for the liquidation account established in
connection with its mutual to stock conversion.
Generally, savings associations, such as the Bank, that before and
after the proposed distribution meet their capital requirements, may make
capital distributions during any calendar year equal to the greater of 100% of
net income for the year-to-date plus 50% of the amount by which the lesser of
the association's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of its net income for the most recent four quarter period.
However, an association deemed to be in need of more than normal supervision by
the OTS may have its dividend authority restricted by the OTS. Western Federal
may pay dividends in accordance with this general authority.
Savings associations proposing to make any capital distribution need
only submit written notice to the OTS 30 days prior to such distribution.
Savings associations that do not, or would not meet their current minimum
capital requirements following a proposed capital distribution, however, must
obtain OTS approval prior to making such distribution. The OTS may object to the
distribution during that 30-day period notice based on safety and soundness
concerns. See "- Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal, a savings association that is a
subsidiary of a holding company may make a capital distribution with notice to
the OTS provided that it has a CAMEL 1 or 2 rating, is not of supervisory
concern and would remain adequately capitalized (as defined in the OTS prompt
corrective action regulations) following the proposed distribution. Savings
associations that would remain adequately capitalized following the proposed
distribution but do not meet the other noted requirements must notify the OTS 30
days prior to declaring a capital distribution. The OTS stated it will generally
regard as permissible that amount of capital distributions that do not exceed
50% of the institution's excess regulatory capital plus net income to date
during the calendar year. A savings association may not make a capital
distribution without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a result of, such a distribution. As under the
current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted.
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Liquidity. All savings associations, including the Bank, are required
to maintain an average daily balance of liquid assets equal to a certain
percentage of the sum of its average daily balance of net withdrawable deposit
accounts and borrowings payable in one year or less. For a discussion of what
the Bank includes in liquid assets, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
This liquid asset ratio requirement may vary from time to time (between 4% and
10%) depending upon economic conditions and savings flows of all savings
associations. At the present time, the minimum liquid asset ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain time
deposits, certain bankers acceptances and short-term United States Treasury
obligations) currently must constitute at least 1% of the association's average
daily balance of net withdrawable deposit accounts and current borrowings.
Penalties may be imposed upon associations for violations of either liquid asset
ratio requirement. At June 30, 1996, the Bank was in compliance with both
requirements, with an overall liquid asset ratio of 9.3% and a short-term liquid
assets ratio of 5.9%.
Accounting. An OTS policy statement applicable to all savings
associations clarifies and re-emphasizes that the investment activities of a
savings association must be in compliance with approved and documented
investment policies and strategies, and must be accounted for in accordance with
GAAP. Under the policy statement, management must support its classification of
and accounting for loans and securities (i.e., whether held for investment, sale
or trading) with appropriate documentation. The Bank is in compliance with these
amended rules. OTS accounting regulations, which may be made more stringent than
GAAP by the OTS, require that transactions be reported in a manner that best
reflects their underlying economic substance and inherent risk and that
financial reports must incorporate any other accounting regulations or orders
prescribed by the OTS.
Qualified Thrift Lender Test. All savings associations, including the
Bank, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (as defined by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. Such assets primarily consist of residential
housing related loans and investments. At June 30, 1996, the Bank met the test
and has always met the test since its effectiveness.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If an association has not yet requalified and or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all the restrictions on bank holding
companies. See "- Company Regulation."
Community Reinvestment Act. Under the Community Reinvestment Act
("CRA"), every FDIC insured institution has a continuing and affirmative
obligation consistent with safe and sound banking practices to help meet the
credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with the examination of the Bank, to assess the
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications, such as a
merger or the establishment of
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a branch, by the Bank. An unsatisfactory rating may be used as the basis for
the denial of an application by the OTS.
The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, the Bank may be required to devote additional funds for
investment and lending in its local community. The Bank was examined for CRA
compliance in October 1995 and received a rating of outstanding.
Transactions with Affiliates. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on terms
as favorable to the association as transactions with non-affiliates. In
addition, certain of these transactions, such as loans to an affiliate, are
restricted to a percentage of the association's capital. Affiliates of the Bank
include the Company and any company which is under common control with the
Company. In addition, a savings association may not lend to any affiliate
engaged in activities not permissible for a bank holding company or acquire the
securities of most affiliates. The Bank's subsidiaries are not deemed
affiliates; however, the OTS has the discretion to treat subsidiaries of savings
associations as affiliates on a case-by-case basis.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
Holding Company Regulation. The Company is a unitary savings and loan
holding company subject to regulatory oversight by the OTS. As such, the Company
is required to register and file reports with the OTS and is subject to
regulation and examination by the OTS. In addition, the OTS has enforcement
authority over the Company and its non-savings association subsidiaries which
also permits the OTS to restrict or prohibit activities that are determined to
be a serious risk to the subsidiary savings association.
As a unitary savings and loan holding company, the Company generally is
not subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of the Company and any of its
subsidiaries (other than Western Federal or any other SAIF-insured savings
association) would become subject to such restrictions unless such other
associations each qualify as a QTL and were acquired in a supervisory
acquisition. If Western Federal fails the QTL test, the Company must obtain the
approval of the OTS prior to continuing after such failure, directly or through
its other subsidiaries, any business activity other than those approved for
multiple savings and loan holding companies or their subsidiaries. In addition,
within one year of such failure the Company must register as, and will become
subject to, the restrictions applicable to bank holding companies. The
activities authorized for a bank holding company are more limited than are the
activities authorized for a unitary or multiple savings and loan holding
company. See " - Qualified Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control
of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.
Federal Securities Law. The Company is registered with the Securities
and Exchange Commission ("SEC") under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). The Company is subject to the information, proxy
solicitation, insider trading restrictions and other requirements of the SEC
under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of
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the Company is able to sell in the public market, without registration, a
limited number of shares in any three-month period.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest-bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). At June 30, 1996, the Bank was in compliance with these
reserve requirements. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve Board may be used to satisfy liquidity
requirements that may be imposed by the OTS. See " - Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Seattle, which is one of 12 regional FHLBs, that administers the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the board of directors of the FHLB. These policies
and procedures are subject to the regulation and oversight of the Federal
Housing Finance Board. All advances from the FHLB are required to be fully
secured by sufficient collateral as determined by the FHLB. In addition, all
long-term advances are required to provide funds for residential home financing.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Seattle. At June 30, 1996, the Bank had $7.5 million in FHLB stock,
which was in compliance with this requirement. In past years, the Bank has
received substantial dividends on its FHLB stock. Over the past five calendar
years such dividends have averaged 9.93% and were 6.59% for calendar year 1995.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Bank's FHLB stock may result in a corresponding
reduction in the Bank's capital.
For the fiscal year ended June 30, 1996, dividends paid by the FHLB of
Seattle to the Bank totaled $521,000, which constitutes a $158,000 increase over
the amount of dividends received in fiscal year 1995. There can be no assurance
that such special dividends will continue in the future.
Change in Control Regulations. Federal law provides that no company
"directly or indirectly or acting in concert with one or more persons, or
through one or more subsidiaries, or through one or more transactions," may
acquire "control" of a savings association at any time without the prior
approval of the OTS. In addition, federal regulations require that, prior to
obtaining control of a savings association, a person, other than a company, must
give 60 days' prior notice to the OTS and have received no OTS objection to such
acquisition of control. Any company that acquires such control becomes a
"savings and loan holding company" subject to registration, examination and
regulation as a savings and loan holding company. Under federal law (as well as
the regulations referred to below) the term "savings association" includes state
and federally chartered SAIF-insured institutions and federally chartered Banks
whose accounts are insured by the FDIC's BIF and holding companies thereof.
Control, as defined under federal law, means ownership, control of or
holding irrevocable proxies representing more than 25% of any class of voting
stock, control in any manner of the election of a majority of the savings
association's directors, or a determination by the OTS that the acquiror has the
power to direct, or directly or indirectly to exercise a controlling influence
over, the management or policies of the institution. Acquisition of more than
10% of any class of a savings association's voting stock, if the acquiror also
is subject to any one of eight "control factors," constitutes a rebuttable
determination of control under the regulations.
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Such control factors include the acquiror being one of the two largest
stockholders. The determination of control may be rebutted by submission to the
OTS, prior to the acquisition of stock or the occurrence of any other
circumstances giving rise to such determination, of a statement setting forth
facts and circumstances which would support a finding that no control
relationship will exist and containing certain undertakings. The regulations
provide that persons or companies which acquire beneficial ownership exceeding
10% or more of any class of a savings association's stock must file with the OTS
a certification that the holder is not in control of such institution, is not
subject to a rebuttable determination of control and will take no action which
would result in a determination or rebuttable determination of control without
prior notice to or approval of the OTS, as applicable.
Federal Taxation. For taxable years beginning prior to January 1, 1996,
savings institutions such as the Bank which met certain definitional tests
primarily relating to their assets and the nature of their business ("qualifying
thrifts") were permitted to establish a reserve for bad debts and to make annual
additions thereto, which additions may, within specified formula limits, have
been deducted in arriving at their taxable income. The Bank's deduction with
respect to "qualifying loans," which are generally loans secured by certain
interests in real property, may have been computed using an amount based on the
Bank's actual loss experience, or a percentage equal to 8% of the Bank's taxable
income, computed with certain modifications and reduced by the amount of any
permitted additions to the non-qualifying reserve. The Bank's deduction with
respect to non-qualifying loans was computed under the experience method, which
essentially allows a deduction based on the Bank's actual loss experience over a
period of several years. Each year the Bank selected the most favorable way to
calculate the deduction attributable to an addition to the tax bad debt reserve.
Recently enacted federal legislation repeals the reserve method of
accounting for bad debt reserves for tax years beginning after December 31,
1995. As result, savings associations are no longer able to calculate their
deduction for bad debts using the percentage-of-taxable-income method. Instead,
savings associations are required to compute their deduction based on specific
charge-offs during the taxable year. This legislation also requires savings
associations to recapture into income over a six-year period their post-1987
additions to their bad debt tax reserves, thereby generating additional tax
liability. At June 30, 1996, the Bank's post-1987 reserves were approximately
$1.2 million and the Bank has recorded a deferral tax liability at $415,000 to
provide for the additional tax liability. The recapture may be suspended for up
to two years if, during those years, the institution satisfies a residential
loan requirement. The Bank anticipates that it will meet the residential loan
requirement for the taxable year ending June 30, 1997.
Under prior law, if the Bank failed to satisfy the qualifying thrift
definitional tests in any taxable year, it would be unable to make additions to
its bad debt reserve. Instead, the Bank would be required to deduct bad debts as
they occur and would additionally be required to recapture its bad debt reserve
deductions ratably over a multi-year period. At June 30, 1996, the Bank's total
bad debt reserve for tax purposes was approximately $10.3 million. Among other
things, the qualifying thrift definitional tests required the Bank to hold at
least 60% of its assets as "qualifying assets." Qualifying assets generally
include cash, obligations of the united States or any agency or instrumentality
thereof, certain obligations of a state or political subdivision thereof, loans
secured by interests in improved residential real property or by savings
accounts, student loans and property used by the Bank in the conduct of its
banking business. Under current law, a savings association will not be required
to recapture its pre-1988 bad debt reserves if it ceases to meet the qualifying
thrift definitional tests.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such as
the Bank, are also subject to an environmental tax equal to 0.12% of the excess
of alternative minimum taxable income for the taxable year (determined without
regard to net operating losses and the deduction for the environmental tax) over
$2.0 million.
36
<PAGE>
The Company, the Bank and its subsidiaries file consolidated federal
income tax returns on a fiscal year basis using the accrual method of
accounting. Savings associations, such as the Bank, that file federal income tax
returns as part of a consolidated group are required by applicable Treasury
regulations to reduce their taxable income for purposes of computing the
percentage bad debt deduction for losses attributable to activities of the
non-savings association members of the consolidated group that are functionally
related to the activities of the savings association member.
The Company and its consolidated subsidiaries have been audited by the
IRS with respect to consolidated federal income tax returns through June 30,
1989. With respect to years examined by the IRS, either all deficiencies have
been satisfied or sufficient reserves have been established to satisfy asserted
deficiencies. In the opinion of management, any examination of still open
returns (including returns of subsidiaries and predecessors of, or entities
merged into, the Bank) would not result in a deficiency which could have a
material adverse effect on the financial condition of the Bank and its
consolidated subsidiaries.
Montana Taxation. Under Montana taxation law, savings associations,
such as the Bank, are subject to a corporation license tax, which incorporates
or is substantially similar to applicable provisions of the Code. The
corporation license tax is imposed on federal taxable income, subject to certain
adjustments at a rate of 6.75% for fiscal 1996. Under Montana law, a savings
association is not allowed to make a deduction from gross income for a reserve
for bad debts in the computations of the Montana corporate license tax or file a
consolidated corporate license tax return with affiliated companies.
Delaware Taxation. As a Delaware holding company, the Company is
exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. The Company is also
subject to an annual franchise tax imposed by the State of Delaware.
Impact of New Accounting Standards
See Note 1, Summary of Signficiant Accounting Policies and Note 15,
Recent Accounting Pronouncements Not Yet Adopted in Notes to Consolidated
Financial Statements.
Competition
Savings institutions generally face strong competition both in
originating real estate loans and in attracting deposits. Competition in
originating loans comes primarily from other savings institutions, commercial
banks, and mortgage bankers who also make loans secured by real estate located
in the Bank's primary market areas. The Bank competes for loans principally on
the basis of the interest rates and loan fees it charges, the types of loans it
originates and the quality of services it provides to borrowers.
The Bank faces substantial competition in attracting deposits from
other savings institutions, commercial banks, securities firms, money market and
mutual funds, credit unions and other investment vehicles. The ability of the
Bank to attract and retain deposits depends on its ability to provide an
investment opportunity that satisfies the requirements of investors as to rate
of return, liquidity, risk, convenient locations and other factors. The Bank
competes for these deposits by offering a variety of deposit accounts at
competitive rates, convenient business hours and a customer oriented staff.
37
<PAGE>
The Bank estimates its market share of the savings deposits in the
counties where it has branch offices to be as follows:
County June 30, 1995 Deposit Share(1) City
------ ------------------------------ ----
Missoula 15.3% Missoula
Yellowstone 3.9 Billings
Lewis & Clark 6.8 Helena
Cascade 4.8 Great Falls
Gallatin 3.1 Bozeman
Ravalli 5.9 Hamilton
Pondera 9.0 Conrad
Fergus 8.5 Lewistown
Custer 6.9 Miles City
Big Horn 9.8 Hardin
- -----------------
(1) Based on data supplied by Ferguson & Company Branch Source as of June
1995, Western Federal held approximately a 3.9% market share of
deposits in Montana. Based on this market share, Western Federal ranked
fourth out of 196 financial institutions located in Montana. See
" - Market Areas" for information regarding the Bank's deposit share in
each county in its market area.
Western Federal's competition for residential real estate loans is
principally from mortgage bankers, other savings institutions, commercial banks
and other institutional lenders. Competition for commercial real estate loans is
primarily from commercial banks in Missoula and other savings institutions in
Missoula, Helena, Billings, Great Falls, and Bozeman. Competition for consumer
loans is from commercial banks, credit unions, other savings institutions and
consumer finance companies. Western Federal competes for loans principally
through the interest rates and loan fees charged. Western Federal's competition
for loans varies from time to time depending upon numerous factors, including
the general availability of lending funds and credit, economic conditions,
current interest rate levels, volatility in the mortgage markets and other
factors which are not readily predictable.
Executive Officers of the Company
The following table sets forth certain information at June 30, 1996
regarding the executive officers of the Company and the Bank who are not also
directors.
Name Age Position(s) Held
---- --- ------------------
Douglas G. Bardwell 54 Vice President and Secretary of the Company
and Executive Vice President and Chief
Operating Officer of the Bank
James A. Salisbury 45 Treasurer and Chief Financial Officer of the
Company and the Bank
Jack E. Lovell 59 Vice President and Credit Administrator of
the Bank
Virginia Dumontier 57 Vice President and Deposit Support Services
Manager of the Bank
Dale W. Brevik 44 Vice President and Marketing Director/
Investor Relations of the Bank
Charles E. Eiseman 46 Vice President/Montana Lending Manager of
the Bank
The business experience of each executive officer who is not also a
director is set forth below.
Douglas G. Bardwell. Mr. Bardwell became Vice President and Secretary
of the Company in September 1993. Mr. Bardwell joined the Bank in August 1973.
He was appointed Chief Operating Officer in 1983 and Executive Vice President in
1989. He also serves on the Board of Directors of WesterFed Service Corporation,
WesterFed Insurance Services, Inc., Monte Mac I, and Service Corporation of
Montana.
38
<PAGE>
Mr. Bardwell is a graduate of the University of Montana. Mr. Bardwell is
responsible for the supervision of the Bank's savings and operations
departments.
James A. Salisbury. Mr. Salisbury became Treasurer and Chief Financial
officer of the Company in September 1993. Mr. Salisbury joined Western Federal
as Treasurer and Chief Financial Officer in 1983. Prior to such time, he was
employed as the Chief Financial Officer for Home Federal from 1980 to 1983. From
1978 to 1980, he was in private practice as a certified public accountant. Mr.
Salisbury is a graduate of the University of Montana and is a certified public
accountant. Mr. Salisbury is responsible for the formulation and implementation
of the policies and objectives of the Bank's finance, accounting and audit
function.
Jack E. Lovell. Mr. Lovell has been employed by Western Federal since
September 1975. He was promoted to Credit Administrator in 1979. As Credit
Administrator he is responsible for policy formulation related to all Credit
Administration and has direct oversight responsibility for Loan Servicing and
Quality Control Departments. Mr. Lovell is a graduate of the University of
Montana.
Virginia Dumontier. Ms. Dumontier has been Vice President/Deposit
Support Services Manager since 1983. She has been employed by Western Federal
since 1957. Ms. Dumontier is responsible for policy formulation and operation of
all of Western Federal's deposit services.
Dale W. Brevik. Mr. Brevik has been with Western Federal since May 1979
and has held his present positions since 1983. In addition to his duties as
Marketing Director, Mr. Brevik is the Investor Relations Manager and coordinates
new product development and oversees Western Federal's insurance programs.
Mr. Brevik is a graduate of the University of Montana.
Charles E. Eiseman. Mr. Eiseman has been employed by Western Federal
since December 1975 and has held his present position since 1988. Mr. Eiseman's
duties include supervision of all loan origination activities in all cities
where Western Federal has loan origination centers. Mr. Eiseman is a graduate of
the University of Montana.
Employees
At June 30, 1996, the Company had a total of 176 full-time employees
and 38 part-time employees. None of the Bank employees are represented by any
collective bargaining group. Management considers its employee relations to be
excellent.
Item 2. Properties
The following table sets forth information concerning the main office
and each branch office and loan production office of the Bank at June 30, 1996.
At June 30, 1996, the Bank's premises and equipment had an aggregate net book
value of approximately $10.9 million.
<TABLE>
<CAPTION>
Year Owned or Lease Expiration Net Book
Location Acquired Leased Date Value
-------- -------- -------- ---------------- --------------
(In Thousands)
<S> <C> <C> <C> <C>
Main Office
100 East Broadway 1957 Owned N/A(1) $ 538
Missoula, Montana
Full Service Branches
2230 Brooks 1966 Owned N/A 393
Missoula, Montana
1610 S. Third West 1977 Leased (2) ---
Missoula, Montana
2601 Garfield 1979 Owned N/A 1,202
Missoula, Montana
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
Year Owned or Lease Expiration Net Book
Location Acquired Leased Date Value
-------- -------- -------- ---------------- --------------
(In Thousands)
<S> <C> <C> <C> <C>
321 Fuller 1983 Owned N/A 431
Helena, Montana
101 Lane Avenue 1983 Owned N/A 51
East Helena, Montana
601 N. Montana 1983 Leased December 1996 9
Helena, Montana
3171 N. Montana 1996 Owned N/A 360
Helena, Montana
1941 West Main at 20th 1983 Owned N/A 368
Bozeman, Montana
501 N. First Street 1980 Owned N/A 1,698
Hamilton, Montana
2425 10th Avenue South 1988 Owned N/A 472
Great Falls, Montana
25 Fifth Street North 1988 Owned N/A 940
Great Falls, Montana
900 Third Street, N.W. 1988 Owned N/A 183
Great Falls, Montana
424 West Main Street 1988 Owned N/A 174
Lewistown, Montana
702 South Main 1988 Owned N/A 185
Conrad, Montana
2929 Third Avenue North 1991 Owned N/A 1,786
Billings, Montana
300 - 24th Street West 1991 Leased December 1996 5
Billings, Montana
1101 Main Street 1991 Owned N/A 68
Miles City, Montana
524 North Cheyenne Avenue 1991 Owned N/A 101
Hardin, Montana
Mortgage Loan Administration
1100 South Avenue 1993 Owned N/A 765
Missoula, Montana _____
9,729
Construction in Progress 87
Land for future branch expansion 1,077
-------
Total $10,893
=======
</TABLE>
- ----------------------
(1) Includes lease for drive-up window which expires in May 2001.
(2) Lease is on a month-to-month basis.
The Company replaced the existing branch in Hamilton with a new
facility and completed construction of a new branch in Helena during fiscal
1996. In addition, land has been purchased in Helena and Billings for potential
branch facilities in the future.
40
<PAGE>
The Bank's accounting and record-keeping activities are maintained on
an on-line basis with an independent service bureau. The net book value of the
Bank's computer and other equipment (including furniture, fixtures and
automobiles) at June 30, 1996, totalled $1.5 million. In addition, subsidiaries
of the Bank hold properties and equipment with a net book value of $1.4 million.
See "Business - Subsidiary Activities."
Item 3. Legal Proceedings
From time to time, the Company and Western Federal are involved as
plaintiff or defendant in various legal proceedings 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 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended June 30, 1996.
PART II
Item 5. Market for the Registrant's Common Stock and Related Security
Holder Matters
The caption "General Corporate and Stockholders' Information" contained
in excerpts from the Company's Annual Report (beginning at page 56 thereto)
filed at Exhibit 13 hereto is incorporated in its entirety by reference under
this Item 5.
Item 6. Selected Financial Data
The caption "Selected Consolidated Financial and Other Data" contained
in excerpts from the Company's Annual Report (beginning at page 8 thereto) filed
at Exhibit 13 hereto is incorporated in its entirety by reference under this
Item 6.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in excerpts from the Company's
Annual Report (beginning at page 9 thereto) filed at Exhibit 13 hereto is
incorporated in its entirety by reference under this Item 7.
Item 8. Financial Statements and Supplementary Data
The caption "Consolidated Financial Statements" contained in excerpts
from the Company's Annual Report (beginning at page 28 thereto) filed at Exhibit
13 hereto is incorporated in its entirety by reference under this Item 8. Note
22 and references thereto included at Exhibit 13 are not included in the
Company's Annual Report.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
There has been no Current Report on Form 8-K filed within 24 months
prior to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
41
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Information concerning Directors of the Registrant is incorporated
herein by reference from the Corporation's definitive Proxy Statement for the
Annual Meeting of Stockholders scheduled to be held on October 22, 1996, except
for information contained under the heading "Compensation Committee Report on
Executive Compensation" and "Stockholder Return Performance Presentation", a
copy of which will be filed not later than 120 days after the close of the
fiscal year. See "Business - Executive Officers of the Company" in Part I of the
Form 10-K for information regarding executive officers.
Item 11. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the Corporation's definitive Proxy Statement for the Annual
Meeting of Stockholders scheduled to be held on October 22, 1996, except for
information contained under the heading "Compensation Committee Report on
Executive Compensation" and "Stockholder Return Performance Presentation", a
copy of which will be filed not later than 120 days after the close of the
fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the Corporation's
definitive Proxy Statement for the Annual Meeting of Stockholders scheduled to
be held on October 22, 1996, except for information contained under the heading
"Compensation Committee Report on Executive Compensation" and "Stockholder
Return Performance Presentation", a copy of which will be filed not later than
120 days after the close of the fiscal year.
Item 13. Certain Relationships and Related Transactions
Information concerning certain relationships and transactions is
incorporated herein by reference from the Corporation's definitive Proxy
Statement for the Annual Meeting of Stockholders scheduled to be held on October
22, 1996, except for information contained under the heading "Compensation
Committee Report on Executive Compensation" and "Stockholder Return Performance
Presentation", a copy of which will be filed not later than 120 days after the
close of the fiscal year.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K
(a)(1) Financial Statements:
The following information appearing in the Registrant's Annual Report
to Stockholders for the year ended June 30, 1996, is incorporated by reference
in this Form 10-K Annual Report as Exhibit 13.
Pages in
Annual
Annual Report Section Report
--------
Consolidated Financial Information..................................... 27
Independent Auditors' Report........................................... 28
Consolidated Balance Sheets -- June 30, 1995 and 1996.................. 29
Consolidated Statements of Income -- Each of the Years in the
Three-Year Period Ended June 30, 1996.................................. 30
42
<PAGE>
Pages in
Annual
Annual Report Section Report
--------
Consolidated Statements of Stockholders' Equity -- Each of the
Years in the Three-Year Period Ended June 30, 1996..................... 31
Consolidated Statements of Cash Flows -- Each of the Years in the
Three-Year Period Ended June 30, 1996.................................. 32
Notes to Consolidated Financial Statements............................. 33
Supplementary Financial Data........................................... 53
(a)(2) Financial Statement Schedules:
All financial statement schedules have been omitted as the information
is not required under the related instructions or is inapplicable.
43
<PAGE>
(a)(3) Exhibits:
<TABLE>
<CAPTION>
Reference to Prior
Filing of Exhibit Are
Regulation S-K Number Attached
Exhibit Number Document Hereto
-------------- -------- ------------------ ---
<S> <C> <C>
2 Plan of acquisition, reorganization, arrangement, liquidation None
or succession
3 (i) Articles of Incorporation *
(ii) By-laws
4 Instruments defining the rights of security holders, including *
indentures
9 Voting trust agreement None
10.1 Stock Option and Incentive Plan **
10.2 Employee Stock Ownership Plan *
10.3 Recognition and Retention Plan **
10.4 Salary Continuation Plan *
10.5 Directors Deferred Compensation Plan *
10.6 Benefit Equalization Plan *
10.7 Employment Agreements for Messrs. Grimes, Bardwell and **
Salisbury
10.8 Employment Agreements for Messrs. Brevik, Eiseman and **
Lovell and Ms. Dumontier
10.9 Annual Management Incentive Plan **
10.10 Wage Continuation Agreements for Messrs. Grimes, Bardwell **
and Salisbury
11 Statement re: computation of per share earnings None
12 Statement re: computation of ratios Not required
13 Annual Report to Security Holders 13
16 Letter re: change in certifying accountant None
18 Letter re: change in accounting principles None
19 Report furnished to security holders None
21 Subsidiaries of Registrant 21
22 Published report regarding matters submitted to vote of None
security holders
23 Consent of experts and counsel 23
24 Power of Attorney Not required
27 Financial Data Schedule 27
28 Information from reports furnished to State insurance None
regulatory authorities
99 Additional exhibits None
</TABLE>
- -------------------
* Filed on September 21, 1993, as exhibits to the Registrant's Form S-1
registration statement (Registration No. 33-69168) pursuant to the
Securities Act of 1933. All of such previously filed documents are hereby
incorporated herein by reference in accordance with Item 601 of Regulation
S-K.
** Filed on September 27, 1995, as the exhibits listed above to the
Registrant's Annual Report on Form 10-K for the year ended June 30, 1995
pursuant to the Securities Exchange Act of 1934 (File No. 0-22772). All of
such previously filed documents are hereby incorporated herein by reference
in accordance with Item 601 of Regulation S-K.
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed during the three-month period
ended June 30, 1996.
44
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
<TABLE>
<CAPTION>
WESTERFED FINANCIAL CORPORATION
<S> <C>
Date: September 26, 1996 By: /s/ Lyle R. Grimes
---------------------------------------------------- ------------------------------------------------
Lyle R. Grimes
(Duly Authorized Representative)
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C>
By: /s/ Lyle R. Grimes By: /s/ Dr. Marvin Reynolds
------------------------------------------------------- --------------------------------------------------
Lyle R. Grimes, President, Chief Executive Dr. Marvin Reynolds, Chairman of the Board
Officer and Director (Principal Executive and
Operating Officer)
Date: September 26, 1996 Date: September 26, 1996
---------------------------------------------------- ------------------------------------------------
By: /s/ Dr. Otto G. Klein By: /s/ John E. Roemer
------------------------------------------------------- --------------------------------------------------
Dr. Otto G. Klein, Jr., Director John E. Roemer, Director
Date: September 26, 1996 Date: September 26, 1996
---------------------------------------------------- ------------------------------------------------
By: /s/ William E. Grabow By: /s/ James A. Salisbury
------------------------------------------------------- --------------------------------------------------
William E. Grabow James A. Salisbury, Treasurer and Chief
Financial Officer (Principal Financial and
Accounting Officer)
Date: September 26, 1996 Date: September 26, 1996
---------------------------------------------------- ------------------------------------------------
By: /s/ Robert F. Burke
-------------------------------------------------------
Robert F. Burke, Director
Date: September 26, 1996
----------------------------------------------------
</TABLE>
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number
-------
13 Excerpts from Annual Report to Security Holders
21 Subsidiaries of the Registrant
23 Consent of Experts and Counsel
27 Financial Data Schedule
<PAGE>
Exhibit 13
Excerpts from Annual Report to Security Holders
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Selected Consolidated Financial and Other Data
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in thousands, except share and per share amounts)
At June 30, 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets $563,931 $563,285 $515,675 $ 404,117 $ 389,395
Loans receivable, net and loans held for sale 368,193 313,121 274,840 233,148 238,281
Mortgage-backed securities, net 104,947 143,825 145,025 87,534 53,169
Investment securities, FHLB stock and other
interest-earning assets 64,108 82,375 74,168 62,941 74,206
Deposits 350,212 344,155 349,121 351,447 346,160
Borrowed funds 125,838 134,704 85,087 15,541 9,265
Stockholders' equity 78,607 75,146 74,168 29,024 24,503
Book value per common share 17.88 17.09 16.03 NA NA
- -------------------------------------------------------------------------------------------------------------------
Year Ended June 30, 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------
Selected Operations Data:
Total interest income $ 42,544 $ 37,783 $ 31,933 $ 30,365 $ 33,883
Total interest expense 24,737 20,984 16,391 16,931 22,237
- -------------------------------------------------------------------------------------------------------------------
Net interest income 17,807 16,799 15,542 13,434 11,646
Provision for loan losses --- --- --- --- (53)
Non-interest income 3,882 3,207 3,511 4,731 4,301
Non-interest expense (14,574) (13,405) (11,938) (10,691) (10,379)
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes, extraordinary item
and cumulative effect of change in accounting
for income taxes 7,115 6,601 7,115 7,474 5,515
Income taxes (2,556) (2,473) (2,681) (2,952) (1,935)
- -------------------------------------------------------------------------------------------------------------------
Income before extraordinary item and cumulative
effect of change in accounting for
income taxes 4,559 4,128 4,434 4,522 3,580
Extraordinary loss, net of tax benefit of $ 188 --- --- --- --- (350)
Cumulative effect of change in accounting for
income taxes --- --- 795 --- ---
- -------------------------------------------------------------------------------------------------------------------
Net income $ 4,559 $ 4,128 $ 5,229 $ 4,522 $ 3,230
===================================================================================================================
Net income per share:
Income before cumulative effect of change
in accounting for income taxes $ 1.07 $ 0.96 $ 1.01 NA NA
Cumulative effect of change in accounting
for income tax --- --- 0.18 --- ---
- -------------------------------------------------------------------------------------------------------------------
Net income per share $ 1.07 $ 0.96(1)$ 1.19(1) NA NA
===================================================================================================================
Dividends per share $ 0.36 $ 0.30 $ 0.05 NA NA
===================================================================================================================
Dividend payout ratio(2) 33.64% 31.25% 4.20% NA NA
===================================================================================================================
<PAGE>
Selected Financial Ratios and Other Data:
Return on assets (ratio of net income to
average total assets) 0.79% 0.76% 1.14% 1.14% 0.83%
Return on assets before cumulative effect of
change in accounting for income taxes 0.79 0.76 0.96 1.14 0.83
Return on equity (ratio of net income to
average equity) 5.90 5.54 10.07 16.90 14.11
Return on equity before cumulative effect of
change in accounting for income taxes 5.90 5.54 8.54 16.90 14.11
Interest rate spread at end of period 2.67 2.38 2.80 3.49 3.29
Net interest margin(3) 3.23 3.23 3.54 3.60 3.15
Ratio of non-interest expense to average
total assets 2.53 2.47 2.60 2.69 2.67
Non-performing assets to total assets, at
end of period 0.13 0.10 0.16 0.21 1.10
Total allowance for loan losses to total
non-performing assets 280.42 350.35 238.82 242.98 49.14
Stockholders' equity to total assets, at
end of period 13.94 13.34 14.38 7.18 6.29
Ratio of average interest-earning assets
to average interest-bearing liabilities 113.58 113.51 110.16 104.04 102.64
Number of offices 19 18 18 18 18
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------
1 Restated
2 Dividends paid per share divided by net income per share.
3 Net interest income divided by average interest-earning assets.
8
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
GENERAL
WesterFed Financial Corporation ("WesterFed" or the "Company") was formed as
part of the conversion of Western Federal Savings Bank of Montana ("Western
Federal" or the "Bank") from a federal mutual to a stock savings bank, which was
completed on January 6, 1994 (the "Conversion"). Currently the Company has no
other business activity other than acting as the holding company for Western
Federal. As a result, the following discussion relates primarily to the
activities of the Bank during the past fiscal year.
The Company's results of operations are dependent primarily on net interest
income and fee income. Net interest income is the difference between the
interest income earned on its loans, mortgage-backed securities, and investment
portfolio and its cost of funds, consisting of interest paid on its deposits and
borrowed money ("spread"). The Company's results of operations are also
significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities.
The Company serves the financial needs of communities in Montana through its
main office located in Missoula, and 18 branch offices and one loan servicing
office. The Company attracts deposits from the general public and uses the
deposits, together with borrowings and other funds, to originate loans secured
by mortgages on owner-occupied one- to four-family residences in its primary
market areas. To a lesser extent, the Company also originates multi-family,
commercial real estate, construction and consumer loans in its market areas. The
Company also invests in mortgage-backed securities, investment securities and
other short-term liquid assets.
Changes in Financial Condition, June 30, 1995 to June 30, 1996
Total assets increased approximately $600,000 to $563.9 million at June 30, 1996
from $563.3 million at June 30, 1995. This increase in assets was primarily the
result of a $55.1 million increase in loans receivable, partially offset by
decreases of $18.3 million in investment securities, Federal Home Loan Bank of
Seattle ("FHLB") stock and other interest earning assets, and $38.9 million in
mortgage-backed securities. The $600,000 increase was funded primarily by an
increase of $6.0 million in deposits and a $3.5 million increase in
stockholders' equity, partially offset by a $8.9 million decrease in borrowed
funds.
The $55.1 million increase in loans receivable was primarily the result of
$165.5 million in new loan originations and $7.0 million in purchases of loans,
which were partially offset by principal repayments of $87.0 million and the
sale of whole loans of $31.2 million. Included in these amounts were $31.9
million in consumer loan originations. The consumer loan portfolio increased
$12.0 million, or 37.6%, to $43.9 million at June 30, 1996 from $31.9 million at
June 30, 1995. The $165.5 million in new loan originations was an increase of
$35.7 million from fiscal 1995. The increase in loan originations and other loan
activity is attributable to a decrease in interest rates in fiscal 1996 as
compared to the higher interest rate environment in fiscal 1995. In addition, a
new dealer finance program was implemented where the Bank originates loans
directly through local auto and recreational dealers. In the first two months of
operation, $2.8 million of these new consumer loan type loans were added to
portfolio.
The $38.9 million decrease in mortgage-backed securities was primarily the
result of principal repayments of $29.6 million and the sale of mortgage-backed
securities available-for-sale of $30.7 million, which exceeded purchases of
$21.9 million. The $30.7 million of mortgage-backed securities that were sold
consisted of $2.2 million in adjustable rate and $28.5 million in fixed rate
fifteen year and thirty year mortgage-backed securities while the $21.9 million
in purchases consisted of $2.2 million of fixed rate five year balloon and $19.7
million of adjustable rate mortgage-backed securities. The mortgage-backed
securities that were sold were experiencing increasing prepayments and therefore
were sold to maximize the net returns available on them and for interest rate
risk management purposes. In addition, $5.6 million of fifteen year fixed rate
mortgage-backed securities and $5.0 million of fixed rate collateralized
mortgage obligations were transferred from the held-to-maturity category to the
9
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
available-for-sale category prior to December 31, 1995 in accordance with a
special report issued by the FASB, "A Guide to Implementation of Statement 115
on Accounting for Certain Investments in Debt and Equity Securities." The $10.6
million of mortgage-backed securities transfered were at amortized cost, had
gross unrealized losses of $140,000 and were transferred for interest rate risk
management purposes.
The $18.3 million decrease in investment securities, FHLB stock and other
interest earning assets was primarily the result of the maturities and principal
payments of investment securities of $53.6 million and a net reduction in
interest bearing deposits due from banks of $2.7 million, partially offset by a
net increase in interest bearing deposits of $898,000, the purchase of $36.2
million in investment securities and an increase of $722,000 in FHLB stock.
Investment securities purchased during the fiscal year included $26.8 million of
U.S. Agency securities and $3.1 million of corporate securities with fixed rates
and maturities ranging from one month to two years. These investments were
purchased in an attempt to earn rates in excess of over-night fund rates while
minimizing the effect of potential interest rate increases. These purchases were
funded primarily from the proceeds of maturing investments.
Deposits increased $6.0 million, or 1.7%, to $350.2 million at June 30, 1996
from $344.2 million at June 30, 1995. Interest credited was $15.7 million while
withdrawals exceeded deposits by $9.7 million. Checking and certificates of
deposit increased $3.9 million and $4.8 million, respectively, while money
market and passbook accounts decreased $1.9 million and $700,000, respectively.
Checking accounts have increased since the introduction and heavy promotion of
the new "Western Style Checking" program. Certificates of deposit continue to
offer interest rates greater than the lower yielding money market and passbook
accounts and this has resulted in a transfer of funds from these lower yielding
accounts into certificates of deposit.
Borrowed funds decreased $8.9 million, or 6.6%, to $125.8 million, at June 30,
1996 from $134.7 million at June 30, 1995. There were $77.7 million of new
advances, of which $20.0 million were amortizing fixed rate advances of five
years or more to partially fund new thirty year fixed rate mortgages added to
portfolio, while $51.7 million were less than one year in maturity and used to
fund short-term cash requirements and $6.0 million were fixed rate advances with
maturities of one to four years. Principal repayments on FHLB advances were
$86.2 million and repayments on collateralized mortgage obligations were
$409,000.
Stockholders' equity increased $3.5 million, or 4.7%, to $78.6 million at June
30, 1996 from $75.1 million at June 30, 1995. This increase was due to net
income for the fiscal year of $4.6 million and $919,000 related to contributions
to the Employee Stock Ownership Plan and shares earned under the Recognition and
Retention Plan while stockholders' equity was reduced $1.5 million for dividends
declared during the fiscal year and $521,000 related to the change in unrealized
gain or loss associated with assets classified as available-for-sale being
adjusted to market value in accordance with Statement of Financial Accounting
Standards No. 115.
10
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
Results of Operations
Net Interest Income Analysis. The following table presents for the periods
indicated the total dollar amount of interest income from average
interest-earning assets and the resultant yields, as well as the interest
expense on average interest-bearing liabilities, expressed both in dollars and
rates. No tax equivalent adjustments were made. Non-accruing loans have been
included in the table as loans carrying a zero yield.
<TABLE>
<CAPTION>
Year Ended June 30, 1996
------------------------------------------------------------------
Average Interest
Outstanding Earned/ Yield/
Balance(1) Paid Rate
- -------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest-Earnings Assets:
Loans receivable(2)(3) $ 347,084 $ 28,640 8.25%
Mortgage-backed securities (2) 132,629 9,167 6.91
Investments 59,004 3,769 6.39
Other interest-earning assets(4) 9,533 787 8.26
Cash surrender value of life insurance 3,059 181 5.92
- -------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 551,309 $ 42,544 7.72%
===================================================================================================================
Interest-Bearing Liabilities:
Certificates of deposit $ 212,458 $ 12,405 5.84%
Passbook deposits 64,881 1,940 2.99
Demand and NOW deposits 47,664 889 1.87
Money market accounts 24,786 851 3.43
- -------------------------------------------------------------------------------------------------------------------
Total deposits 349,789 16,085 4.60
FHLB advances and notes payable 134,211 8,442 6.29
Collateralized mortgage obligations 1,380 210 15.22
Total interest-bearing liabilities $ 485,380 $ 24,737 5.10%
===================================================================================================================
Net interest income $ 17,807
===================================================================================================================
Net interest rate spread 2.62%
===================================================================================================================
Net interest-earning assets $ 65,929
===================================================================================================================
Net interest margin (5) 3.23%
===================================================================================================================
Average interest-earning assets to average
interest-bearing liabilities 113.58%
===================================================================================================================
</TABLE>
- --------
1 Based on average monthly balances.
2 Calculated net of deferred loan fees, loan discounts, loans in process
and loss reserves.
3 Includes loans held for sale.
4 Includes primarily short-term liquid assets.
5 Net interest income divided by average interest-earning assets.
11
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended June 30, 1995 Year Ended June 30, 1994
--------------------------------------------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance(1) Paid Rate Balance1 Paid Rate
- -------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-Earnings Assets:
Loans receivable (2)(3) $ 292,881 $ 23,191 7.92% $ 259,166 $ 21,105 8.14%
Mortgage-backed securities (2) 137,359 9,227 6.72 107,389 7,114 6.62
Investments 60,095 3,762 6.26 43,598 2,585 5.93
Other interest-earning assets (4) 27,501 1,423 5.17 25,528 948 3.71
Cash surrender value of life
insurance 2,882 180 6.25 2,800 181 6.46
- -------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets $ 520,718 $ 37,783 7.26% $ 438,481 $ 31,933 7.28%
===================================================================================================================
Interest-Bearing Liabilities:
Certificates of deposit $ 197,794 $ 10,035 5.07% $ 198,289 $ 9,804 4.94%
Passbook deposits 71,151 2,110 2.97 81,223 2,391 2.94
Demand and NOW deposits 46,330 955 2.06 46,684 1,011 2.17
Money market accounts 29,247 958 3.28 30,454 946 3.11
- -------------------------------------------------------------------------------------------------------------------
Total deposits 344,522 14,058 4.08 356,650 14,152 3.97
FHLB advances and notes payable 112,343 6,632 5.90 38,469 1,913 4.97
Collateralized mortgage obligations 1,877 294 15.66 2,910 326 11.20
- -------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities $ 458,742 $ 20,984 4.57% $ 398,029 $ 16,391 4.12%
===================================================================================================================
Net interest income $ 16,799 $ 15,542
===================================================================================================================
Net interest rate spread 2.69% 3.16%
===================================================================================================================
Net interest-earning assets $ 61,974 $ 40,452
===================================================================================================================
Net interest margin (5) 3.23% 3.54%
===================================================================================================================
Average interest-earning assets
to average interest-bearing
liabilities 113.51% 110.16%
===================================================================================================================
</TABLE>
- --------
1 Based on average monthly balances.
2 Based on average monthly balances.
3 Calculated net of deferred loan fees, loan discounts, loans in process
and loss reserves.
4 Includes primarily short-term liquid assets.
5 Net interest income divided by average interest-earning assets.
12
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- -------------------------------------------------------------------------------
Rate/Volume Analysis
The following table presents the dollar amount of changes in interest income and
interest expense for components of interest-earning assets and interest-bearing
liabilities. It distinguishes between the increase related to higher outstanding
balances and that due to the volatility of interest rates. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (i) changes in volume (i.e., changes in
volume multiplied by old rate), (ii) changes in rate (i.e., changes in rate
multiplied by old volume), (iii) changes in rate-volume (changes in rate
multiplied by the change in volume), and (iv) the net change.
<TABLE>
<CAPTION>
1996 vs. 1995 1995 vs. 1994
--------------------------------------- -------------------------------------
Increase/(Decrease) Due To: Increase/(Decrease) Due To:
--------------------------- ---------------------------
Total Total
Rate/ Increase Rate/ Increase
Volume Rate Volume (Decrease) Volume Rate Volume (Decrease)
- ------------------------------------------------------------------------------- -------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable $ 4,292 $ 978 $ 179 $ 5,449 $ 2,746 $ (583) $ (77) $ 2,086
Mortgage-backed securities (318) 268 (10) (60) 1,986 99 28 2,113
Investments (68) 77 (2) 7 978 144 55 1,177
Other interest-earning assets (930) 848 (554) (636) 73 373 29 475
Cash surrender value of life
insurance 11 (9) (1) 1 5 (6) 0 (1)
- ------------------------------------------------------------------------------- -------------------------------------
Total interest-earning
assets $ 2,987 $ 2,162 $ (388) $ 4,761 $ 5,788 $ 27 $ 35 $ 5,850
=============================================================================== =====================================
Interest-Bearing Liabilities:
Certificates of deposit $ 744 $ 1,515 $ 111 $ 2,370 $ (24) $ 258 $ (2) $ 232
Passbook deposits (186) 17 (1) (170) (297) 18 (2) (281)
Demand and NOW deposits 27 (91) (2) (66) (8) (49) 1 (56)
Money market accounts (146) 46 (7) (107) (37) 51 (3) 11
- ------------------------------------------------------------------------------- -------------------------------------
Total Deposits 439 1,487 101 2,027 (366) 278 (6) (94)
FHLB advances and notes payable 1,291 435 84 1,810 3,674 358 687 4,719
Collateralized mortgage obligations (78) (8) 2 (84) (116) 130 (46) (32)
- ------------------------------------------------------------------------------- -------------------------------------
Total interest-bearing
liabilities $ 1,652 $ 1,914 $ 187 $ 3,753 $ 3,192 $ 766 $ 635 $ 4,593
=============================================================================== =====================================
Changes to net interest income $ 1,335 $ 248 $ (575) $ 1,008 $ 2,596 $ (739) $(600) $ 1,257
=============================================================================== =====================================
</TABLE>
13
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- -------------------------------------------------------------------------------
The following table sets forth the weighted average yields on the Company's
interest-earning assets, the weighted average interest rates on interest-bearing
liabilities and the interest rate spread between the weighted average yields and
rates for the Company at the dates indicated. Non-accruing loans have been
included in the table as loans carrying a zero yield.
<TABLE>
<CAPTION>
At June 30,
------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average yield on:
Loans receivable (1)(2) 8.12% 8.00% 7.62%
Mortgage-backed securities(1) 7.06 7.08 6.66
Investments(1) 6.25 6.29 5.30
Other interest-earning assets 5.31 5.76 5.91
Cash surrender value of life insurance 6.50 6.15 6.50
- -----------------------------------------------------------------------------------------
Combined weighted average yield on interest-
earning assets 7.68 7.48 7.00
- -----------------------------------------------------------------------------------------
Weighted average rate paid on:
Certificates of deposit 5.82 5.88 4.48
Passbook deposits 3.00 3.03 2.94
Demand and NOW deposits 1.66 1.98 2.02
Money market accounts 3.46 3.46 3.13
- -----------------------------------------------------------------------------------------
Total deposits 4.54 4.62 3.86
FHLB advances and notes payable 6.26 6.28 5.39
Collateralized mortgage obligations 11.27 11.22 11.11
- -----------------------------------------------------------------------------------------
Combined weighted average rate paid on interest-
bearing liabilities 5.01 5.10 4.20
- -----------------------------------------------------------------------------------------
Interest rate spread 2.67% 2.38% 2.80%
- -----------------------------------------------------------------------------------------
</TABLE>
- --------
1 Calculated net of deferred loan fees, loan discounts and loans in
process.
2 Does not include interest on loans 90 days or more delinquent.
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
The following table summarizes the major components of the Company's net income
for the last three fiscal years and the changes which occurred between the
periods shown:
<TABLE>
<CAPTION>
Year Ended June 30,
Components of net income: 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
(In Thousands)
Amount Change Amount Change Amount
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 42,544 $ 4,761 $ 37,783 $ 5,850 $ 31,933
Interest expense 24,737 3,753 20,984 4,593 16,391
- -------------------------------------------------------------------------------------------------------------------
Net interest income 17,807 1,008 16,799 1,257 15,542
- -------------------------------------------------------------------------------------------------------------------
Provision for loan losses --- --- --- --- ---
Non-interest income 3,882 675 3,207 (304) 3,511
Non-interest expense (14,574) (1,169) (13,405) (1,467) (11,938)
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of change in accounting for income
taxes 7,115 514 6,601 (514) 7,115
Income taxes (2,556) (83) (2,473) 208 (2,681)
- -------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of change
in accounting for income taxes 4,559 431 4,128 (306) 4,434
Cumulative effect of change in accounting
for income taxes --- --- --- (795) 795
- -------------------------------------------------------------------------------------------------------------------
Net income $ 4,559 $ 431 $ 4,128 $(1,101) $ 5,229
===================================================================================================================
</TABLE>
Comparison of Operating Results for the Years Ended June 30, 1996
and June 30, 1995
General. Net income increased $431,000, or 10.4%, to $4.6 million for the fiscal
year ended June 30, 1996 from $4.1 million for the fiscal year ended June 30,
1995. The increase of $431,000 in net income resulted from an increase in net
interest income of $1.0 million and an increase in non-interest income of
$675,000, offset by an increase in non-interest expense of $1.2 million and an
increase in income tax expense of $83,000. Return on assets (ratio of net income
to average total assets) increased to 0.79% for the fiscal year ended June 30,
1996 from 0.76% for the fiscal year ended June 30, 1995. The interest rate
spread increased to 2.67% at June 30, 1996 from 2.38% at June 30, 1995. While
the Company has adopted interest rate risk policies in an effort to protect net
interest income from significant increases in short term interest rates, the
Company's net income could still be adversely affected by a narrowing of its net
interest rate spread. See Interest Rate Risk Management.
Interest Income. Interest income increased $4.7 million to $42.5 million for the
fiscal year ended June 30, 1996 from $37.8 million for the fiscal year ended
June 30, 1995. This increase resulted from an increase in the average balance of
interest earning assets of $30.6 million to $551.3 million during fiscal 1996
from $520.7 million during fiscal 1995 and an increase in the average yield on
interest-earning assets to 7.72% during fiscal 1996 from 7.26% during fiscal
1995.
Interest earned on loans receivable increased $5.4 million due primarily to a
$54.2 million increase in the average balance of loans receivable to $347.1
million during fiscal 1996 from $292.9 million during fiscal 1995. In
15
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- -------------------------------------------------------------------------------
addition, the average yield on loans increased to 8.25% during fiscal 1996 from
7.92% during fiscal 1995. The increase in the average balance of loans
receivable was the result of continued loan production in excess of principal
repayments and the sale and securitization of loans. The increase in yield was
the result of new loans being originated at rates greater than the average rate
of those loans being repaid.
Interest earned on mortgage-backed securities decreased $60,000 due primarily to
a $4.8 million decrease in the average balance of mortgage-backed securities
outstanding to $132.6 million during fiscal 1996 from $137.4 million during
fiscal 1995. The decrease in average balance was the result of management's
decision during the fiscal year to use a portion of the mortgage-backed
securities portfolio to partially fund the growth in loans receivable in an
attempt to earn yields greater than those available on mortgage-backed
securities.
Interest earned on investment securities increased $7,000. While the average
balance of investment securities decreased $1.1 million to $59.0 million during
fiscal 1996 from $60.1 million during fiscal 1995, the average yield on
investment securities increased to 6.39% during fiscal 1996 from 6.26% during
fiscal 1995.
Interest earned on other interest-earning assets and cash surrender value of
life insurance decreased $636,000 due primarily to a decrease in the average
balance of other interest-earning assets of $18.0 million to $9.5 million during
fiscal 1996 from $27.5 million during fiscal 1995. The decrease in the average
balance of other interest-earning assets was the result of management's decision
during the fiscal year to use the proceeds of other interest-earning assets to
fund growth in loans receivable.
Interest Expense. Total interest expense increased $3.7 million to $24.7 million
in fiscal 1996 from $21.0 million in fiscal 1995 due primarily to an increase in
rates paid on certificates of deposit and an increase in the average balance of
FHLB advances. Interest expense on deposits increased $2.0 million due primarily
to both an increase in the average balance of certificates of deposits of $14.7
million to $212.5 million during fiscal 1996 from $197.8 million during fiscal
1995 and an increase in the average rate paid on certificates of deposit to
5.84% during fiscal 1996 from 5.07% during fiscal 1995 as a result of depositors
electing to invest in longer-term higher-yielding certificates of deposit.
Interest expense on FHLB advances increased $1.8 million to $8.4 million in
fiscal 1996 from $6.6 million in fiscal 1995. This increase was primarily the
result of an increase of $21.9 million in the average balance of FHLB advances
to $134.2 million during fiscal 1996 from $112.3 million during fiscal 1995. The
new FHLB advances were obtained in an effort to fund asset growth and increase
net interest income.
Provisions for Loan Losses. The provision for loan losses is determined by
management as the amount to be added to the allowance for loan losses after net
charge-offs have been deducted to bring the allowance to a level which is
considered adequate to absorb losses inherent in the loan portfolio in
accordance with generally accepted accounting principles. The Company made no
additional provision for loan losses for the fiscal years ended June 30, 1996
and June 30, 1995. At June 30, 1996, the Company had $715,000 of non-performing
assets (representing 0.13% of total assets) compared to $573,000 at June 30,
1995 (representing 0.10% of total assets). At June 30, 1996, the Company had
allowance for loan losses to non-performing assets of 280.4% as compared to
350.4% at June 30, 1995. Management's evaluation of the adequacy of its loan
loss reserves, the quality of the loan portfolio and economic conditions in
Montana resulted in no additional provision for loan losses. 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.
Non-interest Income. Non -interest income increased $675,000 to $3.9 million in
fiscal 1996 from $3.2 million in fiscal 1995. The $675,000 increase in
non-interest income was primarily the result of increases in services fees, net
gain on sale of loans and securities available for sale and other operating
income of $358,000, $298,000 and $85,000, respectively, while loan origination
fees decreased $66,000. The $358,000 increase in service fees was primarily the
result of increases in checking fees and ATM transaction fees. The decrease in
loan origination fees of
16
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
$66,000 was the result of management's decision during the fiscal year to put
into portfolio, rather than sell, a substantial amount of new loan production
which results in the deferral, rather than immediate recognition, of loan
origination fees.
Non-interest Expense. Non-interest expense increased $1.2 million to $14.6
million in fiscal 1996 from $13.4 million in fiscal 1995. The $1.2 million
increase in non-interest expense was primarily the result of increases in net
occupancy expense of premises of $101,000, marketing and advertising of $103,000
and other operating expenses of $791,000. The increase in net occupancy expense
of premises was primarily the result of adding one new branch facility in the
Helena market area and the completion of a new office building in Hamilton which
replaced the existing facility. The increase in marketing and advertising was
related to the increased promotion of loan and deposit products. The increase in
other operating expenses were primarily associated with the increased costs of
the new checking and ATM programs, costs incurred for the engagement of a
consulting firm to assist in developing a long-term operations plan and the
related subsequent restructuring and centralization of operations and a $126,000
write-off of the older, existing branch facility in Hamilton.
Proposed Legislation. The deposits of the Bank are presently insured by the
Savings Association Insurance Fund (the "SAIF"), which together with the Bank
Insurance Fund (the "BIF") are the two insurance funds administered by the
Federal Deposit Insurance Corporation (the "FDIC"). As a result of the BIF
reaching its statutory reserve ratio, the FDIC revised the premium schedule for
BIF insured institutions to provide a range of 0% to 0.27% with an annual
minimum assessment of $2,000, essentially eliminating deposit insurance premiums
for many BIF-insured institutions. As a result of these adjustments, BIF insured
institutions now generally pay lower premiums than SAIF insured institutions.
The FDIC has noted that the SAIF is not expected to attain its designated
reserve ratio until the year 2002. As a result, SAIF insured members will
generally be subject to higher deposit insurance premiums than BIF insured
institutions until, all things being equal, the SAIF attains its required
reserve ratio. The effect of this disparity on the Bank and other SAIF members
is uncertain at this time. In order to eliminate this disparity, a number of
proposals to recapitalize the SAIF have been considered by the United States
Congress in 1995 and 1996. One proposal provides for a one-time assessment to be
imposed on all deposits assessed at SAIF rates, as of March 31, 1995, in order
to recapitalize the SAIF and eliminate the premium disparity. It also provides
for the eventual merger of the BIF and the SAIF. The special assessment rate is
anticipated to be approximately 0.70%. Based on the Bank's level of SAIF
deposits at March 31, 1995, and assuming a special assessment of 0.70%, the
Bank's assessment would be approximately $2.4 million on a pre-tax basis. If
such special assessment had been recorded as of June 30, 1996, on a proforma
basis, the tangible, core, and risk-based capital ratios of the Bank would have
been 11.05%, 11.05%, and 20.86%, respectively. The final form of any such
legislation has been the subject of continuing negotiation and cannot be
assured. If the legislation is enacted, however, this special assessment would
significantly increase non-interest expense and adversely affect the Bank's
results of operations. Conversely, depending on the Bank's capital level and
supervisory rating, and assuming, although there can be no assurance, that the
insurance premium levels for BIF and SAIF members are again equalized, deposit
insurance premiums could decrease significantly to the minimum assessment for
future periods.
Income Taxes. Income tax expense increased $83,000 to $2.6 million in fiscal
1996 from $2.5 million in fiscal 1995. The increase was the result of an
increase in income before income taxes and cumulative effect of change in
accounting for income taxes of $514,000 to $7.1 million in fiscal 1996 from $6.6
million in fiscal 1995, partially offset by a reduction in the effective state
income tax rate for the fiscal year 1996.
17
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
Comparison of Operating Results for the Years Ended June 30, 1995
and June 30, 1994
General. Net income decreased $1.1 million to $4.1 million for the fiscal year
ended June 30, 1995 from $5.2 million for the fiscal year ended June 30, 1994.
The decrease of $1.1 million in net income resulted from a decrease in
non-interest income of $304,000, an increase in non-interest expense of $1.5
million and a decrease in the one-time benefit of a cumulative change in
accounting for income taxes of $795,000. These decreases were partially offset
by an increase of $1.3 million in net interest income and a decrease in income
taxes of $208,000. Return on assets (ratio of net income to average total
assets) before cumulative effect of change in accounting for income taxes
declined to 0.76% for the fiscal year ended June 30, 1995 from 0.96% for the
fiscal year ended June 30, 1994. The interest rate spread declined to 2.38% at
June 30, 1995 from 2.80% at June 30, 1994. While the decline in interest rate
spread had the effect of reducing net interest income, the increase in net
interest income resulting from the increase in net interest-earning assets to
$62.0 million at June 30, 1995 from $40.5 million at June 30, 1994 more than
offset the negative effects of the decline in interest rate spread.
Interest Income. Interest income increased $5.9 million to $37.8 million for the
fiscal year ended June 30, 1995 from $31.9 million for the fiscal year ended
June 30, 1994. This increase resulted from an increase in the average balance of
interest earning assets of $82.2 million to $520.7 million during fiscal 1995
from $438.5 million during fiscal 1994.
Interest earned on loans receivable increased $2.1 million due primarily to a
$33.7 million increase in the average balance of loans receivable to $292.9
million during fiscal 1995 from $259.2 million during fiscal 1994, which was
partially offset by the effect of a reduction in the average yield on loans to
7.92% during fiscal 1995 from 8.14% during fiscal 1994. The increase in the
average balance of loans receivable was the result of continued loan production
in excess of principal repayments and the sale and securitization of loans. The
decline in yield was the result of new loans being originated at rates less than
the average rate of those loans being repaid.
Interest earned on mortgage-backed securities increased $2.1 million due
primarily to a $30.0 million increase in the average balance of mortgage-backed
securities outstanding to $137.4 million during fiscal 1995 from $107.4 million
during fiscal 1994. The increase in average balance was the result of FHLB
advances and funds received from the net proceeds of the stock conversion being
invested in mortgage-backed securities.
Interest earned on investment securities increased $1.2 million due primarily to
a $16.5 million increase in the average balance of investment securities to
$60.1 million during fiscal 1995 from $43.6 million during fiscal 1994. This
increase in investment securities was generally the result of the investment of
a portion of new FHLB advances.
Interest earned on other interest-earning assets and cash surrender value of
life insurance increased $474,000 due primarily to an increase in the average
yield on other interest-earning assets to 5.17% during fiscal 1995 from 3.71%
during fiscal 1994 as a result of an increase in interest rates.
Interest expense. Total interest expense increased $4.6 million to $21.0 million
in fiscal 1995 from $16.4 million in fiscal 1994 due to an increase in FHLB
advances. Interest expenses on borrowed funds increased $4.7 million to $6.6
million in fiscal 1995 from $1.9 million in fiscal 1994. This increase was
primarily the result of an increase of $73.8 million in the average balance of
FHLB advances to $112.3 million during fiscal 1995 from $38.5 million during
fiscal 1994. The new FHLB advances were obtained in an effort to fund asset
growth and increase net interest income. Interest expense on deposits decreased
$94,000 due to a $10.0 million decrease in the average balance of passbook
deposits to $71.2 million for fiscal 1995 from $81.2 million for fiscal 1994,
which was partially
18
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
offset by an increase in the average rate paid on certificates of deposit to
5.07% during fiscal 1995 from 4.94% during fiscal 1994.
Provisions for Loan Losses. The Company made no additional provision for loan
losses for the fiscal years ended June 30, 1995 and June 30, 1994. At June 30,
1995, the Company had $573,000 of non-performing assets (representing 0.10% of
total assets) compared to $850,000 at June 30, 1994 (representing 0.16% of total
assets). At June 30, 1995, the Company had allowance for loan losses to
non-performing assets of 350.4% as compared to 238.8% at June 30, 1994.
Management's evaluation of the adequacy of its loan loss reserves, the quality
of the loan portfolio and economic conditions in Montana resulted in no
additional provision for loan losses.
Non-interest income. Non-interest income decreased $304,000 to $3.2 million in
fiscal 1995 from $3.5 million in fiscal 1994. The primary reason for the decline
in non-interest income was a $417,000 decrease in gain on sale of loans, which
was partially offset by an increase in fees and service charges of $18,000 and
an increase of $95,000 in other non-interest income. The decline in gain on sale
of loans was primarily related to a lower volume of loans sold to the secondary
market resulting from an interest rate environment in fiscal 1995 that was
generally higher than the prior year in which there was a record volume of loan
originations. The increase in other non-interest income was primarily related to
a non-recurring receipt of $66,000 in reserve funds associated with federal
deposit insurance premiums paid by First Federal Savings and Loan Association of
Billings, which merged with the Bank in 1991.
Non-interest expense. Non-interest expense increased $1.5 million to $13.4
million in fiscal 1995 from $11.9 million in fiscal 1994. Salaries and employee
benefits increased $732,000 due primarily to an increase in health insurance
premiums of $105,000, an increase in retirement plan expense of $273,000, which
previously had been over-funded, and an increase of $267,000 in employee stock
benefit plan expense because such plans were in effect for the full fiscal year
1995 as compared to one-half of fiscal 1994. Occupancy and equipment expense,
data processing expense, marketing and advertising, and other operating expense
increased $53,000, $23,000, $22,000 and $669,000, respectively. The increase in
other operating expense was primarily the result of an increase in the Office of
Thrift Supervision ("OTS") examination fees of $15,000, professional fees of
$140,000 and a decrease of $475,000 in the deferral of expenses related to loans
closed and not sold as a result of the decrease in the amount of loans closed in
fiscal 1995 as compared to fiscal 1994. Federal insurance premium expense
decreased $32,000 due to a decrease in deposit balances in fiscal 1995 as
compared to fiscal 1994.
Income Taxes. Income tax expense decreased $208,000 to $2.5 million in fiscal
1995 from $2.7 million in fiscal 1994. The decrease was the result of a decrease
in income before income taxes and cumulative effect of change in accounting for
income taxes of $514,000 to $6.6 million in fiscal 1995 from $7.1 million in
fiscal 1994.
19
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
LOAN QUALITY
The following table sets forth the amounts and categories of non-performing
assets in the Company's loan portfolio. For all periods presented, the Company
did not have any troubled debt restructuring which involved forgiving a portion
of interest or principal on any loans or making loans at a rate materially less
than market rates. Foreclosed assets include assets acquired in settlement of
loans, and are recorded at the lower of the related loan balance, less any
specific allowance for loss, or fair value at the date of foreclosure.
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------
1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
Real Estate:
One- to four-family $ 21 $ --- $119 $253 $ 170
Multi-family --- --- --- --- ---
Commercial --- 166 207 43 66
Construction --- --- --- --- ---
Consumer 383 153 9 109 ---
- --------------------------------------------------------------------------------------------------------
Total 404 319 335 405 236
- --------------------------------------------------------------------------------------------------------
Accruing loans delinquent 90 days or more:
Real Estate:
One- to four-family 288 253 425 367 701
Multi-family --- --- --- --- ---
Commercial --- --- --- --- ---
Construction --- --- --- --- ---
Consumer 23 1 5 11 56
- --------------------------------------------------------------------------------------------------------
Total 311 254 430 378 757
- --------------------------------------------------------------------------------------------------------
Foreclosed assets:
Real Estate:
One- to four-family --- --- 85 64 1,243
Multi-family --- --- --- --- 56
Commercial --- --- --- --- 1,973
Construction --- --- --- --- ---
- --------------------------------------------------------------------------------------------------------
Total --- --- 85 64 3,272
- --------------------------------------------------------------------------------------------------------
Total non-performing assets $ 715 $ 573 $850 $847 $4,265
- --------------------------------------------------------------------------------------------------------
</TABLE>
Total non-performing assets increased $142,000 to $715,000 at fiscal year end
June 30, 1996 from $573,000 at fiscal year end June 30, 1995. The $715,000 of
non-performing assets at June 30, 1996 includes $270,000 of non-accruing
consumer loans 100% secured by loans on savings accounts. For the fourth year in
a row, the Company has had minimal foreclosed assets with no foreclosed assets
for the past two fiscal year-ends 1996 and 1995. In addition to the
non-performing loans and foreclosed assets set forth in the preceding table, as
of June 30, 1996, there was also an aggregate of $199,000 in net book value of
loans identified by the Company with respect to which information known about
the possible credit problems of the borrowers or 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.
20
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- -------------------------------------------------------------------------------
INTEREST RATE RISK MANAGEMENT
In an attempt to manage its exposure to changes in interest rates, management
closely monitors the Bank's interest rate risk position. The Bank has an
Asset/Liability Management Committee consisting of certain members of senior
management and two non-employee members of the Board of Directors (the "Board").
This committee meets to review the Bank's interest rate risk position and makes
recommendations for adjusting such position to the Board. In addition, the Board
reviews on a quarterly basis the Bank's interest rate risk position, including
simulations of the effect on the Bank's capital of various interest rate
scenarios.
The Bank has an Investment Committee consisting of certain members of the senior
management which meets at least monthly to review the Bank's interest rate risk
position using the OTS and the Bank's internal model simulating the effect on
the Bank's capital in various interest rate scenarios. The Investment Committee
makes recommendations for adjusting such position to the Bank's Asset/Liability
Management Committee. The Asset/Liability Management Committee reviews the
Bank's investments, mortgage-backed securities, loan portfolio, loan production,
borrowed funds and deposit structure. The Committee also develops investment
strategies and oversees the timing and implementation of transactions to assure
attainment of Board objectives in the most effective manner.
In managing its asset/liability mix, the Bank, depending on the relationship
between long- and short-term interest rates, market conditions and consumer
preference, may place somewhat greater emphasis on maximizing its net interest
margin than on more closely matching the interest rate sensitivity of its assets
and liabilities in an effort to improve its net interest income Management
believes that the increased net interest income resulting from a mismatch in the
maturity of its asset and liability portfolios can, during periods of declining
or stable interest rates, provide high enough returns to justify the increased
exposure to negative effects which can result from sudden and unexpected
increases in interest rates.
To the extent consistent with its interest rate spread objectives, the Bank
attempts to reduce its interest rate risk and has taken a number of steps to
more closely match the maturities of its assets and liabilities. The Bank has
focused its lending efforts on the origination for its portfolio of adjustable
rate mortgages ("ARMs") and 15-year, fixed rate residential mortgages. At June
30, 1996, approximately $277.2 million, or 74.4% of the Bank's one- to
four-family residential loan and mortgage-backed securities portfolio, consisted
of ARMs and 15 year or less fixed rate mortgages. The Bank has increased its
portfolio of consumer and other loans having terms to maturity that are
significantly shorter than residential loans.
In addition, depending on the Bank's interest rate risk position, the Bank also
sells or converts to Federal Home Loan Mortgage Corporation ("FHLMC")
participation certificates ("PCs") newly originated 30-year, fixed-rate
residential loans. The Bank securitizes such loans to limit credit risk and
increase it's liquidity. The Bank's policy is to carry FHLMC PCs created in this
manner in its "available-for-sale" portfolio until a rising interest rate
scenario or the need for liquidity dictates their sale.
Additionally, since the mid-1980's, the Bank has used interest rate exchange
(i.e., "swap" and "cap") agreements to assist in synthetically extending the
life of interest-bearing liabilities. Under the Bank's current investment
policy, the Bank may engage in swap and cap agreements with the Federal Home
Loan Bank ("FHLB") of Seattle or certain investment firms listed in the Bank's
investment policy.
At June 30, 1996, the Bank was a party to seven interest rate exchange
agreements, all of which were agreements with the FHLB of Seattle covering a
total of $35.0 million in notional principal amounts. Historically, the swaps
and caps have been used to reduce the Bank's cost of funds during periods of
high interest rates; however, in the interest rate environment experienced
during most of fiscal 1996, these swaps and caps had the effect of increasing
the Bank's cost of funds. During fiscal 1996, the increase in the cost of funds
attributable to these swaps and caps was $331,000. The Bank's interest rate caps
expire in 1997 and 1999.
At June 30, 1996 the Bank did not have any interest rate swap agreements in
place.
21
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
The Board of Directors reviews the level of interest rate risk management
activity on a monthly basis. Currently, the Board of Directors has authorized
management to engage in interest rate swaps and caps with notional principal of
up to $108 million. An increase in this type of activity may result in a
decrease in the Bank's income in the future if interest rates do not rise
significantly. See Note 14 of the Notes to Consolidated Financial Statements.
OTS regulations provide a Net Portfolio Value ("NPV") approach to the
quantification of interest rate risk. In essence, this approach calculates the
difference between the present value of expected cash flows from assets and the
present value of expected cash flows from liabilities, as well as cash flows
from off balance sheet contracts. Under OTS regulations, an institution's
"normal" level of interest rate risk in the event of this assumed change in
interest rates is a decrease in the institution's NPV in an amount not exceeding
2% of the present value of its assets. The OTS has adopted, but temporarily
postponed implementation until further notice, a final rule requiring every
thrift institution with greater than "normal" interest rate exposure to take a
deduction from their total capital available to determine if they meet their
risk-based capital requirement. The amount of that deduction is one-half of the
difference between (a) the institution's actual calculated exposure to the 200
basis point interest rate increase or decrease (whichever results in the greater
proforma decrease in NPV) and (b) its "normal" level of exposure which is 2% of
the present value of its assets. At June 30, 1996, the latest date such
information was available from the OTS, 2.0% of the present value of the Bank's
assets was approximately $11.2 million, which was less than the $15.8 million
decrease in NPV resulting from a 200 basis point change in interest rates as
calculated by the OTS. As a result, the Bank would be required to make a
deduction from total capital in the amount of $2.3 million in calculating its
risk-based capital requirement had such rule been in effect on June 30, 1996.
Based on the Bank's excess risk-based capital of $39.9 million at June 30, 1996,
notwithstanding this $2.3 million deduction from capital, the Bank would
continue to exceed its risk-based capital requirement. See Liquidity and Capital
Resources.
The Bank's Asset/Liability Management Committee dictates acceptable limits on
the amount of change in NPV given certain changes in interest rates. Presented
below as of June 30, 1996, the latest date such information is available, is an
OTS analysis of the Bank's interest rate risk as measured by changes in NPV for
instantaneous and sustained parallel shifts in the yield curve, in 100 basis
point increments, up and down 300 basis points and compared to Board policy
limits. Assumptions used in calculating the amounts in this table are OTS
assumptions.
Change in Actual at June 30, 1996
Interest Rate Board Limit as Measured by OTS
(Basis Points) % Change
---------------------------------------
$ Change % Change
- -------------------- --------------- ---------------------- ----------------
(Dollars in Thousands)
+300 -35.0% $(24,784) -33.0%
+200 -25.0 (15,737) -21.0
+100 -12.0 (7,478) -10.0
0 0.0 0 0.0
-100 -12.0 5,600 8.0
-200 -25.0 7,653 10.0
-300 -35.0 7,711 10.0
As indicated in the table above, management has structured its assets and
liabilities to attempt to control its exposure to interest rate risk. In the
event of a 300 basis point change in interest rates, the Bank would experience a
10.0% increase in NPV in a declining rate environment and a 33.0% decrease in a
rising rate environment. During periods of rising rates, the value of monetary
assets and monetary liabilities declines. Conversely, during periods of falling
rates, the value of monetary assets and liabilities increases. However, the
amount of change in value of specific assets and liabilities due to changes in
rates is not the same in a rising rate environment as in a falling rate
environment (i.e., the amount of value increase under a specific rate decline
may not equal the amount of value decrease under an identical upward rate
movement). The 33.0% decrease in NPV as a result of a 300 basis point increase
in interest rates indicates that the Bank is susceptible to a reduction in net
interest income in a rising interest rate environment due to interest-bearing
liabilities potentially repricing more rapidly than interest-earning assets.
22
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
In evaluating the Bank's exposure to interest rate risk, certain shortcomings
inherent in the method of analysis presented in the foregoing table must be
considered. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Further, in the event of a change in interest rates, prepayments and
early withdrawal levels would likely deviate significantly from those assumed in
calculating the table. Finally, the ability of many borrowers to service their
debt may decrease in the event of an interest rate increase. As a result, the
actual effect of changing interest rates may differ from that presented in the
foregoing table.
Liquidity and Capital Resources
The Company's primary sources of funds are new deposits and the payment of
principal and interest on loans, mortgage-backed securities and maturing
investments. While maturities and scheduled amortization of loans and
mortgage-backed securities are a predictable source of funds, deposit flows and
mortgage prepayments are greatly influenced by market interest rates, economic
conditions and competition. In a period of declining interest rates, it is
anticipated that mortgage prepayments would increase. As a result, these
proceeds from mortgage prepayments would be invested in lower yielding loans or
other investments which have the effect of reducing interest income. In a period
of rising interest rates, it is anticipated that mortgage prepayments would
decrease and the proceeds from such prepayments would be invested in higher
yielding loans or investments which would have the effect of increasing interest
income.
The Company's liquidity, represented by cash and cash equivalents, is a result
of its operations, investing and financing activities. These activities are
summarized below for the fiscal years ended June 30, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
For the Year Ended June 30,
---------------------------------------
1996 1995 1994
(In Thousands)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income $ 4,559 $ 4,128 $ 5,229
Adjustments to reconcile net income to net
cash provided by operating activities 14,998 24,430 26,377
- --------------------------------------------------------------------------------------------
Net cash provided by operating activities 19,557 28,558 31,606
Net cash provided (used) by investing activities (2,018) (57,312) (121,901)
Net cash provided (used) by financing activities (19,614) 27,182 92,783
- --------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents (2,075) (1,572) 2,488
Cash and cash equivalents at beginning of period 15,374 16,946 14,458
- --------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 13,299 $ 15,374 $16,946
- --------------------------------------------------------------------------------------------
</TABLE>
The primary investing activities of the Company are the origination of loans and
the purchase of investment and mortgage-backed securities. During the fiscal
years ended June 30, 1996, 1995 and 1994, the Company's loan originations
totaled $165.5 million, $129.8 million and $214.4 million, respectively. Loan
originations increased in the last fiscal year due to an increase in loan
refinancing activity and an increase in commercial real estate loans and
consumer loans resulting from an interest rate environment that was generally
lower than the prior year and management's emphasis on increasing the commercial
real estate and consumer loan portfolio.
Purchases of mortgage-backed securities totaled $21.9 million, $21.5 million and
$93.3 million for fiscal years ended June 30, 1996, 1995 and 1994, respectively.
Purchases of investment securities totaled $36.2 million, $32.6 million and
$29.2 million for the fiscal years ended June 30, 1996, 1995 and 1994,
respectively.
23
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
During the fiscal years ended June 30, 1996, 1995 and 1994, these activities
were funded primarily by principal repayments on loans and mortgage-backed and
investment securities and the maturity of investment securities and the sale of
loans, mortgage-backed securities and investments totaling $232.3 million,
$137.8 million and $226.9 million for the respective fiscal years.
The major sources of cash flows from financing activities are deposits into
savings accounts and additional borrowings. The major uses of cash flows from
financing activities are withdrawals from savings accounts and payments on
borrowings. For the fiscal year ended June 30, 1996 the net decrease in cash
flows from financing activities was $19.6 million and a net increase of $27.2
million and $92.8 million for the fiscal years ended June 30, 1995 and 1994
respectively. In addition, in fiscal 1994 $39.5 million was received from the
sale of stock in connection with the Conversion, net of offering costs. The net
cash provided from these financing activities was used to offset the net cash
used in investing activities.
The Bank is required to maintain minimum levels of liquid assets as defined by
OTS regulations. This requirement, which may be waived at the direction of the
OTS depending upon economic conditions and deposit flows, is based upon a
percentage of deposits and short-term borrowings. The required ratio is 5%. The
Bank's regulatory liquidity ratio was 9.3% at June 30, 1996.
The Bank's most liquid assets are cash and cash in banks and highly liquid,
short-term investments. The levels of these assets are dependent on the Bank's
operating, financing, lending, and investing activities during any given period.
At June 30, 1996, the Bank's regulatory liquid assets totaled $35.0 million.
Liquidity management for the Bank is both a daily and long term function of the
Company's management strategy. Excess funds are generally invested in short-term
investments such as FHLB certificates of deposit. If the Bank should require
funds beyond its ability to generate them internally, additional sources of
funds are available through the use of FHLB of Seattle advances. At June 30,
1996, the Bank had outstanding borrowings of $125.8 million, which include
$124.6 million of FHLB advances and $1.6 million of collateralized mortgage
obligations issued by the Bank's finance subsidiary.
At June 30, 1996, the Bank had outstanding commitments to originate loans of
$20.5 million, of which $18.7 million was at fixed interest rates. These loans
are to be secured by properties located in its primary market areas. The Bank
anticipates that it will have sufficient funds available to meet its current
loan commitments. Certificates of deposit scheduled to mature in one year or
less from June 30, 1996 totaled $134.8 million.
24
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
At June 30, 1996, the Bank exceeded all of its capital requirements on a fully
phased-in basis. The following table sets forth Western Federal's compliance
with its capital requirements at June 30, 1996.
At June 30, 1996
---------------------------------
Amount(1) Percent
- ------------------------------------------------------------------------------
(Dollars in Thousands)
Tangible Capital:
Capital level(2) $ 61,977 11.29%
Requirement 8,234 1.50
- ------------------------------------------------------------------------------
Excess $ 53,743 9.79%
==============================================================================
Core Capital:
Capital level(3) $ 61,977 11.29%
Requirement 16,467 3.00
- ------------------------------------------------------------------------------
Excess $ 45,510 8.29%
==============================================================================
Fully Phased-In Risk-Based Capital:
Capital level(4) $ 63,923 21.26%
Requirement 24,058 8.00
- ------------------------------------------------------------------------------
Excess $ 39,865 13.26%
==============================================================================
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto presented herein have
been prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the changes in the relative purchasing
power of money over time due to inflation. The impact of inflation is reflected
in the increased cost of the Company's operations. Unlike most industrial
companies, nearly all the assets and liabilities of the Company are monetary in
nature. As a result, interest rates have a greater impact on the Company's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the price
of goods and services.
Dividends
The Board of Directors intends to continue the payment of quarterly cash
dividends, dependent on the results of operations and financial condition of the
Bank, tax considerations, industry standards, economic conditions, general
business practices and other factors. The Company's ability to pay dividends is
dependent on the dividend payments it receives from its subsidiary, Western
Federal, which are subject to regulations and the Bank's continued compliance
with all regulatory capital requirements. See Note 2 of the Notes to
Consolidated Financial Statements for information regarding limitations of the
Bank's ability to pay dividends to the Company.
- --------
1 Tangible and core capital levels are shown as a percentage of adjusted total
assets; risk-based capital levels are shown as a percentage of risk-weighted
assets.
2 The Bank's investment in excludable subsidiaries is excluded for purposes of
calculating regulatory capital.
3 In April 1991, the OTS proposed a core capital requirement for savings
associations comparable to the requirement for national banks that became
effective December 31, 1990. The proposal calls for an OTS core capital
requirement of at least 3% of total adjusted assets for thrifts that receive
the highest supervisory rating for safety and soundness, with a 4% to 5% core
capital requirement for all other thrifts.
4 Includes $2.0 million of general valuation allowances.
25
<PAGE>
WESTERFED FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Financial Statements
Three years ended June 30, 1996
(With Independent Auditors' Report Thereon)
<PAGE>
Independent Auditor's Report
- -----------------------------------------------------------------------------
LOGO KPMG Peat Marwick LLP
The Board of Directors and Stockholders
WesterFed Financial Corporation:
We have audited the accompanying consolidated balance sheets of WesterFed
Financial Corporation and subsidiaries as of June 30, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the years in the three-year period ended June 30, 1996. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of WesterFed Financial
Corporation and subsidiaries as of June 30, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1996 in conformity with generally accepted accounting
principles.
As explained in note 1 to the consolidated financial statements, the Corporation
changed its method of accounting for securities on July 1, 1994, to adopt the
provisions of the Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Additionally, the Corporation changed its method of
accounting for income taxes on July 1, 1993, to adopt the provisions of the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes."
Billings, Montana
July 26, 1996, except for note 22 which is as of September 24, 1996.
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Consolidated Balance Sheets
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in thousands, except share and per share data)
June 30,
-------------------------------
1996 1995
-------------------------------
<S> <C> <C>
Assets
Cash and due from banks......................................................... $ 7,829 7,173
Interest-bearing due from banks................................................. 5,470 8,201
----------- -----------
Cash and cash equivalents.............................................. 13,299 15,374
Interest-bearing deposits....................................................... 3,000 2,102
Investment securities available-for-sale........................................ 35,637 49,577
Investment securities, at amortized cost (estimated market value of
$9,399 in 1996 and $12,964 in 1995)........................................ 9,347 12,794
Stock in Federal Home Loan Bank of Seattle, at cost............................. 7,471 6,750
Mortgage-backed securities available-for-sale................................... 44,909 64,900
Mortgage-backed securities, at amortized cost (estimated market value of
$59,278 in 1996 and $79,303 in 1995)....................................... 60,038 78,925
Loans available-for-sale........................................................ 3,967 2,960
Loans receivable, net........................................................... 364,226 310,161
Accrued interest receivable..................................................... 3,695 3,875
Premises and equipment, net..................................................... 13,758 11,372
Cash surrender value of life insurance policies................................. 3,183 2,951
Other assets.................................................................... 1,401 1,544
----------- -----------
$ 563,931 563,285
=========== ===========
- ----------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Deposits .................................................................. $ 350,212 344,155
Borrowed funds.................................................................. 125,838 134,704
Advances from borrowers for taxes and insurance................................. 3,255 3,309
Income taxes.................................................................... 1,961 2,162
Accrued interest payable........................................................ 1,219 1,247
Accrued expenses and other liabilities.......................................... 2,839 2,562
----------- -----------
Total liabilities...................................................... 485,324 488,139
----------- -----------
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized;
none outstanding....................................................... - -
Common stock, $.01 par value, 10,000,000 shares authorized;
4,628,818 shares issued, 4,395,204 outstanding in 1996; 4,628,818
shares issued, 4,396,456 outstanding in 1995........................... 46 46
Paid-in capital............................................................ 45,451 45,232
Common stock acquired by ESOP/RRP.......................................... (3,558) (4,271)
Treasury stock, at cost ................................................... (3,079) (3,066)
Net unrealized gain (loss) on securities available-for-sale................ (226) 295
Retained earnings.......................................................... 39,973 36,910
----------- -----------
Total stockholders' equity............................................. 78,607 75,146
----------- -----------
Commitments and contingencies
$ 563,931 563,285
=========== ===========
Book value per common share................................................ $ 17.88 17.09
=========== ===========
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
WesterFed Financial Corporation and Subsidiaries
<TABLE>
<CAPTION>
Consolidated Statements of Income
- ----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except share and per share data)
Year Ended June 30,
-----------------------------------------
1996 1995 1994
-----------------------------------------
<S> <C> <C> <C>
Interest income:
Loans receivable.................................................. $ 28,640 23,191 21,105
Mortgage-backed securities available-for-sale..................... 4,214 3,482 -
Mortgage-backed securities........................................ 4,953 5,745 7,114
Investment securities available-for-sale.......................... 2,891 3,502 -
Investment securities............................................. 878 260 2,585
Interest-bearing deposits......................................... 787 1,423 948
Other............................................................. 181 180 181
---------- ---------- ----------
Total interest income......................................... 42,544 37,783 31,933
---------- ---------- ----------
Interest expense:
NOW and money market demand....................................... 1,740 1,913 1,957
Savings ......................................................... 1,940 2,110 2,391
Certificates of deposit........................................... 12,074 9,653 9,106
Cost of Swaps and Caps............................................ 331 382 698
---------- ---------- ----------
16,085 14,058 14,152
Advances from FHLB - Seattle and other borrowed funds............. 8,652 6,926 2,239
---------- ---------- ----------
Total interest expense........................................ 24,737 20,984 16,391
---------- ---------- ----------
Net interest income........................................... 17,807 16,799 15,542
Provision for loan losses.............................................. - - -
---------- ---------- ----------
Net interest income after provision for loan losses........... 17,807 16,799 15,542
---------- ---------- ----------
Non-interest income:
Loan origination fees............................................. 348 414 505
Service fees...................................................... 2,120 1,762 1,653
Net gain on sale of loans and securities available-for-sale....... 577 279 696
Other............................................................. 837 752 657
---------- ---------- ----------
Total non-interest income..................................... 3,882 3,207 3,511
---------- ---------- ----------
Non-interest expenses:
Compensation and employee benefits................................ 7,523 7,446 6,430
Net occupancy expense of premises................................. 1,450 1,349 1,283
Equipment and furnishings expense................................. 643 553 566
Data processing expenses.......................................... 632 621 598
Federal insurance premium......................................... 806 806 838
Marketing and advertising......................................... 559 456 434
Net expense (income) from operation of real estate owned.......... (1) 3 (24)
Other............................................................. 2,962 2,171 1,813
---------- ---------- ----------
Total non-interest expense.................................... 14,574 13,405 11,938
---------- ---------- ----------
Income before income taxes and cumulative effect of change
in accounting for income taxes........................... 7,115 6,601 7,115
Income taxes ......................................................... 2,556 2,473 2,681
---------- ---------- ----------
Income before cumulative effect of accounting change.......... 4,559 4,128 4,434
Cumulative effect of change in accounting for income taxes............. - - 795
---------- ---------- ----------
Net income.................................................... $ 4,559 4,128 5,229
========== ========== ==========
Net income per share:
Income before cumulative effect of change in accounting
for income taxes.............................................. 1.07 .96 1.01
Cumulative effect of change in accounting for income taxes........ - - .18
---------- ---------- ----------
Net income per share................................................... $ 1.07 .96 1.19
========== ========== ==========
Weighted average common shares outstanding for earnings per share...... 4,259,109 4,313,615 4,380,040
=========== ========== ==========
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
WesterFed Financial Corporation and Subsidiaries
<TABLE>
<CAPTION>
Consolidated Statements of Stockholders' Equity
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except share data)
Net
unrealized
gain (loss)
on securities
Common Paid-in ESOP/ Treasury available- Retained
stock capital RRP stock for-sale earnings Total
------- -------- ----- -------- ------------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1993..................... $ - - - - - 29,024 29,024
Net income................................... - - - - - 5,229 5,229
Net proceeds from stock offering -
4,081,724 shares........................ 41 39,467 - - - - 39,508
Common stock acquired by ESOP -
354,933 shares ......................... 3 3,546 (3,549) - - - -
Common stock acquired by RRP -
184,200 shares ......................... 2 1,890 (1,892) - - - -
Principal payment made by ESOP............... - 131 253 - - - 384
Amortization of RRP.......................... - - 237 - - - 237
Shares forfeited by RRP participants
(156 shares) ............................ - - 1 (1) - - -
Cash dividends declared ($.05 per share)..... - - - - - (214) (214)
---- ------- ------ ------- -------- -------- --------
Balance at June 30, 1994..................... 46 45,034 (4,950) (1) - 34,039 74,168
Net unrealized loss on securities
available-for-sale, net of income
taxes of $127 as of July 1, 1994........ - - - - (200) - (200)
Net income................................... - - - - - 4,128 4,128
Common stock acquired by RRP - 2,927 shares.. - 29 (29) - - - -
Principal payment made by ESOP............... - 169 227 - - - 396
Amortization of RRP.......................... - - 473 - - - 473
Shares forfeited by RRP participants -
801 shares ............................. - - 8 (8) - - -
Purchase of treasury stock, at cost -
231,405 shares ......................... - - - (3,057) - - (3,057)
Net change in unrealized gain (loss) on
securities available-for-sale, net
of income taxes of $312................. - - - 495 - 495
Cash dividends declared ($.30 per share)..... - - - - - (1,257) (1,257)
---- ------- ------ ------- -------- -------- --------
Balance at June 30, 1995..................... 46 45,232 (4,271) (3,066) 295 36,910 75,146
Net income................................... - - - - - 4,559 4,559
Principal payment made by ESOP............... - 219 227 - - - 446
Amortization of RRP.......................... - - 473 - - - 473
Shares forfeited by RRP participants -
1,252 shares - - 13 (13) - - -
Net change in unrealized gain (loss) on
securities available-for-sale, net
of income taxes of $317................. - - - - (521) (521)
Cash dividends declared ($.36 per share)..... - - - - - (1,496) (1,496)
---- ------- ------ ------- -------- -------- --------
Balance at June 30, 1996..................... $ 46 45,451 (3,558) (3,079) (226) 39,973 78,607
==== ======= ====== ======= ======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
WesterFed Financial Corporation and Subsidiaries
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
- ----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Year Ended June 30,
--------------------------------------------
1996 1995 1994
--------------------------------------------
<S> <C> <C> <C>
Net cash provided by operating activities............................ $ 19,557 28,558 31,606
---------- ---------- ---------
Cash flows from investing activities:
Net change in interest-bearing deposits......................... (898) 216 4,009
Purchase of FHLB stock.......................................... (200) (622) -
Purchases of investment securities.............................. (4,594) (12,772) (29,236)
Proceeds from maturities of investment securities............... 8,100 17,000 16,284
Purchase of investment securities available-for-sale............ (31,325) (19,828) -
Proceeds from sales of investment securities available-for-sale. 3,840 4,470 -
Principal payments from investment securities available-for-sale 1,102 695 -
Proceeds from maturities of investment securities
available-for-sale ......................................... 40,536 - -
Purchases of mortgage-backed securities......................... (990) (9,905) (87,047)
Principal payments from mortgage-backed securities.............. 8,896 7,764 29,418
Purchase of mortgage-backed securities available-for-sale....... (21,274) (11,596) -
Proceeds from sale of mortgage-backed securities
available-for-sale.......................................... 30,862 10,114 -
Principal payments from mortgage-backed securities
available-for-sale.......................................... 20,721 9,477 -
Purchase of mortgage-backed securities held-for-sale............ - - (6,310)
Proceeds from sale of mortgage-backed securities held-for-sale.. - - 63,057
Principal payments from mortgage-backed securities
held-for-sale............................................... - - 1,507
Net change in loans receivable.................................. (53,541) (50,823) (112,484)
Proceeds from sales of real estate owned........................ - 480 68
Purchases of premises and equipment............................. (3,253) (1,982) (1,273)
Proceeds from cancellation of life insurance policies........... - - 106
---------- ---------- ---------
Net cash used by investing activities.................. (2,018) (57,312) (121,901)
---------- ---------- ---------
Cash flows from financing activities:
Net change in deposits.......................................... (9,667) (18,599) (15,935)
Proceeds from borrowings........................................ 77,720 115,800 89,600
Payments on borrowings.......................................... (86,658) (66,290) (20,099)
Net change in advances from borrowers for taxes
and insurance............................................... (54) 298 (77)
Sale of common stock, net of offering costs..................... - - 39,508
Dividends paid to stockholders.................................. (955) (970) (214)
Payments to acquire treasury stock.............................. - (3,057) -
---------- ---------- ---------
Net cash provided (used) by financing activities....... (19,614) 27,182 92,783
---------- ---------- ---------
Net increase (decrease) in cash and cash equivalents................. (2,075) (1,572) 2,488
Cash and cash equivalents at beginning of year....................... 15,374 16,946 14,458
---------- ---------- ---------
Cash and cash equivalents at end of year............................. $ 13,299 15,374 16,946
========== ========== =========
Supplemental disclosure of cash flow information: Payments during
the period for:
Interest.................................................... $ 8,938 6,948 2,820
Income taxes, net........................................... 2,441 1,964 2,376
========== ========== =========
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- -------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statement Presentation
The consolidated financial statements of WesterFed Financial Corporation
(WesterFed) and subsidiaries (collectively, the Bank) have been prepared in
conformity with generally accepted accounting principles. In preparing the
consolidated financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the balance sheet and revenues and expenses for the period.
Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for loan losses and
the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances
for loan losses, management generally obtains independent appraisals for
significant properties.
A substantial portion of the Bank's loans are secured by real estate in the
State of Montana. In addition, real estate owned is located in the same area.
Accordingly, as with most financial institutions in the market area, the
collectibility of a substantial portion of the carrying value of the Bank's loan
portfolio and real estate owned is susceptible to changes in market conditions.
Management believes the allowances for loan and real estate owned losses are
adequate. While management uses available information to recognize losses on
loans and real estate owned, future additions to the allowances may be necessary
based on changes in economic conditions in the Bank's market area and the
composition of the loan portfolio. In addition, various regulatory agencies, as
an integral part of their examination process, periodically review the Bank's
allowances for loan losses and valuation of real estate owned. Such agencies may
require the Bank to recognize additions to the allowances based on their
judgments about information available to them at the time of their examination.
Principles of Consolidation
The consolidated financial statements include the accounts of WesterFed and its
wholly-owned subsidiary, Western Federal Savings Bank (WFSB). Non-bank
subsidiaries of WFSB are WesterFed Service Corporation, Monte Mac I, Inc.,
WesterFed Insurance Services and Service Corporation of Montana.
<PAGE>
All significant intercompany balances and transactions have been eliminated in
consolidation.
Cash Equivalents
For purposes of the statements of cash flows, cash equivalents consist of
interest-bearing due from banks.
Investment and Mortgage-Backed Securities
Investment and mortgage-backed securities available for sale include securities
that management intends to use as part of its overall asset/liability management
strategy and that may be sold in response to changes in interest rates and
resultant prepayment risk and other related factors. Securities available for
sale are carried at fair value, and unrealized gains and losses (net of related
tax effects) are excluded from earnings but are included in stockholders'
equity. Upon realization, such gains and losses will be included in earnings
using the specific identification method. Investment securities and
mortgage-backed securities, other than those designated as available for sale or
trading, are comprised of debt securities for which the Bank has positive intent
and ability to hold to maturity and are carried at cost, adjusted for
amortization of premiums and accretion of discounts using the level-yield method
over the estimated lives of the securities. On July 1, 1994, the Bank adopted
the provisions of Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
Trading account securities are adjusted to market value through earnings. There
were no trading account securities during the years ended June 30, 1996 or 1995.
Management determines the appropriate classification of investment and
mortgage-backed securities as either available for sale, held to maturity, or
held for trading at the purchase date.
Loans Receivable
Loans receivable, other than loans available for sale, are stated at the unpaid
principal balance, net of premiums, unearned discounts, net deferred loan
origination fees, and the allowance for loan losses.
1
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- -------------------------------------------------------------------------------
Loans are placed on nonaccrual status when collection of principal or interest
is considered doubtful (generally loans past due 90 days or more). Interest
income previously accrued on these loans, but not yet received, is reversed in
the current period. Interest subsequently recovered is credited to income in the
period collected. Discounts are accreted and premiums amortized to income using
the level-yield method over the estimated lives of the loans. Loan fees and
certain direct loan origination costs are deferred, and the net fee or cost is
recognized in interest income using the level-yield method over the contractual
life of the individual loans, adjusted for actual prepayments. Amortization of
deferred loan origination fees are suspended during periods in which the related
loan is in nonaccrual status.
Loans available for sale are carried at the lower of cost or market using the
aggregate method. Valuation adjustments, if applicable, are reflected in current
operations. Gains and losses on sales are recorded using the specific
identification method.
Management determines the appropriate classification of loans as either held to
maturity or available for sale at origination, in conjunction with the Bank's
overall asset/liability management strategy.
The cost of loan servicing rights acquired, included in other assets, is
amortized in proportion to, and over the period of, estimated net servicing
revenues. When participating interests in loans sold have an average contractual
interest rate, adjusted for normal servicing costs, which differs from the
agreed yield to the purchaser, gains or losses are recognized equal to the
present value of such differential over the estimated remaining life of such
loans. The resulting excess servicing fees receivable is amortized over the same
estimated life using an interest method.
The cost of loan servicing rights acquired, the excess servicing fees
receivable, and the amortization thereon is periodically evaluated in relation
to estimated future net servicing revenues. The Bank evaluates the carrying
value of the servicing portfolio by estimating the future net servicing income
of the portfolio based on management's best estimate of remaining loan lives.
Allowance for Loan Losses
The allowance for loan losses is based on management's evaluation of the
adequacy of the allowance, including an assessment of known and inherent risks
in the portfolio, review of individual loans for adverse situations that may
affect the borrower's ability to repay, the estimated value of any
<PAGE>
underlying collateral, and consideration of current economic conditions.
Additions to the allowance arise from charges to operations through the
provision for loan losses or from the recovery of amounts previously charged
off. The allowance is reduced by loan charge-offs. Loans are charged off when
management believes there has been permanent impairment of their carrying
values.
On July 1, 1995, the Bank adopted the provisions of SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures," (collectively,
the Statements). The Statements provide guidance for establishing a reserve for
losses on specific loans which are deemed to be impaired and apply only to
specific impaired loans. Groups of small balance homogeneous basis loans
(generally the Bank's consumer loans) are evaluated for impairment collectively.
A loan is considered impaired when, based upon current information and events,
it is probable that the Bank will be unable to collect, on a timely basis, all
principal and interest according to the contractual terms of the loan's original
agreement. When a specific loan is determined to be impaired, the reserve for
possible loan losses is increased through a charge to expense for the amount of
the impairment. For all non-consumer loans, impairment is measured based on
value of the underlying collateral. The value of the underlying collateral is
determined by reducing the collateral's current value by anticipated selling
costs. The Bank's impaired loans are those non-consumer loans currently reported
as non-accrual. The Bank recognizes interest income on impaired loans only to
the extent that cash payments are received.
Real Estate Owned
Real estate owned is recorded at the fair value at the date of acquisition, with
a charge to the allowance for loan losses for any excess of cost over fair
value. Subsequently, real estate owned is carried at the lower of cost or fair
value, less estimated selling costs. Certain costs incurred in preparing
properties for sale are capitalized, and expenses of holding foreclosed
properties are charged to operations as incurred. The Bank held no real estate
owned at June 30, 1996 and 1995.
Cash Surrender Value of Life Insurance
The Bank has acquired life insurance policies covering certain key employees and
the Bank is the beneficiary of such policies. The Bank makes one-time lump-sum
payments as key employees are identified. Earnings on
2
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- -------------------------------------------------------------------------------
the lump-sum payments are expected to exceed future premiums and expenses
associated with the policies and thus result in an increase in the cash
surrender value of the policies.
Collateralized Mortgage Obligations
Bonds are recorded at par value net of discounts. Discounts are accreted to
income using the level-yield method over the estimated life of the bonds.
Premises and Equipment
Premises and equipment, including leasehold improvements, are stated at cost,
less accumulated amortization and depreciation. Depreciation and amortization
are computed using the straight-line and double declining balance methods over
the estimated useful lives of the assets or leases.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using the enacted tax
rates applicable to taxable income for the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. In February 1992, Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes,"
was issued by the Financial Accounting Standards Board. Effective July 1, 1993,
the Bank adopted SFAS No. 109 and has reported the cumulative effect of that
change in method of accounting for income taxes in the 1994 consolidated
statement of income.
WesterFed and its subsidiaries file a consolidated Federal income tax return.
<PAGE>
Financial Instruments
The Bank enters into interest rate exchange agreements (Swaps) and interest rate
cap agreements (Caps) as part of its overall asset/liability management
strategies. 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. Transaction fees on Caps are amortized to interest expense
over the life of the related Caps using the straight-line method. Payments
received on Caps are reflected in operations.
Net Income Per Share
Net income per common share is calculated by dividing net income by the weighted
average number of common shares and common share equivalents outstanding during
the period. Shares sold in the conversion from mutual to stock ownership on
January 6, 1994 are assumed to have been outstanding for all of fiscal year 1994
for the purposes of computed weighted average shares outstanding. Additionally,
unallocated ESOP shares are excluded from the weighted average common shares
outstanding calculation, while allocated shares are considered to be
outstanding. The effect of stock options is determined using the treasury stock
method. Weighted average common shares and common share equivalents did not
differ for primary and fully diluted earnings per share.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the 1995 and 1994 amounts to conform
to the 1996 presentation.
- -------------------------------------------------------------------------------
(2) CONVERSION TO STOCK OWNERSHIP
WesterFed was formed in September 1993, and is the holding company and owner of
100 percent of the common stock of WFSB, a federally chartered stock savings
bank. On January 6, 1994, WFSB completed its conversion from a mutual to a stock
form savings bank at which time WesterFed issued 4,436,657 shares of common
stock at $10 per share realizing $43,057,413 after deducting stock offering
expense of $1,309,157. WesterFed used $21,528,707 to purchase 100 percent of the
common stock of WFSB. Additionally, the Employee Stock Ownership Plan (the ESOP)
borrowed $3,549,330 from WesterFed to fund the purchase of 354,933 shares of
WesterFed's common stock.
3
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- -------------------------------------------------------------------------------
As part of the conversion, WFSB established a liquidation account for the
benefit of eligible depositors who continue to maintain their deposit accounts
in WFSB after conversion. In the unlikely event of a complete liquidation of
WFSB, each eligible depositor will be entitled to receive a liquidation
distribution from the liquidation account, in the proportionate amount of the
then current adjusted balance for deposit accounts held, before distribution may
be made with respect to WFSB's common stock. WFSB may not declare or pay a cash
dividend to the Holding Company on, or repurchase any of, its common stock if
the effect thereof would cause the regulatory capital of WFSB to be reduced
below the amount required for the liquidation account. Except for such
restrictions, the existence of the liquidation account does not restrict the use
or application of retained earnings.
- -------------------------------------------------------------------------------
(3) REGULATORY MATTERS
Capital distributions, in the form of any dividend paid or other distribution in
cash or in kind, are limited by the Office of Thrift Supervision (OTS). A "Tier
1" institution, which is defined as an institution that has capital immediately
prior to a proposed capital distribution that is equal to or greater than the
amount of its fully phased-in capital requirement, is authorized to make capital
distributions during a calendar year up to the higher of 100% of its net income
to date during the calendar year plus the amount that would reduce by one-half
its surplus capital ratio at the beginning of the calendar year, or 75% of its
net income over the most recent four-quarter period. The Bank is a Tier 1
institution.
The Financial Institutions Reform, Recovery and Enforcement Act, which was
signed into law on August 9, 1989, contains provisions for capital standards
that require the Bank to have minimum regulatory tangible capital equal to 1.50%
of adjusted total assets, a minimum 3.00% core capital ratio and an 8.00%
risk-based capital ratio.
In April 1991, the OTS issued a proposal to amend the regulatory capital
regulation by revising the leverage ratio requirement. The proposal would
establish a 3.00% leverage ratio (defined as the ratio of core capital to
adjusted total assets) for institutions in the strongest financial and
managerial condition, with a 1 CAMEL Rating (the highest rating of the OTS for
savings institutions). For all other institutions, the minimum core capital
average ratio would be 3.00%, plus an additional 100 to 200 basis points. In
determining the amount of additional capital under the proposal, the OTS would
assess both the quality of risk management systems and the level of overall risk
in each individual institution through the supervisory process on a case-by-case
basis. Certain features of the new capital regulations and their administration
have not been finalized.
<PAGE>
WFSB is in compliance with capital requirements at June 30, 1996, as follows
(dollar amounts in thousands):
<TABLE>
<CAPTION>
Regulatory
Capital
Percent(a) Amount Requirements Excess
--------- ------ ------------ ------
<S> <C> <C> <C> <C>
Tangible capital............................................ 11.3% $ 61,977 8,234 53,743
Core capital................................................ 11.3 61,977 16,467 45,510
Risk-based capital.......................................... 21.2 63,923 24,058 39,865
====== ========= ======== =========
</TABLE>
(a) Based upon a percentage of adjusted tangible assets for tangible and core
capital and risk-adjusted assets for risk-based capital.
4
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- -------------------------------------------------------------------------------
The following is a reconciliation of capital as shown on the consolidated
financial statements and tangible, core and risk-based regulatory capital at
June 30, 1996 (in thousands):
<TABLE>
<CAPTION>
Risk-
Tangible Core Based
Capital Capital Capital
-------- ------- -------
<S> <C> <C> <C>
Capital per consolidated financial statements........................ $ 78,607 78,607 78,607
Less: Nonqualifying investment in subsidiaries.................. (16,391) (16,391) (16,391)
Nonqualifying purchased mortgage loan servicing........... (13) (13) (13)
Unrealized losses on certain securities
available-for-sale..................................... (226) (226) (226)
Other assets required to be deducted...................... - - (1)
Add:General loan valuation allowances........................... - - 1,947
---------- --------- ---------
Regulatory capital................................................... $ 61,977 61,977 63,923
========== ========= =========
</TABLE>
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
requires the federal banking agencies to take prompt corrective action with
respect to depository institutions which do not meet minimum capital standards
and other safety and soundness regulations which have not been finalized. As a
result, the federal banking agencies have adopted regulations which establish a
system for prompt regulatory corrective action with respect to depository
institutions which do not meet minimum capital requirements. The "prompt
corrective action" regulations established five categories of depository
institutions: (1) well-capitalized, (2) adequately capitalized, (3)
under-capitalized, (4) significantly undercapitalized, and (5) critically
undercapitalized. Each category relates to the level of capital for the
depository institution. A "well-capitalized" meets the minimum level required by
regulation (i.e., total risk-based capital ratio of 10% or greater, a Tier 1
risk-based capital ratio of 6% or greater and a leverage ratio of 5% or
greater). The Bank's total risk-based, Tier 1 and core capital ratios were
21.2%, 20.6% and 11.3% at June 30, 1996.
<PAGE>
- ------------------------------------------------------------------------------
(4) INVESTMENT SECURITIES
The amortized cost and estimated market values of investment securities at June
30, 1996 and 1995 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1996
---------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Investments held-to-maturity:
Federal agency obligations........................... $ 4,010 2 (7) 4,005
Corporate obligations................................ 5,333 22 - 5,355
Other investments.................................... 4 35 - 39
--------- ------ ------- --------
Total investment securities held-to-maturity.... $ 9,347 59 (7) 9,399
========= ====== ======= ========
Investments available-for-sale:
Federal agency obligations........................... $ 32,841 21 (232) 32,630
Corporate obligations................................ 3,000 - (20) 2,980
Other................................................ 28 - (1) 27
--------- ------ ------- ---------
Total investment securities available-for-sale.. $ 35,869 21 (253) 35,637
========= ====== ======= =========
</TABLE>
5
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995
---------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Investments held-to-maturity:
Federal agency obligations........................... $ 6,518 47 (2) 6,563
Corporate obligations................................ 6,272 104 - 6,376
Other investments.................................... 4 21 - 25
--------- ------ ------- --------
Total investment securities held-to-maturity.... $ 12,794 172 (2) 12,964
========= ====== ======= ========
Investments available-for-sale:
Federal agency obligations........................... $ 47,850 99 (392) 47,557
U.S. Government obligations.......................... 2,025 - (5) 2,020
--------- ------ ------- ---------
Total investment securities available-for-sale.. $ 49,875 99 (397) 49,577
========= ====== ======= =========
</TABLE>
Expected maturities may differ from contractual maturities because borrowers may
have the right to call or repay obligations at par value without prepayment
penalties. The cost and estimated fair value of investment securities at June
30, 1996, by contractual maturity, are shown below (in thousands):
<TABLE>
<CAPTION>
Fair
Cost Value
---- -----
<S> <C> <C>
Investment held-to-maturity
Due in:
Less than one year......................................................... $ 7,344 7,366
One to five years.......................................................... 1,999 1,994
Other...................................................................... 4 39
--------- ---------
$ 9,347 9,399
========= =========
Investments available-for-sale
Due in:
Less than one year......................................................... $ 17,353 17,336
One to five years.......................................................... 13,740 13,602
After ten years............................................................ 4,748 4,672
Other...................................................................... 28 27
--------- ---------
$ 35,869 35,637
========= =========
</TABLE>
Gross proceeds from sales of investment securities available-for-sale for 1996
and 1995 were $3,840,000 and $4,470,000, respectively. These sales resulted in
gross gains of $22,636 in 1996 and gross losses of $27,000 and $30,000 in 1996
and 1995, respectively. There were no sales of investment securities during
1994.
Pursuant to a collateral agreement with the FHLB, all unpledged, qualifying
investment securities, including those available-for-sale, are pledged to secure
advances from the FHLB.
6
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- -------------------------------------------------------------------------------
(5) MORTGAGE-BACKED SECURITIES
A summary of mortgage-backed securities at June 30, 1996 and 1995 is as follows
(in thousands):
<TABLE>
<CAPTION>
1996
---------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Mortgage-backed securities held-to-maturity:
FHLMC ............................................. $ 49,525 9 (972) 48,562
GNMA ................................................. 1,412 20 - 1,432
Collateralized mortgage obligations - federal agency.. 9,101 183 - 9,284
--------- ------- ------ ---------
Total mortgage-backed securities
held-to-maturity............................. $ 60,038 212 (972) 59,278
========= ======= ====== =========
Mortgage-backed securities available-for-sale:
FHLMC ............................................. $ 27,693 78 (191) 27,580
GNMA ................................................. 659 - (4) 655
FNMA ................................................. 16,683 76 (85) 16,674
--------- ------- ------ ---------
Total mortgage-backed securities
available-for-sale........................... $ 45,035 154 (280) 44,909
========= ======= ======= =========
1995
---------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Mortgage-backed securities held-to-maturity:
FHLMC ............................................. $ 62,262 590 (163) 62,689
FNMA ................................................. 338 12 - 350
Collateralized mortgage obligations - federal agency.. 16,325 143 (204) 16,264
--------- ------- ------ ---------
Total mortgage-backed securities
held-to-maturity............................. $ 78,925 745 (367) 79,303
========= ======= ====== =========
Mortgage-backed securities available-for-sale:
FHLMC ............................................. $ 43,987 679 (181) 44,485
GNMA ................................................. 2,472 401 - 2,873
FNMA ................................................. 17,664 83 (205) 17,542
--------- ------- ------ ---------
Total mortgage-backed securities
available-for-sale........................... $ 64,123 1,163 (386) 64,900
========= ======= ====== =========
</TABLE>
Gross proceeds from sales of mortgage-backed securities available-for-sale for
1996 and 1995 were $30,862,000 and $10,114,000, resulting in gross gains of
$673,000 and $258,000 and gross losses of $279,000 and $118,000, respectively.
Gross proceeds from sales of mortgage-backed securities for 1994 were
$63,057,000. These sales resulted in gross gains of $257,000, and gross losses
of $147,000 for 1994.
Mortgage-backed securities with a recorded value of approximately $10,181,000
and $2,715,000 have been pledged to secure collateralized mortgage obligations
at June 30, 1996 and 1995, respectively.
Expected maturities of mortgage-backed securities will differ from contractual
maturities because borrowers may have the right to prepay obligations with or
without penalties.
On November 15, 1995, the Financial Accounting Standards Board (FASB) issued a
Special Report titled "A Guide to Implementation of Statement 115 on Accounting
for Certain Investments in Debt and equity Securities." The Special Report
allowed for a one-time reclassification of securities as of a single date
between November 15, 1995 and December 31, 1995. The Bank reclassified
approximately $10,608,000 of mortgage-backed securities from the
held-to-maturity to available-for-sale classification. The net unrealized loss
related to these mortgage-backed securities was approximately $140,000 at the
date of reclassification.
7
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- -------------------------------------------------------------------------------
(6) LOANS RECEIVABLE
A summary of loans receivable at June 30, 1996 and 1995 is summarized as follows
(in thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Loans secured by real estate:
Conventional:
1-4 residential units............................................... $ 273,389 240,202
5 or more residential units......................................... 19,939 18,985
Construction........................................................ 12,977 10,742
Commercial.......................................................... 17,769 11,942
Other nonresidential................................................ 549 457
FHA insured or VA guaranteed........................................ 7,464 7,129
---------- ----------
Total real estate loans ....................................... 332,087 289,457
Less:
Net deferred loan origination fees...................................... (1,625) (1,344)
Undisbursed loan funds.................................................. (4,245) (4,988)
Allowance for loan losses............................................... (1,879) (1,879)
---------- ----------
Net real estate loans.......................................... 324,338 281,246
Other loans:
Loans to depositors, secured by deposits................................ 2,337 2,138
Other consumer loans.................................................... 10,830 5,112
Other consumer loans - real estate secured.............................. 30,814 24,757
Allowance for loan losses............................................... (126) (132)
---------- ----------
Net other loans................................................ 43,855 31,875
---------- ----------
368,193 313,121
Less loans available-for-sale................................................ (3,967) (2,960)
---------- ----------
$ 364,226 310,161
========== ==========
</TABLE>
The Bank has pledged, under a blanket assignment, its unpledged and qualifying
mortgage portfolio to secure advances from the FHLB.
<PAGE>
A summary of nonperforming assets at June 30, 1996 and 1995 follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Nonaccrual loans................................................................ $ 404 319
Loans 90 days or more delinquent and still accruing............................. 311 254
----- -----
Total nonperforming loans.................................................. 715 573
Total nonperforming assets................................................. $ 715 573
===== =====
</TABLE>
If interest income on nonaccrual loans had been current in accordance with their
original terms, approximately $22,000, $33,000 and $27,000 of interest income
would have been recorded in 1996, 1995 and 1994, respectively. Interest income
recognized on nonaccrual loans during the years ended June 30, 1996, 1995, and
1994 was insignificant. At June 30, 1996, there were no commitments to lend
additional funds to borrowers whose loans are classified as nonperforming.
An analysis of the allowance for loan losses, not including provision for real
estate owned, for 1996, 1995 and 1994 is as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year...................................... $ 2,011 2,030 2,058
Provision charged to operations................................... - - -
Charge-offs....................................................... (11) (28) (37)
Recoveries........................................................ 5 9 9
-------- -------- -------
Balance at end of year............................................ $ 2,005 2,011 2,030
======== ======== =======
</TABLE>
- -------------------------------------------------------------------------------
8
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- -------------------------------------------------------------------------------
(7) INTEREST RECEIVABLE, NET
A summary of interest receivable at June 30, 1996 and 1995 is as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Loans (net of allowance for uncollected interest of $22 and $33 at
June 30, 1996 and 1995, respectively)........................................ $ 2,322 1,778
Mortgage-backed securities........................................................ 805 1,016
Investment securities............................................................. 500 946
Interest-bearing deposits......................................................... 68 79
Other............................................................................. - 56
-------- -------
$ 3,695 3,875
======== =======
</TABLE>
- -------------------------------------------------------------------------------
(8) PREMISES AND EQUIPMENT
Premises and equipment at June 30, 1996 and 1995 is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Land............................................................................. $ 3,861 3,792
Office buildings and leasehold improvements...................................... 15,698 13,343
Furniture, fixtures and equipment................................................ 5,356 4,991
--------- --------
24,915 22,126
Less accumulated depreciation and amortization................................... (11,157) (10,754)
--------- --------
$ 13,758 11,372
========= ========
</TABLE>
- -------------------------------------------------------------------------------
(9) DEPOSITS
Deposits at June 30, 1996 and 1995 are summarized as follows (dollar amounts in
thousands):
<TABLE>
<CAPTION>
Weighted Weighted
average average
1996 rate 1995 rate
---- ---- ---- ----
<S> <C> <C> <C> <C>
Certificates of deposit:
6 month.......................................... $ 37,179 4.96% $ 34,290 5.38%
1 year........................................... 47,737 5.44 37,152 5.39
2 year........................................... 54,538 5.52 65,981 5.97
3 year........................................... 28,882 5.78 29,178 5.90
4 year and above................................. 30,779 6.27 29,974 6.74
Jumbo (minimum denomination of $100,000)......... 12,342 5.66 10,124 5.92
---------- ------ ---------- ------
211,457 5.56 206,699 5.88
Passbook accounts..................................... 64,889 2.93 65,607 3.03
Money market accounts................................. 24,018 3.47 25,923 3.46
NOW accounts.......................................... 49,848 1.55 45,926 1.98
---------- ------ ---------- ------
$ 350,212 4.35% $ 344,155 4.62%
========== ====== ======== ======
</TABLE>
9
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- -------------------------------------------------------------------------------
Certificates of deposit at June 30, 1996 mature as follows (in thousands):
<TABLE>
<CAPTION>
Less than One to Four to
one year three years five years
--------- ----------- ----------
<S> <C> <C> <C>
2.00% to 2.99%...................................... $ 405 - -
3.00% to 3.99%...................................... 1,226 - -
4.00% to 4.99%...................................... 18,748 1,966 17
5.00% to 5.99%...................................... 89,264 38,313 2,843
6.00% to 6.99%...................................... 15,352 14,804 3,944
7.00% to 7.99%...................................... 628 10,810 791
8.00% to 11.99%..................................... 4 - -
Jumbo............................................... 9,202 2,641 499
--------- --------- ---------
$ 134,829 68,534 8,094
========= ========= =========
</TABLE>
- -------------------------------------------------------------------------------
(10) BORROWED FUNDS
Advances from the FHLB and other borrowings at June 30, 1996 and 1995 are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Advances from Federal Home Loan Bank............................................. $ 124,663 133,119
Collateralized mortgage obligations.............................................. 1,175 1,585
---------- ---------
$ 125,838 134,704
========== =========
</TABLE>
Advances from Federal Home Loan Bank of Seattle bear interest at rates from
4.93% to 8.20% and mature as follows (in thousands):
Years ending June 30
--------------------
1997........................................... $ 14,000
1998........................................... 44,094
1999........................................... 16,568
2000........................................... 5,000
2001........................................... 19,198
Thereafter..................................... 25,803
---------
$124,663
=========
Advances from the FHLB are secured by pledges of FHLB stock of $7,471,000 and
$6,750,000 at June 30, 1996 and 1995, respectively, and a blanket assignment
(the blanket assignment) of the Bank's unpledged, qualifying mortgage loans,
mortgage-backed securities and investment securities. The Bank has committed to
take a Federal Home Loan Bank advance totaling $470,000 with an interest rate of
7.37%, maturing 15 years from the date the advance is taken.
This advance will be taken during 1997.
- -------------------------------------------------------------------------------
10
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- -------------------------------------------------------------------------------
(11) INCOME TAXES
As discussed in note 1, the Bank adopted SFAS No. 109, effective July 1, 1993.
The cumulative effect of this change in accounting for income taxes was
$795,000.
If certain conditions are met, the Bank is allowed a special bad debt deduction
in determining income for tax purposes. The deduction is based on either a
specified experience formula or a percentage of taxable income before such
deduction (presently 8%). Under new legislation enacted in August 1996, the
special bad debt deduction will be eliminated effective for tax years beginning
after December 15, 1995 (the Bank's fiscal year beginning July 1, 1996).
Retained earnings at June 30, 1996 include approximately $10,251,000 for which
no provision for income tax has been made. This amount represents primarily
income offset by the percentage bad debt deduction for tax purposes only. Under
SFAS No. 109, this amount is treated as a permanent difference; deferred taxes
are not recognized unless it appears that this amount will be reduced and
thereby result in taxable income in the foreseeable future. Also included in the
August 1996 legislation are provisions to recapture bad debt deductions taken in
excess of $10,251,000. The Bank has provided a deferred tax liability of
approximately $415,000 which will be payable over six years beginning in 1997 or
in 1999 if certain residential lending requirements are met. At June 30, 1996,
management does not foresee any events under which the base year amount of
$10,251,000 would become taxable.
A summary of the provision for income taxes for the years ended June 30, 1996,
1995 and 1994 follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Federal:
Current...................................................... $ 1,894 1,567 1,929
Deferred..................................................... 254 466 268
-------- -------- -------
2,148 2,033 2,197
-------- -------- -------
State:
Current...................................................... 377 362 460
Deferred..................................................... 31 78 24
-------- -------- -------
408 440 484
-------- -------- -------
$ 2,556 2,473 2,681
======== ======== =======
</TABLE>
<PAGE>
The effective tax rates for 1996, 1995 and 1994 are 35.9%, 37.5% and 37.7%,
respectively.
A reconciliation between the effective income tax expense and the amount
computed by multiplying the applicable statutory federal income tax rate for
1996, 1995 and 1994 is as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax expense................................... $ 2,419 2,244 2,419
Accumulated earnings on life insurance policies................... (50) (44) (38)
State income taxes, net of Federal income tax benefit............. 270 291 319
Other............................................................. (83) (18) (19)
-------- -------- -------
$ 2,556 2,473 2,681
======== ======== =======
</TABLE>
The tax effects of temporary differences that give rise to deferred tax assets
and liabilities at June 30, 1996 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Loans, principally allowance for loan losses................................... $ 771 773
Employee benefits, principally deferred compensation and accrued vacation...... 468 246
Market value adjustment of investment securities and mortgage backed
securities available-for-sale.............................................. 132 -
-------- -------
Gross deferred income tax assets........................................... 1,371 1,019
-------- --------
</TABLE>
11
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax liabilities:
FHLB stock dividends........................................................... $ 1,631 1,430
Deferred loan fees and origination costs....................................... 575 554
Life insurance contract income................................................. 489 457
Market value adjustment of investment securities and mortgage backed
securities available-for-sale.............................................. - 185
Loans, due primarily to tax bad debt reserves in excess of base year
amount..................................................................... 415 278
Fixed assets, principally depreciation......................................... 191 154
Other.......................................................................... 199 121
-------- --------
Gross deferred income tax liabilities...................................... 3,500 3,179
-------- --------
Net deferred income tax liability.......................................... $ 2,129 2,160
======== ========
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the existence of, or generation of, taxable income in the periods
which those temporary differences are deductible. Management considers the
scheduled reversal of deferred tax liabilities, taxes paid in carryback years,
projected future taxable income, and tax planning strategies in making this
assessment. Based upon the level of historical taxable income and projection for
future taxable income over the periods which the deferred tax assets are
deductible, at June 30, 1996 and 1995, management believes it is more likely
than not that the Bank will realize the benefits of these deductible
differences.
<PAGE>
- -------------------------------------------------------------------------------
(12) COMMITMENTS AND CONTINGENCIES
The Bank is the lessor of office space in certain of its branch office buildings
under operating leases expiring in future years. Management expects as operating
leases expire in the normal course of business, they will be renewed or replaced
by leases on other properties at current market rental rates at the time of
renewal. Approximate minimum future rentals to be received under non-cancelable
leases for the five years subsequent to June 30, 1996 are as follows (in
thousands):
Years ended June 30, Amount
-------------------- ------
1997 $ 482
1998 369
1999 279
2000 235
2001 108
Thereafter 94
-------
Total minimum future rentals $ 1,567
=======
The deposits of the Bank are insured by the Savings Association Insurance Fund
(SAIF), one of two funds administered by the Federal Deposit Insurance
Corporation (FDIC). The Bank currently pays premiums of approximately 0.23% of
deposits. Under a plan to recapitalize the SAIF, the U.S. Treasury Department,
FDIC, OTS, and the Congress are considering a plan to impose a "one-time"
premium assessment of an approximate incremental .7% of deposits. If this plan
is implemented, based on deposit balances at March 31, 1995, the Bank would be
assessed a "one-time" premium resulting in a change of approximately $1.5
million after income taxes.
The Bank is a defendant in various matters of litigation generally incidental to
its business. In the opinion of management, following consultation with legal
counsel, liabilities arising from these proceedings, if any, will not have a
material impact on the Bank's consolidated financial condition.
- -------------------------------------------------------------------------------
12
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- -------------------------------------------------------------------------------
(13) EMPLOYEE BENEFIT PLANS
Employee Stock Ownership Plan (ESOP)
Effective July 1, 1993 the Board of Directors approved the adoption of an ESOP
covering substantially all employees. The ESOP purchased 354,933 shares of
WesterFed's common stock for $10 per share in connection with the conversion to
stock ownership. The ESOP borrowed $3,549,330 from WesterFed to fund the
purchase, evidenced by a note receivable recorded by WesterFed, secured by the
common stock purchased by the ESOP. The terms of the note require quarterly
principal payments from the ESOP of approximately $57,000, bearing interest at
7.26%, maturing December 2008. Contributions of cash or common stock are made
from WFSB to the ESOP at the discretion of the Board of Directors. For financial
reporting purposes, the note receivable is classified as a reduction of
consolidated stockholders' equity and amounts paid to WesterFed for interest
have been eliminated in consolidation.
The Bank records compensation expense equal to the fair value of shares at the
date such shares are made available for allocation to plan participants'
accounts. Shares become available for allocation as the ESOP repays the note
receivable recorded by WesterFed. For 1996, 1995 and 1994, ESOP principal and
interest payments of $446,000, $464,000, and $347,000 were funded by Bank
contributions of $358,000, $406,000, and $329,000. The remainder of the ESOP
payments was funded by dividends on the unallocated shares held. At June 30,
1996, 87,193 shares had been made available for allocation to participants
accounts and the fair value of the unallocated shares was approximately
$3,984,000. The Bank recognized expense relating to the ESOP of $446,000,
$396,000, and $384,000 during 1996, 1995 and 1994, respectively.
Recognition and Retention Plan (RRP)
Under the RRP plan, common stock has been granted to certain officers, directors
and employees. Deferred compensation is recorded at the date of the stock award.
Vesting occurs in four equal, annual installments and the related deferred
compensation is expensed over the same period. For financial reporting purposes
the unamortized deferred compensation balance is reclassified as a reduction of
consolidated stockholders' equity. Officers, directors and employees awarded
shares retain voting rights and, if dividends are paid, dividend privileges
during the vesting period. RRP compensation expense of $473,000, $473,000, and
$237,000 has been recorded for 1996, 1995 and 1994, respectively.
Stock Option and Incentive Plan
The stockholders have approved a Stock Option and Incentive Plan (the Stock
Option Plan). The terms of the Stock Option Plan provide for the granting of up
to 443,665 shares of common stock, or 10% of the shares sold in the Bank's
conversion from mutual to stock ownership, to certain officers and directors.
The Stock Option Plan provides for the granting of incentive stock options,
nonqualified stock options, stock appreciation rights, limited stock
appreciation rights, or restricted stock, or any combination thereof
(collectively, the Awards).
The Bank has granted incentive stock options and nonqualified stock options (the
options). The term of the options may not exceed 10 years from the date the
options are granted. Incentive stock options granted to stockholders with more
than 10% of the total combined voting power of all classes of stock of the
Company shall be granted at an option price of not less than 110% of the fair
market value at the grant date, and the term of the option may not exceed 5
years from the date of grant. For incentive stock options, a maximum of 10,000
shares per Stock Option Plan participant are exercisable per year. All incentive
and nonqualified stock options awarded are exercisable at the grant date.
<TABLE>
<CAPTION>
Options Exercise price
------- --------------
<S> <C> <C>
Year ending June 30, 1996:
Options outstanding, beginning of year......................................... 419,707 $ 10.00 - 12.13
Granted........................................................................ - -
---------- -------------
Outstanding, end of year....................................................... 419,707 $ 10.00 - 12.13
========== ==============
Exercisable, end of year....................................................... 419,707 $ 10.00 - 12.13
========== ==============
</TABLE>
13
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Options Exercise price
------- --------------
<S> <C> <C>
Year ending June 30, 1995:
Options outstanding, beginning of year......................................... 404,623 $ 10.00
Granted........................................................................ 15,084 12.13
---------- -------
Outstanding, end of year....................................................... 419,707 $ 10.00 - 12.13
========== ==============
Exercisable, end of year....................................................... 419,707 $ 10.00 - 12.13
========== ==============
Year ending June 30, 1994:
Options outstanding, beginning of year......................................... - $ -
Granted........................................................................ 404,623 10.00
---------- -------
Outstanding, end of year....................................................... 404,623 $ 10.00
========== =======
Exercisable, end of year....................................................... 404,623 $ 10.00
========== =======
</TABLE>
Pension Plan
The Bank participates in a non-contributory multi-employer defined benefit
pension plan covering substantially all employees. Actuarially determined
pension costs are funded as accrued. Separate actuarial valuations are not
prepared for each employer in the plan. Substantially all employees who attain
the age of 21 years and complete one year of service are eligible to participate
in this plan. Retirement benefits are based upon a formula utilizing years of
service and average compensation, as defined. Participants are vested 100% upon
the completion of five years of service. Total pension expense, including
administrative charges, was approximately $321,000, $286,000 and $19,000 for the
years ended June 30, 1996, 1995 and 1994, respectively.
Deferred Compensation Agreements
The Bank has entered into deferred compensation agreements with certain key
employees that provide for predetermined periodic payments over 10 years upon
retirement or death. Amounts expensed under these agreements totaled
approximately $144,000, $142,000, and $111,000 for 1996, 1995 and 1994,
respectively.
Savings Plan
The Bank has adopted an employee savings plan. To be eligible for the plan, an
employee must complete one year of full time employment with the Bank. Annual
contributions by the Bank match 50% of an employee's contributions, up to a
maximum of 3% of the participating employee's wages. Contributions for 1996,
1995 and 1994 totaled approximately $86,000, $85,000 and $83,000, respectively.
<PAGE>
- -------------------------------------------------------------------------------
(14) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers and to
reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit and interest rate cap
agreements. The Bank was party to an interest rate swap which expired in 1996.
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.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments. The Bank uses the
same credit policies in making commitments and conditional obligations as it
does for on-balance-sheet instruments. For interest rate cap agreements, the
contract or notional amounts does not represent exposure to credit loss. The
Bank controls the credit risk of those instruments through credit approvals,
limits, and monitoring procedures.
14
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- -------------------------------------------------------------------------------
Commitments to Extend Credit
Commitments to extend credit at June 30, 1996 and 1995 are as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Fixed rate.......................................................................... $ 18,654 23,100
Variable rate....................................................................... 1,888 1,793
--------- ---------
.................................................................................... $ 20,542 24,893
========= =========
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have terms which specify commitment periods of 45 days at interest
rates which approximate current market rates, adjusted for management's
assessment of the creditworthiness of the customer. In some cases, customers may
be required to pay a fee for the Bank's commitment to lend. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Bank evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary, by the Bank upon extension
of credit is based on management's evaluation of the counter-party. Collateral
held varies but may include personal property, residential real property, and
income-producing commercial properties.
Interest Rate Caps
Interest rate caps entitle the Bank to receive various interest payments in
exchange for payment of a transaction fee, 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. 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 June 30, 1996:
<TABLE>
<CAPTION>
Notional principal amount Agreement termination Cap
------------------------- --------------------- ---
(in thousands)
<S> <C> <C>
$ 25,000 March 1997 6.5% - 10%
10,000 July 1999 6.5% - 7.0%
--------
$ 35,000
========
</TABLE>
The counterparties to the cap agreements are primary dealers or the FHLB of
Seattle.
<PAGE>
- -------------------------------------------------------------------------------
(15) RECENT ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
On March 31, 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of". SFAS No. 121
provides that long-lived assets and identifiable intangibles should be reviewed
for impairment whenever events or circumstances provide evidence that suggests
the carrying amount of the asset may not be recoverable. An impairment loss is
recognized if the sum of the expected future cash flows is less than the
carrying amount of the asset. SFAS No. 121 is effective for financial statements
issued with fiscal years beginning after December 15, 1995, although earlier
application is encouraged. The Bank intends to adopt the provisions of SFAS No.
121 on July 1, 1996, and management expects adoption will not have a material
effect on the financial position or results of operations of the Bank.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation". SFAS No. 123 defines a "fair value based method" of accounting
for stock based compensation whereby compensation costs is measured at the grant
date based on the value of the award and is recognized over the service period.
The FASB encourages all entities to adopt the fair value based method, however,
it will allow entities to continue to use the "intrinsic value based method"
prescribed by previous pronouncements for grants to employees. Under the
intrinsic value based method, compensation cost is the excess of the market
price of the stock at the grant date over the amount an employee must pay to
acquire the stock. Entities electing to continue use of the accounting treatment
of previous pronouncements must make
15
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- -------------------------------------------------------------------------------
certain pro forma disclosures as if the fair value based method had been
applied. SFAS No. 123 is effective for financial statements issued with fiscal
years beginning after December 31, 1995. The Bank will be required to adopt the
provisions of SFAS No. 123 on July 1, 1996. Management's current intention is to
retain its intrinsic value method of accounting for stock options granted to
employees.
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
"Accounting of Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." SFAS No. 125 provides guidance on accounting for transfers and
servicing of financial assets, recognition and measurement of servicing assets
and liabilities, financial assets subject to prepayment, secured borrowings and
collateral, and extinguishment of liabilities.
SFAS No. 125 specifically provides that mortgage banking enterprises, which
includes the Bank, recognize as a separate asset rights to service loans for
others, regardless of how those servicing rights are acquired. Rights to service
loans must also be assessed for impairment based on the fair value of the
servicing assets, including those purchased before the adoption of this
statement. SFAS No. 125 also specifies that financial assets subject to
prepayment, including loans, that can be contractually prepaid or otherwise
settled in such a way that the holder would not recover substantially all of its
recorded investment be measured like debt securities available-for-sale or
trading securities under SFAS No. 115, as amended by SFAS No. 125.
SFAS No. 125 is effective for all financial asset transactions occurring after
December 31, 1996, and is to be applied prospectively. Earlier or retroactive
application is not permitted. The Bank intends to adopt the provisions of SFAS
No. 125 on January 1, 1997, and management expects adoption will not have a
material effect on the financial position or operations of the Bank.
- -------------------------------------------------------------------------------
(16) RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
The reconciliation of net income to net cash provided by operating activities
for 1996, 1995 and 1994 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net income................................................................... $ 4,559 4,128 5,229
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization of:
Deferred loan origination fees...................................... (445) (447) (538)
Premiums and discounts on securities................................ (63) 482 259
RRP deferred compensation............................................... 473 473 237
ESOP shares available for allocation.................................... 446 396 384
Cumulative effect of change in accounting for income taxes.............. - - (795)
Provision for:
Loan losses......................................................... - - -
Losses on real estate owned......................................... - 3 4
Net (gain) loss on sales of:
Mortgage-backed securities available-for-sale....................... (394) (139) (101)
Investment securities available-for-sale............................ 4 30 -
Loans............................................................... (187) (170) (587)
Other ........................................................... 127 5 (6)
Depreciation and amortization of premises and equipment................. 740 685 658
Federal Home Loan Bank stock dividends.................................. (521) (363) (570)
Origination of loans available-for-sale................................. (31,185) (24,896) (43,720)
Proceeds from sales of loans available-for-sale......................... 30,365 33,851 57,657
Decrease (increase) in accrued interest receivable...................... 180 (637) (574)
Interest expense credited to deposit accounts........................... 15,724 13,633 13,609
Changes in other assets and liabilities................................. (266) 1,524 460
-------- --------- ---------
Net cash provided by operating activities.................. $ 19,557 28,558 31,606
======== ========= =========
</TABLE>
- -------------------------------------------------------------------------------
16
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- -------------------------------------------------------------------------------
(17) NON-CASH INVESTING AND FINANCING ACTIVITIES
Loans originated for the purposes of securitization and subsequent sale as
mortgage-backed securities totaled approximately $3,885,000 (net of discount of
$26,000) and $58,023,000 (net of discount of $194,000) for 1995 and 1994,
respectively. There were no securitizations of loans in 1996.
On June 28, 1996, the Bank declared a dividend of approximately $541,000 which
is recorded in accrued expenses and other liabilities at June 30, 1996.
On June 27, 1995, the Bank declared a dividend of approximately $287,000 which
is recorded in other liabilities at June 30, 1995.
At June 30, 1996, the Bank recorded an unrealized loss on investment and
mortgage-backed securities available-for-sale, net of taxes, of $226,000.
At June 30, 1995, the Bank recorded an unrealized gain on investment and
mortgage-backed securities available-for-sale, net of taxes, of $295,000.
Under the specifications of the FASB's Special Report as discussed in note 5,
the Bank reclassified certain mortgage-backed securities to mortgage-backed
securities available-for-sale.
During 1995 and 1994, the Bank issued common stock under the RRP and recorded
deferred compensation of approximately $29,000 and $1,897,000, respectively. No
common stock was issued under the RRP in 1996.
The Bank financed the ESOP's purchase of common shares by recording a note
receivable of $3,549,330 during 1994.
Real estate owned acquired through foreclosures of loans receivable was
approximately $397,000 and $114,000 for 1995 and 1994, respectively. No real
estate owned was acquired in 1996.
Loans made to finance sales of real estate owned totaled approximately $37,000
for 1995 and 1994, respectively. No such loans were made during 1996.
<PAGE>
- -------------------------------------------------------------------------------
(18) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following fair value estimates, methods and assumptions were used to measure
the fair value of each class of financial instrument for which it is practical
to estimate that value.
Cash and Cash Equivalents
For such short-term investments, the carrying amount was considered to be a
reasonable estimate of fair value.
Investment and Mortgage-Backed Securities
For investment and mortgage-backed securities, fair values were based on quoted
market prices or dealer quotes. If a quoted market price was not available, fair
values were estimated using quoted market prices for similar securities.
Federal Home Loan Bank
Federal Home Loan Bank stock is valued at cost.
Loans
Fair values were estimated for portfolios of performing and nonperforming loans
with similar financial characteristics. For certain analogous categories of
loans, such as residential mortgages, home equity loans, non-residential
mortgages, and consumer loans, fair value was estimated using the quoted market
prices for securities backed by similar loans, adjusted for differences in loan
characteristics. The fair value of other performing loan types was estimated by
discounting the future cash flows using market discount rates that reflect the
credit, collateral, and interest rate risk inherent in the loan.
Deposit Liabilities
The fair value of demand deposits savings deposits and money market accounts
were the amounts payable on demand at June 30, 1996 and 1995. The fair value of
certificates of deposit is estimated based on the discounted value of
contractual cash flows using rates derived from the U.S. Treasury yield curve,
adjusted for certificate redemption features.
Short-Term Borrowings
For short-term borrowings, the carrying amount was considered to be a reasonable
estimate of fair value.
17
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- -------------------------------------------------------------------------------
Long-Term Borrowings
The fair value for long-term borrowings was based upon the discounted value of
the cash flows. The discount rates utilized were based on rates currently
available with similar terms and maturities.
The estimated fair values of the Bank's financial instruments required to be
disclosed under SFAS No. 107 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
------------------------- ---------------------
Book Fair Book Fair
value value value value
----- ----- ----- -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents..................... $ 7,829 7,829 7,173 7,173
Interest-bearing due from banks............... 5,470 5,470 8,201 8,201
Interest-bearing deposits..................... 3,000 3,000 2,102 2,102
Investment securities......................... 9,347 9,399 12,794 12,964
Investment securities available-for-sale...... 35,637 35,637 49,577 49,577
Stock in Federal Home Loan Bank of Seattle.... 7,471 7,471 6,750 6,750
Mortgage-backed securities.................... 60,038 59,278 78,925 79,303
Mortgage-backed securities available-for-sale. 44,909 44,909 64,900 64,900
Loans......................................... 364,226 373,150 310,161 321,724
Loans available-for-sale...................... 3,967 3,967 2,960 2,960
Financial liabilities:
Deposits...................................... 350,212 351,461 344,155 344,456
Borrowed funds................................ 125,838 126,127 134,704 136,124
Off-balance-sheet items:
Interest rate cap agreements.................. 430 138 752 258
========== ========= ========== =========
</TABLE>
Limitations
The foregoing fair value estimates are made at a specific point in time, based
on pertinent market data and relevant information on the financial instrument.
These estimates do not include any premium or discount that could result from an
offer to sell, at one time, the Bank's entire holdings of a particular financial
instrument or category thereof. Since no market exists for a substantial portion
of the Bank's financial instruments, fair value estimates were necessarily based
on judgements with respect to future expected loss experience, current economic
conditions, risk assessments of various financial instruments involving a myriad
of individual borrowers, and other factors. Given the innately subjective nature
of these estimates, the uncertainties surrounding them and the matters of
significant judgment that must be applied, these fair value estimations cannot
be calculated with precision. Modifications in such assumptions could
meaningfully alter these estimates.
Since these fair value approximations were made solely for on- and off-balance
sheet financial instruments, no attempt was made to estimate the value of
anticipated future business and the value of nonfinancial statement assets and
liabilities. Other important elements which are not deemed to be financial
assets or liabilities include the value of the Bank's retail branch delivery
system, its existing core deposit base, premises and equipment, and goodwill.
Further, certain tax implications related to the realization of the unrealized
gains and losses could have a substantial impact on these fair value estimates
and have not been incorporated into any of the estimates.
- -------------------------------------------------------------------------------
18
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- -------------------------------------------------------------------------------
(19) MORTGAGE BANKING ACTIVITIES
A detailed breakout of mortgage banking revenues for each of the years in the
three-year period ended June 30, 1996 is presented below (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Origination fees................................................. $ 348 414 505
Servicing fees................................................... 626 625 624
Net gains on sales of loans...................................... 187 170 587
-------- ------- ------
Total mortgage banking revenues.................................. $ 1,161 1,209 1,716
======== ======= ======
</TABLE>
Mortgage loans serviced for others are not included in the accompanying
consolidated financial statements. The unpaid balances of these loans were
approximately $183,267,000, $190,443,000 and $178,681,000 at June 30, 1996, 1995
and 1994, respectively.
Purchased mortgage servicing rights were approximately $132,000 and $137,000 at
June 30, 1996 and 1995, respectively, and are recorded in other assets.
Amortization of the purchased mortgage servicing rights was approximately
$54,000, $55,000 and $58,000 for the years ended June 30, 1996, 1995 and 1994,
respectively.
- -------------------------------------------------------------------------------
(20) WESTERFED INFORMATION
The summarized condensed financial information for WesterFed Financial
Corporation as of and for the years ending June 30, 1996 and 1995 are presented
below (in thousands):
<TABLE>
<CAPTION>
Condensed Balance Sheet 1996 1995
---- ----
<S> <C> <C>
Assets:
Cash and cash equivalents.................................................... $ 14 12
Interest-bearing and due from banks deposits................................. 774 3,780
Investment securities available-for-sale..................................... 12,853 7,667
Mortgage-backed securities available-for-sale................................ 3,084 4,383
Other assets................................................................. 128 162
Investment in subsidiaries................................................... 62,300 59,407
--------- --------
Total assets........................................................ $ 79,153 75,411
========= ========
Liabilities and Stockholders' Equity:
Other liabilities............................................................ $ 546 265
Stockholders' Equity:
Common stock............................................................. 46 46
Additional paid-in capital............................................... 45,451 45,232
Common stock acquired by ESOP/RRP........................................ (3,558) (4,271)
Treasury stock at cost................................................... (3,079) (3,066)
Net unrealized gain on securities available-for-sale..................... (226) 295
Retained earnings........................................................ 39,973 36,910
--------- --------
Total stockholders' equity.......................................... 78,607 75,146
--------- --------
Total liabilities and stockholders' equity.......................... $ 79,153 75,411
========= ========
</TABLE>
During the year ended June 30, 1996, dividends of approximately $1,199,000 were
paid by the bank subsidiary to WesterFed.
19
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- -------------------------------------------------------------------------------
Condensed Statement of Income
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Interest income................................................................... $ 898 831
Non-interest expense.............................................................. (348) (129)
-------- -------
Income before equity in earnings of subsidiaries............................. 550 702
Equity in earnings of subsidiaries................................................ 4,176 3,696
-------- -------
Income before income taxes................................................... 4,726 4,398
Income taxes .................................................................... (167) (270)
-------- -------
Net income................................................................... $ 4,559 4,128
======== =======
Condensed Statement of Cash Flows
Operating Activities:
Net income................................................................... $ 4,559 4,128
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in undistributed earnings of subsidiaries......................... (2,977) (2,697)
Amortization of premiums on investments and mortgage-backed
securities available-for-sale....................................... (225) 128
ESOP shares available for allocation..................................... 446 396
Increase in other assets and liabilities, net............................ (250) (40)
-------- -------
Net cash provided by operating activities....................... 1,553 1,915
-------- -------
Investing Activities:
Net change in interest-bearing deposits..................................... 3,006 (2,280)
Purchase of investment and mortgage-backed securities....................... (21,782) (2,499)
Principal payments on mortgage-backed securities............................ 1,334 585
Proceeds from maturities of investment securities........................... 16,846 2,500
-------- -------
Net cash used by investing activities.......................... (596) (1,694)
-------- -------
Financing Activities:
Dividends paid to stockholders.............................................. (955) (970)
Payments to acquire treasury stock.......................................... - (3,057)
-------- -------
Net cash used by financing activities.......................... (955) (4,027)
-------- -------
Increase (decrease) in cash and cash equivalents................................. 2 (3,806)
Cash and cash equivalents at beginning of year................................... 12 3,818
-------- -------
Ending cash and cash equivalents............................... $ 14 12
======== =======
</TABLE>
Non-Cash Investing and Financing Activities
Treasury stock of approximately $13,000 and $8,000 was recorded due to
forfeitures of unearned RRP shares for the years ended June 30, 1996 and 1995,
respectively. During 1995, WesterFed issued stock under the RRP and recorded
deferred compensation of approximately $29,000.
At June 30, 1996 and 1995, WesterFed recognized WFSB's change in unrealized gain
(loss) on securities available-for-sale, net of taxes, of $(559,000) and
$531,000.
Amortization of the RRP deferred compensation of approximately $473,000 recorded
at WFSB was recognized by WesterFed through the investment in subsidiaries
account at June 30, 1996 and 1995.
At June 30, 1996, the fair value of securities available-for-sale approximated
their recorded cost. At June 30, 1995, recorded an unrealized loss on securities
available-for-sale of approximately $36,000 net of deferred income taxes of
$24,000.
20
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- -------------------------------------------------------------------------------
On June 28, 1996, WesterFed declared a dividend of approximately $541,000 which
is recorded in other liabilities at June 30, 1996.
On June 27, 1995, WesterFed declared a dividend of approximately $287,000 which
is recorded in other liabilities at June 30, 1995.
- -------------------------------------------------------------------------------
(21) CONDENSED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(in thousands except per share data)
<TABLE>
<CAPTION>
1996
---------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income................................. $ 10,685 10,773 10,680 10,406
Interest expense................................ 6,048 6,269 6,262 6,158
--------- --------- --------- ---------
Net interest income.................... 4,637 4,504 4,418 4,248
Provision for loan losses....................... - - - -
Other income.................................... 903 919 832 1,228
Other expense................................... (3,846) (3,602) (3,388) (3,738)
--------- --------- --------- ---------
Income before income tax expense....... 1,694 1,821 1,862 1,738
Income tax expense.............................. (466) (703) (717) (670)
--------- --------- --------- ---------
Net income............................. $ 1,228 1,118 1,145 1,068
========= ========= ========= =========
Earnings per share..................... $ .29 .26 .27 .25
========= ========= ========= =========
1995
---------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Interest income................................. $ 10,010 9,509 9,276 8,988
Interest expense................................ 5,832 5,379 5,010 4,763
--------- --------- --------- ---------
Net interest income.................... 4,178 4,130 4,266 4,225
Provision for loan losses....................... - - - -
Other income.................................... 834 780 800 793
Other expense................................... (3,392) (3,420) (3,386) (3,207)
--------- --------- --------- ---------
Income before income tax expense....... 1,620 1,490 1,680 1,811
Income tax expense.............................. (615) (546) (625) (687)
--------- --------- --------- ---------
Net income............................. $ 1,005 944 1,055 1,124
========= ========= ========= =========
Earnings per share..................... $ .24 .22 .24 .25
========= ========= ========= =========
</TABLE>
- -------------------------------------------------------------------------------
(22) SUBSEQUENT EVENT
On September 24, 1996, WesterFed Financial Corporation signed an agreement to
purchase all of the outstanding common stock of Security Bancorp. Security
Bancorp has sixteen offices located throughout Montana. The total purchase price
is approximately $44.0 million, subject to certain adjustments. Completion of
the acquisition is subject to various regulatory approvals and other conditions
which must be satisfied by each of the parties to the agreement.
WesterFed Financial Corporation intends to fund the acquisition through a
combination of cash of approximately $24.3 million and the issuance of common
stock of approximately $19.7 million. Subject to satisfaction of the various
conditions, closing of the acquisition is scheduled to occur on or before March
31, 1997. With the acquisition, consolidated assets of WesterFed Financial
Corporation would total approximately $954.0 million compared to consolidated
assets of approximately $563.9 million at June 30, 1996.
21
<PAGE>
General Corporate and Stockholders' Information
- --------------------------------------------------------------------------------
CORPORATE HEADQUARTERS
110 East Broadway
Missoula, MT 59802
(406) 721-5254
INDEPENDENT ACCOUNTANTS
KPMG Peat Marwick LLP
Billings, MT
GENERAL COUNSEL
Worden, Thane and Haines, P.C.
Missoula, MT
SPECIAL COUNSEL
Silver, Freedman and Taff, LLP
Washington, D.C.
TRANSFER AGENT, REGISTRAR AND DIVIDEND DISBURSING AGENT
Stockholder inquiries regarding transfer requirements, dividends, lost
certificates, and changes of address should be directed to the transfer agent:
Trust Corp
8 Third Street North, Suite 301
P.O. Box 2309
Great Falls, MT 59403-2309
1-800-634-5526
ANNUAL MEETING
The annual meeting of stockholders will be held on Tuesday, October 22, 1996,
beginning at 9:00 a.m. at the Southgate Office, 2601 Garfield, Missoula, MT
FORM 10-K
This report is available to stockholders of record without charge upon written
request to:
Douglas G. Bardwell
Corporate Secretary
WesterFed Financial Corporation
110 East Broadway
Missoula, MT 59802
STOCK INFORMATION
WesterFed stock is traded in the over-the-counter market with quotations through
the Nasdaq National Market System under the symbol WSTR.
At June 30, 1996, there were 1,193 stockholders of record.
<PAGE>
At June 30, 1996, there were approximately 2,042 beneficial stockholders.
To request information on dividend reinvestment, please contact:
Dale Brevik
Investor Relations
WesterFed Financial Corporation
110 East Broadway
Missoula, MT 59802
Phone: 406-543-1315
General Corporate and Stockholders' Information
- -------------------------------------------------------------------------------
Stock Prices Dividends
Quarter Ended High Low Declared
March 31, 1994 $14.25 10.00* .05
June 30, 1994 $14.50 12.25 .0512
September 30, 1994 $14.63 13.25 .055
December 31, 1994 $14.00 11.38 .06
March 31, 1995 $13.63 12.38 .065
June 30, 1995 $15.38 12.44 .07
September 30, 1995 $17.13 15.00 .075
December 31, 1995 $17.13 15.50 .080
March 31, 1996 $16.75 14.75 .085
June 30, 1996 $14.88 14.00 .123**
* Initial public offering price
** Declared June 26, 1996, payable August 20 to stockholders of record August 6.
Includes a special dividend of $0.033 per share.
MARKET MAKERS
Friedman Billings Ramsey & Company
D.A. Davidson & Company, Incorporated
Everen Securities Incorporated
Hertzog, Heine, Geduld, Incorporated
Mayer & Schweitzer Incorporated
Sandler O'Neill & Partners
WESTERFED OFFICERS
Lyle R. Grimes
President/CEO
James A. Salisbury
Treasurer/CFO
Douglas G. Bardwell
Vice President/Secretary
<PAGE>
WESTERFED DIRECTORS
Dr. Marvin Reynolds
Chairman
John E. Roemer
Vice Chairman
Lyle R. Grimes
William E. Grabow
Dr. Otto Klein, Jr.
Robert F. Burke
Directors and Officers of Western Federal Savings Bank
- -------------------------------------------------------------------------------
BOARD OF DIRECTORS
Dr. Marvin Reynolds
Chairman
Dentist
John E. Roemer
Vice Chairman
Retired
Lyle R. Grimes
Director/President/CEO
William E. Grabow
Director
Architect
Dr. Otto Klein, Jr.
Director
Ophthalmologist
Robert F. Burke
Director
Financial Planner
Donovan Worden, Jr.
Director Emeritus
EXECUTIVE OFFICERS
Lyle R. Grimes
President/CEO
Douglas G. Bardwell
Executive Vice President/COO
<PAGE>
Exhibit 21
Subsidiaries of Registrant
<PAGE>
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Percent State of
of Incorporation
Parent Subsidiary Ownership or Organization
------ ---------- --------- ---------------
<S> <C> <C> <C>
WesterFed Financial Corporation Western Federal Savings Bank of Montana 100% Federal
Western Federal Savings Bank of Montana Monte Mac I 100% Montana
Western Federal Savings Bank of Montana WesterFed Financial Corporation 100% Montana
Western Federal Savings Bank of Montana Service Corporation of Montana 100% Montana
Western Federal Savings Bank of Montana WesterFed Insurance Services, Inc. 100% Montana
</TABLE>
<PAGE>
Exhibit 23
Consent of Experts and Counsel
<PAGE>
KPMG PEAT MARWICK LLP
1000 First Interstate Center
401 N. 31st Street
P.O. Box 7108
Billings, MT 59103
The Board of Directors
WesterFed Finacial Corporation:
We consent to the incorporation by reference in the registration statement on
Form S-8 of WesterFed Financial Corporation of our report dated July 26, 1996
except for note 22 which is as of September 24, 1996, relating to the
consolidated balance sheet of WesterFed Financial Corporation and subsidiaries
as of June 30, 1996 and 1995, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the years in the three-year
period ended June 30, 1996, which report appears in the June 30, 1996 annual
report on Form 10-k of WesterFed Financial Corporation. Our report refers to a
change to the method of accounting for securities.
KPMG PEAT MARWICK LLP
/s/ KPMG Peat Marwick LLP
- ---------------------------
Billing, Montana
September 27, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 7,829
<INT-BEARING-DEPOSITS> 8,470
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 80,546
<INVESTMENTS-CARRYING> 76,856
<INVESTMENTS-MARKET> 76,148
<LOANS> 368,193
<ALLOWANCE> 2,005
<TOTAL-ASSETS> 563,931
<DEPOSITS> 350,212
<SHORT-TERM> 14,000
<LIABILITIES-OTHER> 9,274
<LONG-TERM> 111,838
0
0
<COMMON> 46
<OTHER-SE> 78,561
<TOTAL-LIABILITIES-AND-EQUITY> 563,931
<INTEREST-LOAN> 28,640
<INTEREST-INVEST> 13,723
<INTEREST-OTHER> 181
<INTEREST-TOTAL> 42,544
<INTEREST-DEPOSIT> 16,085
<INTEREST-EXPENSE> 24,737
<INTEREST-INCOME-NET> 17,807
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 390
<EXPENSE-OTHER> 2,962
<INCOME-PRETAX> 7,115
<INCOME-PRE-EXTRAORDINARY> 4,559
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,559
<EPS-PRIMARY> 1.07
<EPS-DILUTED> 1.07
<YIELD-ACTUAL> 0
<LOANS-NON> 404
<LOANS-PAST> 311
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 358
<ALLOWANCE-OPEN> 2,011
<CHARGE-OFFS> 11
<RECOVERIES> 5
<ALLOWANCE-CLOSE> 2,005
<ALLOWANCE-DOMESTIC> 2,005
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 888
</TABLE>
