As filed with the Securities and Exchange Commission on November 19, 1996
Registration No. 333-
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
Registration Statement Under the Securities Act of 1933
WESTERFED FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 6120 81-0187794
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation) Classification Number) Identification No.)
LYLE R. GRIMES DAVID W. JORGENSON
WesterFed Financial Corporation Security Bancorp
100 East Broadway 219 North 26th Street
Missoula, Montana 59802-4511 Billings, Montana 59101
(406) 721-5254 (406) 238-4800
(Address, including ZIP code, and telephone (Name, address, including
number, including area code, of registrant's ZIP code, and telephone number,
principal executive offices) including area code, of agent
for service)
COPIES TO:
CHRISTOPHER R. KELLY, P.C. STEPHEN M. KLEIN, ESQ.
Beth A. Freedman, Esq. Graham & Dunn
Silver, Freedman & Taff, L.L.P. 1420 Fifth Avenue
1100 New York avenue, N.W. Suite 3300
Washington, D.C. 20005 Seattle, Washington 98101
Approximate date of commencement of proposed sale of the securities to
the public: As soon as practicable after this Registration Statement becomes
effective.
If the securities being registered on this Form are being offered in
connection with formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
-----------------------
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
<TABLE>
<CAPTION>
Calculation of Registration Fee
===============================================================================================================================
Proposed maximum Proposed maximum Amount
Title of each class of Amount to offering price aggregate offering of
securities to be registered be registered per share price registration fee
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value $1,660,000 shares(1) N/A $48,555,000 $14,714
===============================================================================================================================
<FN>
(1) Represents the estimated maximum number of shares of common stock, par
value $.01 per share, of WesterFed Financial Corporation ("WesterFed"),
expected to be issued in exchange for up to 1,660,000 shares of common
stock, par value $1.00 per share, of Security Bancorp ("Security"), upon
consummation of the merger of Security with and into WesterFed, described
herein.
(2) Estimated solely for the purpose of calculating the registration fee. The
registration fee has been computed pursuant to Rule 457(f)(1) under the
Securities Act of 1933, as amended, based on the average of the bid and
ask price ($29.25) of shares of Security Common Stock on November 15,
1996.
</FN>
</TABLE>
===============================================================================
<PAGE>
NOTICE OF SPECIAL MEETING AND PROXY STATEMENT
[WESTERFED LOGO]
February ____, 1997
Dear WesterFed Financial Stockholder:
On behalf of the Board of Directors and management, I cordially invite you to
attend the Special Meeting of Stockholders (the "Special Meeting") of WesterFed
Financial Corporation ("WesterFed Financial") to be held at __:__ _.m. on
February __, 1997 at _____________________________ located at
________________________, Missoula, Montana.
At this important Special Meeting, stockholders will be asked to approve and
adopt an Agreement and Plan of Merger (the "Merger Agreement") pursuant to which
Security Bancorp ("Security") will merge with and into WesterFed Financial (the
"Merger"), with WesterFed Financial as the surviving corporation, and WesterFed
Financial will pay cash and issue shares of its common stock to stockholders of
Security. Security is the holding company for Security Bank FSB, which operates
16 offices throughout Montana.
The terms of the proposed Merger, including the procedures for determining the
amount of cash and WesterFed Financial stock that may be issued as well as other
important information relating to WesterFed Financial, Security and the combined
company, are explained in the accompanying Joint Proxy Statement/Prospectus.
Please give this document your prompt attention.
The Board of Directors of WesterFed Financial has carefully reviewed and
considered the terms and conditions of the Merger Agreement. The Board of
Directors of WesterFed Financial has concluded that the Merger Agreement and the
proposed Merger are in the best interest of the stockholders of WesterFed
Financial, and unanimously recommends that WesterFed Financial stockholders vote
"FOR" the Merger Agreement proposal.
Consummation of the Merger is subject to certain conditions, including
regulatory approvals and approval by the requisite votes of the stockholders of
both WesterFed Financial and Security.
At the Special Meeting, you will also be asked to ratify the adoption of the
Equity Incentive Plan.
I encourage you to attend the Special Meeting in person. Whether or not you do,
I hope you will read the Joint Proxy Statement/Prospectus and then complete,
sign and date the proxy card and return it in the enclosed postage-paid
envelope. This will save WesterFed Financial additional expense in soliciting
proxies and will ensure that your shares are represented. Please note that you
may vote in person at the Special Meeting even if you have previously returned
the proxy.
Thank you for your attention to this important matter.
Sincerely,
Lyle R. Grimes
Chairman of the Board
<PAGE>
[SECURITY LETTERHEAD]
February __, 1997
Dear Security Bancorp Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders
(the "Annual Meeting") of Security Bancorp ("Security") which will be held on
________, 1997 at __:__ a.m., local time, at the
- ----------------------------------------, ------, -----.
At the Annual Meeting, you will be asked to consider and approve and
adopt among other things a proposal to approve an Agreement and Plan of Merger
(the "Merger Agreement") pursuant to which Security will be merged (the
"Merger") with and into WesterFed Financial Corporation ("WesterFed Financial").
Upon consummation of the Merger, each Security Stockholder may elect to receive
for each share of Security common stock held either $30.00 in cash, a number of
shares of WesterFed Financial common stock equal to the "exchange ratio" or a
combination of cash and stock, subject to the stock component being 40% to 45%
of the total consideration. The "exchange ratio" is $30.00 divided by the
average closing price of WesterFed Financial common stock for the twenty trading
days commencing thirty trading days prior to the closing. However, if the
average WesterFed Financial stock price is (a) equal to or less than $13.05, the
exchange ratio will be 2.2989, (b) equal to or greater than $15.55 but not
greater than $17.50, the exchange ratio will be 1.8809, or (c) in excess of
$17.50, the exchange ratio will be (absent extraordinary circumstances) $32.91
divided by the average price.
The proposed Merger has been approved by the Board of Directors of both
Security and WesterFed Financial. Your Board of Directors has determined that
the Merger is in the best interests of Security and its stockholders and
recommends that you vote FOR approval of the Merger Agreement. The investment
banking firm of Montgomery Securities has issued its written opinion to your
Board of Directors regarding the fairness of the consideration to be paid by
WesterFed Financial pursuant to the Merger Agreement as of the date of such
opinion.
Consummation of the Merger is subject to certain conditions, including,
but not limited to, approvals by the requisite vote of the stockholders of both
Security and WesterFed Financial and certain regulatory approvals.
The enclosed Notice of Annual Meeting and Joint Proxy
Statement/Prospectus describe the Merger and provide specific information
regarding the Annual Meeting. Please read these materials carefully.
At the Annual Meeting you will also be asked to elect three directors
to the Board of Directors and to ratify the appointment of accountants.
It is very important that your shares are represented at the Annual
Meeting, whether or not you plan to attend in person. The affirmative vote of
the holders of two-thirds of the votes that may be cast by all Security
stockholders entitled to vote at the Annual Meeting is required for approval of
the Merger Agreement. A failure to vote for approval of the Merger Agreement
will have the same effect as a vote against the Merger Agreement. Therefore, I
urge you to complete, sign, date and return the enclosed proxy appointment card
in the enclosed postage-paid envelope as soon as possible to assure that your
shares will be voted at the Annual Meeting. You should also complete the
Election Form accompanying the Prospectus/Joint Proxy Statement in order to
select your preference (within specified limitations) for WesterFed Financial
common stock or cash. You should not send in certificates for your Security
shares at this time.
On behalf of the Board of Directors, I thank you for your support and
urge you to vote FOR approval of the Merger Agreement.
Sincerely,
-----------------------
David W. Jorgenson
President and Chief
Executive Officer
2
<PAGE>
WESTERFED FINANCIAL CORPORATION
110 East Broadway
Missoula, Montana 59802
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To be Held on February __, 1997
It is our pleasure to invite you to a Special Meeting (the "Special
Meeting") of holders of the common stock, par value $.01 per share (the
"WesterFed Financial Common Stock") of WesterFed Financial Corporation, a
Delaware corporation ("WesterFed Financial"), to be held at the
_____________________________ located at __________________________, Missoula,
Montana, on February __, 1997 at __:__ _.m., Missoula, Montana time.
A proxy card and a Joint Proxy Statement/Prospectus for the Special
Meeting are enclosed.
The Special Meeting is for the purpose of considering and acting upon:
1. The approval and adoption of the Agreement and Plan
of Merger (the "Merger Agreement"), as of September
24, 1996, by and between WesterFed Financial and
Security Bancorp ("Security"), as more fully
described in the accompanying Joint Proxy
Statement/Prospectus. A copy of the Merger Agreement
is set forth as Appendix I to the accompanying Joint
Proxy Statement/Prospectus and is incorporated by
reference herein.
2. The ratification of the adoption of the Equity
Incentive Plan.
3. Such other matters as may properly come before the
Special Meeting and any and all adjournments and
postponements thereof. The Board of Directors is not
aware of any other business to come before the
Special Meeting.
Any action may be taken on the foregoing proposals at the Special
Meeting on the date specified above or on any date or dates to which the Special
Meeting may be adjourned or postponed. Only holders of record of WesterFed
Financial Common Stock at the close of business on January __, 1997 are the
stockholders entitled to receive notice of and to vote at the Special Meeting
and any and all adjournments and postponements thereof. A list of WesterFed
Financial stockholders entitled to vote at the Special Meeting will be available
for examination, for any purpose germane to the Special Meeting, at the
_____________________________ located at _________________________, Missoula,
Montana, during ordinary business hours for at least ten days prior to the
Special Meeting and for the duration of the Special Meeting itself.
The affirmative vote of the holders of a majority of the outstanding
shares of WesterFed Financial Common Stock is required to approve the proposal
to adopt the Merger Agreement. The ratification of the adoption of the Equity
Incentive Plan requires the affirmative vote of holders of a majority of the
shares actually voted on such proposal.
You are requested to complete, sign and date the enclosed form of
proxy, which is solicited on behalf of the Board of Directors, and to mail it
promptly in the enclosed postage-paid envelope. The proxy will not be used if
you attend and vote at the Special Meeting in person.
Remember, if your shares are held in the name of a broker, only your
broker can vote your shares and only after receiving your instructions. Please
contact the person responsible for your account and instruct him/her to execute
a proxy card on your behalf.
3
<PAGE>
If you have any questions or require assistance, please call
_________________, which is assisting us in the solicitation of proxies, at
(___) ___-____.
By Order of the Board of Directors
-----------------------
Lyle R. Grimes
Chairman of the Board
Missoula, Montana
January __, 1997
- --------------------------------------------------------------------------------
IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE WESTERFED FINANCIAL THE
EXPENSE OF FURTHER REQUESTS FOR PROXIES TO ENSURE A QUORUM AT THE SPECIAL
MEETING. A PRE-ADDRESSED RETURN ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO
POSTAGE IS REQUIRED IF MAILED WITHIN THE UNITED STATES.
- --------------------------------------------------------------------------------
4
<PAGE>
[SECURITY LETTERHEAD]
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held on February __, 1997
NOTICE IS HEREBY GIVEN that the Annual Meeting (the "Annual Meeting")
of holders of the common stock, par value $1.00 per share (the "Security Common
Stock"), of Security Bancorp, a Montana corporation ("Security") will be held at
Security Bank, located at 219 North 26th Street, Billings, Montana 59101 on
February __, 1997, at __:__ _.m., local time, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt
an Agreement and Plan of Merger (the "Merger Agreement"), as of
September 24, 1996, by and between Security and WesterFed Financial
Corporation ("WesterFed Financial"), a copy of which is included in the
accompanying Joint Proxy Statement/Prospectus as Appendix I. As more
fully described in the Joint Proxy Statement/Prospectus, the Merger
Agreement provides for the merger (the "Merger") of Security with and
into WesterFed Financial, with WesterFed Financial surviving the
transaction. Pursuant to the Merger Agreement and subject to certain
exceptions, as more fully described in the Joint Proxy
Statement/Prospectus.
2. The election of three directors of Security Bancorp.
3. To ratify the selection of KPMG Peat Marwick LLP as
independent public accountants for the fiscal year ended June 30, 1997
and any interim periods.
4. To transact such other business as may properly come before
the Annual Meeting or any adjournments or postponements thereof.
Pursuant to Security's Bylaws, the Board of Directors has set January
__, 1997 as the record date for the determination of stockholders entitled to
notice of and to vote at the Annual Meeting and at any adjournments or
postponements thereof. Only holders of record of Security Common Stock at the
close of business on that date will be entitled to receive notice of and to vote
at the Annual Meeting and any adjournments or postponements thereof. A list of
Security stockholders entitled to vote at the Annual Meeting will be available
for examination, for any purpose germane to the Annual Meeting, at the Main
office of Security Bank, FSB, Billings, Montana, during ordinary business hours
for the ten days prior to the Annual Meeting and for the duration of the Annual
Meeting itself.
Your vote is important regardless of the number of shares you own. Each
stockholder, even though he or she may plan to attend the Annual Meeting, is
requested to sign, date and return the enclosed Proxy without delay in the
enclosed postage-paid envelope. You may revoke your Proxy at any time prior to
its exercise. Any stockholder present at the Annual Meeting or at any
adjournments or postponements thereof may revoke his or her Proxy and vote
personally on each matter brought before the Annual Meeting.
If you have any questions or require assistance, please call D.F. King
& Co., Inc., which is assisting us in the solicitation of proxies, at (212)
493-6920.
By Order of the Board of Directors,
Elaine F. Hine
Secretary
February __, 1997
Billings, Montana
THE BOARD OF DIRECTORS OF SECURITY RECOMMENDS THAT YOU VOTE FOR THE
ABOVE PROPOSALS. PLEASE SIGN AND DATE THE ENCLOSED PROXY
AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE.
5
<PAGE>
JOINT PROXY STATEMENT
OF
WESTERFED FINANCIAL CORPORATION
AND
SECURITY BANCORP
FOR MEETINGS OF THEIR
RESPECTIVE STOCKHOLDERS
TO BE HELD ON FEBRUARY __, 1997
AND FEBRUARY __, 1997
---------------
PROSPECTUS
OF
WESTERFED FINANCIAL CORPORATION
---------------
This Joint Proxy Statement/Prospectus relates to the proposed merger
(the "Merger") of Security Bancorp, a Montana corporation ("Security"), with and
into WesterFed Financial Corporation, a Delaware corporation ("WesterFed
Financial"), as contemplated by the Agreement and Plan of Merger, as of
September 24, 1996 (the "Merger Agreement'), by and between Security and
WesterFed Financial. The Merger Agreement is included as Appendix I and
incorporated herein by reference.
This Joint Proxy Statement/Prospectus is being furnished to the holders
of shares of common stock, par value $.01 per share, of WesterFed Financial
("WesterFed Financial Common Stock") in connection with the solicitation of
proxies by the Board of Directors of WesterFed Financial for use at the Special
Meeting of Stockholders of WesterFed Financial (the "WesterFed Financial Special
Meeting") to be held at __:__ _.m., local time, on February __, 1997 at
______________________________, located at __________________________, ______,
________, and at any and all adjournments or postponements thereof.
This Joint Proxy Statement/Prospectus is also being furnished to the
stockholders of Security in connection with the solicitation of proxies by the
Board of Directors of Security for use at the Annual Meeting of stockholders of
Security (the "Security Annual Meeting") to be held at _____ _.m., local time,
on February __, 1997 at the Main Office of Security Bank, located at 219 North
26th Street, Billings, Montana, and at any and all adjournments or postponements
thereof.
This Joint Proxy Statement/Prospectus also constitutes a prospectus of
WesterFed Financial, filed as part of the Registration Statement (defined below)
with respect to up to __________ shares of WesterFed Financial Common Stock to
be issued upon consummation of the Merger pursuant to the terms of the Merger
Agreement.
Subject to the terms, conditions and procedures set forth in the Merger
Agreement, each stockholder of Security Common Stock, par value $1.00 per share
("Security Common Stock"), may elect to receive for each share of Security
common stock held either $30.00 in cash, a number of shares of WesterFed
Financial Common Stock equal to the "exchange ratio" or a combination of cash
and stock, subject to the stock component being 40% to 45% of the total
consideration. The "exchange ratio" (the "Exchange Ratio") is $30.00 divided by
the average closing price of WesterFed Financial Common Stock for the 20 trading
days commencing on and including the thirtieth trading day prior to the date of
the closing (the "Average WesterFed Stock Price"). However, if the Average
WesterFed Financial Stock Price is (a) equal to or less than $13.05, the
Exchange Ratio will be 2.2989, (b) equal to or greater than $15.95 but not
greater than $17.50, the Exchange Ratio will be 1.8809, or (c) in excess of
$17.50, the Exchange Ratio will be (absent extraordinary circumstances) $32.91
divided by the Average WesterFed Financial Stock Price.
The outstanding shares of WesterFed Financial Common Stock are, and the
shares of WesterFed Financial Common Stock offered hereby will be, quoted on the
National Association of Securities Dealers Automated
i
<PAGE>
Quotations National Market System (the "Nasdaq/NMS"). The last reported sale
price of the WesterFed Financial Common Stock on the Nasdaq/NMS on January ___,
1997 was $_____ per share. The Security Common Stock is quoted on the
Nasdaq/NMS. The last reported sale price of the Security Common Stock on the
Nasdaq/NMS on January ___, 1997 was $______ per share.
---------------------
NEITHER THIS TRANSACTION NOR THESE SECURITIES HAVE BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT
SUPERVISION, ANY STATE SECURITIES COMMISSION, OR ANY OTHER GOVERNMENTAL AGENCY,
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT
SUPERVISION, ANY STATE SECURITIES COMMISSION, OR ANY OTHER AGENCY PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF WESTERFED FINANCIAL COMMON STOCK OFFERED HEREBY ARE NOT
SAVINGS ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF ANY BANK OR SAVINGS
ASSOCIATION AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE BANK INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER
GOVERNMENTAL AGENCY.
-------------------
This Joint Proxy Statement/Prospectus, the accompanying notices and the
accompanying forms of proxy are first being mailed to stockholders of WesterFed
Financial and Security on or about January __, 1997.
ii
<PAGE>
AVAILABLE INFORMATION
WesterFed Financial and Security are subject to the informational
reporting requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and, in accordance therewith, file reports, proxy statements and
other information with the Securities and Exchange Commission (the "SEC"). Such
reports, proxy statements and other information filed by WesterFed Financial and
Security can be obtained, upon payment of prescribed fees, from the Public
Reference Section of the SEC at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington D.C. 20549. In addition, such information can be inspected and copied
at the public reference facilities of the SEC located at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549 and at the SEC's Regional Offices located at
Citicorp Center, Suite 1400, 500 West Madison Street, Chicago, Illinois
60661-2511 and 7 World Trade Center, Suite 1300, New York, New York 10048. In
addition, the SEC maintains a Web site that contains reports, proxy and
information statements and other information regarding WesterFed Financial's and
Security's electronic filings with the SEC. The address of the SEC's Web site is
"http://www.sec.gov."
WesterFed Financial has filed with the SEC a registration statement on
Form S-4 (together with all amendments, schedules, and exhibits thereto, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the shares of WesterFed Financial Common
Stock to be issued pursuant to and as contemplated by the Merger Agreement. This
Joint Proxy Statement/Prospectus does not contain all the information set forth
in the Registration Statement, certain parts of which have been omitted in
accordance with the rules and regulations of the SEC. The Registration Statement
is available for inspection and copying as set forth above. Statements contained
in this Joint Proxy Statement/Prospectus or in any document incorporated by
reference in this Joint Proxy Statement/Prospectus as to the contents of any
contract or other document are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference.
-------------------
All information contained in this Joint Proxy Statement/Prospectus with
respect to WesterFed Financial and its subsidiaries has been supplied by
WesterFed Financial, and all information with respect to Security and its
subsidiaries has been supplied by Security.
No person is authorized to give any information or to make any
representation other than those contained or incorporated by reference in this
Joint Proxy Statement/Prospectus, and if given or made, such information or
representation should not be relied upon as having been authorized. This Joint
Proxy Statement/Prospectus does not constitute an offer to sell, or a
solicitation of an offer to purchase, the securities offered by this Joint Proxy
Statement/Prospectus, or the solicitation of a proxy, in any jurisdiction, to or
from any person to whom or from whom it is unlawful to make such offer,
solicitation of an offer or proxy solicitation in such jurisdiction. Neither the
delivery of this Joint Proxy Statement/Prospectus nor any distribution of
securities pursuant to this Joint Proxy Statement/Prospectus shall, under any
circumstances, create an implication that there has been no change in the
affairs of WesterFed Financial or Security or any of their respective
subsidiaries, or in the information set forth herein, since the date of this
Joint Proxy Statement/Prospectus.
THIS JOINT PROXY STATEMENT/PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS WITH RESPECT TO THE FINANCIAL CONDITION, RESULTS OF OPERATIONS AND
BUSINESS OF WESTERFED FINANCIAL FOLLOWING THE CONSUMMATION OF THE MERGER,
INCLUDING STATEMENTS RELATING TO THE COST SAVINGS AND REVENUE ENHANCEMENTS THAT
MAY BE REALIZED FROM THE MERGER. SEE "SUMMARY" AND "UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS." FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS INCLUDE,
AMONG OTHERS, THE FOLLOWING POSSIBILITIES: (1) EXPECTED COST SAVINGS OR REVENUE
ENHANCEMENTS FROM THE MERGER CANNOT BE FULLY REALIZED; (2) DEPOSIT ATTRITION,
CUSTOMER LOSS OR REVENUE LOSS FOLLOWING THE MERGER IS GREATER THAN EXPECTED; (3)
COMPETITIVE PRESSURE IN THE BANKING AND FINANCIAL SERVICES INDUSTRY INCREASES
SIGNIFICANTLY; (4) CHANGES IN THE INTEREST RATE ENVIRONMENT REDUCE MARGINS; AND
(5) GENERAL ECONOMIC CONDITIONS, EITHER NATIONALLY OR IN THE STATE OF MONTANA,
ARE LESS FAVORABLE THAN EXPECTED. -------------------
iii
<PAGE>
TABLE OF CONTENTS
Page
----
SUMMARY ............................................................... 1
The Parties to the Merger...................................... 1
WesterFed Financial................................... 1
Security ............................................. 1
The Meetings................................................... 2
WesterFed Financial Special Meeting................... 2
Security Annual Meeting............................... 2
The Merger..................................................... 3
General ............................................. 4
Reasons for the Merger; Recommendations of the Boards
of Directors......................................... 4
Merger Consideration.................................. 4
Opinions of Financial Advisors........................ 4
Effective Time and Closing Date....................... 5
Interests of Certain Persons in the Merger............ 5
Dissenters' Rights.................................... 6
Conditions to the Merger.............................. 6
Regulatory Approvals.................................. 6
Waiver and Amendment; Termination..................... 7
Conduct of Business Pending the Merger................ 7
Expenses ............................................. 7
Accounting Treatment.................................. 7
Certain Federal Income Tax Consequences of the
Merger............................................... 7
Effects of the Merger on Rights of Stockholders....... 8
Nasdaq Listing........................................ 8
Certain Related Transactions................................... 8
Stock Option Agreements............................... 8
COMPARATIVE STOCK PRICES AND DIVIDEND INFORMATION....................... 9
SUMMARY HISTORICAL FINANCIAL INFORMATION OF WESTERFED FINANCIAL......... 11
SUMMARY HISTORICAL FINANCIAL INFORMATION OF SECURITY.................... 12
COMPARATIVE UNAUDITED PER SHARE DATA.................................... 13
THE MEETINGS............................................................ 14
WesterFed Financial Special Meeting............................ 14
Security Annual Meeting........................................ 16
THE MERGER.............................................................. 18
General ...................................................... 18
Background of and Reasons for the Merger....................... 18
Recommendations of the Boards of Directors..................... 21
Merger Consideration........................................... 21
Security Stockholder Election Procedures....................... 22
Opinion of WesterFed Financial's Financial Advisor............. 22
Opinion of Security's Financial Advisor........................ 25
Effective Time and Closing Date................................ 29
Interests of Certain Persons in the Merger..................... 30
Effect on Employees and Employee Benefit Plans of Security..... 33
Dissenters' Rights............................................. 34
Fractional Shares.............................................. 35
Exchange of Certificates....................................... 36
Representations and Warranties................................. 37
Conditions to the Merger....................................... 37
Regulatory Approvals........................................... 38
Waiver and Amendment; Termination.............................. 38
Conduct of Business Pending the Merger......................... 39
Expenses ...................................................... 40
Accounting Treatment........................................... 41
Certain Federal Income Tax Consequences of the Merger.......... 41
Nasdaq Listing................................................. 43
CERTAIN RELATED TRANSACTIONS............................................ 44
iv
<PAGE>
Stock Option Agreements........................................ 45
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION...................... 46
MANAGEMENT OF WESTERFED FINANCIAL....................................... 53
Directors and Executive Officers............................... 53
Executive Compensation......................................... 54
Employment Agreements.......................................... 55
Certain Relationships and Related Transactions................. 60
BUSINESS OF WESTERFED FINANCIAL......................................... 61
Market Areas................................................... 61
Lending Activities............................................. 62
One- to Four-Family Residential Real Estate Lending............ 66
Multi-Family and Commercial Real Estate Lending................ 67
Consumer Lending............................................... 67
Construction Lending........................................... 68
Originations, Purchases and Sales of Loans and
Mortgage-Backed Securities.................................... 69
Non-Accruing Loans and Delinquencies........................... 71
Investment Activities.......................................... 78
Sources of Funds............................................... 83
Regulation..................................................... 87
Impact of New Accounting Standards............................. 96
Competition.................................................... 96
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF WESTERFED FINANCIAL....................... 98
GENERAL ...................................................... 98
Changes in Financial Condition, June 30, 1995 to
June 30, 1996................................................. 98
Results of Operations.......................................... 102
Rate/Volume Analysis........................................... 105
Comparison of Operating Results for the Years Ended
June 30, 1996 and June 30, 1995............................... 107
Comparison of Operating Results for the Years Ended
June 30, 1995 and June 30, 1994............................... 111
Interest Rate Risk Management.................................. 113
Liquidity and Capital Resources................................ 116
Impact of Inflation and Changing Prices........................ 118
BUSINESS OF SECURITY.................................................... 120
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION OF SECURITY................................... 151
DESCRIPTION OF WESTERFED FINANCIAL COMMON STOCK......................... 161
Certificate of Incorporation and Bylaws........................ 162
Federal Law.................................................... 166
COMPARISON OF RIGHTS OF WESTERFED FINANCIAL AND SECURITY
STOCKHOLDERS........................................................... 167
General ...................................................... 167
RATIFICATION OF THE ADOPTION OF THE WATERFED EQUITY INVESTMENT PLAN..... 170
ELECTION OF SECURITY DIRECTORS.......................................... 173
RATIFICATION OF ACCOUNTANTS............................................. 183
LEGAL MATTERS........................................................... 184
EXPERTS ............................................................... 184
STOCKHOLDER PROPOSALS................................................... 184
OTHER MATTERS........................................................... 184
WESTERFED FINANCIAL CORPORATION INDEX TO FINANCIAL STATEMENTS........... WF-0
SECURITY BANCORP INDEX TO FINANCIAL STATEMENTS.......................... SB-0
APPENDIX I --AGREEMENT AND PLAN OF MERGER
APPENDIX II --OPINION OF ALEX. BROWN & SONS INCORPORATED
APPENDIX III --OPINION OF MONTGOMERY SECURITIES, INC.
APPENDIX IV --STOCK OPTION AGREEMENT #1
APPENDIX V --STOCK OPTION APGREEMENT #2
APPENDIX VI --SECTION 35-1-827 OF THE MONTANA BUSINESS CORPORATION ACT
APPENDIX VII --WESTERFED FINANCIAL EQUITY INVESTMENT PLAN
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SUMMARY
The following is a brief summary of certain information contained
elsewhere or incorporated by reference in this Joint Proxy Statement/Prospectus.
Certain capitalized terms used in this summary are defined elsewhere in this
Joint Proxy Statement/Prospectus. This summary is not intended to be a complete
description of all material facts regarding WesterFed Financial, Security and
the matters to be considered at the meetings and is qualified in its entirety
by, and reference is made to, the more detailed information contained elsewhere
in this Joint Proxy Statement/Prospectus, the accompanying Appendices and the
documents referred to and incorporated herein by reference.
The Parties to the Merger
WesterFed Financial
WesterFed Financial, a Delaware corporation, is the holding company for
Western Federal Savings Bank of Montana ("Western Bank"). With $566.1 million in
consolidated total assets at September 30, 1996, WesterFed Financial is the
largest Montana-based thrift institution. WesterFed Financial conducts
operations through 19 branch offices serving the communities of Missoula,
Billings, Helena, East Helena, Great Falls, Bozeman, Hamilton, Conrad,
Lewistown, Miles City and Hardin, Montana. At September 30, 1996, WesterFed
Financial had deposits of $343.0 million and stockholders' equity of $78.3
million, and Western Bank had a tangible capital to assets ratio of 13.83% and a
non-performing assets to total assets ratio of 0.23%. WesterFed Financial
reported net income of $4.6 million for the year ended June 30, 1996.
WesterFed Financial's business consists primarily of attracting
deposits from the general public and using those deposits, together with
borrowings and other funds, to originate real estate loans and to acquire
mortgage-backed securities. The principal elements of WesterFed Financial's
operating strategy are to (i) concentrate lending efforts on single-family
residential loans; (ii) focus on retail deposits as a primary funding source;
and (iii) control exposure to interest rate risk. See "Business of WesterFed
Financial."
The executive offices of WesterFed Financial are located at 110 East
Broadway, Missoula, Montana 59802. WesterFed Financial's telephone number at
that address is (406) 721-5254.
Security
Security Bancorp, a Montana corporation ("Security"), is a savings and
loan holding company registered under the Home Owner's Loan Act, as amended. The
business of Security consists primarily of holding 100% of the capital stock of
Security Bank, FSB ("Security Bank"), a federally chartered stock savings bank.
Security Bank operates 16 full service offices in Montana, with its main office
and two branches located in Billings. The remaining 13 branch offices are
located in various Montana communities, including Missoula, Glasgow, Havre,
Kalispell, Laurel, Bozeman, Butte, Anaconda, Lewistown, Malta, Sidney and
Plentywood.
Security Bank's business consists primarily of attracting deposits from
the general public and using those deposits, together with other available
funds, to make mortgage loans secured by residential and other real property,
and to make consumer and other loans. In recent years, Security Bank has used a
substantial portion of its available funds to purchase mortgage-backed
securities and expand commercial and agricultural lending. In 1984, Security
Bank formed a subsidiary service corporation, S.F.S. Industries, Inc. ("SFS").
SFS engages in real estate rental and securities brokerage services.
The principal executive office of Security is located at 219 N. 26th
Street, Billings, Montana 59101. The telephone number at that address is (406)
238-4800.
At September 30, 1996, Security and its subsidiaries had total assets
of approximately $382.3 million, total deposits of approximately $289.3 million,
and stockholders' equity of approximately $30.9 million. Security had a tangible
capital to assets ratio of 7.07% and a non-performing assets to total assets
ratio of 0.18%. Security
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reported net income of $40,162 for the three months ended September 30, 1996 and
$2.5 million for the year ended June 30, 1996. See "Summary Historical Financial
Information of Security," "Unaudited Pro Forma Combined Financial Information,"
and "Supplemental Historical and Pro Forma Combined Regulatory Capital
Information."
The Meetings
WesterFed Financial Special Meeting
Meeting Date. The WesterFed Financial Special Meeting will be held on
February __, 1997, at the _____________________________, located at
__________________________, Missoula, Montana, at __:__ a.m., local time, and
any and all adjournments or postponements thereof. See "The Meetings--WesterFed
Financial Special Meeting."
Record Date. Only holders of record of shares of WesterFed Financial
Common Stock at the close of business on ________, 1997 (the "WesterFed
Financial Record Date") are entitled to notice of and to vote at the WesterFed
Financial Special Meeting. See "The Meetings--WesterFed Financial Special
Meeting."
Matters to be Considered. At the WesterFed Financial Special Meeting,
holders of shares of WesterFed Financial Common Stock will vote on a proposal
(the "WesterFed Financial Proposal") to approve and adopt the Merger Agreement
and the transactions contemplated thereby, including the merger of Security with
and into WesterFed Financial and the issuance by WesterFed Financial of up to
___________ shares of WesterFed Financial Common Stock. WesterFed Financial
stockholders will also consider and vote upon the ratification of the Equity
Incentive Plan and such other matters as may properly be brought before the
WesterFed Financial Special Meeting. See "The Meetings--WesterFed Financial
Special Meeting."
Vote Required. The affirmative vote of the holders of a majority of the
outstanding shares of WesterFed Financial Common Stock is required for approval
of the Merger Agreement. The ratification of the adoption of the Equity
Incentive Plan requires the affirmative vote of holders of a majority of the
shares actually voted on such proposal. As of the WesterFed Financial Record
Date, there were _____ shares of WesterFed Financial Common Stock entitled to be
voted at the WesterFed Financial Special Meeting.
With a quorum, or in the absence of such, the affirmative vote of a
majority of the shares represented at the WesterFed Financial Special Meeting
may authorize the adjournment of the meeting.
Approval of the Merger Proposal, by the stockholders of WesterFed
Financial is a condition to, and required for, consummation of the Merger. See
"The Merger--Conditions to the Merger."
Common Stock Ownership. As of January __, 1997, directors and executive
officers of WesterFed Financial and their affiliates were beneficial owners of
164,372 shares, or 10.57% of the then outstanding shares, of WesterFed Financial
Common Stock. The directors and executive officers of WesterFed Financial have
indicated that they intend to vote such shares of WesterFed Financial Common
Stock for approval and adoption of the WesterFed Financial Proposal at the
WesterFed Financial Special Meeting. As of January ___, 1997, directors and
executive officers of Security and their affiliates were not beneficial owners
of any shares of WesterFed Financial Common Stock with the exception of
directors Jorgenson and Dimich and principal stockholder McCann who own 3,000,
1,000 and 3,000 shares of WesterFed Financial Common Stock, respectively.
Security Annual Meeting
Meeting Date. The Security Annual Meeting will be held on February ___,
1997 at Security Bank, located at 219 N. 26th Street, Billings, Montana, at
__:__ a.m., local time, and any and all adjournments or postponements thereof.
See "The Meetings--Security Annual Meeting."
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Record Date. Only holders of record of Security Common Stock at the
close of business on January __, 1997 (the "Security Record Date") are entitled
to notice of and to vote at the Security Annual Meeting. See "The
Meetings--Security Annual Meeting."
Matters to be Considered. At the Security Annual Meeting, holders of
shares of Common Stock of Security will vote on proposals (the "Security
Proposals") to (i) approve and adopt the Merger Agreement and the transactions
contemplated thereby (the "Merger Proposal"); (ii) elect three directors of
Security (the "Election of Directors"); and (iii) ratify the appointment of KPMG
Peat Marwick LLP as independent public accountants for the fiscal year ended
June 30, 1997, and any interim periods ("Ratification of Accountants"). Security
stockholders will also consider and vote upon such other matters as may properly
be brought before the Security Annual Meeting.
See "The Meetings--Security Annual Meeting."
Vote Required. The affirmative vote of the holders of two-thirds of the
outstanding shares of Security Common Stock is required for approval of the
Merger Proposal. The Election of Directors and Ratification of Accountants
requires a plurality of the votes of the shares present in person or represented
by proxy and entitled to vote on the Election of Directors. As of the Security
Record Date, there were _____ shares of Security Common Stock entitled to be
voted at the Security Annual Meeting. Each share of Security Common Stock
outstanding on the Record Date is entitled to one vote on each matter properly
submitted at the Meeting except that cumulative voting is authorized in
connection with the election of directors. Cumulative voting permits the
stockholder entitled to vote in person or by proxy the number of shares owned by
him or her for as many persons as there are directors to be elected to a
particular class or to accumulate votes by giving one candidate as many votes as
the number of such directors to be elected multiplied by the number of shares
owned shall equal, or by distributing such votes on the same principle among any
number of candidates.
Election Form. Security stockholders will also receive a form of
election (the 'Election Form'). Pursuant to the Election Form, security
stockholders will indicate their preference for receiving cash or WesterFed
Financial Common Stock or a combination of both in exchange for their Security
Common Stock subject to the stock component being 40% to 45% of the total Merger
Consideration.
With a quorum, or in the absence of such, the affirmative vote of a
majority of the shares represented at the Security Annual Meeting may authorize
the adjournment of the meeting.
Approval of the Security Proposal to approve the Merger Agreement by
the stockholders of Security is a condition to, and required for, consummation
of the Merger. See "The Merger--Conditions to the Merger."
Common Stock Ownership. As of January ___, 1997, directors and
executive officers of Security and their affiliates were beneficial owners of
164,372 shares of Security Common Stock outstanding or 10.57% of Security Common
Stock entitled to vote at the Security Annual Meeting. As of January __, 1997,
directors and executive officers of WesterFed Financial and their affiliates
were beneficial owners of ___ shares of Security Common Stock, or ___% of the
then outstanding shares of Security Common Stock entitled to vote at the
Security Annual Meeting. Such directors and executive officers have indicated
that they intend to vote such shares of Security Common Stock for approval and
adoption of the Security Proposals.
The Merger
The following summary is qualified in its entirety by reference to the
full text of the Merger Agreement, which is attached hereto as Appendix I and
incorporated by reference herein.
General
The stockholders of WesterFed Financial and Security, respectively, are
each being asked to consider and vote upon, among other things, a proposal to
approve and adopt the Merger Agreement, pursuant to which Security will be
merged with and into WesterFed Financial, with WesterFed Financial being the
surviving entity. The name of the surviving corporation following consummation
of the Merger will be "WesterFed Financial Corporation." See "The
Merger--General."
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Reasons for the Merger; Recommendations of the Boards of Directors
WesterFed Financial. The WesterFed Financial Board of Directors (the
"WesterFed Financial Board") has unanimously adopted and approved the Merger
Agreement and the transactions contemplated thereby and has determined that the
Merger and the issuance of the shares of WesterFed Financial Common Stock
pursuant thereto are fair to, and in the best interests of, WesterFed Financial
and its stockholders. The WesterFed Financial Board therefore recommends a vote
FOR approval of the matters presented at the WesterFed Financial Special
Meeting.
For a discussion of the factors considered by the WesterFed Financial
Board in reaching its decision to approve the Merger Agreement and the
transactions contemplated thereby, see "The Merger--Background of and Reasons
for the Merger--WesterFed Financial's Reasons for the Merger."
Security. The Security Board of Directors (the "Security Board") has
approved and adopted the Merger Agreement and the transactions contemplated
thereby and has determined that the Merger is fair to, and in the best interests
of, Security and its stockholders. The Security Board therefore recommends a
vote FOR approval of the matters presented at the Security Annual Meeting. One
director, Mr. Stephen C. Sandels, voted against approval of the Merger
Agreement, see 'The Merger--Recommendations of the Boards of Directors.'
For a discussion of the factors considered by the Security Board in
reaching its decision to approve the Merger Agreement and the transactions
contemplated thereby, see "The Merger--Background of and Reasons for the
Merger--Security's Reasons for the Merger."
Merger Consideration
Subject to the terms, conditions and procedures set forth in the Merger
Agreement, Security stockholders may elect to receive for each share of Security
Common Stock held either $30.00 in cash, a number of shares of WesterFed
Financial Common Stock equal to the "Exchange Ratio" or a combination of cash
and stock, subject to the stock component being 40% to 45% of the total
consideration. The Exchange Ratio is $30.00 divided by the average closing price
of WesterFed Financial common stock for the 20 consecutive trading days
commencing 30 trading days prior to the closing. However, if the average
WesterFed Financial stock price is (a) equal to or less than $13.05, the
exchange ratio will be 2.2989, (b) equal to or greater than $15.95 but not
greater than $17.50, the exchange ratio will be 1.8809, or (c) in excess of
$17.50, the exchange ratio will be (absent extraordinary circumstances) $32.91
divided by the average price. Security may terminate the agreement if the
average WesterFed Financial stock price is less than $11.75 and WesterFed
Financial does not agree to an exchange ratio that produces a value of $27.01
per share for the stock component of the merger consideration. Each share of
WesterFed Financial Common Stock issued and outstanding at the "Effective Time"
(as defined herein) will remain outstanding and unchanged as a result of the
Merger.
Opinions of Financial Advisors
WesterFed Financial. WesterFed Financial has retained Alex. Brown &
Sons Incorporated ("Alex. Brown") as its financial advisor in connection with
the transactions contemplated by the Merger Agreement and to evaluate the
financial terms of the Merger. See "The Merger--Background of and Reasons for
the Merger."
Alex. Brown has delivered an opinion to the WesterFed Financial Board
that the exchange ratio in the Merger is fair to WesterFed Financial
stockholders from a financial point of view. A copy of the opinion of Alex.
Brown is attached to this Joint Proxy Statement/Prospectus as Appendix II and is
incorporated by reference herein. See "The Merger--Opinion of WesterFed
Financial's Financial Advisor."
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Security. Security has retained Montgomery Securities ("Montgomery") as
its financial advisor in connection with the transactions contemplated by the
Merger Agreement and to evaluate the financial terms of the Merger. See "The
Merger--Background of and Reasons for the Merger."
Montgomery has delivered an opinion to the Security Board that the
Merger Consideration is fair, from a financial point of view, to Security
stockholders. A copy of the opinion of Montgomery is attached to this Joint
Proxy Statement/Prospectus as Appendix III and is incorporated by reference
herein. See "The Merger-Opinion of Security's Financial Advisor."
Effective Time and Closing Date
The Merger shall become effective at the time and on the date specified
in the certificate and articles of merger to be filed with the Secretary of
States of Delaware and Montana (the "Effective Time"). Such filing will occur
only after the receipt of all requisite regulatory approvals, approval of the
Merger Agreement by the requisite vote of WesterFed Financial's and Security's
respective stockholders and the satisfaction or waiver of all other conditions
to the Merger. The closing of the Merger will occur on a date mutually agreed
upon by WesterFed Financial and Security. In the absence of such agreement, the
closing shall occur on the tenth business day after the last to occur of: (i)
the receipt of all requisite regulatory approvals and the expiration of all
applicable statutory waiting periods; and (ii) the requisite approval of the
Merger by stockholders of Security and WesterFed Financial.
Interests of Certain Persons in the Merger
Certain members of Security's management and the Security Board may be
deemed to have certain interests in the Merger in addition to their interests as
stockholders of Security generally. These interests include, among others,
rights under the Merger Agreement relating to indemnification, maintenance of
director and officer liability insurance, severance benefits, appointments to
the WesterFed Financial Board, and employment agreements. The Merger Agreement
provides that for the six-year period following the Merger, WesterFed Financial
will indemnify, defend, and hold harmless the directors, officers and employees
of Security and Security Bank against certain liabilities to the extent that
such persons were entitled to indemnification under Montana law and the Articles
of Incorporation and Bylaws of Security. Subject to certain restrictions, the
Merger Agreement also provides that directors and officers of Security and
Security Bank will be covered by the directors' and officers' liability
insurance policies of WesterFed Financial or Western Bank for the six-year
period following the Merger.
WesterFed Financial has agreed to appoint two directors of Security to
WesterFed Financial's Board of Directors. WesterFed Financial also will appoint
one officer of Security to serve as an officer of WesterFed Financial. In
addition, Western Bank has entered into employment agreements with Mr. David W.
Jorgenson and three Senior Vice Presidents of Security Bank: Ms. Elaine F. Hine
and Messrs. Stanley R. Hill and Scott W. Sanders. Each of these employment
agreements becomes effective upon consummation of the Merger. Under the terms of
Mr. Jorgenson's agreement, he will serve as Executive Vice President of Western
Bank for a term of three years following the Merger. Mr. Jorgenson's annual base
salary under the agreement will be $160,200. Under the terms of Ms. Hine's
agreement, she will serve as a Senior Vice President of Western Bank for a term
of two years following the Merger. Ms. Hine's annual base salary under the
agreement will be $76,648. Mr. Hill and Mr. Sanders will serve as Senior Vice
Presidents and Commercial Lending Officers of WesterFed Financial for a term of
two years following the Merger, with an annual base salary of $71,500.
Western Bank also has entered into employment agreements with Mr. Mark
L. Bauer, an agricultural and commercial loan officer of Security Bank, and
James M. Pieters, a branch manager of Security Bank. Under these agreements,
each of which will become effective upon consummation of the Merger, Mr. Bauer
will serve as a Vice President of Western Bank for a term of two years, with an
annual base salary of $52,000, and Mr. Pieters will serve as a Vice President
and branch manager of Western Bank for a term of two years, with an annual base
salary of $67,118. Although Western Bank also has offered to enter into an
employment agreement with Ms. Karen S. Engelhaupt, a Vice President of Security
Bank, Ms. Engelhaupt has not signed the agreement as of the date of this Proxy
Statement/Prospectus.
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Under the terms of existing employment agreements with Security and
Security Bank, Security Bank will pay severance benefits to Mr. David W.
Jorgenson, the President and Chief Executive Officer of Security and Security
Bank, and Ms. Elaine F. Hine, a Senior Vice President of Security Bank. Subject
to certain limitations, Mr. Jorgenson will receive a single cash payment in an
amount equal to three times his annual salary. Under the severance provisions of
Ms. Hine's existing employment agreement, she will continue to receive her
annual salary for a 24-month period following the Merger. For purposes of
severance, the current annual salaries for Mr. Jorgenson and Ms. Hine are
$210,000 and $76,648, respectively. In the event that Ms. Karen S. Engelhaupt, a
Vice President of Security Bank, does not enter into an employment agreement
with Western Bank, she will be entitled, pursuant to the severance provisions of
her existing employment agreement, to continue to receive her annual salary for
a 24-month period following the Merger. Ms. Engelhaupt's current annual salary
is $37,013. See "Election of Security Directors - Executive Compensation" and
"-Employment Contracts". See "The Merger-Interests of Certain Persons in the
Merger."
Dissenters' Rights
The Montana Business Corporation statute provides that a stockholder of
a Montana corporation (such as Security) is generally entitled to demand payment
of the fair value of his or her stock if such stockholder dissents from a merger
or consolidation. The value determined in such demand could be more than, the
same as, or less than the value of the consideration to be received under the
Merger Agreement by holders of Security Common Stock who do not dissent from the
Merger. A holder of Security Common Stock who returns an executed proxy which
does not indicate either a vote against the Merger or an abstention will be
deemed to have voted in favor of the Merger and therefore will have waived his
or her dissenters' rights. See "The Merger--Dissenters' Rights" and Appendix VI
to this Joint Proxy Statement/Prospectus.
Conditions to the Merger
The respective obligations of the parties to consummate the Merger are
subject to the fulfillment or waiver of certain conditions specified in the
Merger Agreement, including, among other things, the receipt of the requisite
regulatory and stockholder approvals, the accuracy of the representations and
warranties contained therein, the performance of all obligations imposed
thereby, the receipt by WesterFed Financial and Security of certain tax and
legal opinions and certain other conditions customary in transactions of this
nature. See "The Merger--Conditions to the Merger."
Regulatory Approvals
The Merger is subject to the approval of the Office of Thrift
Supervision (the "OTS"). WesterFed Financial filed an application for approval
of the Merger with the OTS, and anticipates obtaining the approval of the OTS in
the first quarter of 1997. There can be no assurance as to the timing of such
approval or that the OTS will approve the Merger.
It is a condition to the consummation of the Merger that Security and
WesterFed Financial shall have received all applicable regulatory approvals and
consents to consummate the Merger Agreement. There can be no assurance that such
approvals or consents will not contain terms, conditions or requirements which
cause such approval to fail to satisfy such conditions to the consummation of
the Merger.
In addition, under federal law, a period of 30 days (subject to
reduction to 15 days) must expire following approval by the OTS within which
period the United States Department of Justice (the "Department of Justice") may
file objections to the Merger under the federal antitrust laws. The Department
of Justice could take such action under the antitrust laws as it deems necessary
or desirable in the public interest, including seeking to enjoin the Merger
unless divestiture of an acceptable number of branches to a competitively
suitable purchaser could be made. While WesterFed Financial believes that the
likelihood of such action by the Department of Justice is remote in this case,
there can be no assurance that the Department of Justice will not initiate such
a proceeding. See "The Merger- -Conditions to the Merger" and "--Regulatory
Approvals."
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Waiver and Amendment; Termination
Prior to the Effective Time, the WesterFed Financial and Security
Boards may extend the time for performance of any obligations under the Merger
Agreement, waive any inaccuracies in the representations and warranties
contained in the Merger Agreement and waive compliance with any agreements or
conditions of the Merger Agreement.
Subject to applicable law, the Merger Agreement may be amended by
action of the WesterFed Financial and Security Boards at any time before or
after approval of the Merger Agreement by the stockholders of WesterFed
Financial and Security. However, the Merger Agreement may not be amended after
stockholder approval which changes the form of consideration or the value of the
consideration to be received by the stockholders of Security without the
approval of the stockholders of Security. See "The Merger--Waiver and Amendment;
Termination."
The Merger Agreement may be terminated at any time prior to the
Effective Time: (i) by the mutual written consent of the Board of Directors of
WesterFed and Security; (ii) at any time prior to the Effective Time, by
WesterFed Financial or Security if there is a final judicial or regulatory
determination that any material provision of the Merger Agreement is illegal,
invalid or unenforceable or denying any regulatory application the approval of
which is a concern precedent to WesterFed Financial or Security's obligations
under the Merger Agreement (iii) if the conditions precedent to the obligations
of the other party are rendered impossible to be satisfied or fulfilled; (iv) if
the stockholders of WesterFed Financial or Security fail to approve the Merger;
(v) the other party has materially breached any representation, warranty,
covenant or agreement set forth in the Merger Agreement and has failed to or
cannot in a timely manner rectify such breach after receiving written notice of
such breach; (vi) if the Merger is not consummated by the 270th day (360 days if
there is a CRA protest); or (vii) by Security if the average WesterFed Financial
Stock Price is less than $11.75; and the Board of WesterFed Financial does not
increase the exchange ratio such that stockholders of Security who are entitled
to exchange their shares for WesterFed Financial Common Stock will receive a
stock distribution equal to $27.01 per share based upon the Average WesterFed
Financial Stock Price. See "The Merger--Waiver and Amendment; Termination."
Conduct of Business Pending the Merger
Each of WesterFed Financial and Security has agreed to conduct its
business prior to the Effective Time in accordance with certain guidelines set
forth in the Merger Agreement. See "The Merger--Conduct of Business Pending the
Merger."
Expenses
All expenses incurred in connection with the Merger Agreement and the
transactions contemplated thereby are to be paid by the party incurring such
expenses, except that WesterFed Financial and Security shall bear equally all
printing and mailing expenses and filing fees associated with the Registration
Statement and this Joint Proxy Statement/Prospectus.
Accounting Treatment
The Merger is expected to qualify as a "purchase" for accounting and
financial reporting purposes. See "The Merger-Accounting Treatment."
Certain Federal Income Tax Consequences of the Merger
It is a condition to consummate the Merger that WesterFed Financial and
Security shall have received an opinion of WesterFed Financial's counsel to the
effect that the Merger will be treated as a reorganization within the meaning of
Section 368(a) of the Code and for federal income tax purposes no gain or loss
will be recognized by Security as a result of the Merger and, accordingly, for
federal income tax purposes, no gain or loss will be recognized by any Security
stockholder upon receipt solely of WesterFed Financial Common Stock, pursuant to
the Merger (except with respect to cash received by a Security stockholder in
lieu of stock or in combination with stock
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or in lieu of a fractional share interest in WesterFed Financial Common Stock).
Each of these conditions is waivable at the option of the party entitled to
receipt of the requisite opinion. Security stockholders are urged to consult
their tax advisors concerning the specific tax consequences to them of the
Merger, including the applicability and effect of various state, local and
foreign tax laws. See "The Merger--Certain Federal Income Tax Consequences of
the Merger" and "--Conditions to the Merger."
Effects of the Merger on Rights of Stockholders
As a result of the Merger, holders of Security Common Stock who receive
shares of WesterFed Financial Common Stock will become stockholders of WesterFed
Financial. For a comparison of the charter and bylaw provisions of WesterFed
Financial and Security governing the rights of WesterFed Financial and Security
stockholders, see "Comparison of Rights of WesterFed Financial and Security
Stockholders."
Nasdaq Listing
Both WesterFed Financial Common Stock and Security Common Stock are
currently included for quotation on the Nasdaq/NMS (symbols: WSTR and SFBM,
respectively). It is a condition to consummation of the Merger that the
WesterFed Financial Common Stock to be issued to the stockholders of Security
pursuant to the Merger Agreement will be included for quotation on the
Nasdaq/NMS. See "The Merger--Conditions to the Merger."
Certain Related Transactions
Stock Option Agreements
As a condition to entering into the Merger Agreement WesterFed
Financial required that it be granted two stock options to purchase shares of
Security Common Stock representing approximately 19.9% of the issued and
outstanding shares of Security Common Stock under Stock Option Agreement #1 and
5.98% of the issued and outstanding shares of Security Common Stock under Stock
Option Agreement #2. The options may only be exercised upon the occurrence of
certain events (none of which has occurred as of the date hereof). Pursuant to
Stock Option Agreement #1, dated as of September 24, 1996 (the "Stock Option
Agreement #1"), Security granted to WesterFed Financial an option to purchase up
to 390,642 shares of Security Common Stock at an exercise price of $26.00 per
share, subject to the terms and conditions set forth therein. Pursuant to the
Stock Option Agreement #2, dated as of September 24, 1996 (the "Stock Option
Agreement #2" and together with the Stock Option Agreement #1, the "Stock Option
Agreements"), Security granted to WesterFed Financial an additional option to
purchase up to 100,000 shares of Security Common Stock at an exercise price of
$24.00 per share, subject to the terms and conditions set forth therein. See
"Certain Related Transactions--Stock Option Agreements."
The Stock Option Agreements are intended to increase the likelihood
that the Merger will be consummated in accordance with the terms of the Merger
Agreement. Consequently, certain aspects of the Stock Option Agreements may have
the effect of discouraging persons who might now or prior to the Effective Time
be interested in acquiring all or a significant interest in Security from
considering or proposing such an acquisition, even if such persons were prepared
to pay a higher price per share for Security Common Stock than the price per
share implicit in the Common Stock Consideration.
Copies of the Stock Option Agreements are attached to this Joint Proxy
Statement/Prospectus as Appendix IV and Appendix V. For additional information
regarding the Stock Option Agreements, see "Certain Related Transactions--Stock
Option Agreements."
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COMPARATIVE STOCK PRICES AND DIVIDEND INFORMATION
WesterFed Financial Common Stock and Security Common Stock are included
for quotation in the Nasdaq/NMS (symbols: WSTR and SFBM, respectively).
The following table sets forth the reported high and low sales prices
of shares of WesterFed Financial Common Stock and Security Common Stock, as
reported in the Nasdaq/NMS, and the quarterly cash dividends per share declared,
for the periods indicated. The stock prices do not include retail mark-ups,
mark-downs or commissions.
<TABLE>
<CAPTION>
WesterFed Financial Security
Common Stock Common Stock
--------------------------------- ----------------------------------
High Low Dividends High Low Dividends
---- --- --------- ---- --- ---------
<S> <C> <C> <C> <C> <C> <C>
Year Ended June 30, 1995
First Quarter..................................... $14.63 $13.25 $.055 $19.75 $18.00 $0.185
Second Quarter.................................... 14.00 11.38 .060 20.50 18.25 0.137
Third Quarter..................................... 13.63 12.38 .065 19.75 17.25 0.14
Fourth Quarter.................................... 15.38 12.44 .070 20.38 18.25 0.145
Year Ended June 30, 1996
First Quarter..................................... 17.13 15.00 .075 21.25 19.75 0.1975
Second Quarter.................................... 17.13 15.50 .080 21.25 20.00 0.1525
Third Quarter..................................... 16.75 14.75 .085 21.25 20.00 0.1575
Fourth Quarter.................................... 14.88 14.00 .123(1) 21.25 20.25 0.16
Year Ended June 30, 1997
First Quarter...................................... 16.13 13.88 .095 29.38 20.25 0.215
Second Quarter.....................................
<FN>
_______________
(1) Amount includes a special dividend of $0.033 per share.
</FN>
</TABLE>
9
<PAGE>
As of January __, 1997, WesterFed Financial's _____ outstanding shares
of WesterFed Financial Common Stock were held by approximately ____ record
owners and Security's ___________ outstanding shares of Security Common Stock by
approximately _____ record owners.
The timing and amount of the future dividends of WesterFed Financial
will depend upon earnings, cash requirements, WesterFed Financial's financial
condition and other factors deemed relevant by the WesterFed Financial Board.
Dividends may also be limited by certain regulatory restrictions.
WesterFed Financial is a legal entity separate and distinct from
Western Bank and its revenues are comprised principally of dividends from
Western Bank. Western Bank's ability to pay dividends or make other capital
distributions to WesterFed Financial is governed by OTS regulations. Under these
regulations, "capital distributions" include cash or in-kind dividends, payments
by a savings association to repurchase or otherwise acquire its own shares,
payments other than stock to stockholders of another institution in order to
acquire that institution, and other distributions charged against capital. An
institution that has not been notified that it "is in need of more than normal
supervision," is a Tier 1 institution. Western Bank, as a Tier 1 institution, is
permitted, after prior notice to (and no objection by) the OTS, to make capital
distributions during a calendar year up to the greater of (i) 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 OTS may prohibit
any capital distribution if it determines that the distribution would be
inconsistent with the safe and sound operation of Western Bank. As of September
30, 1996, Western Bank's capital exceeded its tangible, core and risk-based
capital requirements by approximately $53.5 million, $45.3 million and $39.3
million, respectively. As of September 30, 1996, Western Bank would have been
permitted under these regulations to make capital distributions of up to $21.1
million.
WesterFed Financial is also subject to Delaware law which limits
dividends to an amount equal to the excess of a corporation's net assets over
paid-in capital or, if there is no excess, to its net profits for the current
and immediately preceding fiscal years.
10
<PAGE>
SUMMARY HISTORICAL FINANCIAL INFORMATION OF WESTERFED FINANCIAL
The following table shows, for the periods indicated, certain summary
historical data for WesterFed Financial. This information is derived in part
from, and should be read in conjunction with, the separate financial statements
and related notes included elsewhere herein (dollars in thousands except share
and per share data).
<TABLE>
<CAPTION>
September 30, At June 30,
--------------------- --------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
- ---------------------------------
Total assets................................... $566,109 $568,680 $563,931 $563,285 $515,675 $404,117 $389,395
Loans receivable, net and loans held for sale.. 371,228 327,410 368,193 313,121 274,840 233,148 238,281
Mortgage-backed securities, net................ 100,409 135,199 104,947 143,825 145,025 87,534 53,169
Investment Securities, FHLB stock and other
interest-earning assets..................... 69,049 81,861 64,108 82,375 74,168 62,941 74,206
Deposits....................................... 342,986 349,678 350,212 344,155 349,121 351,447 346,160
Borrowed funds................................. 130,351 130,468 125,838 134,704 85,087 15,541 9,265
Stockholders' equity........................... 78,289 75,960 78,607 75,146 74,168 29,024 24,503
Book value per common share.................... 17.81 17.28 17.88 17.09 16.03 N/A N/A
Three Months Ended
September 30, Fiscal Year Ended June 30,
----------------------- -------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
Selected Operations Data:
- ------------------------
Total interest income.......................... $10,593 $10,406 $ 42,544 $ 37,783 $ 31,933 $ 30,365 $ 33,883
Total interest expense......................... 5,950 6,158 24,737 20,984 16,391 16,931 22,237
--------- -------- -------- ------- -------- --------- ------
Net interest income........................... 4,643 4,248 17,807 16,799 15,542 13,434 11,646
Provision for loan losses....................... (15) --- --- --- --- --- (53)
Non-interest income............................. 835 1,089 3,882 3,207 3,511 4,731 4,301
Non-interest expense............................ (5,731) (3,599) (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................. (268) 1,738 7,115 6,601 7,115 7,474 5,515
Income taxes.................................... 89 (670) (2,556) (2,473) (2,681) (2,952) (1,935)
--------- ---------- ------- -------- -------- --------- --------
Income (loss) before extraordinary item and
cumulative effect of change in accounting
for income taxes............................. (179) 1,068 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 (loss)............................. $(179) $1,068 $4,559 $4,128 $5,229 $4,522 $3,230
======== ========= ======= ======= ======= ======== ======
Net income (loss) per share:
Income before cumulative effect of change in
accounting for income taxes.................. $(0.04) $ 0.25 $ 1.07 $ 0.96 $ 1.01 $ N/A $ N/A
Cumulative effect of change in accounting for
income taxes................................. --- --- --- --- 0.18 --- ---
--------- ---------- ------- -------- -------- ------- -------
Net income (loss) per share..................... $(0.04) $ 0.25 $ 1.07 $ 0.96(1) $ 1.19(1) $ N/A $ N/A
======== ========= ======= ======= ======== ======== ======
Dividends per share............................. $0.095 $0.075 $ 0.36 $ 0.30 $ 0.05 $ N/A $ N/A
======== ========= ======= ======= ======== ======== ======
Dividend payout ratio(2)........................ N/A 30.00% 33.64% 31.25% 4.20% N/A N/A
Selected Financial Ratios and Other Data:
Return on assets (ratio of net income to average
total assets)................................. (0.13)% 0.75% 0.79% 0.76% 1.14% 1.14% 0.83%
Return on assets before cumulative effect
of change in accounting for income taxes....... (0.13) 0.75 0.79 0.76 0.96 1.14 0.83
Return on equity (ratio of net income to
average equity................................. (0.91) 5.64 5.90 5.54 10.07 16.90 14.11
Return on equity before cumulative effect
of change in accounting for income taxes....... (0.91) 5.64 5.90 5.54 8.54 16.90 14.11
Interest rate spread at end of period........... 2.70 2.44 2.67 2.38 2.80 3.49 3.29
Net interest margin(3).......................... 3.43 3.12 3.23 3.23 3.54 3.60 3.15
Ratio of non-interest expense to average total
assets......................................... 4.04 2.54 2.53 2.47 2.60 2.69 2.67
Non-performing assets to total assets, at
end of period.................................. 0.23 0.06 0.13 0.10 0.16 0.21 1.10
Total allowance for loan losses to total non-
performing assets............................. 157.19 552.47 280.42 350.35 238.82 242.98 49.14
Stockholders' equity to total assets, at end
of period...................................... 13.83 13.36 13.94 13.34 14.38 7.18 6.29
Ratio of average interest-earning assets
to average interest-bearing liabilities........ 113.82 113.43 113.58 113.51 110.16 104.04 102.64
Number of offices............................... 19 18 19 18 18 18 18
<FN>
- ----------------
(1) Restated
(2) Dividends declared per share divided by net income per share.
(3) Net interest income divided by average interest-earning assets.
</FN>
</TABLE>
11
<PAGE>
SUMMARY HISTORICAL FINANCIAL INFORMATION
OF SECURITY
The following table sets forth, for the periods indicated, certain
summary financial data of Security. This summary information is derived in part
from, and should be read in conjunction with the separate financial statements
and related notes included elsewhere herein (dollars in thousands, except for
per share amounts).
<TABLE>
<CAPTION>
September 30, June 30,
-------------------- ---------------------------------------------------
1996(1) 1995(1) 1996(1) 1995(1) 1994(1) 1993 1992
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
- ---------------------------------
Total assets ................................ $382,309 $367,369 $372,239 $352,595 $348,065 $270,353 $250,912
Loans receivable, net and loans held for sale 207,054 152,432 187,591 147,180 117,105 78,672 64,406
Mortgage-backed securities, net ............. 122,688 157,392 131,256 145,615 180,395 153,339 148,418
Investment securities, FHLB stock and other
interest-earning assets .................... 26,423 33,562 26,681 33,641 29,487 27,348 24,231
Deposits .................................... 289,336 294,209 289,219 290,933 293,877 212,715 218,801
Borrowed funds .............................. 51,381 36,935 44,756 26,088 14,792 26,542 3,500
Stockholders' equity ........................ 30,930 31,061 30,704 30,884 28,274 26,966 25,170
Book value per common share ................. 20.83 21.00 21.00 20.88 19.17 18.36 17.20
Three Months Ended
September 30, Fiscal Year Ended June 30,
------------------- ----------------------------------------------------
1996(1) 1995(1) 1996(1) 1995(1) 1994(1) 1993 1992
---- ---- ---- ---- ---- ---- ----
Selected Operations Data:
- ------------------------
Total interest income ...................... $ 6,838 $ 6,400 $ 25,342 $24,284 $17,792 $ 17,640 $19,372
Total interest expense ..................... 3,771 3,807 14,912 12,951 9,369 9,933 13,219
------- ------- -------- -------- ------- -------- -------
Net interest income ...................... 3,067 2,593 10,430 11,333 8,423 7,707 6,153
Provision for loan losses .................. (150) (30) (120) (30) (80) (11) (118)
Non-interest income ........................ 1,272 866 4,014 2,228 2,258 1,323 1,260
Non-interest expense ....................... (4,125) (2,452) (10,358) (9,225) (5,884) (5,026) (4,455)
Income before income taxes ............... 64 977 3,966 4,306 4,717 3,993 2,840
Income taxes ............................... (24) (352) (1,422) (1,558) (1,962) (1,515) (994)
------ ------- -------- ------- ------ -------- -------
Net income ................................. $ 40 $ 625 $ 2,544 $2,748 $2,755 $ 2,478 $1,846
====== ======= ======== ======= ====== ======== =======
Net Income per share ....................... $ 0.03 $ 0.41 $ 1.68 $ 1.80 $ 1.82 $ 1.64 $ 1.25
Dividends per share ........................ $ 0.215 $ 0.1975 $ 0.6675 $ 0.6075 $ 0.5525 $ 0.4800 $ 0.4050
Dividend payout ratio(2) ................... NM 48.17 39.73 33.75 30.36 29.27 32.40
Selected Financial Ratios and Other Data:
- ----------------------------------------
Return on assets (ratio of net income to
average total assets ..................... 0.04% 0.68% 0.70% 0.77% 0.99% 0.97% 0.74%
Return on equity (ratio of net income to
average equity) .......................... 0.52 8.07 8.26 9.33 9.92 9.51 7.60
Interest rate spread at end of period ...... 2.99 2.55 2.58 3.07 2.91 2.83 2.14
Net interest margin(3) ..................... 3.47 3.02 3.11 3.37 3.19 3.17 2.80
Ratio of non-interest expense to average
total assets.............................. 4.32 2.67 3.09 2.74 2.20 2.07 1.85
Non-performing assets to total assets at
end of period ............................ 0.18 0.03 0.18 0.12 0.24 0.72 1.30
Total allowance for loan losses to total
non-performing assets .................... 181.86 1,155.88 176.80 272.00 135.11 29.16 17.01
Stockholders equity to total assets, at
end of period............................. 8.09 8.45 8.25 8.76 8.12 9.97 10.10
Ratio of average interest-earning assets
to average interest-bearing liabilities... 111.00 110.72 111.76 111.05 107.92 108.14 107.80
Number of offices .......................... 16 15 16 15 14 11 11
<FN>
- --------------
(1) Reflects the acquisition of three branch offices in May 1994.
(2) Dividends declared per share divided by net income per share.
(3) Net interest income divided by average interest earning assets.
</FN>
</TABLE>
12
<PAGE>
COMPARATIVE UNAUDITED PER SHARE DATA
The following table shows unaudited comparative per share data for
WesterFed Financial and Security Common Stock on an historical basis, and pro
forma combined comparative per share data for WesterFed Financial and Security
giving effect to the Merger. The Merger is a business combination accounted for
under the purchase method of accounting.
<TABLE>
<CAPTION>
Pro Forma
---------
Historical WesterFed Financial/
-------------------- Security
WesterFed --------------------
Financial Security Combined
--------- -------- --------
<S> <C> <C> <C>
Book value per share at:
September 30, 1996.................. $17.81 $20.83 $17.23(1)
June 30, 1996....................... 17.88 21.00 NM
Cash dividends declared per share for:
Three months ended September
30, 1996(1)....................... 0.0950 0.2150 0.1273
June 30, 1996(1).................... 0.3600 0.6675 0.4463
Income (loss) per share for:
Three months ended September
30, 1996(1)..... ................. (0.04) 0.03 (0.11)
Year ended June 30, 1996(1).......... 1.07 1.68 0.92
<FN>
- ---------------
(1) Based on the combined stockholders' equity of WesterFed Financial and
Security, including the effect of pro forma adjustments. The pro forma
combined adjusted amounts are divided by the number of shares of WesterFed
Financial Common Stock outstanding for the periods indicated plus the pro
forma number of shares of WesterFed Financial Common Stock assumed to be
issued as a result of the Merger.
</FN>
</TABLE>
The information shown above should be read in conjunction with the
historical consolidated financial statements of WesterFed Financial and Security
and related notes thereto, which are elsewhere herein, and the unaudited pro
forma financial data included herein. See "Unaudited Pro Forma Combined
Financial Information" for a description of the assumptions and adjustments used
in preparing the unaudited pro forma financial data. The pro forma comparative
per share data has been included for comparative purposes only and does not
purport to be indicative of the results of operations that actually would have
been obtained if the Merger had been effected on the dates indicated or of those
results that may be obtained in the future.
13
<PAGE>
THE MEETINGS
WesterFed Financial Special Meeting
Place, Time and Date. The Special Meeting of Stockholders (the
"WesterFed Financial Special Meeting") of WesterFed Financial Corporation
("WesterFed Financial") will be held at ___________________________ located at
______________________ at _____ _:m., local time, on _________, 199_. This Joint
Proxy Statement/Prospectus is being sent to holders of common stock, par value
$.01 per share, of WesterFed Financial ("WesterFed Financial Common Stock") and
accompanies a form of proxy (the "WesterFed Financial Proxy") which is being
solicited by the WesterFed Financial Board of Directors (the "WesterFed
Financial Board") for use at the WesterFed Financial Special Meeting and at any
and all adjournments or postponements thereof.
Matters to Be Considered. At the WesterFed Financial Special Meeting,
holders of shares of WesterFed Financial Common Stock will vote upon a proposal
to approve the adoption of the Merger Agreement and the transactions
contemplated thereby, including the merger of Security with and into WesterFed
Financial and the issuance by WesterFed Financial of up to _______ shares of
WesterFed Financial Common Stock in connection with the Merger (the "WesterFed
Financial Proposal"). See "The Merger."
WesterFed Financial stockholders will also consider and vote upon the
ratification of the adoption of the Equity Incentive Plan and such other matters
as may properly be brought before the WesterFed Financial Special Meeting. As of
the date hereof, the WesterFed Financial Board knows of no business that will be
presented for consideration at the WesterFed Financial Special Meeting other
than the matters described in this Joint Proxy Statement/Prospectus.
WesterFed Financial Record Date; Vote Required. The WesterFed Financial
Board has fixed the close of business on January __, 1997 (the "WesterFed
Financial Record Date") as the date for determining holders of WesterFed
Financial Common Stock who will be entitled to notice of, and to vote at the
WesterFed Financial Special Meeting. Only holders of record of WesterFed
Financial Common Stock at the close of business on the WesterFed Financial
Record Date will be entitled to notice of and to vote at the WesterFed Financial
Special Meeting. As of the WesterFed Financial Record Date, there were
outstanding and entitled to vote at the WesterFed Financial Special Meeting
___________ shares of WesterFed Financial Common Stock.
Each holder of record of shares of WesterFed Financial Common Stock on
the WesterFed Financial Record Date will be entitled to cast one vote per share
for each of the WesterFed Financial Proposals at the WesterFed Financial Special
Meeting. Such vote may be exercised in person or by properly executed proxy. The
presence, in person or by properly executed proxy, of the holders of a majority
of the outstanding shares of WesterFed Financial Common Stock entitled to vote
at the WesterFed Financial Special Meeting is necessary to constitute a quorum.
With a quorum, or in the absence of such, the affirmative vote of the majority
of shares represented at the WesterFed Financial Special Meeting may authorize
adjournment of the meeting. Abstentions and broker non- votes (i.e., proxies
from brokers or nominees indicating that such persons have not received
instructions from the beneficial owners or other persons as to certain proposals
on which such beneficial owners or persons are entitled to vote their shares but
with respect to which the brokers or nominees have no discretionary power to
vote without such instructions) will be treated as shares present at the
WesterFed Financial Special Meeting for purposes of determining the presence of
a quorum.
The affirmative vote of the holders of a majority of the outstanding
shares of WesterFed Financial Common Stock is required for approval of the
Merger Proposal. The ratification of the adoption of the Equity Incentive Plan
requires the affirmative vote of the holders of a majority of the shares
actually voted on such proposal. Therefore, abstentions and broker non-votes
will have the same effect as votes against approval of the Merger Proposal.
14
<PAGE>
Approval of the Merger Proposal by the stockholders of WesterFed
Financial is a condition to, and required for, consummation of the Merger. See
"The Merger--Conditions to the Merger."
As of January ___, 1997, the directors and executive officers of
WesterFed Financial and their affiliates beneficially owned in the aggregate ___
shares (including shares which may be acquired upon the exercise of options
within 60 days of ________, 1997) of WesterFed Financial Common Stock, or
approximately __% of the then outstanding shares of WesterFed Financial Common
Stock entitled to vote at the WesterFed Financial Special Meeting. The directors
and executive officers of WesterFed Financial have indicated their intention to
vote such shares for the WesterFed Financial Proposal at the WesterFed Financial
Special Meeting. As of such date, neither Security and its subsidiaries, nor the
directors and executive officers of Security and their affiliates, beneficially
owned any outstanding shares of WesterFed Financial Common Stock except for
directors Jorgenson and Dimich and principal stockholder McCann who own 3,000,
1,000 and 3,000 shares of WesterFed Financial Common Stock, respectively. As of
that date, Security subsidiaries, acting as fiduciaries, custodians or agents,
did not have sole or shared power over any shares of WesterFed Financial Common
Stock.
Proxies. Shares of WesterFed Financial Common Stock represented by
properly executed proxies received prior to or at the WesterFed Financial
Special Meeting will, unless such proxies have been revoked, be voted at the
WesterFed Financial Special Meeting and any adjournments or postponements
thereof, in accordance with the instructions indicated in the proxies. If no
instructions are indicated on a properly executed WesterFed Financial Proxy, the
shares will be voted FOR the WesterFed Financial Proposals.
Any WesterFed Financial Proxy given pursuant to this solicitation or
otherwise may be revoked by the person giving it at any time before it is voted
either by delivering to the Secretary of WesterFed Financial at 110 East
Broadway, Missoula, Montana 59802 on or before the taking of the vote at the
WesterFed Financial Special Meeting, a written notice of revocation bearing a
later date than the date of the proxy or a later dated proxy relating to the
same shares or by attending the WesterFed Financial Special Meeting and voting
in person. Attendance at the WesterFed Financial Special Meeting will not in
itself constitute the revocation of a proxy.
If any other matters are properly presented at the WesterFed Financial
Special Meeting for consideration, the persons named in the WesterFed Financial
Proxy or acting thereunder will have discretion to vote on such matters in
accordance with their best judgment. As of the date hereof, the WesterFed
Financial Board knows of no such other matters.
In addition to solicitation by mail, directors, officers and employees
of WesterFed Financial, who will not be specifically compensated for such
services, may solicit proxies from the stockholders of WesterFed Financial,
personally or by telephone, telegram or other forms of communication. Brokerage
houses, nominees, fiduciaries and other custodians will be requested to forward
soliciting materials to beneficial owners and will be reimbursed for their
reasonable expenses incurred in sending proxy material to beneficial owners. In
addition, WesterFed Financial has engaged ____________ ("______________") to
assist WesterFed Financial in distributing proxy materials and contacting record
and beneficial owners of WesterFed Financial Common Stock. WesterFed Financial
has agreed to pay ________ approximately $________ plus out-of-pocket expenses
for its services to be rendered on behalf of WesterFed Financial. WesterFed
Financial will bear its own expenses in connection with the solicitation of
proxies for the WesterFed Financial Special Meeting. See "The Merger--Expenses."
15
<PAGE>
HOLDERS OF WESTERFED FINANCIAL COMMON STOCK ARE REQUESTED TO COMPLETE,
DATE AND SIGN THE ACCOMPANYING PROXY AND RETURN IT PROMPTLY TO WESTERFED
FINANCIAL IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
Security Annual Meeting
Place, Time and Date. The Security Annual Meeting will be held at
Security located at 219 North 26th Street, Billings, Montana at _____ _.m.,
local time, on February ____, 1997. This Joint Proxy Statement/Prospectus is
being sent to holders of Security common stock (the "Security Common Stock"),
and accompanies a form of proxy (the "Security Proxy") which is being solicited
by the Security Board for use at the Security Annual Meeting and at any and all
adjournments or postponements thereof.
Matters to Be Considered. At the Security Annual Meeting, holders of
Security Common Stock will vote on the following proposals: (i) approve and
adopt the Merger Agreement and the transactions contemplated thereby (the
"Merger Proposal"); (ii) the election of three directors of Security (the
"Election of Directors"); and (iii) the ratification of the selection of KPMG
Peat Marwick LLP as independent public accountants for the fiscal year ended
June 30, 1997 and any interim periods. See "The Merger" and "Election of
Security Directors."
Holders of Voting Securities will also consider and vote upon such
other matters as may properly be brought before the Security Annual Meeting. As
of the date hereof, the Security Board knows of no business that will be
presented for consideration at the Security Annual Meeting, other than the
matters described in this Joint Proxy Statement/Prospectus.
Security Record Date; Vote Required. The Security Board has fixed the
close of business on ________, 1997 (the "Security Record Date"), as the date
for determining holders of Security Common Stock who will be entitled to notice
of, and to vote at, the Security Annual Meeting. Only holders of record of
Security Common Stock at the close of business on the Security Record Date will
be entitled to notice of and to vote at the Security Annual Meeting. As of the
Security Record Date, there were outstanding and entitled to vote at the
Security Annual Meeting _____ shares of Security Common Stock.
Each holder of Security Common Stock is entitled to one vote per share
except that cumulative voting is authorized in connection with the election of
directors. Cumulative voting permits the stockholder entitled to vote in person
or by proxy the number of shares owned by him or her for as many persons as
there are directors to be elected to a particular class or to accumulate votes
by giving one candidate as many votes as the number of such directors to be
elected multiplied by the number of shares owned shall equal, or by distributing
such votes on the same principle among any number of candidates. The presence,
in person or by properly executed proxy, of the holders of a majority of the
outstanding shares of Security Common Stock entitled to vote at the Security
Annual Meeting is necessary to constitute a quorum. With a quorum, or in the
absence of such, the affirmative vote of a majority of the shares represented at
the Security Annual Meeting may authorize the adjournment of the meeting.
Abstentions and broker non-votes will be treated as shares present at the
Security Annual Meeting for purposes of determining a quorum.
The affirmative vote of the holders of two-thirds of the outstanding
shares of Security Common Stock is required for approval of the Merger Proposal.
The Election of Directors and Ratification of Accountants requires a plurality
of the votes of the shares present in person or represented by proxy and
entitled to vote.
As of January __, 1997, the directors and executive officers of
Security and their affiliates beneficially owned in the aggregate 164,372 shares
(including shares which may be acquired upon the exercise of options within 60
days of January __, 1997) of Security Common Stock, or 10.57% of the Security
Common Stock entitled to vote at the Security Annual Meeting. The directors
(except for Stephen C. Sandels who owns 100 shares) and executive officers of
Security have indicated their intention to vote such shares for the Security
Proposals at the Security Annual Meeting. As of January __, 1997, the directors
16
<PAGE>
and executive officers of WesterFed Financial and their affiliates beneficially
owned in the aggregate ____ shares of Security Common Stock, or _____ % of the
Security Common Stock entitled to vote at the Security Annual Meeting. The
directors and executive officers of WesterFed Financial have indicated their
intention to vote such shares for the Security Proposals at the Security Annual
Meeting.
Proxies. Security Common Stock represented by properly executed proxies
received prior to or at the Security Annual Meeting will, unless such proxies
have been revoked, be voted at the Security Annual Meeting and any adjournments
or postponements thereof in accordance with the instructions indicated in the
proxies. If no instructions are indicated on a properly executed Security Proxy,
the shares will be voted FOR the Security Proposals.
Any Security Proxy given pursuant to this solicitation or otherwise may
be revoked by the person giving it at any time before it is voted by delivering
to the Secretary of Security at 219 North 26th Street, Billings, Montana 59101
on or before the taking of the vote at the Security Annual Meeting, a written
notice of revocation bearing a later date than the proxy or a later dated proxy
relating to the same shares of Security Common Stock or by attending the
Security Annual Meeting and voting in person. Attendance at the Security Annual
Meeting will not in itself constitute the revocation of a proxy.
If any other matters are properly presented at the Security Annual
Meeting for consideration, the persons named in the Security Proxy or acting
thereunder will have discretion to vote on such matters in accordance with their
best judgment. As of the date hereof, the Security Board knows of no such other
matters.
In addition to solicitation by mail, directors, officers, and employees
of Security, who will not be specifically compensated for such services, may
solicit proxies from the stockholders of Security, personally or by telephone,
telegram or other forms of communication. Brokerage houses, nominees,
fiduciaries and other custodians will be requested to forward soliciting
materials to beneficial owners and will be reimbursed for their reasonable
expenses incurred in sending proxy material to beneficial owners. In addition,
Security has engaged D.F. King & Co., Inc. to assist Security in distributing
proxy materials and contacting record and beneficial owners of Security Common
Stock. Security has agreed to pay $4,000 plus $3 for each Security stockholder
contacted by D.F. King & Co., Inc. and out-of-pocket expenses for its services
to be rendered on behalf of Security.
HOLDERS OF SECURITY COMMON STOCK ARE REQUESTED TO COMPLETE, DATE AND
SIGN THE ACCOMPANYING PROXY AND RETURN IT PROMPTLY TO SECURITY IN THE ENCLOSED
POSTAGE-PAID ENVELOPE.
HOLDERS OF SECURITY COMMON STOCK SHOULD NOT FORWARD STOCK CERTIFICATES
WITH THEIR PROXY CARDS.
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THE MERGER
The information in this Joint Proxy Statement/Prospectus concerning the
terms of the Merger is qualified in its entirety by reference to the full text
of the Merger Agreement, which is attached hereto as Appendix I and incorporated
herein by reference. All stockholders are urged to read the Merger Agreement in
its entirety.
General
Pursuant to the Merger Agreement, Security will be merged with and into
WesterFed Financial, with WesterFed Financial being the surviving entity (the
"Merger"). As soon as possible after the conditions to consummation of the
Merger described below have been satisfied or waived, and unless the Merger
Agreement has been terminated as provided below, WesterFed Financial and
Security will file certificate and articles of merger with the Secretary of
States of Delaware and Montana, respectively, for the Merger. The Merger will
become effective at the time the certificate and articles of merger are filed
with the Secretary of States of Delaware and Montana, respectively. The time at
which the Merger becomes effective is referred to herein as the "Effective
Time." It is presently contemplated that the Effective Time will be as soon as
practical following the fulfillment or waiver of each of the conditions to the
Merger.
Upon consummation of the Merger, the stockholders of Security shall be
entitled to receive the Merger Consideration in consideration for their shares
of Security Common Stock held and thereupon shall cease to be stockholders of
Security, and the separate existence and corporate organization of Security
shall cease. WesterFed Financial shall succeed to all the rights and property of
Security. The members of the Board of Directors of WesterFed Financial and two
directors of Security mutually acceptable to WesterFed Financial and Security
immediately prior to the Effective Time shall be the members of the Board of
Directors of WesterFed Financial immediately after the Effective Time. See also
"--Interests of Certain Persons in the Merger."
Background of and Reasons for the Merger
Background of the Merger. In recognition of the rapid changes occurring
in the financial services industry, for the last several years, Security has
been on a path of expanding its business into commercial banking. Security
believes that the benefits of this strategy are being realized.
WesterFed Financial has been interested in expanding its banking
franchise as well as employing its strong capital position. Toward that end,
WesterFed Financial retained Alex. Brown in May 1995 to help achieve these
goals. Consistent with these goals, Alex. Brown assisted WesterFed Financial in
identifying certain acquisition opportunities, including the possibility of
combining with Security.
In March 1996, Lyle R. Grimes, President and CEO of WesterFed Financial
called David W. Jorgenson, President and CEO of Security, advising that he
intended to forward a letter proposing a merger between the two companies. The
letter from WesterFed Financial, dated March 22, 1996, was immediately
distributed to the Security Board of Directors at their regularly scheduled
meeting. Based on the strong interest shown in the letter, the Security Board
approved pursuing preliminary discussions with WesterFed Financial. To
facilitate such discussions, a special board committee (the "Special Committee")
was appointed by the Security Board on June 24, 1996 composed of outside
directors William M. Leslie, George R. Pierce and Harold S. Hanson, was
appointed by the Security Board, with Mr. Harold Hanson serving as chairman.
In April 1996, Mr. Jorgenson and William M. Dimich, Chairman of the
Security Board, met with Mr. Grimes and Robert Burke, a director of WesterFed
Financial to discuss general business and operating issues. There was no
discussion of price at that meeting. On April 15, 1996, the parties signed a
Joint Confidentiality Agreement concerning the possible combination and the
related exchange of information.
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On May 2, 1996, the Security Board received a letter from WesterFed
Financial proposing a price range for a stock exchange between the companies and
the mix of cash and WesterFed Financial stock to accomplish the proposed
combination. The Special Committee met shortly thereafter and authorized Mr.
Jorgenson to contact certain investment advisors on a confidential basis to
obtain proposals to assist Security in considering the WesterFed Financial
proposal. The Special Committee subsequently met to review the proposals
received from the investment advisors. On May 20, 1996, the Security Board
accepted the Special Committee's recommendation to select Montgomery Securities
and authorized management to negotiate an engagement letter with Montgomery,
which was executed on June 3, 1996.
On June 24, 1996, Montgomery made a presentation to the Security Board,
giving their preliminary analysis of the WesterFed Financial proposal. Based on
that analysis and the advice of their financial and legal advisors, the Security
Board authorized Montgomery, in consultation with the Special Committee,
management and legal counsel, to pursue further negotiations with WesterFed
Financial.
During July 1996, various meetings involving the parties and their
financial advisors occurred, focusing primarily on financial performance,
projections and accounting matters. During that time, the Special Committee met
frequently with management to receive updates and provide direction with respect
to the negotiations. In midlate July, Security received and considered an
initial Term Sheet, outlining certain key terms, as proposed by WesterFed
Financial. The Term Sheet, with input from the Security Special Committee, the
Security Board, financial and legal advisors, was revised several times through
late July and August.
During the month of August, WesterFed Financial had several meetings
with its advisors to review Security's comments and submit a revised term sheet
to Security.
On August 26, 1996, the Security Board received the final Term Sheet
and authorized the negotiation of a definitive agreement consistent with such
terms.
On September 24, 1996, following extensive negotiation among the
parties, their counsel and financial advisors, the Boards of Security and
WesterFed Financial, with their respective advisors present, approved the Merger
Agreement and related stock option agreements to effect the proposed
combination.
Security's Reasons for the Merger. The Security Board, at its meeting
held on September 24, 1996, considered the Merger Agreement and determined it to
be fair, and in the best interests of, Security and its stockholders, customers,
and employees. In reaching its determination, the Security Board consulted with
Security management, and its financial and legal advisors regarding, the
financial fairness of the Merger to Security and its stockholders, and the legal
duties of the Security Board, in connection with the Merger and the terms of the
Merger Agreement. A number of factors were considered. Below is a listing of the
material factors the Security Board considered in their decision. The Security
Board did not assign any specific or relative weight to the below listed
factors.
o The Security Board determined that a merger with WesterFed
Financial would be a better alternative than expanding
independently through internal growth and/or acquisitions.
After the Merger, Security would become part of the largest,
publicly held financial institution headquartered in Montana.
A larger financial institution will enhance Security's ability
to compete more effectively in the rapidly changing market
place for banking and financial services while maintaining its
community banking flavor.
o Confronted with changing stockholder demographics and
stockholder desires, the Security Board determined that
combining with a larger company would provide
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the alternative of an attractive cash premium or stock with a
likelihood of improved liquidity.
o Combining the management resources of both companies should
result in a greater depth of management, which should
strengthen the combined organization.
o Because of the combined companies' relative size and
resources, Security should benefit as a result of enhanced
technology and employee training which should enable employees
to better serve customers.
FOR THE REASONS SET FORTH ABOVE, THE SECURITY BOARD HAS APPROVED THE
MERGER AGREEMENT AS ADVISABLE AND IN THE BEST INTERESTS OF SECURITY AND SECURITY
STOCKHOLDERS AND RECOMMENDS THAT THE STOCKHOLDERS OF SECURITY VOTE FOR THE
APPROVAL OF THE MERGER AGREEMENT.
WesterFed Financial's Reasons for the Merger. Over the last 15 years,
WesterFed Financial has attempted to increase its market share through
acquisitions. Between 1983 and 1991, Western Bank acquired three financial
institutions with total assets aggregating approximately $287.0 million. Since
its conversion in 1994, WesterFed Financial has returned to a program of
in-market and adjacent-market acquisitions that would add value to its
stockholders and its banking franchise. To that end, WesterFed Financial
retained Alex. Brown in May 1995 to provide certain investment banking advice
and services, including advice with respect to potential acquisitions and
related matters. In March 1996, WesterFed contacted Security to discuss the
possibility of a merger.
The WesterFed Financial Board believes that the Merger is fair to, and
in the best interests of, WesterFed Financial and its stockholders. Accordingly,
the WesterFed Financial Board has unanimously approved the Merger Agreement and
recommends that WesterFed Financial shareholders vote FOR the approval and
adoption of the WesterFed Financial Proposal.
In negotiating the terms of the Merger and in considering its
recommendation for the approval of the Merger Agreement, the WesterFed Financial
Board considered a number of factors including, without limitation, the
following:
(i) the Merger Consideration to be paid to the Security stockholders in
relation to the book value, earnings per share and market value of the WesterFed
Financial Common Stock and Security Common Stock;
(ii) the expansion of WesterFed Financial's services into a number of
new communities in Montana;
(iii) the WesterFed Financial Board's review, based in part on
presentations by Alex. Brown and WesterFed Financial management's due diligence
review of Security, of the business, operations and financial condition of
Security, the prospects of the combined institution, and the increased market
presence, economies of scale, cost savings opportunities and enhanced
opportunities for growth made possible by the Merger; in this regard, the
WesterFed Financial Board noted that the combined institution would constitute
the largest publicly traded financial institution headquartered in Montana;
(iv) the short-term and long-term impact the Merger is anticipated to
have on WesterFed Financial's consolidated results of operations, including
anticipated cost savings resulting from consolidation in certain areas;
(v) the opinion of Alex. Brown that, as of September 24, 1996, the
Merger Consideration to be paid by WesterFed Financial pursuant to the Merger
Agreement was fair, from a financial point of view, to the holders of WesterFed
Financial Common Stock (see "--Opinion of WesterFed Financial's Financial
Advisor");
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(vi) the impact of the Merger on depositors, employees, customers and
communities served by WesterFed Financial and Security;
(vii) the opportunity to diversify its lending activities to include
commercial lending;
(viii) the opportunity to leverage excess capital from proceeds
received in WesterFed Financial's conversion to the stock form of organization;
(ix) the expectation that the Merger will generally be a tax-free
transaction to WesterFed Financial and its stockholders and that the Merger will
be accounted for under the purchase method of accounting (see "--Certain Federal
Income Tax Consequences of the Merger" and "--Accounting Treatment"); and
(x) the terms of the Merger Agreement, the Stock Option Agreements and
the other documents executed in connection with the Merger.
In view of the wide variety of factors considered in connection with
its evaluation of the Merger, the WesterFed Financial Board did not find it
practicable to, and did not quantify or otherwise attempt to, assign relative
weights to the specific factors considered in reaching its determination.
Recommendations of the Boards of Directors
WesterFed Financial. The WesterFed Financial Board has unanimously
adopted and approved the Merger Agreement and the transactions contemplated
thereby and has determined that the Merger and the issuance of the WesterFed
Financial shares pursuant thereto are in the best interests of WesterFed
Financial and its stockholders. The WesterFed Financial Board therefore
recommends a vote FOR approval of the matter presented at the WesterFed
Financial Special Meeting.
For a discussion of the factors considered by the WesterFed Financial
Board in reaching its decision to approve the Merger Agreement, see
"--Background of and Reasons for the Merger--WesterFed Financial's Reasons for
the Merger."
Security. The Security Board has adopted and approved the Merger
Agreement and the transactions contemplated thereby and has determined that the
Merger is fair to, and in the best interests of, Security and its stockholders.
The Security Board therefore recommends a vote FOR approval of the matters
presented at the Security Annual Meeting. One director, Mr. Stephen C. Sandels,
voted against approval of the Merger Agreement. See "The Merger--Recommendations
of the Boards of Directors."
For a discussion of the factors considered by the Security Board in
reaching its decision to approve the Merger Agreement, see "--Background of and
Reasons for the Merger-- Security's Reasons for the Merger."
Merger Consideration
Subject to the terms, conditions and procedures in the Merger
Agreement, Security stockholders may elect to receive for each share of Security
Common Stock issued and outstanding immediately prior to the Merger (other than
certain shares of Security Common Stock held by WesterFed Financial or Security)
either $30.00 in cash, a number of shares of WesterFed Common Stock equal to the
"exchange ratio" or a combination of cash and stock, subject to the stock
component being 40% to 45% of the total consideration. The "exchange ratio" is
$30.00 divided by the average closing price of WesterFed Financial Common Stock
for the 20 trading days commencing 30 trading days prior to the closing.
However, if the average WesterFed Financial stock price is (a) equal to or
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less than $13.05, the exchange ratio will be 2.2989, (b) equal to or greater
than $15.95 but not greater than 17.50, the exchange ratio will be 1.8809, or
(c) in excess of $17.50, the exchange ratio will be (absent extraordinary
circumstances) $32.91 divided by the average price. Security may terminate the
agreement if the average WesterFed Financial stock price is less than $11.75 and
WesterFed Financial does not agree to an exchange ratio that produces a value of
$27.01 per share for the stock component of the Merger Consideration.
Each share of WesterFed Financial Common Stock issued and outstanding
at the Effective Time will remain outstanding and unchanged as a result of the
Merger. No fractional shares of WesterFed Financial Common Stock will be issued
in the Merger, and Security stockholders who otherwise would be entitled to
receive a fractional share of WesterFed Financial Common Stock will receive a
cash payment in lieu thereof.
Security Stockholder Election Procedures
Concurrently with the mailing of this Proxy Statement, Security
Stockholders will receive a form of election (the 'Election Form') pursuant to
which Security Stockholders shall make an election to receive (i) the cash
distribution ('Cash Distribution') for all of his or her shares ('Cash Election
Shares'); (ii) the stock distribution ('Stock Distribution') for all of his or
her shares ('Stock Election Shares'), or (iii) the Cash Distribution for those
shares designated by the Security Stockholder as Cash Election Shares and the
Stock Distribution for the remaining shares. If the Security Stockholder fails
to make an election ('No Election Share'), such Security Common Stock shall be
deemed to be Cash Election Shares, except as set forth below. A Security
Stockholder of 1% or more of the Security Common Stock (determined as of the
Closing Date) who does not make an election on or before the election deadline,
will be deemed to have made a timely election to receive the Cash Distribution.
As soon as practicable after the Effective Time, the Exchange Agent
will allocate among the holders of Security Common Stock the right to receive
the Cash Distribution or the Stock Distribution pursuant to the Merger Agreement
as follows:
(i) all Stock Election Shares will be converted into the right to
receive the Stock Distribution;
(ii) all No Election Shares will be converted to Stock Election Shares
('Additional Stock Election Shares') provided that the aggregate number of Stock
Election Shares (including Additional Stock Election Shares) is equal or
approximately equal to the number of maximum stock consideration shares; in the
event that the conversion of all No Election Shares to Additional Stock Election
Shares would cause the aggregate number of Stock Election Shares (including
Additional Stock Election) to exceed the number of maximum stock consideration
shares exchanged for the stock distribution, the Additional Stock Election Share
shall be reduced so that the aggregate number of Stock Election Shares
(including Additional Stock Election Shares) equals or approximately equals the
number of Maximum Stock Consideration Shares, with the aggregate Additional
Stock Election Shares created upon the conversion of No Election shares being
allocated pro rata to each holder of No Election Shares in the proportion that
the total No Election Shares of such holder bear to the total number of No
Election Shares of all holders;
(iii) in the event that conversion of all No Election Shares to
Additional Stock Election Shares pursuant to (ii) above would cause the
aggregate number of Stock Election Shares (including Additional Stock Election
Shares) to be less than the number of minimum stock consideration shares, the
Exchange Agent (in addition to converting all No Election Shares) shall convert
a number of Cash Election Shares (excluding shares tendered by holders of less
than 100 shares) to Stock Election Shares and exchange the same for the Stock
Distribution such that the aggregate number of Stock Election Shares (including
Additional Stock Election Shares) shall equal or be approximately equal to the
number of minimum stock consideration shares, with the aggregate Stock Election
Shares that are to be created upon the conversion of Cash Election Shares being
allocated pro rata to each holder of Cash Election Shares in the proportion that
the total Cash Election Shares of such holder bear to the total number of Cash
Election Shares of all holders (excluding each holder of less that 100 shares);
and
(iv) after the allocations set forth in (ii) and (iii) above have been
made, all remaining shares of Security Common Stock will be converted into the
Cash Distribution.
If the number of shares of WesterFed Financial Common Stock
distributable in respect of the Stock Election Shares is greater than the number
of maximum stock consideration shares, then:
(i) all Cash Election Shares (including No Election Shares) will be
converted into the right to receive the Cash Distribution; and
(ii) the Exchange Agent will reallocate the Merger Consideration
payable to each holder of Stock Election Shares pro rata (based upon the number
of Stock Election Shares owned by each Security Common Stockholder, as compared
with the total number of Stock Election Shares owned by all holders) such that
the holders of the Stock Election Shares will receive, as Stock Distributions,
the number of shares of WesterFed Financial Common Stock which in the aggregate
will be equal or approximately equal to the Maximum Stock Consideration Shares
and will receive the balance of the Merger Consideration due to them in cash as
cash distributions.
Opinion of WesterFed Financial's Financial Advisor
WesterFed Financial retained Alex. Brown & Sons Incorporated ("Alex.
Brown") on May 31, 1995 to provide certain investment banking advice and
services, including advice with respect to potential acquisitions and related
matters. On May 3, 1996, WesterFed executed an addendum to the existing
engagement letter (the terms of which were further revised on August 12, 1996)
to retain Alex. Brown as its financial advisor with respect to the acquisition
of Security. Alex. Brown was selected to act as WesterFed's financial advisor
based upon its qualifications, expertise and reputation, as well as its
familiarity with WesterFed's business and market area. Alex. Brown regularly
publishes research reports regarding the financial services industry and the
businesses and securities of publicly owned companies in that industry.
Representatives of Alex. Brown attended a meeting of the WesterFed
Financial Board on September 24, 1996 at which the WesterFed Financial Board
approved the Merger Agreement. At such meeting, Alex. Brown made a presentation
to the WesterFed Financial Board and rendered an opinion (the "Alex. Brown
Opinion") to the WesterFed Financial Board that, as of such date, the
consideration to be paid by WesterFed Financial to the holders of Security
Common Stock was fair, from a financial point of view, to the holders of
WesterFed Financial Common Stock. The Alex. Brown Opinion was reaffirmed as of
the date of this Joint Proxy Statement/Prospectus. Alex. Brown relied upon
analyses such as those described below in connection with rendering the Alex.
Brown Opinion and providing its written opinion as of the date hereof. No
limitations were imposed by the WesterFed Financial Board upon Alex. Brown with
respect to the investigations made or procedures followed by it in rendering the
Alex. Brown Opinion.
The full text of the Alex. Brown Opinion, which sets forth, among other
things, assumptions made, matters considered and qualifications and limitations
on the review undertaken, is attached hereto as Appendix II and is incorporated
herein by reference. WesterFed Financial shareholders are urged to read the
Alex. Brown Opinion in its entirety. The Alex. Brown Opinion was directed to the
WesterFed Financial Board, addresses only the fairness to the holders of
WesterFed Financial Common Stock, from a financial point of view, of the
consideration to be paid by WesterFed Financial to the holders of Security
Common Stock pursuant to the Merger Agreement, and does not constitute a
recommendation to any WesterFed Financial shareholder as to how such shareholder
should vote. The Alex. Brown Opinion was rendered to the WesterFed Financial
Board for its consideration in determining whether to approve the Merger
Agreement. The following summary of the Alex. Brown Opinion is qualified in its
entirety by reference to the full text of the Alex. Brown Opinion.
In rendering the Alex. Brown Opinion, Alex. Brown reviewed certain
publicly available financial information and other information concerning
WesterFed Financial and Security and certain internal financial
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analyses and other information furnished to it by WesterFed Financial and
Security. Alex. Brown also held discussions with members of the senior
management of WesterFed Financial and Security regarding the business and
prospects of their respective financial institutions and the joint prospects of
a combined company. In addition, Alex. Brown (i) reviewed the reported price and
trading activity of the WesterFed Financial common stock and the Security common
stock, (ii) compared certain financial and stock market information of WesterFed
Financial and Security, respectively, with similar information of certain
comparable companies whose securities are publicly traded (see "Opinion of
WesterFed Financial Financial Advisor --- Analysis of Selected Publicly Traded
Companies"), (iii) reviewed the Merger Agreement, (iv) reviewed the financial
terms of certain recent business combinations which Alex. Brown deemed
comparable to the Merger, in whole or in part (see "Opinion of WesterFed
Financial Financial Advisor --- Analysis of Selected Acquisition Transactions"),
(v) reviewed the potential pro forma impact of the Merger on WesterFed's
financial condition, operating results and per share figures (see "Opinion of
WesterFed Financial Financial Advisor --- Pro Forma Merger Analysis") and (vi)
performed such other studies and analyses and considered such other factors as
Alex. Brown deemed appropriate.
In conducting its review and arriving at the Alex. Brown Opinion, Alex.
Brown assumed and relied upon, without independent verification, the accuracy,
completeness and fairness of all of the financial and other information reviewed
by and discussed with it for purposes of rendering the Alex. Brown Opinion. With
respect to the financial forecasts and other information reviewed by Alex. Brown
in rendering the Alex. Brown Opinion (including, without limitation, projected
cost savings from the Merger), Alex. Brown assumed that such financial forecasts
were reasonably prepared on bases reflecting the best currently available
estimates and judgments of the respective managements of WesterFed Financial and
Security as to the likely future financial performance of WesterFed Financial
and Security. Alex. Brown did not make or obtain any independent evaluations or
appraisals of the assets or liabilities of either WesterFed Financial or
Security or their respective subsidiaries, nor did it review any individual loan
files of WesterFed Financial or Security. Alex. Brown is not an expert in the
evaluation of allowances for loan losses, has not made an independent evaluation
of the adequacy of the allowance for loan losses set forth in the balance sheets
of WesterFed Financial and Security and has assumed such allowances were
adequate and complied fully with applicable law, regulatory policy and sound
banking practice as of the date of such financial statements. Alex. Brown
assumed that the Merger will have the tax, accounting and legal effects
(including, without limitation, that the Merger will be accounted for as a
purchase) described in the Merger Agreement. Moreover, Alex. Brown also assumed
that the Merger in all respects is, and will be consummated, in compliance with
all laws and regulations applicable to WesterFed Financial and Security.
In connection with rendering the Alex. Brown Opinion, Alex. Brown
performed a variety of financial analyses, including those summarized below.
While the following summary describes all analyses and factors that Alex. Brown
deemed material in its presentation to the WesterFed Financial Board, it is not
a comprehensive description of all analyses and factors considered by Alex.
Brown. The preparation of a fairness opinion is a complex process involving
various determinations as to the most appropriate and relevant methods of
financial analysis and the application of these methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
summary description. Accordingly, notwithstanding the separate factors discussed
below, Alex. Brown believes that its analyses must be considered as a whole and
that selecting portions of its analyses and of the factors considered by it,
without considering all analyses and factors, could create an incomplete view of
the evaluation process underlying the Alex. Brown Opinion. No one of the
analyses performed by Alex. Brown was assigned a greater significance than any
other. The analyses performed by Alex. Brown are not necessarily indicative of
actual values or future results, which may be significantly more or less
favorable than suggested by such analyses. Accordingly, such analyses and
estimates are inherently subject to substantial uncertainty. Additionally,
analyses relating to the values of businesses do not purport to be appraisals or
to reflect the prices at which businesses actually may be sold. The Alex. Brown
Opinion is based on market, economic and other conditions as they existed and
could be evaluated as of the date of the Alex. Brown Opinion.
Analysis of Selected Publicly Traded Companies. In preparing the Alex.
Brown Opinion, Alex. Brown, using publicly available information, compared
selected financial and stock market information, including, among
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other things, the composition of earning assets, asset quality ratios, loan loss
reserve levels, net interest margin, the ratio of fee income to total revenue,
the ratio of general and administrative expenses to average assets, the
efficiency ratio, the ratio of net income to average assets and average equity,
capitalization ratios, and the multiple of market price to latest twelve months'
("LTM") earnings per share ("EPS") and market price to book value per share, for
Security and a selected group of thrifts deemed similar to Security. Alex. Brown
noted that no company used in the analysis was identical to Security.
The selected group of thrifts comprised of Western thrifts with total
assets between $104.2 million and $2.1 billion as of June 30, 1996. A total of
11 institutions were included (the "Selected Thrifts"). As of September 16,
1996, the mean multiples implied by the market price of the common stock of the
Selected Thrifts to the Selected Thrifts' LTM EPS and book value per share at or
for the period ending June 30, 1996 were 12.9x and 125.0%, respectively, for the
Selected Thrifts, and 12.2x, and 97.6%, respectively, for Security.
Analysis of Selected Acquisition Transactions. In preparing the
Opinion, Alex. Brown analyzed the financial terms, to the extent publicly
available, of certain selected merger and acquisition transactions for acquired
thrifts which it deemed comparable in whole or in part to the Merger. Alex.
Brown noted that no transaction used in the analysis of selected acquisition
transactions was identical to the Merger. These transactions were analyzed based
upon both the financial characteristics of acquired thrifts and the acquisition
price relative to the acquired thrift's LTM EPS, book value, tangible book
value, assets and market value. The analysis included a review and comparison of
the mean, median, high and low multiples represented by a sample of 48 effected
or pending thrift acquisitions nationwide having transaction values between $25
million and $250 million that were announced since January 1, 1993 and that
involved acquired thrifts with equity to assets less than 10% and return on
average assets between 0.50% and 1.00%. (the "Comparable Transactions"). The
average price to LTM EPS, price to book value, price to tangible book value,
price to assets and price to market value implied by the merger consideration
for the Comparable Transactions were 15.6x, 155.3%, 159.7%, 12.0% and 32.0%,
respectively. The value of the consideration in the Merger as of September 24,
1996 (the "September 24 Value") implied a multiple of 142.9% and 166.7% of
Security's book value and tangible book value, respectively, and a premium to
market value of 37.9%. Further, the September 24 Value represented a multiple of
17.9x Security's LTM EPS. Alex. Brown noted that this multiple, while higher
than the mean of the Comparable Transactions, was within the range of multiples
paid in the Comparable Transactions. Applying the September 24 Value against
projected EPS for fiscal 1997 for both the "expected case" and the "adjusted
case" resulted in price/earnings multiples of 12.0x and 12.9x, respectively.
Discounted Cash Flow Analysis. Using a discounted dividend analysis,
Alex. Brown prepared an estimated valuation of Security based on the present
value of the future dividend streams and the terminal value that Security could
produce over a four-year period. Projection ranges for Security's four-year
balance sheet and income statement were provided by Security's management and
were based upon various factors and assumptions, many of which are beyond the
control of Security. These projections are, by their nature, forward-looking and
may differ materially from the actual values or actual future results, which may
be significantly more or less favorable than suggested by such projections. Such
projections were also modified to present an "adjusted" case for Security.
The implied future dividend stream projection was based upon the
assumption that Security would maximize yearly dividend payments, subject to
maintaining a constant year-end ratio of shareholders' equity to total assets of
7.0%. Estimated terminal values were calculated by applying multiples ranging
from 10.0x to 11.0x projected net income. The dividend streams and terminal
values were discounted to present values using a range of discount rates from
12.5% to 15.0%. The discounted cash flow analysis produced a range of net
present values per share of Security common stock of approximately $29.50 to
$34.25 in the expected case and approximately $28.25 to $32.75 in the adjusted
case. Giving effect to projected cost savings (based on estimates provided by
WesterFed Financial management and Security management), the analysis produced a
range of net present values per share of the Security Common Stock of
approximately $32.25 to $37.50 in the expected case and approximately $31.00 to
$36.00 in the adjusted case. These analyses do not purport to be indicative of
actual values or expected values or
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an appraisal range of the Security Common Stock. Alex. Brown noted that the
discounted cash flow analysis is a widely used valuation methodology, but that
such analysis relies on numerous assumptions, including dividend payout rates,
terminal values and discount rates, the future values of which may differ
significantly from such estimates.
Pro Forma Merger Analysis. Alex. Brown analyzed the pro forma effects
of the Merger on WesterFed Financial shareholders by comparing, among other
things, the projected pro forma fully diluted earnings per share for fiscal
years 1997, 1998, 1999 and 2000 and the tangible book value per share as of June
30, 1996 with the standalone estimates of fully diluted earnings per share for
fiscal years 1997, 1998, 1999 and 2000 and tangible book value per share as of
June 30, 1996. Based on certain assumptions, including those with respect to
cost savings and other synergies from the Merger, and the standalone earnings
projections of WesterFed Financial (based on estimates provided by WesterFed
Financial management) and Security (based on estimates provided by Security
management), the analysis showed that the Merger could result in accretion to
WesterFed's pro forma projected EPS in fiscal 1998 (the first full fiscal year
of combined operations), 1999 and 2000 of 7.7%, 6.1% and 5.8%, respectively, in
the expected case. In the adjusted case, the analysis showed that the Merger
could result in accretion to WesterFed's pro forma projected EPS in fiscal 1998,
1999 and 2000 of 3.2%, 3.5% and 4.0%, respectively. In both the expected case
and the adjusted case, the projected dilution to book value was 19.2%.
Alex. Brown also considered the effect on pro forma equity/assets and
pro forma tangible equity/tangible assets and noted that the pro forma capital
levels would be in line with that of the Selected Thrifts. As of June 30, 1997,
pro forma equity/assets and tangible equity/tangible assets were projected to be
9.45% and 8.05%, respectively, in the expected case, and 9.45% and 8.04% in the
adjusted case, respectively.
Additional Considerations. In arriving at its opinion, Alex. Brown also
considered a number of qualitative factors that might result from the Merger,
including WesterFed Financial's broadened geographic presence in Montana,
enhanced lending capabilities and loan portfolio mix, greater management depth,
and the improved leverage of WesterFed Financial's capital base.
Compensation of Financial Advisor. Pursuant to the terms of an
engagement letter dated May 31, 1995, and related Addendum B, dated May 3, 1996
(collectively, the "Alex. Brown Engagement Letter"), WesterFed Financial will
pay Alex. Brown an aggregate fee of $350,000 for acting as Financial Advisor in
connection with the Merger, including rendering the Alex. Brown Opinion, against
which will be credited a $25,000 retainer fee paid upon execution of the
Engagement Letter. Of the fee, $50,000 was paid on the delivery of the Alex.
Brown Opinion, with the remainder of the fee payable upon closing of the Merger.
Whether or not the Merger is consummated, WesterFed Financial also has agreed to
reimburse Alex. Brown for its reasonable out-of-pocket expenses incurred in
connection with the transaction. WesterFed Financial has also agreed to
indemnify Alex. Brown and certain related persons against certain liabilities
relating to or arising out of its engagement.
Opinion of Security's Financial Advisor
General. Pursuant to an engagement letter dated May 31, 1996 (the
"Montgomery Engagement letter"), Security engaged Montgomery to assist in
evaluating the WesterFed Financial proposal and advising Security concerning
opportunities for the sale of Security to WesterFed Financial. As part of its
engagement, Montgomery agreed, if requested by Security, to render to the
Security Board a fairness opinion with respect to a potential sale of Security
to WesterFed Financial. Montgomery is a nationally recognized investment banking
firm and, as part of its investment banking activities, is regularly engaged in
the valuation of businesses and their securities in connection with merger
transactions and other types of acquisitions, negotiated underwritings, private
placements and valuations for corporate and other purposes. Security selected
Montgomery to render the opinion on the basis of its experience and expertise in
transactions similar to the Merger and its reputation in the banking and
investment communities.
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At a meeting of the Security Board on September 24, 1996, Montgomery
delivered its oral opinion that the consideration to be received by the holders
of Security Common Stock pursuant to the Merger Agreement was fair to such
shareholders from a financial point of view as of the date of such opinion.
Montgomery's oral opinion was confirmed in a letter dated September 24, 1996.
Montgomery has confirmed its opinion dated September 24, 1996 by delivery of an
opinion dated the date of this Joint Proxy Statement/Prospectus. No limitations
were imposed by Security on Montgomery with respect to the investigations made
or procedures followed in rendering its opinions.
The full text of Montgomery's written opinion to the Security Board,
dated September 24, 1996, which sets forth the assumptions made, matters
considered, and limitations of the review by Montgomery, is attached hereto as
Appendix III and is incorporated herein by reference. The following summary of
Montgomery's opinion is qualified in its entirety by reference to the full text
of the opinion, which should be read carefully and in its entirety. In
furnishing such opinion, Montgomery does not admit that it is an expert with
respect to the Registration Statement of which this Joint Proxy
Statement/Prospectus is part within the meaning of the term "experts" as used in
the Securities Act (as defined below) and the rules and regulations promulgated
thereunder. Montgomery's opinion is addressed to the Security Board, covers only
the fairness of the consideration to be received by holders of Security Common
Stock from a financial point of view as of the date of the opinion and does not
constitute a recommendation to any holder of Security Common Stock as to how
such stockholder should vote at the Annual Meeting.
In connection with its September 24, 1996 opinion, Montgomery, among
other things: (i) reviewed certain publicly available financial and other data
with respect to Security and WesterFed Financial, including the audited,
consolidated financial statements for the fiscal years ended June 30, 1994 and
1995 prepared in accordance with generally accepted accounting principles
("GAAP") as applied to financial institutions, audited consolidated financial
statements for the fiscal year ended June 30, 1996 prepared in accordance with
GAAP, and certain other relevant financial and operating data relating to
Security and WesterFed Financial made available to Montgomery from published
sources and from the internal records of Security and WesterFed Financial; (ii)
reviewed the draft Merger Agreement dated September 19, 1996; (iii) reviewed
certain publicly available information concerning the trading of, and the
trading market for, Security Common Stock and WesterFed Financial Common Stock;
(iv) compared WesterFed Financial from a financial point of view with certain
other companies in the thrift industry that Montgomery deemed to be relevant;
(v) considered the financial terms, to the extent publicly available, of
selected recent business combinations that Montgomery deemed to be comparable,
in whole or in part, to the Merger; (vi) reviewed and discussed with
representatives of the management of Security and WesterFed Financial certain
information of a business and financial nature regarding Security and WesterFed
Financial, furnished to Montgomery by them, including financial forecasts
prepared by their respective managements and related assumptions of Security and
WesterFed Financial; (vii) made inquiries regarding, and discussed with
Security's counsel, the Merger and the merger Agreement and other matters
related thereto; and (viii) performed such other analyses and examinations as
Montgomery deemed appropriate.
In connection with its review, and with the consent of Security,
Montgomery did not assume any obligation independently to verify the foregoing
information and relied on such information being accurate and complete in all
material respects. With respect to the financial forecasts for Security and
WesterFed Financial provided to Montgomery by their respective managements,
Montgomery assumed for purposes of its opinion and with Security's consent that
the forecasts were reasonably prepared on bases reflecting the best currently
available estimates and judgments of their respective managements as to the
future financial performance of Security and WesterFed Financial, and provided a
reasonable basis upon which Montgomery could form its opinion. Montgomery also
assumed that there were no material changes in Security's or WesterFed
Financial's assets, financial condition, results of operations, business or
prospects since the respective dates of their last financial statements made
available to it. Montgomery assumed that the Merger would be consummated in a
manner that complies in all respects with the applicable provision of the
Securities Act of 1933, as amended (the "Securities Act"), the Securities
Exchange
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Act of 1934, as amended, Federal and state regulations relating to financial
institutions, and all other applicable federal and state statutes, rules and
regulations.
In addition, Montgomery did not assume responsibility for reviewing any
individual credit files, or making an independent evaluation, appraisal or
physical inspection of any of the assets or liabilities (contingent or
otherwise) of Security or WesterFed Financial, nor was Montgomery furnished with
any such appraisals. Montgomery is not an expert in the evaluation of loan
portfolios for purposes of assessing the adequacy of the allowances for losses
with respect thereto, and assumed that such allowances for each of Security and
WesterFed Financial are in the aggregate adequate to cover such losses.
Montgomery was informed that the Merger will be accounted for as a purchase
under GAAP. Finally, Montgomery's oral and written opinions were based on
economic, monetary and market and other conditions as of September 24, 1996.
Set forth below is a brief summary of the report presented by
Montgomery to the Security Board of Directors on September 24, 1996 in
connection with its opinion.
Analysis of Selected Merger Transactions. Montgomery reviewed the
consideration paid in recently announced transactions whereby certain thrifts
and banks were acquired. Specifically, Montgomery reviewed 10 transactions
involving acquisitions of thrifts based in a region of the United States defined
as "Western" announced after January 1, 1995 (the "Western Thrift
Acquisitions"), the acquisition of 18 selected "Western" banks announced since
January 1, 1995 (the "Western Bank Acquisitions"), and the acquisition of 11
selected Montana commercial banks announced since January 1, 1991 (the "Montana
Bank Acquisitions"). No Montana thrift acquisitions were identified. For each
thrift or bank acquired or to be acquired in such transactions, Montgomery
analyzed data illustrating, among other things, the ratio of the premium (i.e.,
purchase price in excess of tangible book value) to core deposits, purchase
price to deposits, purchase price to tangible book value and purchase price to
last twelve-months ("LTM") earnings.
The figures for the Western Thrift Acquisitions, Western Bank
Acquisitions, and Montana Bank Acquisitions produced, respectively: (i) median
percentage of premium to core deposits of 3.57%, 7.55% and 6.62%; (ii) median
percentage of purchase price to deposits of 11.08%, 18.17% and 14.77%; (iii)
median ratio of purchase price to tangible book value of 1.35, 1.77 and 1.68 and
(iv) median ratio of purchase price to LTM earnings of 9.55, 10.61, and 11.11.
In comparison, based upon a purchase price of $30.00 for each share of Security
Common Stock, Montgomery determined that the consideration to be received by the
holders of Security Common Stock in the Merger represented a percentage of
premium to core deposits of 7.16%, a percentage of price to deposits of 15.82%,
a ratio of price to tangible book value of 1.72 and a ratio of price to
Security's LTM earnings for the twelve months ended June 30, 1996 of 17.98.
Montgomery used a group of national thrift acquisitions announced since
January 1, 1995 with purchase prices of between $20 million and $250 million to
analyze premiums paid compared to the sellers' stock price at various times
prior to the announcement of the acquisition. These figures (a) for all of the
identified transactions and (b) for those transactions where the consideration
offered was a combination of stock and cash produced, respectively: (i) a median
premium to the seller's stock price one month prior to announcement of 28.0% and
17.4%; (ii) a median premium to the seller's stock price six days prior to
announcement of 25.3% and 18.4%; and (iii) a median premium to the seller's
stock price the day prior to announcement of 21.4% and 15.1%. In comparison,
WesterFed Financial's offer of $30.00 per share exceeded Security's stock price
one month prior to September 24, 1996 by 46.3%, the stock price six days prior
to September 24, 1996 by 46.3% and the stock price one day prior to September
24, 1996 by 39.5%.
No other company or transaction used in the above analysis as a
comparison is identical to Security or the Merger. Accordingly, an analysis of
the results of the foregoing is not mathematical; rather, it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the companies and
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other factors that could affect the public trading value and the announced
acquisition prices of the companies to which Security and the Merger are being
compared.
Contribution Analysis. Montgomery analyzed the contribution of each of
Security and WesterFed Financial to, among other things, total equity, total
tangible equity, assets, fiscal year net income, loans and core deposits of the
pro forma combined companies at or for the period ended June 30, 1996, and
projected net income for the fiscal year ending June 30, 1996. This analysis
showed, among other things, that based on pro forma combined balance sheets for
Security and WesterFed Financial at June 30, 1996, Security would have
contributed 28.1% of the total equity, 25.1% of tangible equity, 39.8% of
assets, 33.8% of loans and 45.1% of core deposits. Pro forma income statements
for the fiscal year ending June 30, 1996, indicated that Security would have
contributed 35.8% of the net income. Pro forma projected income statements for
the fiscal year ending June 30, 1997, showed that Security would contribute
42.0% of the net income. Based upon analysis assuming an all stock transaction,
WesterFed Financial stock price of $15.50 and therefore an exchange ratio in the
Merger of 1.9355 shares of WesterFed Financial Common Stock for each share of
Security Common Stock, holders of Security Common Stock would own approximately
39.5% of the combined companies based on fully diluted shares outstanding on
September 24, 1996.
Dilution Analysis. Using estimates of future earnings of Security and
WesterFed Financial prepared by Security management and WesterFed Financial
management, respectively, Montgomery compared the fiscal year 1997 estimated
earnings per share for WesterFed Financial to the fiscal year 1997 estimated
earnings per share of the common stock of the pro forma combined companies.
Based on an exchange ratio in the Merger of 1.9355 shares of WesterFed Financial
Common Stock for 45% of the shares of Security Common Stock, and $30.00 cash for
55% of the shares of Security Common Stock, the proposed transaction would have
virtually no impact on WesterFed Financial's estimated earnings. This analysis
did not account for costs associated with the Merger or expense savings or other
synergies that may result from the Merger.
Present Value Analysis. In performing the present value analysis,
Montgomery estimated the future earnings per share and dividend payments of
Security over a four year period. The estimated earnings per share in the year
2000 was multiplied by an estimated price to earnings multiple ranging from 9.0x
to 13.0x. This product was then added to the cumulative estimated dividends and
the sum of these two numbers was discounted to the present using a discount rate
of 14%. This analysis indicated that the present value of Security's future
stock price plus dividends ranged from $21.72 to $30.13 per share.
The summary set forth above does not purport to be a complete
description of the presentation by Montgomery to Security's Board or of the
analyses performed by Montgomery. The preparation of a fairness opinion is not
necessarily susceptible to partial analysis or summary description. Montgomery
believes that its analyses and the summary set forth above must be considered as
a whole and that selecting a portion of its analyses and factors, without
considering all analyses and factors, would create an incomplete view of the
process underlying the analyses set forth in its presentation to Security's
Board. In addition, Montgomery did not provide the Board with any specific
weight that may have been given to various factors in its analyses, and may have
deemed various assumptions more or less probable than other assumptions, so that
the ranges of valuations resulting from any particular analysis described above
should not be taken to be Montgomery's view of the actual value of Security or
the combined companies. The fact that any specific analysis has been referred to
in the summary above is not meant to indicate that such analysis was given
greater weight than any other analysis.
In performing its analyses, Montgomery made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, may of which are beyond the control of Security or WesterFed
Financial. The analyses performed by Montgomery are not necessarily indicative
of actual values or actual future results, which may be significantly more or
less favorable than suggested by such analyses. Such analyses were prepared
solely as part of Montgomery's analysis of the fairness of the consideration to
be received by the holders of Security's Common Stock in the Merger and were
provided to Security's Board in connection with the delivery of Montgomery's
opinion. The analyses do not purport to be appraisals or to reflect the prices
at which
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a company might actually be sold or the prices at which any securities may trade
at the present time or any time in the future. The projections are based on
numerous variables and assumptions which are inherently unpredictable and must
be considered not certain of occurrence as projected. Accordingly, actual
results could vary significantly from those set forth in such projections.
As described above, Montgomery's opinion and presentation to Security's
Board were among the factors taken into consideration by Security's Board in
making its determination to approve the Merger Agreement.
Pursuant to the Engagement Letter, Security paid Montgomery a retainer
fee of $25,000 and a fee of $125,000 upon delivery of its September 24, 1996
fairness opinion. Additionally, Montgomery will receive approximately $360,000
upon the closing of the Merger. Security has also agreed to reimburse Montgomery
for its reasonable out-of-pocket expenses, including any fees and disbursements
for Montgomery's legal counsel and other experts retained by Montgomery.
Security has agreed to indemnify Montgomery, its affiliates, and their
respective partners, directors, officer, agents, consultants, employees and
controlling persons against certain liabilities, including liabilities under the
federal securities laws. Except for its engagement in connection with the
Merger, over the past two years, Montgomery has not provided any investment
banking services or any other financial advisory services to Security for which
any fee was paid.
In the ordinary course of its business, Montgomery may trade equity
securities of WesterFed Financial and Security for its own account and for the
accounts of customers and, accordingly, may at any time hold a long or short
position in such securities.
Effective Time and Closing Date
The Merger shall become effective at the time and on the date specified
in the certificate and articles of merger to be filed with the Secretary of
State of Delaware and the Secretary of State of Montana (the "Effective Time").
Such filing will occur only after the receipt of all requisite regulatory
approvals and the approval of the WesterFed Financial Proposal and the Security
Proposals by the requisite vote of WesterFed Financial's and Security's
respective stockholders and the satisfaction or waiver of all other conditions
to the Merger. The closing of the Merger will be held on a date mutually agreed
upon by WesterFed Financial and Security ("Closing Date"). In the absence of an
agreement, the closing will be held on the tenth business day after the last to
occur of: (i) the receipt of all consents and approvals of government regulatory
authorities as legally required to consummate the Merger and the expiration of
all applicable statutory waiting periods, and (ii) the requisite approval of the
Merger by the stockholders of Security and WesterFed Financial.
Security. Security's Board of Directors has duly adopted and approved
the Merger Agreement and the transactions contemplated thereby and has
determined that the Merger is fair to, and in the best interests of, Security
and its stockholders. Security's Board of Directors therefore recommends a vote
FOR approval of the matters presented at the Security Annual Meeting. One
director, Stephen C. Sandels who owns 100 shares of Security, has advised
Security that he voted against approval of the Merger Agreement based upon his
stated view that (i) the financial terms of WesterFed Financial's merger offer
are insufficient, and the stockholders of Security Bank would be better served
if the offer were rejected and Security remained independent, (ii) the Special
Committee and its professional advisors should have tried harder to obtain
higher values for the consideration to be received by the stockholders of
Security in the merger, including the solicitation of offers from other
prospective acquirors, (iii) the terms of the "lock-up" stock options granted to
WesterFed Financial are unfair and not in the best interests of Security and its
stockholders and (iv) the severance payments to be made to David W. Jorgenson
and Elaine F. Hine in connection with the merger, despite their continuing
employment by WesterFed, are improper and unfair.
For a discussion of the factors considered by Security's Board of
Directors in reaching its decision to approve the Merger Agreement, see "The
Merger--Background of and Reasons for the Merger" and "--Security's Reasons for
the Merger".
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Interests of Certain Persons in the Merger
The directors and executive officers of Security, together with their
affiliates, beneficially owned a total of 164,372 shares of Security Common
Stock (representing approximately 10.57% of all outstanding shares of Security
Common Stock) as of the Security Record Date. The directors and executive
officers will receive the same consideration in the Merger for their shares,
including any shares that they may acquire prior to the Effective Time pursuant
to the exercise of stock options, as the other stockholders of Security. As
described below, certain members of Security's management team and Board of
Directors have interests in the Merger that are in addition to their interests
as stockholders of Security generally. The Board of Directors of Security was
aware of these interests and considered them, among other matters, in approving
the Merger Agreement and the transactions contemplated thereby.
Indemnification/Insurance. The Merger Agreement provides that for the
six-year period following the Effective Time, WesterFed Financial will
indemnify, defend, and hold harmless the officers, directors and employees of
Security and Security Bank against claims arising out of pre-Merger acts and
omissions, including claims related to the Merger, to the extent that such
persons were entitled to indemnification under Montana law and the Articles of
Incorporation and Bylaws of Security. Any determination required to be made
regarding whether a person's conduct complies with the standards set forth under
Montana law and the Articles of Incorporation and Bylaws of Security will be
made by independent counsel mutually agreed upon by WesterFed Financial and the
indemnitee. WesterFed Financial will also cause the persons serving as officers
and directors of Security and Security Bank immediately prior to the Merger to
be covered for pre-Merger acts or omissions for a six-year period by the
directors' and officers' liability insurance policies of WesterFed Financial and
Western Bank, provided that the additional premium cost to WesterFed Financial
does not exceed 300% of Security's present annual premium cost, and that the
insurance is available. WesterFed Financial may also substitute or cause
Security to substitute single premium tail coverage with a policy limit equal to
Security's existing annual coverage limit.
Directors and Officers. The Merger Agreement provides that two current
members of Security's Board of Directors, selected by WesterFed Financial after
consulting with Security's Board of Directors, shall serve as directors of
WesterFed Financial after the Effective Time. In addition, the Merger Agreement
provides that one current officer of Security, selected by WesterFed Financial
after consulting with the Board of Directors of Security, shall serve as an
officer of WesterFed Financial after the Effective Time.
Employment Agreements. Western Bank has entered into employment
agreements with Messrs. David W. Jorgenson, Stanley R. Hill, Scott W. Sanders,
James M. Pieters, and Mark L. Bauer and with Ms. Elaine F. Hine, each of which
employment agreements becomes effective upon consummation of the Merger.
Under the terms of Mr. Jorgenson's employment agreement with Western
Bank, he will serve as Executive Vice President of Western Bank for the
three-year period following the Effective Time. Mr. Jorgenson's initial annual
base salary under the agreement will be $160,200. The agreement further provides
that Mr. Jorgenson will be eligible to participate in employee benefit plans in
which the continuing employees of Security Bank are entitled to participate
after the Merger. Mr. Jorgenson also will have use of an automobile owned by
Western Bank. If Mr. Jorgenson's employment is terminated by Western Bank and
such termination does not constitute a "termination for cause" (as that term is
defined in the employment agreement), he will be entitled to receive his salary
then in effect and certain employee benefits for the remaining term of the
agreement, unless such termination occurs within 12 months following a "change
in control" of Western Bank (as that term is defined in the agreement), in which
case he will be entitled to receive his salary then in effect and certain
employee benefits for the longer of the remaining term of the agreement or 18
months after termination. In the event that Western Bank materially breaches the
employment agreement or upon the occurrence of certain other events that would
adversely affect his employment, Mr. Jorgenson will be entitled to terminate his
employment with Western Bank and receive his salary then in effect and certain
employee benefits for the remaining term of the agreement.
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Under the terms of his employment agreement, Mr. Jorgenson must
maintain the confidential nature of information regarding Western Bank and its
clients that is not available to the general public. Further, for a period of
three years following the termination of his employment with Western Bank, Mr.
Jorgenson cannot attempt to solicit other employees to terminate their
employment with Western Bank. During this three-year period, Mr. Jorgenson is
also prohibited from attempting to solicit any banking-related business from any
person or entity that is or was a client, employee, or customer of Western Bank
and who dealt with either Mr. Jorgenson or employees under his supervision. The
employment agreement also provides that if Mr. Jorgenson voluntarily terminates
his employment with Western Bank or is terminated for cause, for a period of one
year, he cannot participate in the ownership, management, operation or control
of, nor be employed by or connected in any manner with any financial institution
having an office located within twenty miles of any office of Western Bank. The
non-compete provision does not prevent Mr. Jorgenson from purchasing, solely for
investment, not more than 5% of the stock of a financial institution that is
traded on a securities exchange or actively traded in over-the-counter market
and registered under the Securities Exchange Act of 1934.
Mr. Jorgenson's employment agreement also provides that, on the date on
which the Merger is consummated, WesterFed Financial will grant to Mr. Jorgenson
under the WesterFed Financial Corporation 1993 Stock Option and Incentive Plan
(the "Plan") options to purchase 12,000 shares of WesterFed Financial Common
Stock at an exercise price equal to the market value of a share of the WesterFed
Financial Common Stock on such date (the "Initial Options"). The Initial Options
will vest based on Continuous Service (as defined in the Plan) at the rate of
20% per year over the five years following the date of the grant. If a change in
control or merger, consolidation or combination of WesterFed Financial into
another corporation occurs, vesting of the Initial Options will accelerate in
the same manner as options granted to WesterFed Financial executive officers
under the Plan prior to the Merger. In addition, Mr. Jorgenson will be entitled
to receive options to purchase an additional 30,000 shares of WesterFed
Financial Common Stock at an exercise price equal to the market value on the
date of grant if the shareholders of WesterFed Financial authorize an increase
in the number of shares to be awarded under the Plan, or if they approve a new
stock option plan for WesterFed Financial executive officers. These additional
30,000 options will vest on the same schedule and be subject to the same
acceleration provisions that are applicable to the Initial Options.
Ms. Hine's employment agreement with Western Bank provides that she
will serve as a Senior Vice President of Western Bank for a period of two years
following the Effective Time. Ms. Hine will receive an annual base salary of
$76,648 and non-exclusive use of a car owned by Western Bank, and be entitled to
participate in all retirement and employee benefit plans in which continuing
employees of Security and Security Bank are entitled to participate after the
Effective Time. If Ms. Hine's employment is terminated by Western Bank and such
termination does not constitute a "termination for cause" (as that term is
defined in the employment agreement), she will be entitled to receive her salary
then in effect for the remaining term of the agreement. In the event that
Western Bank materially breaches her employment agreement or upon the occurrence
of certain other events that would adversely affect her employment, Ms. Hine
will be entitled to terminate her employment with Western Bank and receive her
salary then in effect for the remaining term of the agreement.
Under the terms of their employment agreements with Western Bank,
Messrs. Hill and Sanders will each serve as a Senior Vice President of Western
Bank for a period of two years following the Effective Time. In addition,
Messrs. Hill and Sanders will each serve as Commercial Lending Officers of
Western Bank during such two-year period. Messrs. Hill and Sanders will each
receive an annual base salary of $71,500 and non-exclusive use of a car owned by
Western Bank, and be entitled to participate in all retirement and employee
benefit plans in which continuing employees of Security and Security Bank are
entitled to participate after the Effective Time. If either individual's
employment is terminated by Western Bank and such termination does not
constitute a "termination for cause" (as that term is defined in the employment
agreement), he will be entitled to receive his salary then in effect for the
remaining term of the agreement, unless such termination occurs within 12 months
following a "change in control" (as that term is defined in the agreement) of
Western Bank, in which case he is entitled to receive his salary then in effect
for the remaining term of the agreement. In the event that Western Bank
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materially breaches the employment agreement or upon the occurrence of certain
other events that would adversely affect his employment, each of Messrs. Hill
and Sanders will be entitled to terminate his employment with Western Bank and
receive his salary then in effect for the remaining term of the agreement. Under
the terms of their employment agreements with Western Bank, Messrs. Hill and
Sanders forfeited their severance rights under their respective employment
agreements with Security Bank.
Mr. Pieters' employment agreement provides that he will serve as a Vice
President and branch manager of Western Bank for a two-year period following the
Effective Time, with a base salary of $67,118, and a monthly car allowance of
$300. Mr. Bauer's employment agreement provides that he will serve as a Vice
President of Western for a two-year period following the Effective Time, with a
base salary of $52,000. Each of Messrs. Pieters and Bauer will be entitled to
participate in all employee benefit plans in which continuing employees of
Security and Security Bank are entitled to participate and, if terminated
without cause, to receive their salary then in effect for the remaining term of
the employment agreement. If Ms. Engelhaupt accepts employment with Western
Bank, it is presently expected that her employment will be on terms similar to
her existing employment contract.
Existing Severance Arrangements. On June 19, 1995, Security and
Security Bank (collectively, the "Company") entered into a one-year employment
agreement with Mr. David W. Jorgenson, the President and Chief Executive Officer
of the Company, and that agreement was renewed for an additional one-year term
on March 25, 1996. Security Bank also is a party to employment agreements with
certain other individuals, including Ms. Elaine F. Hine, a Senior Vice President
of Security Bank, and Ms. Karen S. Engelhaupt, a Vice President of Security
Bank. Each of these employment agreements contains provisions for severance
benefits upon a "change in control" (as that term is defined in the agreements).
The Company's severance payment obligations under Mr. Jorgenson's
employment agreement are triggered if (i) the Company (for other than cause or
Mr. Jorgenson's death or disability) or Mr. Jorgenson terminates his employment
within three years after a change in control, or (ii) the Company terminates Mr.
Jorgenson's employment (for other than cause or Mr. Jorgenson's death or
disability) on or after the date that any party announces or is required by law
to announce any prospective change in control transaction and a change in
control occurs within one year after such termination; or (iii) the Company
substantially changes Mr. Jorgenson's position, duty, responsibility or status.
Upon the occurrence of any of these events, Mr. Jorgenson will be entitled to a
severance benefit consisting of a single payment in an amount equal to three
times his annual salary (the "Jorgenson Severance Payment") and continuing
employee benefits for two years following the change in control, less the amount
of any compensation received by Mr. Jorgenson from the Company or its successor
following the change in control. The amount of Mr. Jorgenson's severance benefit
is subject to limitation under Section 280G(b)(2)(A) of the Internal Revenue
Code of 1986, as amended. Mr. Jorgenson's current annual salary for purposes of
the severance provisions of his employment agreement is $210,000.
A "change in control" for the purposes of Mr. Jorgenson's employment
agreement means any of the following events: (i) a takeover of the Company by
another entity by purchase or merger; (ii) a purchase of substantially all the
assets of the Company; (iii) the acquisition of more than 50% of the outstanding
common stock or combined voting power of the Company's outstanding securities;
or (iv) a change in the composition of the board of directors of the Company
during any three-year period that results in less than a majority of the
original directors serving on the board, unless the election or nomination of
each new director was approved by at least two-thirds of the directors still in
office who were directors at the beginning of the three-year period.
The Company's severance payment obligations under Ms. Hine's employment
agreement are triggered if her employment is terminated by Security Bank as a
result of a change in control. Upon any such termination, subject to certain
limitations, Security Bank is obligated to continue to pay Ms. Hine her annual
salary of $76,648 for a period of 24 months following the date of termination
(the "Hine Severance Payments"). For purposes of Ms. Hine's employment
agreement, a "change of control" is defined as the direct or indirect
acquisition of more than 25% of the voting stock of Security.
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Under the terms of its employment agreement with Ms. Engelhaupt,
Security Bank is obligated to continue payment of Ms. Engelhaupt's annual salary
of $37,013 for a period of 24 months following termination of employment if such
termination is the result of a "change in control". The definition of "change in
control" is identical to the definition used in Ms. Hine's employment agreement.
Consummation of the Merger will constitute a change in control for
purposes of the employment agreements with Mr. Jorgenson, Ms. Hine, and Ms.
Engelhaupt. In order to induce Mr. Jorgenson and Ms. Hine to enter into
employment agreements with it, Western Bank has agreed that consummation of the
Merger will be deemed to be an event that triggers severance payments to each
such individual under the terms of their existing employment agreements with
Security Bank, without reduction for any compensation to be received by Mr.
Jorgenson or Ms. Hine under their new employment agreements with Western Bank.
Accordingly, immediately prior to consummation of the Merger, Security Bank will
pay to Mr. Jorgenson and Ms. Hine severance benefits consisting of the Jorgenson
Severance Payment and the Hine Severance Payments, respectively.
Conversion/Early Vesting of Security Stock Options. Under the terms of
the Merger Agreement, all Security Stock Options (as that term is defined in the
Merger Agreement) will, at the election of the holder, become fully vested and
exercisable for cash as of the Effective Time or be converted into the right to
receive options to purchase WesterFed Financial Common Stock. See "The
Merger--Effect on Employees and Employee Benefit Plans of Security".
See "Election of Security Directors--Executive Compensation" and
"--Employment Contracts".
Effect on Employees and Employee Benefit Plans of Security
The Merger Agreement provides that to the extent permitted by
applicable law, employees of Security and Security Bank who become employees of
WesterFed Financial or its subsidiaries (the "Continuing Employees") will
continue to participate in Security Benefit Plans (as that term is defined in
the Merger Agreement). If WesterFed Financial or its subsidiaries terminates or
amends a Security Benefit Plan in a manner that adversely affects the Continuing
Employees, WesterFed Financial or its subsidiaries will provide the Continuing
Employees with benefits that are substantially equivalent to the benefits being
received by other similarly situated employees of WesterFed Financial or its
subsidiaries under comparable plans then in effect. Subject to certain
exceptions, neither WesterFed Financial nor its subsidiaries will have the right
to amend any Security Qualified Plan (as that term is defined in the Merger
Agreement) in a manner that adversely affects the benefits of participants.
WesterFed Financial and its subsidiaries may terminate a Security Qualified Plan
or merge it into a WesterFed Financial Qualified Plan (as that term is defined
in the Merger Agreement) in accordance with applicable laws and regulations. All
Continuing Employees who become participants in a WesterFed Financial Benefit
Plan (as that term is defined in the Merger Agreement) will receive credit for
past service with Security and its subsidiaries when determining eligibility to
participate in and the vesting of benefits (but not the accrual of benefits)
under the WesterFed Financial Benefit Plan. Continuing Employees will not be
excluded or penalized for pre-existing conditions that were covered under the
Security health plan immediately prior to the Effective Time, nor will any
waiting period relating to coverage under the WesterFed Financial health plan
apply, subject to the carrier's policies.
Under the Merger Agreement, each Security Stock Option (as that term is
defined in the Merger Agreement) outstanding and unexercised immediately prior
to the Effective Time and held by a non-employee of Security or Security Bank
shall be converted automatically as of the Effective Time into a right to
receive from WesterFed Financial a cash payment in an amount equal to the
product of (a) the number of shares of Security Common Stock subject to such
option immediately prior to the Effective Time, and (b) the excess, if any, of
$30 over the exercise price per share of such option, net of any cash which must
be withheld under income and employment tax requirements.
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In addition, the Merger Agreement provides that each Security Stock
Option that is outstanding and unexercised immediately prior to the Effective
Time and held by an employee of Security or Security Bank shall, upon the
election of the holder (the "Option Election"), be converted automatically as of
the Effective Time into a right to receive from WesterFed Financial the cash
payment described in the preceding paragraph or an option to purchase shares of
WesterFed Financial Common Stock on the same terms as those applicable to the
Security Stock Option immediately prior to the Effective Time, except that (i)
each converted option will be exercisable only for shares of WesterFed Financial
Common Stock, (ii) the number of shares of WesterFed Financial Common Stock
subject to the converted option shall be equal to the number of shares of
Security Common Stock subject to the Security Stock Option immediately prior to
the Effective Time multiplied by the Exchange Ratio, and (iii) the per-share
exercise price under each converted option shall be adjusted by dividing the
per-share exercise price of the Security Stock Option by the Exchange Ratio. If
a holder of Security Stock Options fails to make the Option Election, the holder
will be deemed to have elected to receive an option to purchase shares of
WesterFed Financial Common Stock.
Dissenters' Rights
The following is a brief summary of the statutory procedures to be
followed by a holder of Security Common Stock in order to dissent from the
Merger and obtain payment of fair value under the Montana Business Corporation
Act ("MBCA"). This summary is not intended to be complete and is qualified in
its entirety by reference to Section 35-1-827, the text of which is attached as
Appendix VI to this Joint Proxy Statement/Prospectus.
If any holder of Security Common Stock elects to exercise his or her
right to dissent from the Merger, such stockholder must satisfy each of the
following conditions:
(i) such stockholder must deliver a written notice to demand
payment to Security before the stockholder vote with respect to the
Merger Agreement (the written demand for payment must be in addition
to and separate from any proxy or vote against the Merger Agreement;
neither voting against, abstaining from voting nor failing to vote on
the Merger Agreement will constitute a demand for payment within the
meaning of Section 35-1-827);
(ii) such stockholder must not vote in favor of the Merger
Agreement (a failure to vote will satisfy this requirement, but a vote
in favor of the Merger Agreement, by proxy or in person, or the return
of a signed proxy which does not specify a vote against approval and
adoption of the Merger Agreement or a direction to abstain, will
constitute a waiver of such stockholder's right of demand for payment
and will nullify any previously filed written demand for appraisal);
and
(iii) such stockholder must continuously hold such shares from
the date of the making of the demand through the Effective Time.
If any holder of Security Common Stock fails to comply with any of
these conditions and the Merger becomes effective, he or she will be entitled to
receive the consideration provided in the Merger Agreement, and will have no
dissenters' rights with respect to his or her shares of Security Common Stock.
All written demands for appraisal should be addressed to: Security
Bancorp, 219 N. 26th Street, Billings, Montana 59101, Attention: Elaine F. Hine,
Secretary, before the taking of the vote concerning the Merger Agreement at the
Security Annual Meeting, and should be executed by, or on behalf of, the holder
of record. Such demand must reasonably inform Security of the identity of the
stockholder and that such stockholder is thereby demanding payment of his or her
shares.
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To be effective, a demand for payment must be executed by or for the
stockholder of record who held such shares on the date of making such demand,
and who continuously holds such shares through the Effective Time, fully and
correctly, as such stockholder's name appears on his or her stock certificate(s)
and can be made by the beneficial owner if he or she does not also hold the
shares of record with the record holder's written consent to the dissent not
later than the time the beneficial shareholder asserts dissenter's rights, and
only if the demand is made with respect to all shares of which he or she is the
beneficial shareholder or over which he or she has power to direct the vote.
Within ten days after the Effective Time, WesterFed Financial (as the
surviving corporation in the Merger) must give written notice to each
stockholder who so filed a written demand for payment and who did not vote in
favor of the Merger Agreement as to where the payment demand must be sent and
where and when certificates for share must be deposited. In addition, WesterFed
Financial must inform stockholders of uncertified shares to what extent transfer
of shares will be restricted after the payment is received, must supply a form
for demanding payment and must set a date by which it must receive the payment
demand. Such date may not be fewer than 30 days nor more than 60 days of the
date the stockholder notice is delivered. WesterFed Financial must provide a
copy of the applicable section in its correspondence. Any stockholder sent a
dissenters' notice payment may demand in writing from WesterFed Financial the
payment of his or her shares of Security Common Stock so long as such demands
comply with the terms of the notice with respect to the deposit of such
certificates.
Upon the receipt of a payment demand, WesterFed Financial must within
60 days pay to each dissenter complying with the applicable statutory
requirements, the amount the corporation estimates to be the fair value of the
dissenter's shares plus accrued interest. WesterFed Financial must include with
such payment (i) its balance sheet as of the last fiscal year, its income
statement, a statement of shareholders' equity and the latest available interim
financial statements; (ii) a statement of its estimate of the fair value of the
shares; (iii) an explanation of how the interest was calculated; (iv) a
statement of dissenter's right to demand payment pursuant to Montana law; and
(v) a copy of the applicable statutes regarding dissenter's rights. If WesterFed
Financial does not take action within 60 days after the date set for demanding
payment and depositing certificates, WesterFed Financial must return the
deposited certificates.
If the Security Stockholder is dissatisfied with the payment or offer,
the stockholder must send written notification of their own estimate of fair
value and the amount of interest due if (i) the dissenter believes the amount
paid or offered is less than fair value; (ii) WesterFed Financial fails to make
payment within 60 days; or a Security stockholder who fails to provide written
notice of dissent within 30 days after WesterFed Financial makes an offer of
payment, receives his or her right to demand payment; or (iii) WesterFed
Financial fails to take action within 60 days and the certificates are not
returned.
If a demand for payment remains unsettled, WesterFed Financial must
within 60 days petition the [court] to determine fair value of the shares and
accrued interest. If WesterFed Financial fails to commence proceedings with the
court, it must pay each dissenter whose demand remains unsettled the amount
demanded.
Failure to comply strictly with these procedures will cause the
stockholder to lose his or her dissenters' rights. Consequently, any stockholder
who desires to exercise his or her dissenters' rights is urged to consult a
legal advisor before attempting to exercise such rights.
Fractional Shares
No certificates representing fractional shares of WesterFed Financial
Common Stock will be issued upon the surrender for exchange of certificates
representing Security Common Stock, no dividend or distribution of WesterFed
Financial will relate to any fractional shares, and such fractional share
interests will not entitle the owner thereof to vote or to any rights of a
stockholder of WesterFed Financial. Each stockholder of Security who would
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be entitled to a fractional share in the Merger will receive a cash payment
(without interest) equal to the product achieved when such fraction is
multiplied by $30.00 rounded to the nearest cent.
Exchange of Certificates
After the Effective Time, holders of certificates of Security Common
Stock shall cease to have rights with respect to such certificates, and their
sole rights shall be to exchange such certificates for the Merger Consideration.
As soon as practicable after the Effective Time, an exchange agent
appointed by WesterFed Financial (the "Exchange Agent") will deliver to each
Security holder of record of a certificate or certificates, which as of the
Effective Time represented outstanding shares of Security Common Stock (the
"Certificates"), a transmittal letter and instructions to be used in
surrendering Certificates in exchange for (i) certificates representing the
number of shares of WesterFed Financial Common Stock into which their shares of
Security Common Stock were converted pursuant to the Merger Agreement, and (ii)
a check representing the amount of cash in lieu of fractional shares, if any,
and unpaid dividends and distributions, if any, which such stockholder has the
right to receive in respect of the Certificates surrendered in connection with
the Merger. No interest will be paid or accrued on the cash in lieu of
fractional shares or on the unpaid dividends and distributions, if any, payable
to holders of Security Common Stock.
SECURITY STOCKHOLDERS SHOULD NOT FORWARD THEIR SECURITY STOCK
CERTIFICATES UNTIL THEY RECEIVE THE TRANSMITTAL LETTER AND INSTRUCTIONS.
Until such surrender for the Merger Consideration and subject to the
effect, if any, of applicable law, the Certificates will thereafter represent
ownership of the number of shares of WesterFed Financial Common Stock into which
such shares were converted in the Merger, and the holders will be entitled to
all rights and privileges of holders of WesterFed Financial Common Stock, except
that holders of Certificates will not be entitled to receive dividends or any
other distributions declared by WesterFed Financial until the Certificates are
so surrendered. Following surrender of the Certificates in accordance with the
terms of the Merger Agreement, the holders of newly-issued WesterFed Financial
certificates will be paid, without interest, any dividends or other
distributions with respect to the shares of WesterFed Financial Common Stock,
and the record date for which is after the Effective Time (less any taxes that
may have been imposed thereon).
After the Effective Time, holders of unsurrendered Certificates shall
be entitled to vote at any meeting of WesterFed Financial stockholders at which
holders of WesterFed Financial Common Stock are eligible to vote, regardless of
whether such holders have exchanged their Certificates. Any Certificate
representing shares of WesterFed Financial Common Stock to be issued in a name
other than that in which the Certificate is registered must be properly endorsed
and otherwise in proper form for transfer, and the holder requesting such
exchange must pay to the Exchange Agent in advance any transfer or other taxes
in connection therewith.
In the event any Certificate has been lost, stolen or destroyed, upon
the mailing of an affidavit of that fact by the holder of such Certificate and
the posting of any bond required by WesterFed Financial or the Exchange Agent,
WesterFed Financial or the Exchange Agent will issue for such lost, stolen or
destroyed Certificate, the shares of WesterFed Financial Common Stock and
deliver cash in lieu of fractional shares due to the holder of such Certificate
under the terms of the Merger Agreement.
After the Effective Time, there will be no further transfers on the
records of Security of the Certificates and, if such Certificates are presented
to WesterFed Financial for transfer, they will be cancelled against delivery of
certificates for WesterFed Financial Common Stock.
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Representations and Warranties
In the Merger Agreement each of Security and WesterFed Financial has
made certain customary representations and warranties relating to, among other
things, the parties' respective organization, capitalization, qualification to
do business and compliance with applicable law, authority relative to the Merger
Agreement, the timely filing of all regulatory reports, reliability of financial
statements, taxes, employee benefit plans, compliance, the truth and accuracy of
information prepared and provided by them in connection with the Merger, the
absence of certain legal proceedings and other events, including material
adverse changes in the parties' business, financial condition, operations or
properties. For detailed information on such representations and warranties, see
the Merger Agreement attached hereto as Appendix I.
Conditions to the Merger
The respective obligations of Security and WesterFed Financial to
consummate the Merger are subject to the fulfillment at or prior to the
Effective Time of the following conditions: (i) the Merger Agreement has been
approved by the requisite vote of the holders of WesterFed Financial Common
Stock and the Merger Agreement shall have been approved by the requisite vote of
the stockholders of Security; (ii) the shares of WesterFed Financial Common
Stock to be issued to Security stockholders upon consummation of the Merger
shall have been authorized for inclusion on the Nasdaq/NMS subject to official
notice of issuance; (iii) all requisite regulatory approvals of the Merger shall
have been obtained and shall remain in full force and effect without the
imposition of any condition which differs from conditions customarily imposed by
regulatory authorities in orders approving acquisitions of the type contemplated
by the Merger Agreement and compliance with which would materially adversely
affect the reasonably anticipated benefits of the Merger to WesterFed Financial
or Western Bank, and all applicable waiting periods shall have expired; (iv) the
Registration Statement relating to the shares of WesterFed Financial Common
Stock to be issued in the Merger shall have been declared effective and shall
not be subject to a stop order or any threatened stop order; and (v) neither
WesterFed Financial nor Security shall be subject to any order, decree or
injunction of a court or agency of competent jurisdiction which enjoins or
prohibits the consummation of the Merger and no governmental entity shall have
enacted, entered, promulgated or enforced any statute, rule, regulation, order,
injunction or decree which prohibits, restricts or makes illegal consummation of
the Merger.
In addition, the obligation of WesterFed Financial to consummate the
Merger is subject to the satisfaction by Security or waiver by WesterFed
Financial of the following conditions: (i) the representations and warranties of
Security contained in the Merger Agreement shall be true and correct in all
material respects on the date of the Merger Agreement and as of the Effective
Time; (ii) Security shall have performed in all material respects all
obligations required to be performed by it under the Merger Agreement at or
prior to the Effective Time; (iii) WesterFed Financial shall have received an
opinion from counsel to Security dated the Closing Date regarding certain legal
matters; (iv) Security shall not have experienced a "Material Adverse Effect"
(as defined below); and (v) WesterFed Financial shall have received a
Certificate of the President and Chief Executive Officer of Security certifying
certain matters in the Merger Agreement.
In addition, the obligation of Security to consummate the Merger is
subject to the satisfaction by WesterFed Financial or waiver by Security of the
following conditions: (i) the representations and warranties of WesterFed
Financial contained in the Merger Agreement shall be true and correct in all
material respects on the date of the Merger Agreement and as of the Effective
Time; (ii) WesterFed Financial shall have performed in all material respects all
obligations required to be performed by it under the Merger Agreement at or
prior to the Effective Time; (iii) Security shall have received an opinion from
counsel to WesterFed Financial dated the Closing Date regarding certain legal
matters; and (iv) WesterFed Financial shall not have experienced a Material
Adverse Effect.
For purposes of the Merger Agreement, a "Material Adverse Effect" means
any condition, event, change or occurrence, or series of the foregoing, which
has had, or is reasonably likely to have, a material adverse effect on the
business, properties, assets, liabilities, results of operations or financial
condition of WesterFed Financial
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and its subsidiaries or Security and its subsidiaries, taken as a whole. A
Material Adverse Effect shall not include a change with respect to, or effect
on, either WesterFed Financial or Security resulting from (i) a change in law,
rule, regulation, generally accepted accounting principles or regulatory
accounting principles applicable to the financial statements of WesterFed
Financial or Security or (ii) a change in general economic conditions or
prevailing interest and deposit rates, or any other matter affecting depository
institutions or their holding companies generally.
Regulatory Approvals
The Merger is subject to the approval of the Office of Thrift
Supervision (the "OTS"). WesterFed Financial filed an application for approval
of the Merger with the OTS on November ___, 1996, and anticipates obtaining the
approval of the OTS in the first quarter of 1997. There can be no assurance as
to the timing of such approval or that the OTS will approve the Merger.
It is a condition to the consummation of the Merger that the OTS
approval be obtained on terms which do not differ from conditions customarily
imposed in orders approving acquisitions of the type contemplated by the Merger
Agreement and compliance with which would materially adversely affect the
reasonably anticipated benefits of the Merger to WesterFed Financial. There can
be no assurance that any such approval will not contain terms, conditions or
requirements which cause such approval to fail to satisfy such condition to the
consummation of the Merger. See "--Conditions to the Merger."
In addition, under federal law, a period of 30 days (subject to
reduction in 15 days) must expire following approval by the OTS within which
period the United States Department of Justice (the "Department of Justice") may
file objections to the Merger under the federal antitrust laws. The Department
of Justice could take such action under the antitrust laws as it deems necessary
or desirable in the public interest, including seeking to enjoin the Merger
unless divestiture of an acceptable number of branches to a competitively
suitable purchaser could be made. While WesterFed Financial believes that the
likelihood of such action by the Department of Justice is remote in this case,
there can be no assurance that the Department of Justice will not initiate such
a proceeding.
Waiver and Amendment; Termination
Prior to the Effective Time, the Boards of Directors of WesterFed
Financial and Security may by written action (i) extend the time for performance
of any obligations or other acts required by the Merger Agreement; (ii) waive
any inaccuracies in the representations and warranties contained in the Merger
Agreement or in any document delivered pursuant to the Merger Agreement; and
(iii) waive compliance with any agreements or conditions contained in the Merger
Agreement. Subject to applicable law, any of the provisions of the Merger
Agreement may be amended or modified by action of the Boards of Directors of
WesterFed Financial and Security at any time before or after approval of the
Merger Agreement by WesterFed Financial or Security stockholders.
The Merger Agreement may be terminated at any time prior to the
Effective Time, whether before or after approval by the stockholders of
WesterFed Financial or Security (i) by mutual consent of WesterFed Financial and
Security in writing, and approved by their respective Boards; (ii) by WesterFed
Financial or Security at any time prior to the Effective Time if there shall
have been a final judicial or regulatory determination that any material
provision of the Merger Agreement is illegal, invalid or unenforceable or
denying any regulatory approval of an application filed with a regulatory body
which is a condition precedent to either party's obligations; (iii) by WesterFed
Financial or Security if any of the conditions precedent to the obligations of
the other party are not fulfilled by date specified in the Merger Agreement
(other than by reason of a breach by the party seeking to terminate) or rendered
impossible to be satisfied; (iv) by WesterFed Financial or Security if any
approval of the stockholders of Security or WesterFed Financial, as the case may
be, required for consummation of the Merger shall not have been obtained by
reason of the failure to obtain the required vote at a duly held meeting of
stockholders; (v) by WesterFed Financial or Security if there has been a
material breach of their respective representations, warranties, covenants or
other agreements contained in the Merger Agreement; (vi) by either party on or
after 270
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days (360 days if there is a CRA protest) following the date of the Merger
Agreement, in the event the Merger has not been consummated; or (vii) by
Security if: (a) the Average WesterFed Financial Common Stock Price is less than
$11.75; and (b) the Board of WesterFed Financial does not increase the Exchange
Ratio such that the shareholders of Security who are entitled to exchange their
shares for WesterFed Financial Common Stock shall receive a stock distribution
equal to $27.01 per share based upon the average WesterFed Financial price.
Conduct of Business Pending the Merger
Each of WesterFed Financial and Security has agreed that, prior to the
Effective Time, it will, with respect to it and its subsidiaries, operate its
business in the ordinary and usual course consistent with past and prudent
banking practices and use its best efforts to maintain and preserve its business
organization, employees and advantageous business relationships, and it will
not: (i) take any action that is intended or may reasonably be expected to
adversely affect any of the representations and warranties, conditions or
provisions of the Merger Agreement; (ii) change its methods of accounting except
as required by generally accepted accounting principles or regulatory accounting
principles as concurred to by its independent auditors; (iii) commit any act or
omission which constitutes a material breach or default under any regulatory
agreement, material contract or material license to which it or any of its
properties is bound; or (iv) take any action that would materially impede or
delay receipt of any regulatory approval or the consummation of the Merger.
Security has agreed that, prior to the Effective Time, it will not, and
will not allow any of its subsidiaries to, among other things and except as
otherwise contemplated by the Merger Agreement or as may be agreed to in writing
by WesterFed Financial: (i) declare or pay any dividends on its capital stock,
except that Security may declare and pay the regular periodic dividends on the
Security Common Stock in amounts and at points of time, not inconsistent with
past practices; (ii) issue any shares of its capital stock or any options,
warrants or other rights to subscribe for or purchase capital stock or any
securities convertible into or exchangeable for any capital stock, except for
options granted pursuant to the Security Stock Option Plan on the dates of the
Merger Agreement; (iii) amend its Certificate of Incorporation or directly or
indirectly redeem, purchase or otherwise acquire any capital stock or ownership
interests of Security or any of the Security Subsidiaries; (iv) effect a
reclassification, recapitalization, split-up, exchange of shares, readjustment
or other similar change in or to any capital stock or otherwise reorganize or
recapitalize; (v) change its Articles of Incorporation, Charter, or Bylaws; (vi)
enter into any employment agreement (except as otherwise permitted pursuant to
the Merger Agreement), severance agreement or change of control agreement; or
grant any increase (other than ordinary and normal increases consistent with
past practices) in the compensation payable or to become payable to directors,
officers or employees except as required by law; pay or agree to pay any bonus
inconsistent with past practices, or adopt or make any material change in any
bonus, insurance, pension, or other Security Benefit Plan; or, except as
required by law or necessary in connection with insurance requirements, adopt
any change to any Security Qualified Plan; (vii) except for the short-term
renewal of Federal Home Loan Bank ("FHLB") advances outstanding at September 24,
1996, raising short-term funds against its existing line of credit with the
FHLB, and deposit-taking in the ordinary course of its business, borrow or agree
to borrow any funds or guarantee any obligations of others; (viii) make or
commit to make any new loan or letter of credit or any new or additional
discretionary advance under any existing line of credit, in a principal amount
in excess of $500,000 or that would increase the aggregate credit outstanding to
any one borrower (or group of affiliated borrowers) to more than $1,500,000
(excluding for this purpose any accrued interest or overdrafts), without the
prior written consent of WesterFed Financial acting through its Chief Executive
Officer in a written notice, which approval shall not be unreasonably withheld
and approval or rejection shall be given within two business days after delivery
by Security to such officer of WesterFed Financial of the complete loan package;
(ix) make any changes in its policies concerning which persons may approve
loans; (x) enter into any securities transaction for its own account or purchase
or otherwise acquire any investment security for its own account, provided that
(A) Security and the Security Subsidiaries may enter into transactions for its
own account involving, and purchase or sell for its own account, U.S. Treasury
obligations and securities issued or guaranteed by the Government National
Mortgage Association, the Federal National Mortgage Association or the Federal
Home Loan Mortgage Corporation, (B) Security and the Security Subsidiaries may
make deposits in an overnight account
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at the FHLB of Seattle, and (C) WesterFed Financial's consent to transactions
otherwise restricted by this paragraph (ix) shall not be unreasonably withheld
or delayed; (xi) increase or decrease the rate of interest paid on time deposits
or on certificates of deposit, except in a manner and pursuant to policies
consistent with past practices; (xii) enter into, modify or extend any
agreement, contract or commitment out of the ordinary course of business or
having a term in excess of six months and involving an expenditure in excess of
$25,000, other than letters of credit, loan agreements, deposit agreements, and
other lending, credit and deposit documents made in the ordinary course of
business; (xiii) except in the ordinary course of business, place on any of its
assets or properties any mortgage, pledge, lien, charge, or other encumbrance;
(xiv) cancel any material indebtedness owing to it or any material claims which
it may possess or waive any rights of material value; (xv) sell or otherwise
dispose of any real property or any material amount of tangible or intangible
personal property other than (A) properties acquired in foreclosure or otherwise
in the ordinary collection of indebtedness owed to Security Bank, (B) student
loans, or (C) loans which are held for sale by Security Bank and are sold in the
secondary market within sixty (60) days of origination; (xvi) foreclose upon or
otherwise take title to or possession or control of any real property without
first obtaining a phase one environmental report thereon; provided however, that
Security Bank and its Subsidiaries shall not be required to obtain such a report
with respect to single family, non-agricultural residential property of one acre
or less to be foreclosed upon unless it has reason to believe that such property
might contain Hazardous Substances; (xvii) knowingly or willfully commit any act
or fail to commit any act which will cause a material breach of any material
agreement, contract or commitment; (xviii) violate any law, statute, rule,
governmental regulation, or order, which violation might have a Material Adverse
Effect on Security; (xix) purchase any real or personal property or make any
capital expenditure where the amount paid or committed therefor is in excess of
$25,000; (xx) in the case of Security Bank, voluntarily make any material
changes in or to its asset and deposit mix; (xxi) engage in any activity or
transaction outside the ordinary course of business; (xxii) enter into or
acquire, or modify, amend or extend the terms of any existing, Derivative
Securities; or (xxiii) enter into any new, or modify, amend or extend the terms
of any existing, contracts relating to the purchase or sale of financial or
other futures, or any put or call option relating to cash, securities or
commodities.
In addition, pursuant to the Merger Agreement, Security and the
Security Subsidiaries may not, without the prior written consent of WesterFed
Financial, willfully engage in any transaction or willfully take any action that
would render untrue any of the representations and warranties of Security
contained in Merger Agreement, if such representations and warranties were given
as of the date of such transaction or action. Security will also, and will cause
each of the Security Subsidiaries to, use its best efforts to maintain its
respective properties and assets in their present state of repair, order and
condition, reasonable wear and tear excepted, and to maintain and keep in full
force and effect all policies of insurance presently in effect, including the
insurance of accounts with the FDIC; and Security will, and will cause each of
the Security Subsidiaries to, take all requisite action (including the making of
claims and the giving of notices) pursuant to its directors' and officers'
liability insurance policy or policies in order to (i) increase by $1,000,000
the amount of coverage available under such policy or policies, and (ii)
preserve all rights thereunder with respect to all matters known by Security
which could reasonably give rise to a claim prior to the Effective Time.
Expenses
All expenses incurred in connection with the Merger Agreement and the
transactions contemplated thereby are to be paid by the party incurring such
expenses, except that WesterFed Financial and Security shall bear equally all
printing and mailing expenses and filing fees associated with the Registration
Statement and this Joint Proxy Statement/Prospectus.
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Accounting Treatment
The Merger, if completed as proposed, will be treated as a purchase in
accordance with generally accepted accounting principles. Accordingly, the
assets and liabilities of Security will be recorded on the books of WesterFed
Financial at their respective fair values at the time of consummation of the
Merger.
Certain Federal Income Tax Consequences of the Merger
The following is a discussion of all material federal income tax
consequences of the Merger to WesterFed Financial, Security and holders of
Security Common Stock. The discussion is based upon the Code, Treasury
regulations, Internal Revenue Service (the "Service") rulings, and judicial and
administrative decisions in effect as of the date hereof, all of which are
subject to change at any time, possibly with retroactive effect. This discussion
assumes that Security Common Stock are held as "capital assets" within the
meaning of Section 1221 of the Code (i.e., property generally held for
investment). In addition, this discussion does not address all of the tax
consequences that may be relevant to a holder of Security Common Stock in light
of his or her particular circumstances or to holders subject to special rules,
such as foreign persons, financial institutions, tax-exempt organizations or
insurance companies. The opinion of counsel referred to in this section will be
based on facts existing at the Effective Time, and in rendering such opinion,
such counsel may require and rely upon representations contained in certificates
of officers of WesterFed Financial, Security and others.
HOLDERS OF SECURITY COMMON STOCK SHOULD CONSULT THEIR TAX ADVISERS AS
TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND
OTHER TAX LAWS.
It is a condition to the obligation of WesterFed Financial to
consummate the Merger that WesterFed Financial shall have received an opinion
from Silver, Freedman & Taff, L.L.P., counsel to WesterFed Financial, in form
and substance reasonably satisfactory to WesterFed Financial, substantially to
the effect that the Merger will be treated as a reorganization within the
meaning of Section 368(a) of the Code and, accordingly, for federal income tax
purposes that:
The following discussion of the material federal income tax
consequences of the Merger to certain Security stockholders does not purport to
be a complete analysis or listing of all potential tax considerations or
consequences relevant to a decision whether to vote for the approval of the
Merger. The discussion does not address all aspects of federal income taxation
that may be applicable to Security stockholders subject to special federal
income tax treatment including (without limitation) foreign persons, insurance
companies, tax-exempt entities, retirement plans, dealers in securities and
persons who acquired their Security Common Stock pursuant to the exercise of
employee stock options or otherwise as compensation. The discussion addresses
neither the effect of any applicable state, local or foreign tax laws, nor the
effect of any federal tax laws other than those pertaining to federal income
taxes. In view of the individual nature of federal income tax consequences, each
Security stockholder is urged to consult his or her own tax advisor to determine
the specific tax consequences of the Merger to him or her.
The discussion is based on the Code, regulations and rulings now in
effect or proposed thereunder, current administrative rulings and practice, and
judicial precedent, all of which are subject to change. Any such change, which
may or may not be retroactive, could alter the tax conseuqnces discussed herein.
The discussion is also based on certain customary assumptions regarding the
factual circumstances that will exist at the Effective Time of the Merger,
including without limitation, certain representations of WesterFed Financial,
Security and holders of 1% or more of Security Common Stock (determined as of
the Closing Date) who make a valid Stock Election. If any of these factual
assumptions or representations is inaccurate, the tax consequences of the Merger
could differ from those described herein. The discussion assumes that shares of
Security Common Stock are held as capital assets (within the meaning of Section
1221 of the Code).
If the Merger occurs in accordance with the Merger Agreement, the
Merger will constitute a "reorganization" for federal income tax purposes under
Section 368(a)(1)(A) of the Code, by reason of the application of Section
368(a)(2)(D) of the Code, with the following federal income tax consequences:
(1) Security stockholders who receive solely shares of WesterFed
Financial Common Stock in exchange for their Security Common Stock
pursuant to the merger will recognize no gain or loss, except with
respect to cash received in lieu of fractional shares, if any, as
discussed below.
(2) A Security stockholder who received only cash (i) in exchange
for shares of Security Common Stock pursuant to the Merger or (ii) as a
result of the exercise of dissenters' rights, will realize gain or loss
for federal income tax purposes (determined separately as to each block
of Security Common Stock exchanged) in an amount equal to the
difference between (x) the amount of cash received by such stockholder,
and (y) such stockholder's tax basis for the shares of Security Common
Stock surrendered in exchange therefor, provided that the cash payment
does not have the effect of the distribution of a dividend. Any such
gain or loss will be recognized for federal income tax purposes and
will be treated as capital gain or loss. However, if the cash payment
does have the effect of the distribution of a dividend, the amount of
taxable income recognized generally will equal the amount of cash
received; such income generally will be taxable as a dividend; and no
loss (or other recovery of such stockholder's tax basis for the shares
of Security Common Stock surrendered in the exchange) generally will be
recognized by such stockholder. The determination of whether a cash
payment has the effect of the distribution of a dividend will be made
pursuant to the provisions and limitations of Section 302 of the Code,
taking into account the constructive stock ownership rules of Section
318 of the Code. See "--Impact of Section 302 of the Code," below.
(3) A Security stockholder who receives shares of WesterFed
Financial Common Stock and cash in exchange of shares of Security
Common Stock in the Merger will realize gain (determined separately as
to each block of Security Common Stock exchanged) if (i) the sum of the
amount of cash and the fair market value of the shares of WesterFed
Financial Common Stock received by such stockholder exceeds (ii) such
stockholder's tax basis for the shares of Security common Stock
surrendered in exchange therefor. The amount of such gain that is
recognized for federal income tax purposes will be limited to the
amount of cash received. If the amount of cash received exceeds the
amount of gain realized, only the amount of gain realized will be
recognized for federal income tax purposes. Any such gain recognized
will be taxable as capital gain, provided that the cash payment does
not have the effect of the distribution of a dividend. Any loss
realized will not be recognized for federal income tax purposes. Under
Section 356 of the Code, the determination of whether a cash payment
has the effect of the distribution of a dividend generally will be made
in accordance with the provisions and limitations of Section 302 of the
Code, taking into account the constructive stock ownership rules of
Section 318 of the Code. See "--Impact of Section 302 of the Code,"
below.
(4) The aggregate adjusted tax basis of the shares of WesterFed
Financial Common Stock received by each Security stockholder in the
Merger (including any fractional share of WesterFed Financial Common
Stock deemed to be received, as described in paragraph 6 below), will
be equal to the aggregate adjusted tax basis of the shares of Security
Common Stock surrendered, decreased by the amount of any cash received
and increased by the amount of any gain (or dividend) recognized.
(5) The holding period of the shares of WesterFed Financial
Common Stock (including any fractional share of WesterFed Financial
Common Stock deemed to be received, as described in paragraph 6 below)
will include the holding period of the shares of Security Common Stock
exchanged therefor.
(6) A Security stockholder who received cash in the Merger in
lieu of a fractional share of WesterFed Financial Common Stock will be
treated as if the fractional share had been received in the Merger and
then redeemed by WesterFed Financial in return for the cash. The
receipt of such cash will cause the recipient to recognize capital gain
or loss equal to the difference between the amount of cash received and
the portion of such holder's adjusted tax basis in the shares of
WesterFed Financial Common Stock allocable to the fractional share.
Impact of Section 302 of the Code. the determination of whether a cash
payment has the effect of the distribution of a dividend generally will be made
in accordance with the provisions of Section 302 of the Code. A cash payment to
a Security stockholder will be condiered not to have the effect of the
distribution of a dividend under Section 302 of the Code and such stockholder
will recognize capital gain or loss only if the cash payment (i) results in a
"complete redemption" of such stockholder's actual and constructive stock
interest, (ii) results in a "substantially disproportionate" reduction in such
stockholder's actual and constructive stock interest, (iii) is "not essentially
equivalent ot a dividend."
A cash payment will result in a "complete redemption" of a
stockholder's stock interest and such stockholder will recognize capital gain or
loss if such stockholder does not actually or constructively own any stock after
the receipt of the cash payment. A reduction in a stockholder's stock interest
will be "subtantially disproportionate" and such stockholder will recognize
capital gain or loss if (i) the precentage of outstanding shares actuslly and
constructively owned by such stockholder after the receipt of the cash payment
is less than four-fifths (80%) of the precentage of outstanding shares actually
and constructively owned by such stockholder immediately prior to the receipt of
the cash payment. A cash payment will qualify as "not essentially equivalent to
a dividend" and a stockholder will recognize capital gain or loss if it results
in a meaningful reduction in the percentage of outstanding shares actually and
constructively owned by such stockholder. No specific tests apply to determine
whether a reduction in a stockholder's ownership interest is meaningful; rather,
such determination will be made based on all the facts and circumstances
applicable to such Security stockholder. No general guidelines dictating the
appropriate interpretation of facts and circumstances have been announced by the
courts or issued by the Internal Revenue Service (the "Service"). However, the
Service has indicated in Revenue Ruling 76-385 that a minority stockholder
(i.e., a holder who exercises no control over corporate affairs and whose
proportionate stock interest is minimal in relation to the number of shares
outstanding) generally is treated as having had a "meaningful reduction" in
interest if a cash payment reduces such holder's actual and constructive stock
ownership to any extent.
With regard to Security stockholders who receive WesterFed Financial
Common Stock and cash in the Merger, the determination of whether a cash payment
has the effect of a distribution of a dividend will be made as if the Security
Common Stock exchanged for cash in the Merger had instead been exchanged in the
Merger for shares of WesterFed Financial Common Stock followed immediately by a
redemption of such shares by WesterFed Financial for the cash payment (a "deemed
WesterFed Financial redemption"). Under this analysis, the
41
<PAGE>
determination of whether a cash payment qualifies as a substantially
disproportionate reduction of interest or is not essentially equivalent to a
dividend will be made by comparing (i) the stockholders' actual and constructive
stock interest in WesterFed Financial before the deemed WesterFed Financial
redemption (determined as if such stockholder had received solely WesterFed
Financial Common Stock in the Merger) with (ii) such stockholder's actual and
constructive stock interest in WesterFed Financial after the deemed WesterFed
Financial redemption.
With regard to Security stockholders who receive only cash (i) in
exchange for shares of Security Common Stock pursuant to the Merger or (ii) as a
result of the exercise of dissenters rights, WesterFed Financial's Counsel has
noted in its opinion that many tax practitioners believe that the determination
of whether a cash payment has the effect of a distribution of a dividend should
be made in accordance with the deemed WesterFed Financial redemption analysis
discussed above; i.e., as if the WesterFed Financial Common Stock exchanged for
cash in the Merger had instead been exchanged in the Merger for shares of
WesterFed Financial Common Stock followed immediately by a redemption of such
shares by WesterFed Financial for the cash payment. However, under the
traditional analysis, which apparently continues to be used by the Service,
Section 302 of the Code will apply as though the cash payment were made by
Security in a hypothetical redemption of Security Common Stock immediately prior
to, and in a transaction separate from, the Merger (a "deemed Security
redemption"). Accordingly, under the traditional analysis, the determination of
whether a cash payment results in a complete redemption of interest, qualifies
as a substantially disproportionate reduction of interest or is not essentially
equivalent of a dividend will be made by comparing (x) the stockholder's actual
and constructive stock interest in Security before the deemed Security
redemption, with (y) such stockholder's actual and constructive stock interest
in Security after the deemed Security redemption (but before the Merger). The
law is unclear regarding whether the approach of the Service is correct, and
WesterFed Financial's Counsel has rendered no opinion on the correctness of the
Service's approach. WesterFed Financial's Counsel has noted in its opinion that
because the traditional analysis, as applied by the Service, is more likely to
result in dividend treatment than the deemed WesterFed Financial redemption
analysis, each Security stockholder who receives solely cash in exchange for all
of the Security Common Stock he or she actually owns should discuss with his or
her tax advisor which analysis is applicable.
The determination of ownership for purposes of the three foregoing
tests will be made by taking into account both shares owned actually by such
stockholder and shares owned constructively by such stockholder pursuant to
Section 318 of the Code. Under Section 318 of the Code, a stockholder will be
deemed to own stock that is actually or constructively owned by certain members
of his or her family (spouse, children, grandchildren and parents) and other
related parties including, for example, certain entities in which such
stockholder has a direct or indirect interest (including partnerships, estates,
trusts and corporations), as well as shares of stock that such stockholder (or a
related person) has the right to acquire upon exercise of an option or
conversion right. Section 302(c)(2) of the Code provides certain exceptions to
the family attribution rules for the purpose of determining whether a complete
redemption of stockholder's interest has occurred for purposes of Section 302 of
the Code. These exceptions apply only to Security stockholders who receive, in
the Merger, solely cash in return for the Security Common Stock they actually
own.
Because the determination of whether a payment will be treated as
having the effect of the distribution of a dividend will generally depend upon
the facts and circumstances of each Security stockholder, Security stockholders
are strongly advised to consult their own tax advisors regarding the tax
treatment of cash received in the Merger.
Each Security stockholder's ability to elect the type of consideration
he or she receives pursuant to the Merger affords each such stockholder the
opportunity to select that type of consideration which will best serve his or
her personal tax and financial planning needs. However, each Security
stockholder should be aware that his or her ability to satisfy (or,
alternatively, fail to satisfy) any of the foregoing tests and thereby avoid
(or, alternatively, obtain) dividend treatment may be affected by any
redesignation of the stockholder's election by the Exchange
42
<PAGE>
Agent, without regard to whether such stockholder made a Stock Election, a Cash
Election or, instead, made no election. See 'TERMS OF THE PROPOSED MERGER -
General Description of the Merger."
Security's obligation to consummate the Merger is subject to the
condition that it shall have received from WesterFed Financial's Counsel an
opinion to the effect that the tax consequences of the Merger will in all
material respects be as described in this section and that such opinion shall
not have been withdrawn. Such opinion is subject to the conditions and
assumptions stated therein and relies upon various representations made by
WesterFed Financial, Security and certain stockholders of Security. The opinion
is attached as an exhibit to the Registration Statement and copies of the
opinion will be available, without charge, to Security stockholders upon written
request to Elaine Hine, Secretary, Security Bancorp, 219 North 26th Street,
Billings, Montana 59101. An opinion of counsel, unlike a private letter ruling
from the Service, has no binding effect on the Service. The Service could take a
position contrary to WesterFed Financial Counsel's opinion and, if the matter is
litigated, a court may reach a decision contrary to the opinion. The Service is
not expected to issue a ruling on the tax consequences of the Merger, and no
such ruling has been requested.
THE FOREGOING IS A GENERAL DISCUSSION OF CERTAIN OF THE MATERIAL
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER AND IS INCLUDED FOR GENERAL
INFORMATION ONLY. THE FOREGOING DISCUSSION DOES NOT TAKE INTO ACCOUNT THE
PARTICULAR FACTS AND CIRCUMSTANCES OF EACH SECURITY STOCKHOLDER'S TAX STATUS AND
ATTRIBUTES. AS A RESULT, THE FEDERAL INCOME TAX CONSEQUENCES ADDRESSED IN THE
FOREGOING DISCUSSION MAY NOT APPLY TO EACH SECURITY STOCKHOLDER. IN VIEW OF THE
INDIVIDUAL NATURE OF INCOME TAX CONSEQUENCES, EACH SECURITY STOCKHOLDER SHOULD
CONSULT HIS OR HER OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES OF
THE MERGER TO HIM OR HER, INCLUDING THE APPLICATION AND EFFECT OF FEDERAL,
STATE, LOCAL AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL
AND OTHER TAX LAWS.
Based upon the current ruling position of the Service, cash received by
a holder of Security Common Stock will be treated as received in exchange for
such fractional share interest, and gain or loss will be recognized for federal
income tax purposes, measured by the difference between the amount of cash
received and the basis of the share of Security Common Stock. Such gain or loss
should be long-term capital gain or loss if such share of Security Common Stock
has been held for more than one year at the Effective Time.
Nasdaq Listing
Both WesterFed Financial Common Stock and Security Common Stock are
currently included for quotation on the Nasdaq/NMS. It is a condition to
consummation of the Merger that the WesterFed Financial Common Stock to be
issued to the stockholders of Security pursuant to the Merger Agreement will be
included for quotation on the Nasdaq/NMS. See "--Conditions to the Merger."
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CERTAIN RELATED TRANSACTIONS
Stock Option Agreements
The information in this Joint Proxy Statement/Prospectus concerning the
terms of the Stock Option Agreements is qualified in its entirety by reference
to the full text of the Stock Option Agreements which are attached hereto as
Appendix IV and V and incorporated herein by reference.
General. As a condition to entering into the Merger Agreement,
WesterFed Financial required that it be granted two stock options by Security.
Pursuant to Stock Option Agreement #1, Security granted to WesterFed Financial
an option to purchase shares of Security's Common Stock representing
approximately 19.9% of the shares of such Common Stock issued and outstanding at
such time at an exercise price of $26.00 per share, subject to the terms and
conditions set forth therein. The options may only be exercised upon the
occurrence of certain events which are defined below (none of which has occurred
as of the date hereof). Pursuant to Stock Option Agreement #2, Security granted
to WesterFed Financial an option to purchase Security Common Stock representing
5.98% of the shares of such Common Stock issued and outstanding at such time at
an exercise price of $24.00 per share, subject to the terms and conditions set
forth therein.
Effect of Stock Option Agreements. The Stock Option Agreements are
intended to increase the likelihood that the Merger will be consummated in
accordance with the terms of the Merger Agreement. Consequently, certain aspects
of the Stock Option Agreements may have the effect of discouraging persons who
might now or prior to the consummation of the Merger be interested in acquiring
all of or a significant interest in either Security or WesterFed Financial from
considering or proposing such an acquisition, even if such persons were prepared
to pay a higher price per share for the Security Common Stock than the value per
share contemplated by the Merger Agreement or a higher price per share for
WesterFed Financial Common Stock than the then-current market price of such
shares. The acquisition of the issuer or an interest in the issuer, or an
agreement to do either, could cause the option to become exercisable. The
existence of such option could significantly increase the cost to a potential
acquiror of acquiring the issuer compared to its cost had the Stock Option
Agreement not been entered into. Such increased costs might discourage a
potential acquiror from considering or proposing an acquisition or might result
in a potential acquiror proposing to pay a lower per share price to acquire the
issuer than it might otherwise have proposed to pay. The exercise of either
option by WesterFed Financial may prohibit any other potential acquiror of
Security from accounting for an acquisition of Security using the pooling of
interests accounting method for a period of two years. This could discourage or
preclude an acquisition of Security.
Terms of Stock Option Agreements. The following is a brief summary of
certain provisions of the Stock Option Agreements, which are attached hereto as
Appendix IV and V.
Stock Option Agreement #1. The option is exercisable, in whole or in
part, at any time, and from time to time, only upon the occurrence of a
"Purchase Event." A "Purchase Event" is deemed to occur upon the commencement or
initiation of an Acquisition Transaction.
For purposes of the Stock Option Agreement, the term "Acquisition
Transaction" means (i) a merger, consolidation or similar transaction involving
Security or any of its subsidiaries (other than internal mergers,
reorganizations, consolidations or dissolutions involving only existing
subsidiaries), (ii) the sale, lease, exchange or other disposition of 10% or
more of the consolidated assets of Security and its subsidiaries, or (iii) the
issuance, sale or other disposition of (including by merger, consolidation,
share exchange or similar transaction) securities representing 15% or more of
the voting power of Security or any of its material subsidiaries. For purposes
of the Stock Option Agreements, a "Public Announcement" will occur when it is
publicly announced that any person (other than WesterFed Financial, any
affiliate of WesterFed Financial or any person acting in concert with WesterFed
Financial) proposed an Acquisition Transaction or filed an application under the
Change in Bank Control Act (the
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"Control Act") or the Savings and Loan Holding Company Act (the "Holding Company
Act") for approval of an Acquisition Transaction.
The option expires upon the earliest to occur of (i) the Effective
Time, (ii) termination of the Merger Agreement after approval of the Merger by
Security stockholders; (iii) termination of the Merger Agreement by Security (as
defined in Section 7.01); (iv) termination of the Merger Agreement after the
stockholders of WesterFed Financial reject the merger; (v) any other termination
of the Merger Agreement (as defined in Section 7.01) except a termination by
WesterFed Financial (pursuant to Section 701(e)), if no Purchase Event shall
have occurred prior to such termination; (vi) except as set forth in [clauses]
(ii) and (iii) above, on the 730th day after the termination of the Merger
Agreement if no Purchase Event has occurred during the term of the Merger
Agreement or during the post-termination period; (vii) on the 730th day after
the discontinuance of all Purchase Events that occurred during the term of the
Merger Agreement or during the Post-Termination Period if a Purchase Event
occurred during any such period; or (viii) termination of the option.
Stock Option Agreement #2. The option is exercisable in whole or in
part, at any time from time to time following the failure of Security
stockholders to approve the Merger Agreement at a duly held stockholder meeting
or the failure of Security to hold a meeting to vote on the Merger.
The option expires upon the earliest to occur of (i) the Effective
Time; (ii) termination of the Merger Agreement by Security (as defined in
Section 7.01(e) of the Merger Agreement); (iii) the date two years after
termination of the Merger Agreement (pursuant to provisions of the Merger
Agreement other than Section 7.01(e)); or (iv) termination of the option.
The number and type of securities subject to the options and the
purchase price of such securities will be adjusted (i) for any change in
Security common stock by reason of a stock dividend, stock split, split-up,
recapitalization, combination, exchange of shares or similar transaction or (ii)
in the event any rights issued by Security become exercisable, proper provision
shall be made in any agreement governing the transactions described in clause
(i) such that WesterFed Financial will receive (upon exercise of the option) the
same number and type of securities that it would have received if the option had
been exercised immediately prior to the occurrence of such transaction (or the
record date therefor). The number of shares of Security common stock subject to
each option will also be adjusted in the event Security issues additional shares
of common stock such that the number of shares of Security common stock subject
to the option, together with shares previously purchased pursuant thereto,
represents 19.9% of Security common stock then issued and outstanding, without
giving effect to shares subject to or issued pursuant to the option.
Security has granted WesterFed Financial certain registration rights
with respect to shares of Security Common Stock acquired by WesterFed Financial
upon exercise of the options. These rights require that Security file up to two
registration statements under the Securities Act if requested by WesterFed
Financial within three years of the date upon which the option first becomes
exercisable during the term of the agreement provided such registration is
necessary in order to permit the sale or other disposition of the shares
acquired by WesterFed Financial. Security shall use its best efforts to qualify
such shares under applicable state securities laws. Any such registration
statement will be at Security's expense except for the registration of Security
Common Stock pursuant to Stock Option Agreement #2. Pursuant to the terms of
Stock Option Agreement #2, WesterFed Financial agrees to reimburse for actual
accountable out-of-pocket expenses up to a maximum of $25,000 for the First
Registration effected. If a second registration is requested pursuant to Stock
Option Agreement #2, WesterFed Financial and Security will share the expenses
equally except for underwriting discounts or commissions, brokers' fees and the
fees and disbursements of WesterFed Financial's counsel related thereto. In
addition, in the event Security effects a registration under the Securities Act
of its common stock (other than on Form S-4 or Form S-8 or any form with respect
to a dividend reinvestment or similar plan), Security will allow WesterFed
Financial to participate in such registration and such participation shall not
affect Security's obligation to effect two registrations. In connection with any
registration effected pursuant to the obligations described above, Security and
WesterFed Financial will provide to each other and any underwriter of the
offering customary representations, warranties, covenants, indemnifications and
contributions.
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UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined financial information gives
effect to the merger of WesterFed Financial and Security pursuant to the Merger
Agreement based on the purchase accounting adjustments, estimates and other
assumptions described in the accompanying notes. The unaudited pro forma
combined balance sheet and statement of operations as of and for the three
months ended September 30, 1996 are based upon the unaudited quarterly
consolidated balance sheets and statements of operations of WesterFed Financial
and Security. The unaudited pro forma combined statement of operations for the
year ended June 30, 1996 is based upon the audited annual consolidated
statements of operations of WesterFed Financial and Security.
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PRO FORMA COMBINED BALANCE SHEET
WESTERFED FINANCIAL AND SECURITY
<TABLE>
<CAPTION>
At September 30, 1996 (unaudited)
-------------------------------------------------------------
Pro Forma Pro Forma
WesterFed Adjustments Combined
Financial Security (Unaudited) (Unaudited)
--------- -------- ----------- -----------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Assets:
- ------
Cash and due from banks.................. $ 6,256 $ 7,995 $ --- $ 14,251
Interest-bearing due from banks.......... 6,030 434 --- 6,464
-------- --------- ---------- ----------
Cash and cash equivalents.............. 12,286 8,429 --- 20,715
Interest-bearing deposits................ 5,103 --- --- 5,103
Investment securities available-for sale. 40,223 19,888 (27,169) 32,942
Investment securities, at amortized cost. 6,851 200 --- 7,051
Stock in Federal Home Loan Bank of
Seattle, at cost....................... 7,622 3,209 --- 10,831
Mortgage-backed securities available-for-
sale................................... 42,386 89,638 --- 132,024
Mortgage-backed securities, at amortized
cost................................... 58,023 33,050 (953) 90,120
Loans available-for-sale................. 4,768 1,307 --- 6,075
Loans receivable, net.................... 366,460 205,746 1,184 573,390
Accrued interest receivable.............. 3,733 3,156 --- 6,889
Premises and equipment, net.............. 13,995 9,379 4,500 27,874
Cash surrender value of life insurance
policies............................... 3,220 2,693 --- 5,913
Goodwill................................. --- 4,293 (4,293) 13,816
13,816
Other assets............................. 1,439 1,321 5,625 8,385
------- ------- ------- --------
Total Assets........................... $566,109 $382,309 $(7,290) $941,128
======== ======== ======= ========
Liabilities and Stockholders' Equity:
- ------------------------------------
Liabilities:
Deposits............................... $342,986 $289,336 $ 1,640 $633,962
Borrowed funds......................... 130,351 51,381 (321) 181,411
Advances from borrowers for taxes and
insurance............................. 6,217 950 --- 7,167
Income taxes........................... 1,899 258 1,328 3,485
Accrued interest payable............... 1,195 2,131 --- 3,326
Accrued expenses and other liabilities. 5,172 7,323 1,250 13,745
--------- --------- -------- ---------
Total liabilities..................... 487,820 351,379 3,897 843,096
-------- -------- ------- --------
Stockholders' Equity:
Preferred stock........................ --- --- --- ---
Common stock........................... 46 1,485 (1,485) 59
13
Additional paid-in capital............. 45,499 9,015 (9,015) 65,229
19,730
Common stock acquired by ESOP/RRP...... (3,382) --- --- (3,382)
Treasury stock, at cost................ (3,080) --- --- (3,080)
Net unrealized gain (loss) on securities
available-for-sale.................... (196) (1,360) 1,360 (196)
Retained earnings, substantially
restricted........................... 39,402 21,790 (21,790) 39,402
---------- --------- --------- --------
Total stockholders' equity........... 78,289 30,930 (11,187) 98,032
---------- --------- ---------- --------
Total liabilities and stockholders' equity $566,109 $382,309 $ (7,290) $941,128
======== ======== ======== ========
</TABLE>
See accompanying notes to unaudited pro forma combined financial information.
47
<PAGE>
PRO FORMA COMBINED STATEMENT OF OPERATIONS
WESTERFED FINANCIAL AND SECURITY
<TABLE>
<CAPTION>
Three Months Ended September 30, 1996 (unaudited)
--------------------------------------------------------------
Pro Forma Pro Forma
WesterFed Adjustments Combined
Financial Security (Unaudited) (Unaudited)
--------- ------- ----------- -----------
(Dollars In Thousands Except Per Share Data)
<S> <C> <C> <C> <C>
Interest income:
Loans receivable....................... $ 7,710 $ 4,351 $ (42) $ 12,019
Mortgage-backed securities............. 1,766 2,081 40 3,887
Investment securities.................. 1,071 343 (460) 954
Other.................................. 46 63 --- 109
--------- --------- ----------- ----------
Total interest income................ 10,593 6,838 (462) 16,969
------- -------- --------- --------
Interest expense:
NOW and money market demand............ 382 334 --- 716
Savings................................ 474 271 --- 745
Certificates of deposit................ 2,928 2,481 (137) 5,272
Cost of Swaps and Caps................. 81 --- --- 81
--------- --------- ---------- ---------
3,865 3,086 (137) 6,814
Advances from FHLB - Seattle and other
borrowed funds....................... 2,085 685 27 2,797
-------- -------- --------- --------
Total interest expense............... 5,950 3,771 (110) 9,611
-------- ------- -------- --------
Net interest income.................. 4,643 3,067 (352) 7,358
Provision for loan losses............ 15 150 --- 165
--------- -------- --------- --------
Net interest income after provision
for loan losses................. 4,628 2,917 (352) 7,193
-------- -------- -------- --------
Non-interest income:
Loan origination fees.................. 125 272 --- 397
Service fees........................... 566 316 (32) 850
Net gain on sale of loans and securities
available-for-sale................... 109 138 --- 247
Other.................................. 35 546 --- 581
--------- -------- -------- --------
Total non-interest income............ 835 1,272 (32) 2,075
-------- ------- ------- --------
Non-interest expenses:
Compensation and employee benefits..... 1,887 1,336 --- 3,223
Net occupancy expense of premises...... 223 191 45 459
Equipment and furnishings expense...... 192 155 --- 347
Data processing expenses............... 165 191 --- 356
Federal insurance premium.............. 211 119 --- 330
SAIF special assessment................ 2,297 1,331 --- 3,628
Core deposit intangible amortization... --- --- 194 194
Marketing and advertising.............. 36 45 --- 81
Other.................................. 720 757 54 1,531
-------- ------- ------- ---------
Total non-interest expense.......... 5,731 4,125 293 10,149
-------- ------- ------ --------
Income (loss) before income taxes... (268) 64 (677) (881)
Income taxes........................... 89 (24) 204 269
--------- -------- ------ ---------
Net income (loss).................. $ (179) $ 40 $ (473) $ (612)
======== ======= ====== ========
Net income (loss) per share........... $ (0.04) $ 0.03 $ (0.11)
======== ====== ========
Weighted average common shares
outstanding for income (loss) per share 4,260,452 1,511,180 5,553,562
========= ========= =========
</TABLE>
See accompanying notes to unaudited pro forma financial information.
48
<PAGE>
PRO FORMA COMBINED STATEMENT OF OPERATIONS
WESTERFED FINANCIAL AND SECURITY
<TABLE>
<CAPTION>
Year Ended June 30, 1996
--------------------------------------------------------------
Pro Forma Pro Forma
WesterFed Adjustments Combined
Financial Security (Unaudited) (Unaudited)
--------- ------- ----------- -----------
(Dollars In Thousands Except Per Share Data)
<S> <C> <C> <C> <C>
Interest income:
Loans receivable....................... $ 28,640 $ 14,115 $ (169) $ 42,586
Mortgage-backed securities............. 9,167 9,220 159 18,546
Investment securities.................. 4,556 1,785 (1,834) 4,507
Other.................................. 181 222 --- 403
--------- --------- --------- ----------
Total interest income................ 42,544 25,342 (1,844) 66,042
------- -------- ------ --------
Interest expense:
NOW and money market demand............ 1,740 1,392 --- 3,132
Savings................................ 1,940 1,228 --- 3,168
Certificates of deposit................ 12,074 10,556 (547) 22,083
Cost of Swaps and Caps................. 331 --- --- 331
--------- --------- --------- ---------
16,085 13,176 (547) 28,714
Advances from FHLB - Seattle and other
borrowed funds....................... 8,652 1,736 107 10,495
-------- -------- ------- --------
Total interest expense............... 24,737 14,912 (440) 39,209
-------- ------- ------ --------
Net interest income.................. 17,807 10,430 (1,404) 26,833
Provision for loan losses............ --- 120 --- 120
--------- -------- ---------- --------
Net interest income after provision
for loan losses................. 17,807 10,310 (1,404) 26,713
-------- -------- -------- --------
Non-interest income:
Loan origination fees.................. 348 798 --- 1,146
Service fees........................... 2,120 1,077 (158) 3,039
Net gain on sale of loans and securities
available-for-sale................... 577 975 --- 1,552
Other.................................. 837 1,164 --- 2,001
--------- -------- --------- --------
Total non-interest income............ 3,882 4,014 (158) 7,738
-------- ------- -------- --------
Non-interest expenses:
Compensation and employee benefits..... 7,523 4,832 --- 12,355
Net occupancy expense of premises...... 1,450 812 180 2,442
Equipment and furnishings expense...... 643 533 --- 1,176
Data processing expenses............... 632 749 --- 1,381
Federal insurance premium.............. 806 475 --- 1,281
Marketing and advertising.............. 559 211 --- 770
Core deposit intangible amortization... --- --- 968 968
Other.................................. 2,961 2,746 213 5,920
-------- ------- ------- --------
Total non-interest expense.......... 14,574 10,358 1,361 26,293
------- ------- ------ -------
Income before income taxes.......... 7,115 3,966 (2,923) 8,158
Income taxes (expense) benefit......... (2,556) (1,422) 901 (3,077)
-------- -------- -------- --------
Net income......................... $ 4,559 $ 2,544 $ (2,022) $ 5,081
======== ======= ======== ========
Net income per share.................. $ 1.07 $ 1.68 $ 0.92
======== ======= =======
Weighted average common shares
outstanding for income per share..... 4,259,109 1,515,947 5,552,219
========= ========= =========
</TABLE>
49
<PAGE>
Notes to Unaudited Pro Forma Combined Financial Information
NOTE A: BASIS OF PRESENTATION
The unaudited pro forma combined balance sheet combines the historical
consolidated balance sheets of WesterFed Financial and Security as if the Merger
had become effective on September 30, 1996. The unaudited pro forma combined
statements of operations combines the historical consolidated statements of
operations of WesterFed Financial and Security as if the Merger had become
effective on July 1, 1995. Certain amounts in the historical financial
statements of Security have been reclassified in the unaudited pro forma
combined financial information to conform to WesterFed Financial's historical
financial statements.
The Merger will be accounted for using the purchase method of
accounting. Under this method of accounting, assets and liabilities of Security
are adjusted to their estimated fair value and combined with the historical
recorded book values of the assets and liabilities of WesterFed Financial.
Applicable income tax effects of such adjustments are included as a component of
WesterFed Financial's net deferred taxes with a corresponding offset to
goodwill. The actual revaluation of Security's net assets acquired is subject to
the completion of studies and evaluations by management and will be based on the
estimated fair value of the net assets acquired at the Effective Date of the
Merger.
Any transactions conducted in the ordinary course of business between
WesterFed Financial and Security would be immaterial and, accordingly, have not
been eliminated.
Following the Merger and, subject to regulatory approvals, WesterFed
Financial may merge Western Bank and Security Bank. The impact of any such
merger is not expected to be material. WesterFed Financial also expects to
achieve certain operating cost savings as a result of the Merger, however, no
pro forma adjustment has been included in the unaudited pro forma combined
financial information for the anticipated operating cost savings.
NOTE B: PURCHASE PRICE
The purchase price to be paid to Security stockholders is assumed to be
$30 per share. The total number of Security shares to be acquired is 1,572,332.
This assumes all options to acquire 87,700 shares of Security common stock are
exercised and acquired as part of the Merger. The actual purchase price paid per
share is subject to adjustment depending upon the average price of WesterFed
Financial Common Stock prior to the Effective Date. In addition, the form of
consideration paid to Security stockholders in the form of WesterFed Financial
Common Stock is limited to 40% to 45% of the total consideration.
Total consideration is calculated as follows
(in thousands, except share amounts):
Acquisition of 1,484,682 shares of Security Common Stock............ $44,540
Acquisition of Security Common Stock options outstanding............ 1,372
Estimated direct acquisition costs.................................. 1,000
-------
Total purchase price consideration.............................. 46,912
Estimated common stock issuance costs............................... 300
-------
Total acquisition consideration................................. $47,212
=======
It is assumed that 45% of the acquisition cost of Security is paid
through the issuance of WesterFed Financial Common Stock. The assumed value of
these shares is $15.50, which is the average market price of WesterFed Financial
Common Stock immediately prior to and after the announcement of the Merger. The
actual value of these shares issued will be based on the average closing price
of WesterFed Financial Common Stock for the 20 trading days commencing 30
trading days prior to the closing. The total number of WesterFed Financial
common stock assumed to be issued is as follows (in thousands, except share
amounts):
50
<PAGE>
Acquisition cost of Security common stock....................... $ 44,540
Percentage to be paid through the issuance of stock............. 45%
---------
Acquisition cost to be paid through the issuance of stock... $ 20,043
---------
Divided by the assumed value per share of shares issued......... $ 15.50
---------
Total WesterFed Financial common shares to be issued............ 1,293,110
=========
The total cash consideration is assumed to be funded with the proceeds
from the sale of investment securities which are classified as
available-for-sale and whose carrying value approximates market value. Total
cash consideration is assumed as follows (in thousands):
Acquisition cost of Security common stock....................... $44,540
Percentage to be paid in cash at closing........................ 55%
-------
Acquisition cost to be paid in cash......................... $24,497
Acquisition cost of Security Common Stock options
outstanding................................................ 1,372
Estimated direct acquisition costs.............................. 1,000
Estimated common stock issuance costs........................... 300
-------
Total acquisition consideration paid in cash.................... $27,169
=======
NOTE C: ALLOCATION OF PURCHASE PRICE
Certain matters are still pending that will have an effect on the
ultimate allocation of the purchase price. Accordingly, the allocation of the
purchase price has not been finalized and the portion of the purchase price
allocated to fair value adjustments, identifiable intangibles and goodwill is
subject to change.
Subject to the foregoing, the purchase price has been allocated as
described below (in thousands):
Security's net assets at September 30, 1996.............. $30,930
Increase (decrease) to the Security's net asset
values as a result of estimated fair value adjustments:
Mortgage-backed securities......................... (953)
Loans receivable, net.............................. 1,184
Premises and equipment............................. 4,500
Deposits........................................... (1,640)
Accrued expenses(2)................................ (1,250)
Borrowed funds..................................... 321
Core deposit intangible and mortgage
servicing rights................................. 5,625
-----
7,787
Applicable income tax effects...................... (2,959)
-----
Net fair value adjustments............................... 4,828
Eliminate Security's existing goodwill, net of income
tax effects............................................ (2,662)
-----
Estimated fair value of identifiable tangible and
intangible net assets.................................. 33,096
Goodwill................................................. 13,816
------
Total purchase price consideration....................... $46,912
======
- -------------
(1) Estimated marginal tax rate of 38%.
(2) Includes $750,000 of estimated severance costs under existing Security
employment agreements.
51
<PAGE>
NOTE D: PRO FORMA ADJUSTMENTS
For the unaudited pro forma statements of operations, the pro forma
adjustments are based on the allocated purchase price of the net assets acquired
based on the fair value estimates at September 30, 1996 described above.
The effect on income of the amortization of the aggregate $1,450,000
estimated fair value adjustments to the carrying values is estimated to be
incurred on a straight-line basis over three to seven years for the following
categories: mortgage-backed securities, loans receivable, net, deposits, accrued
expenses, and borrowd funds. The increase in the carrying value of premises and
equipment is being depreciated over the remaining economic life of the related
assets, currently estimated at 25 years.
The core deposit intangible and mortgage servicing rights will be
amortized on an accelerated basis over their respective economic lives,
currently estimated not to exceed ten years. Goodwill resulting from the Merger
is expected to be amortized over 25 years.
The assumed interest rate on securities sold to fund the total
acquisition consideration paid in cash is 6.75%.
The incremental effect on pro forma combined net income of the purchase
accounting adjustments for the 12-month periods subsequent to the year ending
June 30, 1996 is estimated to be an after-tax increase in expenses as follows:
Subsequent 12-month periods
ending June 30 Amount
- --------------------------- ------
1997 $745
1998 634
1999 817
2000 745
2001 660
Applicable income tax effects have been recorded using an estimated
marginal tax rate of 38%.
NOTE E: PRO FORMA INCOME (LOSS) PER SHARE
Pro forma combined weighted average shares outstanding is based on the
number of shares assumed to be issued to Security shareholders of 1,293,110 as
described above combined with the actual weighted average shares outstanding for
WesterFed Financial for the respective periods. No options to acquire Security
common stock are assumed to be outstanding after the Effective Date of the
Merger.
52
<PAGE>
MANAGEMENT OF WESTERFED FINANCIAL
Directors and Executive Officers
The business experience of each director of WesterFed Financial is set
forth below. All directors have held their present positions for at least the
past five years, except as otherwise indicated.
Lyle R. Grimes. Mr. Grimes is President and Chief Executive Officer of
WesterFed Financial and Western Bank, positions he has held since September 1993
and January 1983, respectively. Mr. Grimes is responsible for establishing
policies and plans for directing and controlling the activities of WesterFed
Financial and Western Bank in order to achieve the objectives set by the Board
of Directors. Mr. Grimes also acts as spokesman for WesterFed Financial and the
Western Bank and maintains business, civic and governmental contacts. Mr. Grimes
joined Western Bank in 1958 and has worked in all phases of Western Bank's
operations during his 38 years of employment with Western Bank. Mr. Grimes also
serves as President and a Director of Western Bank's subsidiaries. Mr. Grimes
served as a Director of the Federal Home Loan Bank of Seattle from January 1993
to January 1995. Mr. Grimes graduated from the University of Montana.
Otto G. Klein, Jr., M.D. Dr. Klein has practiced ophthalmology with the
Rocky Mountain Eye and Ear Center located in Missoula, Montana since 1978. Prior
to such time, he was a Clinical Associate Professor of Ophthalmology at the
University of Washington and partner of the Mason Clinic in Seattle. He is a
graduate of Stanford University and Cornell Medical School.
Laurie Caras DeMarois. Ms. DeMarois joined the Garden City Floral
Company in 1976. She now manages the Garden City Floral Company and is the
majority shareholder. Ms. DeMarois has served as President of the Montana State
Florists Association and as a director on the boards of the Missoula Chamber of
Commerce, United Way and Rotary Club. Ms. DeMarois is a graduate of the
University of Montana.
John E. Roemer. Mr. Roemer is retired. From 1953 to 1988, Mr. Roemer
was the owner and operator of Roemer's Tire Center, Inc. with retail tire and
automotive centers located in Missoula, Montana and Coeur d'Alene, Idaho.
Marvin P. Reynolds, D.D.S. Dr. Reynolds is a dentist who has practiced
in Missoula, Montana for over 37 years. He is a graduate of the Washington
University Dental School at St. Louis.
Robert F. Burke. Mr. Burke joined I.D.S. Financial Services, Inc.
("I.D.S."), Missoula, Montana, as a personal financial advisor in August 1991.
I.D.S. is a wholly owned subsidiary of American Express Company. In January
1995, I.D.S. became American Express Financial Advisors, Inc. Prior to such
time, he was Chairman and President of the Bank of Sheridan, a commercial bank
located in Sheridan, Montana, from 1983 to 1990. Mr. Burke has approximately 32
years of experience in the banking industry. He is a graduate of the University
of Montana and the Pacific Coast Banking School.
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 WesterFed Financial in September 1993. Mr. Bardwell joined Western 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. Mr. Bardwell is a graduate of the University of Montana.
Mr. Bardwell is responsible for the supervision of Western Bank's savings and
operations departments.
James A. Salisbury. Mr. Salisbury became Treasurer and Chief Financial
officer of WesterFed Financial in September 1993. Mr. Salisbury joined Western
Bank 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
53
<PAGE>
of Montana and is a certified public accountant. Mr. Salisbury is responsible
for the formulation and implementation of the policies and objectives of the
Western Bank's finance and accounting functions.
Jack E. Lovell. Mr. Lovell has been employed by Western Bank 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 Bank since
1957. Ms. Dumontier is responsible for policy formulation and operation of all
of Western Bank's deposit services.
Dale W. Brevik. Mr. Brevik has been with Western Bank 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 Bank's insurance programs. Mr.
Brevik is a graduate of the University of Montana.
Charles E. Eiseman. Mr. Eiseman has been employed by Western Bank 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 Bank has loan origination centers. Mr. Eiseman is a graduate of the
University of Montana.
Executive Compensation
WesterFed Financial has not paid any compensation to its executive
officers since its formation. WesterFed Financial does not presently anticipate
paying any compensation to such persons until it becomes actively involved in
the operation or acquisition of businesses other than Western Bank.
The following table sets forth the compensation paid or accrued by
Western Bank during fiscal years indicated for services rendered by the Named
Officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation(1) Long-Term Compensation
---------------------- ----------------------
Awards
------
Restricted
Stock Options/ All Other
Fiscal Salary Bonus Award(s) SARs Compensation
Name and Principal Position Year ($) ($)(2) ($)(3) (#)(4) ($)
- --------------------------- ---- --- ------ ------ ------ ---
<S> <C> <C> <C> <C> <C> <C>
Lyle R. Grimes, President and 1996 $ 220,000(5) $ 90,025 $ --- --- $136,802(6)
Chief Executive Officer 1995 210,000(5) 52,059 --- --- 128,086
1994 210,000(5) 70,000 470,280 126,444 80,080
Douglas G. Bardwell, Executive 1996 123,000(7) 33,555 --- --- 35,760(8)
Vice President an Chief Operating Officer 1995 117,000(7) 19,340 --- --- 32,031
1994 117,000(7) 36,457 226,260 44,366 16,287
James A. Salisbury, Treasurer and 1996 100,000(9) 27,280 --- --- 22,048(10)
Chief Financial Officer 1995 95,000(9) 15,704 --- --- 19,826
1994 95,000(9) 29,602 181,900 37,268 6,804
<FN>
- ------------------
(1) "Perquisites" received by the named officers are not presented in the table
as such amounts are below the minimum required for disclosure under
executive compensation disclosure rules adopted by the Securities and
Exchange Commission.
(2) Paid pursuant to the Annual Incentive Plan.
(3) Represents the dollar value of awards of shares of Common Stock pursuant to
the RRP based upon the $10.00 per share market value on the date of grant.
At June 30, 1996, the market value of the restricted stock awards to
Messrs. Grimes, Bardwell and Salisbury was $699,777, $336,675 and $270,667,
respectively, based upon the closing price of the Common Stock as reported
on the Nasdaq National Market System on such date. Prior to vesting,
holders of restricted stock have the right to receive dividends, if any,
paid on shares of the Common Stock. At June 30, 1996, 50% of the initial
awards listed above had vested.
54
<PAGE>
(4) Represents awards of options to purchase shares of Common Stock at an
exercise price of $10.00 per share, granted pursuant to the Stock Option
Plan.
(5) Includes zero, zero, and $6,369 deferred under the 401(k) Plan, and $346,
$253 and $152 deferred under the Flexible Compensation Plan in fiscal 1996,
1995 and 1994, respectively.
(6) Includes $115,000 accrued by Western Bank for the benefit of Mr. Grimes
under the Benefit Equalization Plan. The Benefit Equalization Plan provides
supplemental retirement income to Mr. Grimes since his normal retirement
benefit is diminished as a result of IRS rules limiting benefits payable
under the Pension Plan. See "Benefit Plans." Also includes $18,198
allocated to Mr. Grimes' account under the ESOP (representing 1,223 shares
at $14.88 per share), $2,538 in unused sick leave, a $102 Christmas bonus
and the following insurance premiums paid by Western Bank on Mr. Grimes'
behalf: $38 in life insurance, $688 in life insurance under the Salary
Continuation Plan and $238 in long-term disability.
(7) Includes $5,810, $4,680 and $4,680 deferred under the 401(k) Plan, and
$862, $841 and $752 deferred under the Flexible Compensation Plan in fiscal
1996, 1995 and 1994, respectively.
(8) Includes $12,695 accrued and a life insurance premium of $223 paid on
behalf of Mr. Bardwell under the Salary Continuation Plan. Also includes
$17,439 allocated to Mr. Bardwell's account under the ESOP (representing
1,172 shares at $14.88 per share), $1,419 of unused sick leave, a Christmas
bonus of $102, a long-term disability insurance premium of $238, a life
insurance premium of $38 and contributions to the 401(k) Plan of $3,606
paid by Western Bank on behalf of Mr. Bardwell.
(9) Includes $4,878, $4,752 and $4,752 deferred under the 401(k) Plan, and
$900, $500 and $111 deferred under the Flexible Compensation Plan in fiscal
1996, 1995 and 1994, respectively.
(10) Includes $2,872 accrued and life insurance premiums of $85 paid on behalf
of Mr. Salisbury under the Salary Continuation Plan. Also includes $14,671
allocated to Mr. Salisbury's account under the ESOP (representing 986
shares at $14.88 per share), $1,154 in unused sick leave, a Christmas bonus
of $102, life insurance premiums of $38, a long-term disability insurance
premium of $198, and contributions to the 401(k) Plan of $2,928 paid by
Western Bank on behalf of Mr. Salisbury.
</FN>
</TABLE>
The following table sets forth certain information concerning the
number and value of unexercised stock options held by the Named Officers at June
30, 1996. No options or stock appreciation rights were awarded to the Named
Officers during fiscal 1996.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised In-the-Money
Options/SARs at FY-End(#)(1) Options/SARs at FY-End ($)(2)
- ---------------------------- -----------------------------
Shares Acquired Value
Name on Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ---- -------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Lyle R. Grimes N/A N/A 56,444 70,000 $275,447 $341,600
Douglas G. Bardwell N/A N/A 30,000 14,366 146,400 70,106
James A. Salisbury N/A N/A 30,000 7,268 146,400 35,468
<FN>
-------------
(1) Represents options to purchase Common Stock granted pursuant to the Stock
Option Plan. Except for an option to purchase 26,444 shares of Common Stock
granted to Mr. Grimes, all of which vested in March 1994, the terms of the
option awards provide that shares will be exercisable at a rate of 10,000
shares per year, commencing on January 6, 1995.
(2) Represents the difference between the aggregate option exercise price and
the fair market value of the underlying shares based on the closing price
of $14.88 per share of the Common Stock as reported on the Nasdaq National
Market on June 30, 1996.
</FN>
</TABLE>
Employment Agreements
Western Bank has entered into employment agreements with Messrs.
Grimes, Bardwell and Salisbury and four other executive officers. The employment
agreements are designed to assist Western Bank in maintaining a stable and
competent management base. The employment agreements became effective January 6,
1994 and provide for an annual base salary in an amount equal to the employee's
current salary. The agreements provide for termination upon the employee's
death, for cause or in certain events specified by OTS regulations. The
employment agreements are terminable by the employee upon 90 days' notice to
Western Bank.
The following discussion relates to the terms of the agreements with
Messrs. Grimes, Bardwell and Salisbury. These employment agreements provide for
an initial term of three years. Subject to annual Board approval following a
satisfactory annual performance review, on each annual anniversary of the
effective date of the agreement, each agreement shall be automatically extended
for an additional one-year period, unless either the employee or Western Bank
gives notice to the contrary. The employment agreements provide for a lump sum
payment to the employee of up to 299% of his then-current annual compensation in
the event there is a change in control of Western Bank where employment
terminates involuntarily in connection with such change in control of
55
<PAGE>
Western Bank or WesterFed Financial or within 12 months thereafter. This
termination payment is subject to reduction by the amount of all other
compensation to the employee deemed for purposes of the Internal Revenue Code of
1986, as amended (the "Code") to be contingent on a change in control. Such
termination payments are provided on a similar basis in connection with a
voluntary termination of employment, where the change in control was at any time
opposed by Western Bank's Board of Directors. For the purposes of the employment
agreements, a change in control is defined to mean an acquisition of control of
Western Bank or WesterFed Financial (other than by a trustee or other fiduciary
holding securities under an employee benefit plan of WesterFed Financial or its
subsidiary) as defined in OTS regulations which would require the filing of an
application for acquisition of control or notice of change in control. The
agreements provide, among other things, for participation in an equitable manner
and employee benefits applicable to executive personnel.
Based on current salary information, if Messrs. Grimes, Bardwell and
Salisbury had been terminated as of June 30, 1996, under circumstances entitling
each of them to severance pay as described above, such individuals would have
been entitled to receive a lump sum cash payment of approximately $680,237,
$349,572 and $280,241, respectively.
Benefit Plans
Pension Plan and Benefit Equalization Plan. Western Bank's employees
are included in the Financial Institutions Retirement Fund, a multiple employer
comprehensive pension plan (the "Pension Plan"). This noncontributory defined
benefit retirement plan covers all employees who have met minimum service
requirements. Western Bank's policy is to fund pension costs accrued. In
addition to administrative expenses of the Pension Plan paid by Western Bank,
Western Bank made contributions totaling approximately $307,275 to such plan
during fiscal 1996.
The following table illustrates annual pension benefits payable upon
retirement at age 65 to a participant electing to receive the standard form of
retirement benefits based on various levels of compensation and years of
service.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
Years of Service
----------------
Remuneration 15 20 25 30 35
------------ -- -- -- -- --
<S> <C> <C> <C> <C> <C>
$ 50,000 $ 15,000 $ 20,000 $ 25,000 $ 30,000 $ 35,000
75,000 22,500 30,000 37,500 45,000 52,500
100,000 30,000 40,000 50,000 60,000 70,000
125,000 37,500 50,000 62,500 75,000 87,500
150,000 45,000 60,000 75,000 90,000 105,000
175,000 52,500 70,000 87,500 105,000 109,991*
200,000 60,000 80,000 100,000 109,991* 109,991*
225,000 67,500 90,000 109,991* 109,991* 109,991*
<FN>
- ----------
* Maximum annual benefit payable.
</FN>
</TABLE>
At June 30, 1996, Messrs. Grimes, Bardwell and Salisbury had 37 years,
21 years 11 months and 15 years six months, respectively, of credited services
under the Plan. Retirement benefits payable under the Pension Plan are based
upon salary contained in the Summary Compensation Table.
Western Bank also maintains a Benefit Equalization Plan for the benefit
of certain highly compensated individuals whose normal benefits payable upon
retirement under the Pension Plan are reduced due to limits placed on benefits
payable under the Pension Plan by federal law. This plan provides for an annual
retirement benefit commencing at the normal retirement date (as defined in
Western Bank's Pension Plan) equal to the actuarial equivalent of the
participant's accrued benefit (as determined before applying the limitations
contained in the Pension Plan and any dollar limitation for the amount
considered compensation) minus the actuarial equivalent of the
56
<PAGE>
participant's accrual provided under the Pension Plan. In the event of the
participant's death prior to the date payments are due to commence under this
plan, the plan provides for a death benefit payable to the participant's
beneficiary. Currently, Mr. Grimes is the only person participating in this
plan. Information regarding the amount contributed by Western Bank to this plan
on behalf of Mr. Grimes is contained in the Summary Compensation Table.
Salary Continuation Plan. Western Bank has adopted the Salary
Continuation Plan ("SCP") for the benefit of 14 officers. The SCP provides for
the payment of monthly retirement benefits to participating officers for a
period of ten years upon retirement at age 55, provided the officer has at least
20 years of service to Western Bank. Benefits payable under the SCP are equal to
1/120 of such officer's monthly salary for calendar 1992. The SCP also provides
for a benefit equal to one to two times the participant's 1992 salary, in the
event of such person's death while employed by Western Bank. Information
regarding amounts contributed to the SCP during the past three fiscal years on
behalf of the Named Officers is contained in the Summary Compensation Table.
Compensation Committee Report on Executive Compensation
The Compensation and Benefits Committee of WesterFed Financial has
furnished the following report on executive compensation:
Compensation Policies. This report reflects WesterFed Financial's
compensation policies as endorsed by the Board of Directors and the Committee.
The Committee recommends to the Board of Directors amounts of cash compensation
for executive officers of WesterFed Financial and its subsidiaries. With regard
to the compensation actions affecting the CEO, all of the non-employee members
of the Board of Directors acted as the approving body.
The Annual Incentive Plan of WesterFed Financial is designed to:
1. support a pay-for-performance policy that differentiates compensation based
on corporate, business unit, and individual performance;
2. motivate key senior officers to achieve strategic business initiatives and
award them for their achievement;
3. provide compensation opportunities that are comparable to those offered by
other leading companies, allowing WesterFed Financial to compete for and
retain talented executives who are critical to WesterFed Financial's
long-term success; and
4. align the interests of executives with the long-term interests of
stockholders through award opportunities that can result in ownership of
Common Stock.
At present, the Annual Incentive Plan is comprised of salary, annual
cash incentive opportunities, long-term incentive opportunities in the form of
stock options, restricted stock and miscellaneous benefits typically offered to
executives by major corporations. Along with other eligible employees, executive
officers also participate in WesterFed Financial's 401(k) Plan, which provides
for matching contributions, a defined benefit retirement program, and the ESOP.
Annual incentive plans for executive officers of Western Bank were
developed in 1993 with the assistance of outside consultants with implementation
occurring in fiscal year 1994. During the fiscal year, incentive plans for each
of the three Named Officers listed in the compensation table, as well as other
senior officers, were established based on stated goals and objectives which are
drawn by Western Bank's Business Plan. Incentives are awarded based on
attainment of those goals. However, all annual incentives are eliminated
entirely under this incentive plan if a set minimum of before-tax earnings in
dollars is not met during the fiscal year. There is also a maximum before-tax
earnings set in dollars above which incentives will not be paid. The Board of
WesterFed Financial believes that tying executive officers' income more directly
to institution performance will more closely align individual objectives and
interests with stockholder value.
57
<PAGE>
Long-term incentives for executive officers, and to a lesser degree for
employees, were provided during the fiscal year ending 1994 with the
implementation of the RRP and the Stock Option Plan, which were approved by the
stockholders at the Special Meeting of Stockholders held on March 29, 1994. The
price of the Common Stock must increase over time to maximize the benefit of the
RRP and for the employee to realize any benefit from the options awarded under
the Stock Option Plan.
Salaries. The base salaries paid to Messrs. Grimes, Bardwell and
Salisbury were increased 5.0%, 5.13%, and 5.26%, respectively, for fiscal year
1995-96. This change reflected consideration of WesterFed Financial's
performance and competitive data on similar companies indicating that such
changes would be commensurate with experience and individual performance. The
other executive officers will be granted base salary increases based on
competitive data, individual performance, position, tenure and internal
comparability considerations. The Compensation Committee will review and change
the compensation strategy as needed in order that it be responsive to
stockholder interests over time.
Bonus Awards for Fiscal 1996. Executive officers of WesterFed Financial
were awarded cash bonuses during the year based on a review of WesterFed
Financial's fiscal year performance and individual performance. WesterFed
Financial performance review included an assessment of how WesterFed Financial's
before-tax earnings compared with goals set by the Board of Directors and the
goals included in the Business Plan. Additional factors that are taken into
account by the non-employee members of the Board of Directors were their
assessment of non-performing loans, interest rate risk, regulatory ratings, the
degree of customer satisfaction and morale of WesterFed Financial's employees.
Based on all these factors, the amount of bonus paid to Grimes, Bardwell and
Salisbury were 40.9%, 27.3% and 27.3% of their base salaries, respectively, as
compared to the maximum possible award of 60%, 40%, and 40%, respectively.
RRP and Stock Option Plan Awards. The RRP and Stock Option Plan (the
"Plans") are designed to align a significant portion of the executive officer's
compensation, and to a lesser degree other employees compensation, with
stockholders' interests. The Plans, approved by stockholders in 1994, permit the
granting of stock based awards. To date, two types of awards have been granted
to executive officers and other key employees:
1. Stock Option -- a right to purchase shares of Common Stock over a ten-year
period at the market price on the date of grant.
2. Restricted Stock -- shares of Common Stock the recipient cannot sell or
otherwise dispose of until the applicable restriction period lapses and
which are forfeited if the recipient terminates employment for any reason
other than retirement, disability, or death prior to the lapsing of the
restriction period (or applicable portion of such period).
No Stock Options or Restricted Stock were granted during fiscal 1996 to
Messrs. Grimes, Bardwell, Salisbury and other executive officers and employees.
In making future grants, the Committee will consider, among other things, the
individual's position and years of service, the value of the individual's
service to Western Bank and the responsibilities of the individual as an
executive officer of a public company as well as the practices of other
financial institutions.
In 1993, Section 162(m) was added to the Internal Revenue Code, the
effect of which is to eliminate the deductibility of compensation over $1
million, with certain exclusions, paid to each of certain highly compensated
executive officers of publicly held corporations, such as WesterFed Financial.
Section 162(m) applies to remuneration (both cash and non-cash) that would
otherwise be deductible for tax years beginning on or after January 1, 1994,
unless expressly excluded. Although the current compensation of each of
WesterFed Financial's executive officers is below the $1 million threshold,
WesterFed Financial intends to consider the new provision in establishing future
compensation policies and has amended its Stock Option Plan to comply with the
requirements of Section 162(m).
The Compensation and Benefits Committee
John E. Roemer (Chairman) Marvin P. Reynolds Otto G. Klein, Jr., M.D.
58
<PAGE>
Stockholder Return Performance Presentation
The graph below compares the cumulative total stockholder return on
WesterFed Financial's Common Stock to the cumulative total return of the Nasdaq
Market Index and the SIC Industry Group, an index of federally chartered savings
institutions, for the period January 10, 1994, the date WesterFed Financial's
Common Stock commenced trading on the Nasdaq National Market, through June 30,
1996. The graph assumes that $100 was invested on January 10, 1994 and that all
dividends were reinvested.
CUMULATIVE TOTAL RETURN
WESTERFED FINANCIAL CORPORATION, NASDAQ
MARKET INDEX AND SIC INDUSTRY GROUP OF
FEDERALLY CHARTERED SAVINGS INSTITUTIONS
- --------------------------------------------------------------------------------
1/10/94 6/30/94 6/30/95 6/30/96
------- ------- ------- -------
NASDAQ .................. 100 101 119 149
Savings Index ........... 100 105 123 155
Westerfed ............... 100 109 119 119
- --------------------------------------------------------------------------------
59
<PAGE>
Certain Relationships and Related Transactions
Western Bank has followed a policy of granting loans to eligible
directors, officers, employees and members of their immediate families for the
financing of their personal residences and for consumer purposes. All such
loans, except as described below, to directors and the seven executive officers
of Western Bank are required to be made in the ordinary course of business and
on the same terms, including collateral and interest rates, as those prevailing
at the time for comparable transactions and do not involve more than the normal
risk of collectibility. Loans to full-time employees, with at least one year of
service with Western Bank (other than executive officers) secured by a first
mortgage on the employee's principal residence are made under a standard
adjustable-rate mortgage program and modified to a reduced interest rate equal
to two percent over Western Bank's cost of funds subject to their continued
employment. Full-time employees (other than executive officers) with over one
year of service with Western Bank also receive a preferential rate on consumer
and home improvement loans obtained from Western Bank. The rate on these loans
is modified by a margin (which varies depending on the type of loan) over
Western Bank in-house consumer loan index. Loans on savings accounts are
extended to employees at a rate of one percent above the savings account yield
and all processing fees are waived.
All loans by Western Bank to its executive officers and directors are
subject to OTS regulations restricting loans and other transactions with
affiliated persons of Western Bank. Federal law prohibits a savings association
from making loans to its executive officers and directors at favorable rates or
on terms not comparable to those prevailing to the general public.
Set forth below is certain information as to loans made by Western Bank
prior to changes in federal law to each of its directors and executive officers
whose aggregate indebtedness exceeded $60,000 at any time since July 1, 1995, at
a preferential interest rate pursuant to Western Bank's loan policy at the time
such loans were made. Each of the loans was made in the ordinary course of
business and did not involve more than the normal risk of collectibility. All
loans designated as residential loans are first mortgage loans secured by the
borrower's principal place of residence.
<TABLE>
<CAPTION>
Largest
Date Amount Market Modified
of Original Outstanding Balance at Rate at Rate at
Name and Position Loan Type of Loan Amount Since 7/1/95 6/30/96 Origination Origination
- ----------------- ---- ------------ ------ ------------ ------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Lyle R. Grimes 02/88 Residential $ 92,800 $ 74,055 $ 72,417 8.75% 7.46%
President and Chief
Executive Officer
Otto G. Klein 05/87 Residential 125,000 110,611 108,035 8.75 7.44
Director 07/88 Line of Credit N/A 3,089 1,567 17.90 15.00
John E. Roemer 06/89 Residential 99,750 92,429 90,624 9.75 8.52
Director 05/85 Line of Credit N/A 1,104 6 17.90 15.00
</TABLE>
In addition to the loans listed in the tables above, Western Bank has
in the ordinary course of business made loans to its directors, executive
officers and members of their immediate families or affiliates thereof on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with unrelated parties and
did not involve more than the normal risk of collectibility or present other
unfavorable features. All loans to such persons totalled approximately $255,047,
or .32% of WesterFed Financial's stockholders' equity, at June 30, 1996.
60
<PAGE>
BUSINESS OF WESTERFED FINANCIAL
WesterFed Financial, a Delaware corporation, is a unitary savings and
loan holding company which was organized in 1993 at the direction of Western
Bank for the purpose of owning all of the outstanding stock of Western Bank to
be issued in connection with Western Bank's conversion from mutual to stock form
(the "Conversion"). The Conversion was completed on January 6, 1994 at which
time WesterFed Financial issued a total of 4,436,657 shares of WesterFed
Financial Common Stock. At June 30, 1996, WesterFed Financial 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 Bank, founded in 1911, is a federally chartered bank. Western
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 Bank seeks to
serve the financial needs of the communities throughout its market areas.
Western Bank 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 Bank 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, Western 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.
WesterFed Financial's main office is located at 110 East Broadway,
Missoula, Montana 59802-4511 and its telephone number at that address is (406)
721-5254.
Market Areas
Western Bank conducts operations through its main office in Missoula,
Montana and its 19 branch offices and one loan administration office in ten
diverse counties located throughout the State.
Missoula. In Missoula Western 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 Bank 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 Bank 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 Bank 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
61
<PAGE>
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 Bank 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.
Hamilton. Western Bank 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.
Lewistown. Western Bank 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 Bank 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 Bank 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 Western 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 Western Bank's market areas, Western Bank also originates
commercial real estate, consumer, multi-family, and construction loans. Western
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 Bank 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 Bank serviced loans with
principal balances of approximately $183.3 million for others. The loan
servicing fees earned provided a supplement to Western Bank's earnings.
62
<PAGE>
Loan Portfolio Composition. The following table sets forth information
regarding the composition of Western 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 1993 1992
---- ---- ---- ---- ----
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <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% $192,950 79.75% $ 194,311 79.79%
Multi-family................ 19,939 5.30 18,985 5.91 14,430 5.12 11,801 4.88 13,016 5.34
Commercial.................. 18,318 4.87 12,399 3.86 11,300 4.01 13,215 5.46 16,641 6.83
Construction................ 12,977 3.45 10,742 3.34 7,866 2.79 8,764 3.62 4,483 1.84
--------- ----- -------- ----- -------- ----- ------- ----- -------- ------
Total real estate loans.... 332,087 88.31 289,457 90.05 264,296 93.77 226,730 93.71 228,451 93.80
--------- ----- -------- ----- -------- ----- ------- ----- -------- ------
Consumer Loans:
Deposit account ............ 2,337 0.62 2,138 0.67 2,034 0.72 1,839 0.76 2,405 0.99
Student .................... -- -- -- -- -- -- 4 -- 9 --
Automobile ................. 7,236 1.92 3,224 1.00 1,339 0.48 1,272 0.53 1,360 0.56
Home improvement ........... 9,917 2.64 7,504 2.33 2,100 0.75 1,939 0.80 1,662 0.68
Other loans(2) ............. 24,491 6.51 19,141 5.95 12,098 4.28 10,162 4.20 9,663 3.97
-------- ----- ------- ---- ------- ----- ------- ----- -------- -----
Total consumer loans ...... 43,981 11.69 32,007 9.95 17,571 6.23 15,216 6.29 15,099 6.20
-------- ----- ------- ---- ------- ----- ------- ----- -------- -----
Total gross loans ........ 376,068 100.00% 321,464 100.00% 281,867 100.00% 241,946 100.00% 243,550 100.00%
====== ====== ====== ====== ======
Less:
Unearned fees and discounts. (1,625) (1,344) (1,301) (1,017) (1,055)
Undisbursed loan funds ..... (4,245) (4,988) (3,696) (5,723) (2,118)
Allowance for losses ....... (2,005) (2,011) (2,030) (2,058) (2,096)
-------- ------ ------- -------- --------
Total loans receivable and
loans available for sale,
net........................ 368,193 313,121 274,840 233,148 238,281
======== ======= ======= ======= ========
<FN>
- ------------
(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.
</FN>
</TABLE>
63
<PAGE>
The following table illustrates the interest rate maturities of Western
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 Consumer Total
----------- ------------ ---------- ------------ -------- -----
Weighted Weighted Weighted Weighted Weighted Weighted
Due During Years Average Average Average Average Average Average
Ending June 30, Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
--------------- ------ ---- ------ ---- ------ ---- ------ ---- ------ ---- ------ ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997(1) .......... $ 317 8.17% $232 9.44% $ 321 9.88% $12,265 8.87% $5,145 8.54% $18,280 8.76%
1998 ............. 258 8.95 24 9.71 171 10.80 712 9.14 2,099 9.14 3,264 9.22
1999 ............. 547 8.09 135 9.82 3,010 10.08 -- -- 4,610 9.19 8,302 9.45
2000 and 2001 .... 2,378 8.75 1,281 8.93 129 9.60 -- -- 12,277 9.06 16,065 9.01
2002 and 2006 .... 17,023 8.24 2,298 9.64 2,784 9.05 -- -- 19,850 9.97 41,955 9.19
2007 and 2011 .... 138,019 7.43 8,313 9.32 8,210 8.96 -- -- -- -- 154,542 7.61
2012 and following 122,311 7.81 7,656 8.99 3,693 9.21 -- -- -- -- 133,660 7.92
-------- ---- ------ ---- ----- ----- ------ ---- ------- ---- ------- ----
Total ....... $280,853 7.66% $19,939 9.21% $18,318 9.25% $12,977 8.88% $43,981 9.44% $376,068 8.07%
======== ==== ====== ==== ====== ===== ====== ==== ======= ===== ======== ====
<FN>
- -----------
(1) Includes demand loans and loans having no stated maturity.
</FN>
</TABLE>
64
<PAGE>
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 Western 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, Western Bank's regulatory loans-to-one-borrower
limit was $9.6 million. On the same date, Western 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 Bank
assesses both the borrower's ability to repay the loan and the adequacy of the
proposed security. Initially, Western Bank'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 Bank also
obtains information concerning the income, financial condition, employment and
credit history of the applicant. Western Bank's policy is to require title, fire
and extended hazard coverage on its real estate loans.
If the loan terms and borrower meet Western Bank'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 Bank.
All of Western 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 Western 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.
Western 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. Western
Bank also requires flood insurance to protect the property securing its
interest.
65
<PAGE>
One- to Four-Family Residential Real Estate Lending
The cornerstone of Western 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
Western Bank's loan portfolio consisted of permanent loans on one- to
four-family residences. Substantially all of the residential loans originated by
Western Bank are secured by properties located in Western Bank's primary market
areas.
Historically, Western Bank 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 Bank 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 Bank has continued to originate loans for sale in
the secondary market in amounts and at rates which are monitored for compliance
with Western Bank's asset/liability management policy.
Western Bank's loans are underwritten and documented to permit their
sale, consistent with Western Bank's asset/liability management objectives.
Since under Western Bank's current policy, it may sell or securitize all of the
newly originated fixed-rate loans with terms of more than 15 years, Western
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 Western Bank's newly originated fixed-rate
residential loans have contractual terms to maturity of 15 to 30 years. Western
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. Western Bank typically retains the servicing of the conventional
loans it originates. During fiscal 1996, Western 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
Western Bank in connection with loans serviced for others. At June 30, 1996,
Western Bank had $146.9 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.
Western 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. Western 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 Bank are subject
to adjustment at stated intervals based on a margin over a specified index and
are subject to lifetime adjustment limits.
Western Bank 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 Bank 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, Western Bank
had $60.2 million of one-to four-family ARM loans.
It is Western Bank'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 Bank 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 Bank would receive a payment equal to 12%
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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<PAGE>
Substantially all of Western Bank'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 Western Bank's
market areas, Western Bank rarely originates loans in excess of $207,000 (the
Federal Home Loan Mortgage Corporation ("FHLMC") one-family maximum).
Western Bank's residential mortgage loans customarily include
due-on-sale clauses giving Western 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. Western 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 Western Bank's underwriting standards and
the applicable fees are paid.
Multi-Family and Commercial Real Estate Lending
Western Bank also makes real estate loans secured by multi-family and
non-residential properties. Western Bank's multi-family residential loans are
primarily secured by apartment buildings located within Western Bank's market
area.
Western Bank'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 net cash flow, after deducting
all operating expenses except depreciation, of 120% of the required annual debt
service and have a loan-to-value ratio of no more than 75%.
The commercial real estate loans originated by Western Bank 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 Bank 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 Western Bank's loan portfolio, consisted of
multi-family loans and $18.3 million, or 4.9% of Western Bank's loan portfolio,
consisted of commercial real estate loans.
Western Bank 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 Bank
does not offer other secured or unsecured commercial loans. In addition, at June
30, 1996, Western Bank had no outstanding letters of credit.
Consumer Lending
Management believes that offering consumer loan products helps expand
Western 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 "WesterFed Financial - Management's Discussion and Analysis of
Financial Condition - Interest Rate Risk Management."
Western Bank currently originates substantially all of its consumer
loans in its market areas. At June 30, 1996, Western Bank's consumer loans
totaled $44.0 million, or 11.7%, of Western Bank's loan portfolio.
Western Bank 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.
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<PAGE>
In addition, Western Bank offers an in-house VISA credit card program
with the credit card receivables owned by Western Bank. The VISA credit card is
provided as an additional service to Western Bank customers. At June 30, 1996,
Western Bank had $992,000 of credit card receivables outstanding. In addition,
on such date, Western Bank had $2.5 million in unused lines of credit available
to cardholders under this program.
During fiscal 1995, Western Bank 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 Western 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 fiscal 1996, Western Bank 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 Bank, 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 Western Bank's Visa credit card program are generally limited to
$10,000 maximum. Underwriting for all unsecured lending is substantially the
same.
Western 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 Western 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 Western
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 Bank'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 Bank 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. Western Bank
occasionally makes acquisition and development loans to credit worthy borrowers
for residential projects within Western Bank's market area. At June 30, 1996,
approximately $13.0 million, or 3.5% of Western Bank's loan portfolio, consisted
of construction loans.
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<PAGE>
Most of Western 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, Western Bank requires an appraisal of the property. Western
Bank obtains personal guarantees for substantially all of its construction
loans. Western Bank generally requires that both borrowers and guarantors
provide personal financial statements. Virtually all of Western Bank's
construction loans have been located in its primary market areas.
Western Bank's construction loan agreements generally provide that loan
proceeds are disbursed in increments as construction progresses. Western Bank
periodically reviews the progress of the underlying construction project.
Construction lending generally affords Western 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. Western 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, Western 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 Bank 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 Bank generally receives in return
FHLMC participation certificates or cash for non-recourse sales to the FHLMC.
During fiscal 1996, Western Bank 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 Bank currently has loan correspondent agreements with mortgage
banking firms under which Western Bank agrees to originate and sell primarily
conventional, FHA and VA loans to such firms. Under these programs, Western Bank
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 Bank retains any loan origination fees and
negotiates the retention of discount points. Under these programs, the borrower
locks in an interest rate, and Western Bank concurrently obtains a purchase
commitment from the correspondent that does not require delivery unless the loan
is closed. Western Bank'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 Bank can be required to repurchase any loan
which becomes 60 days or more delinquent within four months of the sale. During
fiscal 1996, Western Bank 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 Bank had never had to repurchase a delinquent loan from a loan
correspondent.
Western Bank also participates in loan programs financed by the Montana
Board of Housing ("MBOH"). Under these programs, Western Bank 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 Bank retains servicing
rights on all loans sold to the MBOH.
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<PAGE>
Typically, when loans or participations are sold (other than in respect
of the agreements with correspondent institutions described above), Western Bank
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 Bank 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 Western
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 Western 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 Bank'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 Bank in the event of default, except in the case
of the loan agreements with correspondence institutions discussed above. Western
Bank 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.
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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 receivable and loans available for sale, 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 receivable and loans available for sale, 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, Western 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
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<PAGE>
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.
In the event a real estate loan payment is past due for 90 days or
more, Western 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, Western 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 Western 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.
Western 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 Western 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>
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<PAGE>
The following table sets forth Western 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 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 Bank 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, Western 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 Western 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.
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<PAGE>
Real estate acquired by Western Bank 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.
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.
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The following table sets forth the amounts and categories of
non-performing assets in Western Bank's loan portfolio. For all periods
presented, Western 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
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 Bank'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 Western Bank with respect to the majority of which known
information about the possible
75
<PAGE>
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 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 Western 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. Western 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 Western 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>
76
<PAGE>
The following table sets forth the distribution of Western Bank's
allowance for loan losses at the dates indicated is summarized as follows:
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four- family... $ 539 74.69% $ 175 76.94% $ 175 81.85% $ 175 79.75% $ 177 79.79%
Multi-family........... 136 5.30 12 5.91 10 5.12 10 4.88 14 5.34
Commercial............. 152 4.87 75 3.86 65 4.01 75 5.46 85 6.83
Construction........... 164 3.45 5 3.34 --- 2.79 --- 3.62 --- 1.84
Consumer................ 126 11.69 132 9.95 150 6.23 163 6.29 195 6.20
Unallocated............. 888 --- 1,612 --- 1,630 --- 1,635 --- 1,625 ---
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total............. $2,005 100.00% $2,011 100.00% $2,030 100.00% $2,058 100.00% $2,096 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
77
</TABLE>
<PAGE>
Investment Activities
Securities. As part of its asset/liability management strategy,
WesterFed Financial and Western 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 WesterFed Financial nor Western 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,
WesterFed Financial and Western Bank did not own any securities of a single
issuer which exceeded 10% of WesterFed Financial's stockholders' equity, other
than U.S. government or federal agency obligations.
Western 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, Western 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%.
Western 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 Western Bank's ability to maximize profits during periods
of favorable interest trends. See Note 14 of the WesterFed Financial Notes to
Consolidated Financial Statements. At June 30, 1996 Western 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 Western
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 they mature in
1998.
On July 1, 1995, WesterFed Financial and Western 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 WesterFed Financial Consolidated Financial
Statements.
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 WesterFed Financial Consolidated
Financial Statements.
78
<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>
79
<PAGE>
Mortgage-Backed Securities. Western Bank purchases mortgage-backed
securities to supplement residential loan production. The type of securities
purchased is based upon Western Bank's asset/liability management strategy and
balance sheet objectives. For instance, most of the mortgage-backed investments
purchased by Western Bank over the last several years have had adjustable
interest rates or short or intermediate effective terms to maturity. In
addition, Western 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 Western 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 Bank'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 Western
Bank's mortgage-backed securities at June 30, 1996 was $104.9 million. See
"WesterFed Financial Management's Discussion and Analysis of Financial Condition
and Results of Operations - Interest Rate Risk Management." At June 30, 1996,
Western Bank did not own mortgage-backed securities of a single issuer which
exceeded 10% of WesterFed Financial's stockholders' equity, other than U.S.
government agency obligations.
Western Bank's mortgage-backed securities are classified as either
held-to-maturity or available-for-sale. Those mortgage-backed securities
classified as held-to-maturity are carried at amortized cost in Western Bank's
financial statements. While those mortgage-backed securities classified as
available-for-sale are carried at fair value.
All of Western 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, WesterFed Financial and Western 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.
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>
80
<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>
81
<PAGE>
The following schedule sets forth the contractual repricing of Western
Bank's mortgage-backed securities portfolio, net, at June 30, 1996. Those loans
which have fixed interest rates are shown as repricing in the period during
which the contract matures.
<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>
82
<PAGE>
Cash Surrender Value of Life Insurance Policies. Western Bank 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 Western 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 Bank 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 Western Bank's funds for use in lending and for other general business
purposes. In addition to deposits, Western 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 Western Bank include borrowings from the Federal Home Loan Bank
("FHLB") of Seattle and other borrowings.
Deposits. Western Bank attracts both short-term and long-term deposits
by offering a wide assortment of accounts and rates. Western 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, Western 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 Bank has not actively sought deposits outside of its primary market
area. Western Bank does not have any brokered deposits at this time but may
consider the use of such funds in the future to fund loan growth. Western 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 Western Bank has allowed it to be competitive in
obtaining funds and to respond to changes in consumer demand. However, Western
Bank has become more susceptible to short term fluctuations in deposit flows, as
customers have become more interest rate conscious. In setting rates, Western
Bank 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 Bank imposes penalties on early
withdrawal on its certificates of deposit.
Based on its experience, Western Bank believes that the majority of its
passbook, NOW and money market accounts are relatively stable sources of
deposits. Western 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. Western 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.
83
<PAGE>
The following table sets forth the savings flows at Western 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 deposits in the
various types of deposit programs offered by Western 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>
84
<PAGE>
The following table sets forth the rate and maturity information for
Western Bank's certificates of deposit as of June 30, 1996.
<TABLE>
<CAPTION>
0.00- 4.00- 6.00- 8.00% or Percent
3.99% 5.99% 7.99% Greater Total of Total
----- ----- ----- ------- ----- --------
(Dollars in Thousands)
<S> <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 Western 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> <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
======= ======= ======= ======= ========
- -----------------------
<FN>
(1) Deposits from governmental and other public entities.
</FN>
</TABLE>
For additional information regarding the composition of Western Bank's
deposits, see Note 9 of the Notes to the WesterFed Financial Consolidated
Financial Statements.
Borrowings. Western Bank's other available sources of funds include
advances from the FHLB of Seattle and other borrowings. As a member of the FHLB
of Seattle, Western 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.
Western 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.
Western 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 Western
Bank. See Note 10 of the Notes to the WesterFed Financial Consolidated Financial
Statements.
85
<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 Western Bank's
FHLB advances and CMO's at the dates indicated.
<TABLE>
<CAPTION>
At 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. WesterFed Financial has no direct subsidiaries other than
Western Bank. Western Bank 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 Bank'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 Bank'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 Bank in connection with its acquisition of Home Federal
in 1983. Western Bank'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 Bank could utilize various
investment tax credits then allowed for federal tax purposes. As
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a result of changes in federal tax law, however, such investment tax credits
have been eliminated and WesterFed Service is in the process of consolidating
its leasing operations with Western Bank. Western Bank'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 Bank's investment in
Service Corp. totaled $538,000 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 Bank to Monte Mac.
The transferred FHLMC certificates had a book value of $2.3 million at June 30,
1996. Western Bank'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. Western 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, Western Bank is subject to broad federal
regulation and oversight extending to all of its operations. Western 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 Western Bank, WesterFed
Financial is subject to federal regulation and oversight. The purpose of the
regulation of WesterFed Financial and other holding companies is to protect
subsidiary savings associations. Western Bank is a member of the Savings
Association Insurance Fund ("SAIF") and the deposits of Western Bank are insured
by the Federal Deposit Insurance Corporation (the "FDIC"). As a result, the FDIC
has certain regulatory and examination authority over Western Bank.
Federal Regulation of Savings Associations. The OTS has extensive
authority over the operations of savings associations. As part of this
authority, Western 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 Western 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.
Western Bank's OTS assessment for the fiscal year ended June 30, 1996, was
approximately $122,000. Savings associations (unlike Western 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 Western Bank and WesterFed
Financial. 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 Western
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. Western Bank is in compliance with the noted restrictions.
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Western 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, Western Bank's lending limit under this restriction was $9.6
million. Western 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
Western 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 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.
The deposits of savings associations, such as Western Bank, are
presently insured by the SAIF, which together with the BIF, are the two
insurance funds administered by the FDIC. Financial institutions which are
members of the BIF are experiencing substantially lower deposit insurance
premiums because the BIF has achieved its required level of reserves while the
SAIF has not yet achieved its required reserves. In order to help eliminate this
disparity and any competitive disadvantage due to disparate deposit insurance
premium schedules, legislation to recapitalize the SAIF was enacted in September
1996.
The legislation requires a special one-time assessment of approximately
65.7 cents per $100 of SAIF insured deposits held by the Bank at March 31, 1995.
Management currently anticipates that the one-time special assessment will
result in a tax affected charge to earnings of approximately $1.4 million during
the quarter ended September 30, 1996. The legislation is intended to fully
recapitalize the SAIF fund so that commercial bank and thrift deposits will be
charged the same FDIC premiums beginning January 1, 1997. As of such date
deposit insurance premiums for highly rated institutions, such as the Bank, have
been eliminated.
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The Bank, however, will continue to be subject to an assessment to fund
repayment of the FICO obligations. It is anticipated that the FICO assessment
for SAIF insured institutions will be 6.5 cents per $100 of deposits while BIF
insured institutions will pay 1.3 cents per $100 of deposits until the year 2000
when the assessment will be imposed at the same rate on all FDIC insured
institutions. Accordingly, as a result of the reduction of the SAIF assessment
and the resulting FICO assessment, the annual after tax decrease in assessment
costs is expected to be approximately $365,000 based upon a June 30, 1996
assessment base.
Regulatory Capital Requirements. Federally insured savings
associations, such as Western 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, Western 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 Western 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,
Western Bank was required to deduct $538,000 of its investment in Service Corp.
of Montana, Inc. under these rules.
At June 30, 1996, Western 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, Western
Bank had no intangibles which were subject to these tests.
At June 30, 1996, Western 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. 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, Western 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.
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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. Western 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 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, Western
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 Western Bank's excess risk-based
capital of $39.9 million at June 30, 1996, notwithstanding this $2.3 million
deduction from capital, Western Bank would continue to exceed it's risk-based
capital requirement.
On June 30, 1996, Western 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.
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
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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
Western Bank may have a substantial adverse effect on Western Bank's operations
and profitability. If the OTS or the FDIC require an association such as Western
Bank, to raise additional capital through the issuance of common stock or other
capital instruments by WesterFed Financial such issuance may result in the
dilution in the percentage of ownership of existing Company stockholders since
WesterFed Financial'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 Western 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 Bank 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.
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.
Liquidity. All savings associations, including Western 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 Western 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%.
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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, Western 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. Western 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
Western 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, Western 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.
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 Western 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 a branch, by Western 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, Western Bank may be required to devote additional funds
for investment and lending in its local community. Western 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
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capital. Affiliates of Western Bank include WesterFed Financial and any company
which is under common control with WesterFed Financial. 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. Western
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. WesterFed Financial is a unitary savings
and loan holding company subject to regulatory oversight by the OTS. As such,
WesterFed Financial 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 WesterFed Financial 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, WesterFed Financial
generally is not subject to activity restrictions. If WesterFed Financial
acquires control of another savings association as a separate subsidiary, it
would become a multiple savings and loan holding company, and the activities of
WesterFed Financial and any of its subsidiaries (other than Western Bank 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 Bank fails the QTL test,
WesterFed Financial 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
WesterFed Financial 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.
WesterFed Financial 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. WesterFed Financial is registered with the
Securities and Exchange Commission ("SEC") under the Securities Exchange Act of
1934, as amended (the "Exchange Act"). WesterFed Financial 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 WesterFed Financial may not be resold
without registration or unless sold in accordance with certain resale
restrictions. If WesterFed Financial meets specified current public information
requirements, each affiliate of WesterFed Financial 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, Western 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.
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.
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Federal Home Loan Bank System. Western 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, Western Bank is required to purchase and maintain stock in
the FHLB of Seattle. At June 30, 1996, Western Bank had $7.5 million in FHLB
stock, which was in compliance with this requirement. In past years, Western
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 Western Bank's FHLB stock may result in a corresponding
reduction in Western Bank's capital.
For the fiscal year ended June 30, 1996, dividends paid by the FHLB of
Seattle to Western 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. 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 Western 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. Western
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<PAGE>
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 Western Bank's actual loss experience, or a percentage equal to
8% of Western Bank's taxable income, computed with certain modifications and
reduced by the amount of any permitted additions to the non-qualifying reserve.
Western Bank's deduction with respect to non-qualifying loans was computed under
the experience method, which essentially allows a deduction based on Western
Bank's actual loss experience over a period of several years. Each year Western
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 with assets over $500.0 million 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, Western Bank's
post-1987 reserves were approximately $1.2 million and Western 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. Western Bank
anticipates that it will meet the residential loan requirement for the taxable
year ending June 30, 1997.
Under prior law, if Western 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, Western 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, Western Bank's total bad debt reserve for tax purposes was approximately
$10.3 million. Among other things, the qualifying thrift definitional tests
required Western 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 Western 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 Western 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
Western 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.
WesterFed Financial, Western 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 Western 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.
WesterFed Financial 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, Western Bank) would not result in a deficiency which could have a
material adverse effect on the financial condition of WesterFed Financial and
its consolidated subsidiaries.
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<PAGE>
Montana Taxation. Under Montana taxation law, savings associations,
such as Western 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, WesterFed Financial
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. WesterFed Financial
is also subject to an annual franchise tax imposed by the State of Delaware.
Impact of New Accounting Standards
See Note 1, Summary of Significant Accounting Policies and Note 15,
Recent Accounting Pronouncements Not Yet Adopted in Notes to the WesterFed
Financial Consolidated Financial Statements.
Employees
At June 30, 1996, the WesterFed Financial 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.
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 Western Bank's primary market areas. Western 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.
Western 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
Western 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. Western Bank
competes for these deposits by offering a variety of deposit accounts at
competitive rates, convenient business hours and a customer oriented staff.
Western Bank estimates its market share of the savings deposits in the
counties where it has branch offices to be as follows:
<TABLE>
<CAPTION>
County June 30, 1995 Deposit Share(1) City
- ------ ------------------------------ ----
<S> <C> <C>
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
- -----------------
<FN>
(1) Based on data supplied by Sheshunoff Information Services, Inc. Branch
Source as of June 1995, Western Bank held approximately a 3.9% market share
of deposits in Montana. Based on this market share, Western Bank ranked
fourth out of 196 financial institutions located in Montana. See "- Market
Areas" for information regarding Western Bank's deposit share in each
county in its market area.
</FN>
</TABLE>
96
<PAGE>
Western Bank'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 Bank competes for loans principally through
the interest rates and loan fees charged. Western Bank'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.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF WESTERFED FINANCIAL
General
Currently WesterFed Financial has no other business activity other than
acting as the holding company for Western Bank. As a result, the following
discussion relates primarily to the activities of Western Bank during the past
fiscal year.
WesterFed Financial'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"). WesterFed Financial'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.
WesterFed Financial serves the financial needs of communities in
Montana through its main office located in Missoula, and 18 branch offices and
one loan servicing office. WesterFed Financial 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, WesterFed Financial
also originates multi-family, commercial real estate, construction and consumer
loans in its market areas. WesterFed Financial also invests in mortgage-backed
securities, investment securities and other short-term liquid assets.
Changes in Financial Condition, June 30, 1996 to September 30, 1996
Total assets of WesterFed Financial increased $2.2 million to $566.1
million at September 30, 1996 from $563.9 million at June 30, 1996. This
increase in assets was primarily the result of a $3.0 million increase in loans
receivable and loans held for sale and a $4.9 million increase in investment
securities, Federal Home Loan Bank of Seattle stock and other interest earning
assets, partially offset by a $4.5 million decrease in mortgage-backed
securities. The $2.2 million increase was funded primarily by an increase of
$4.6 million in borrowed funds, a $2.9 million increase in advances from
borrowers for taxes and insurance and a $2.4 million increase in accrued
expenses and other liabilities, partially offset by a $7.2 million decrease in
deposits.
Loans Receivable -- The $3.0 million increase in loans receivable and
loans available-for-sale was primarily the result of $38.1 million in new loan
originations and $900,000 in purchases of real estate loans, which were
partially offset by principal repayments of $24.3 million and the sale of whole
loans of $13.2 million. Real estate mortgage loan originations were $23.9
million and consumer loan originations were $14.2 million during this three
month period as compared to $38.6 million and $6.8 million respectively for the
same period last year. The consumer loan portfolio increased $7.1 million, or
16.2%, to $51.0 million at September 30, 1996 from $43.9 million at June 30,
1996.
Mortgage-Backed Securities -- The $4.5 million decrease in
mortgage-backed securities was primarily the result of principal repayments of
$5.6 million which exceeded purchases of $1.0 million. The $1.0 million of
mortgage-backed securities that were purchased consisted of adjustable rate
mortgage-backed securities.
Investment Securities, FHLB Stock and Other Interest Earning Assets --
Investment Securities, FHLB stock and other interest earning assets increased
$4.9 million, or 7.6%, to $69.0 million at September 30, 1996 from $64.1 million
at June 30, 1996. The increase was primarily the result of the purchase of $21.7
million in investment securities, an increase in FHLB stock of $150,000, a net
increase of $560,000 in interest-bearing due from banks and a net increase in
interest bearing deposits of $2.1 million, partially offset by maturities and
principal payments of investment securities of $19.7 million. Investment
securities purchased during the quarter ended September 30, 1996 included $19.7
million of U.S. Agency securities with maturities of three years or less and
$2.0 million of U.S. Agency securities with maturities of three to five years.
These investments were purchased in an
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<PAGE>
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.
From time to time, Western Bank, may, in order to reduce interest rate
risk, purchase financial instruments that lock in a spread between
interest-earning assets and interest-bearing liabilities. While these types of
financial instruments limit risk, they also reduce Western Bank's ability to
maximize profits during periods of favorable interest rate trends. At September
30, 1996 Western Bank had three structured notes totaling $4.7 million wherein
their interest rate is based upon a fraction of the increase or decrease in a
specified index. These securities have variable interest rates and were
purchased to enable Western Bank to increase its interest income when interest
rates increase. The market value of these securities at September 30, 1996 was
$4.6 million and they will mature in 1998.
Western Bank may be a party to financial instruments with
off-balance-sheet risk in the normal course of business to reduce its own
exposure to fluctuations in interest rates. These financial instruments may
include interest rate cap and interest rate swap agreements. These instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of amounts recognized in the consolidated balance sheets. The contract or
notional amounts of these instruments reflect the extent of involvement Western
Bank has in particular classes of financial instruments. For interest rate cap
and interest rate swap agreements, the contract or notional amounts do not
represent exposure to credit loss. Western Bank controls the credit risk of
those instruments through credit approval, limits and monitoring procedures.
Interest Rate Caps -- Interest rate caps entitle Western Bank to
receive various interest payments in exchange for payment of a premium, provided
the three-month LIBOR exceeds an agreed upon interest rate. Transaction fees
paid in connection with interest rate cap agreements are amortized to interest
expense as an adjustment of the interest cost of liabilities. Interest rate cap
agreements are used to manage interest rate risk by synthetically extending the
life of interest-bearing liabilities.
The following summarizes interest rate cap agreements at September 30,
1996:
<TABLE>
<CAPTION>
Notional principal Agreement
amount termination Cap
- --------------------------------- --------------------------- ----------------------
(in thousands)
<S> <C> <C> <C>
$25,000 March, 1997 6.5% - 10.0%
5,000 July, 1999 6.5%
5,000 July, 1999 7.0%
-------
$35,000
=======
</TABLE>
Interest Rate Swaps -- Interest rate swap agreements involve the
exchange of fixed and floating rate payments without the exchange of the
underlying principal amounts. Estimated amounts to be received or paid on the
swap settlement dates are accrued when realized. The net swap settlements are
reflected in interest expense. Interest rate swap agreements are used to manage
interest rate risk by synthetically extending the life of interest-bearing
liabilities. At September 30, 1996 Western Bank did not have any interest rate
swap agreements in place.
The counterparty to the cap agreements is the FHLB of Seattle and the
agreements are not collateralized. Interest rate swaps would be collateralized
by stock in FHLB, certificates of deposit issued by the FHLB, securities issued
by the U.S. Government or agency thereof, mortgage-backed securities, or
qualifying first mortgage loans not otherwise pledged.
Deposits -- Deposits decreased $7.2 million, or 2.1%, to $343.0 million
at September 30, 1996 from $350.2 million at June 30, 1996. NOW and Money Market
accounts decreased $2.7 million, Passbook accounts decreased $1.5 million and
Certificates of Deposit decreased $3.0 million. The decrease in deposits is
primarily the result of increased competition in Western Bank's market areas.
While Western Bank pays competitive interest rates, management believes it is
not prudent to pay deposit rates beyond normal treasury spreads while Western
Bank's regulatory liquidity remains strong at 10.6%.
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<PAGE>
Borrowed Funds -- Borrowed funds increased $4.6 million, or 3.7%, to
$130.4 million, at September 30, 1996 from $125.8 million at June 30, 1996.
There was $7.0 million of new fixed rate advances with maturities of one to four
years. Principal repayments on FHLB advances were $2.3 million and repayments on
collateralized mortgage obligations were $122,000 during the quarter ended
September 30, 1996.
Stockholders' Equity -- Stockholders' equity decreased $318,000, or
0.4%, to $78.3 million at September 30, 1996 from $78.6 million at June 30,
1996. This decrease was due to a net loss for the three month period of $200,000
and $392,000 for dividends declared during the three month period while
stockholders' equity was increased $223,000 related to contributions to the
Employee Stock Ownership Plan and shares earned under the Recognition and
Retention Plan. There was also a $30,000 increase to stockholders' equity
related to the change in unrealized loss associated with assets classified as
available-for-sale being adjusted to market value in accordance with Statement
of Financial Accounting Standards No. 115.
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 Western Bank originates loans
directly through local auto and recreational dealers. In the first two months of
operation, $2.8 million of these new consumer 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 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
transferred 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
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<PAGE>
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.
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Results of Operations
Net Interest Income Analysis. The following tables present for the
periods indicated the total dollar amount of interest income from average
interest-earning assets and the resultant yields, as well as the interest
expense on average interest-bearing liabilities, expressed both in dollars and
rates. No tax equivalent adjustments were made.
Non-accruing loans have been included in the table as loans carrying a zero
yield.
<TABLE>
<CAPTION>
Three Month Period Ended
(Unaudited)
------------------------------------------- --------------------------------------
September 30,1996 September 30,1995
------------------------------------------- --------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance (5) Paid Rate Balance (5) Paid Rate
------------------------------------------- --------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans receivable (1) (2) $ 370,941 $ 7,710 8.31 % $ 322,028 $ 6,624 8.23 %
Mortgage-backed securities (2) 102,177 1,766 6.91 137,905 2,383 6.91
Investments (2) 54,495 843 6.19 61,524 1,090 7.09
Other interest-earning assets (3) 10,583 228 8.62 19,630 265 5.40
Cash surrender value of life insurance 3,208 46 5.74 2,975 44 5.92
Total Interest-Earning Assets $ 541,404 $ 10,593 7.83 % $ 544,062 $ 10,406 7.65 %
========================================== =====================================
INTEREST-BEARING LIABILITIES:
Certificates of deposits $ 209,740 $ 3,009 5.74 % $ 209,252 $ 3,061 5.85 %
Passbook deposits 63,715 474 2.98 65,282 494 3.03
Demand and now accounts 48,902 177 1.45 47,017 227 1.93
Money market accounts 23,776 205 3.45 25,198 219 3.48
------------------------------------------ --------------------------------------
Total deposits 346,133 3,865 4.47 346,749 4,001 4.62
FHLB advances and notes payable 128,424 2,039 6.35 131,356 2,102 6.40
Collateralized mortgage obligations 1,097 46 16.77 1,537 55 14.31
------------------------------------------ --------------------------------------
Total Interest-Bearing Liabilities $ 475,654 $ 5,950 5.00 % $ 479,642 $ 6,158 5.14 %
========================================== ======================================
Net interest income ($4,643) ($4,248)
========= =========
Net interest rate spread 2.83 % 2.51 %
===== =====
Net interest earning assets ($65,750) ($64,420)
========== ==========
Net interest margin (4) 3.43 % 3.12 %
===== =====
Average interest-earning assets
to average interest-bearing liabilities 113.82% 113.43%
======= =======
<FN>
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves
(2) Includes held and available-for-sale categories
(3) Includes primarily short-term liquid assets
(4) Net interest income divided by average interest earning assets
(5) Based on average monthly balances
</FN>
</TABLE>
102
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30, 1996
--------------------------------------------------------
Average Interest
Outstanding Earned/
Balance(1) Paid Yield/Rate
----------- ---- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest-Earnings Assets:
Loans receivable(2)(3)......................... $347,084 $28,640 8.25%
Mortgage-Backed securities..................... 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%
<FN>
======
- ----------
(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.
</FN>
</TABLE>
103
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30, 1995 Year Ended June 30, 1994
------------------------------------- -------------------------------------------
Average Interest Average Interest
Outstanding Earned/ Outstanding Earned/
Balance(6) Paid Yield/Rate Balance(1) Paid Yield/Rate
---------- ---- ---------- ---------- ---- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-Earnings Assets:
Loans receivable(7)(8)............. $292,881 $23,191 7.92% $259,166 $21,105 8.14%
Mortgage-Backed securities(6)...... 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(9)... 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(10)..................... 3.23% 3.54%
======
Average interest-earning assets to average
interest-bearing liabilities............... 113.51% 110.16%
====== ======
<FN>
- ----------
(6) Based on average monthly balances.
(7) Based on average monthly balances.
(8) Calculated net of deferred loan fees, loan discounts, loans in process
and loss reserves.
(9) Includes primarily short-term liquid assets.
(10) Net interest income divided by average interest-earning assets.
</FN>
</TABLE>
104
<PAGE>
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>
September 30, 1996 vs. September 30, 1995 June 30, 1996 vs. June 30, 1995
----------------------------------------- --------------------------------------
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 ............................. $ 277 $ 4,025 $(3,216) $ 1,086 $ 4,292 $ 978 $ 179 $ 5,449
Mortgage-backed securities ................... 1 (2,470) 1,852 (617) (318) 268 (10) (60)
Investments .................................. 57 (1,031) 727 (247) (68) 77 (2) 7
Other interest-earning assets ................ (71) (82) 116 (37) (930) 848 (554) (636)
Cash surrender value of life insurance ....... (5) 14 (7) 2 11 (9) (1) 1
----- ------- ------- ------- ------- ------- ----- -------
Total interest-earning assets ............. 259 456 (528) 187 2,987 2,162 (388) 4,761
===== ======= ======= ======= ======= ======= ===== =======
Interest-Bearing Liabilities:
Certificates of deposit ...................... (234) 29 153 (52) 744 1,515 111 2,370
Passbook deposits ............................ (38) (47) 64 (21) (186) 17 (1) (170)
Demand and NOW deposits ...................... (227) 36 141 (50) 27 (91) (2) (66)
Money market accounts ........................ (3) (49) 39 (13) (146) 46 (7) (107)
----- ------- ------- ------- ------- ------- ----- -------
Total deposits ............................ (502) (31) 397 (136) 439 1,487 101 2,027
FHLB advances and notes payable ................ (66) (188) 191 (63) 1,291 435 84 1,810
Collateralized mortgage obligations ............ 38 (63) 16 (9) (78) (8) 2 (84)
----- ------- ------- ------- ------- ------- ----- -------
Total interest-bearing liabilities ........ (530) (282) 604 (208) 1,652 1,914 187 3,753
===== ======= ======= ======= ======= ======= ===== =======
Changes to net interest income ................. $ 789 $ 738 $(1,132) $ 395 $ 1,335 $ 248 $(575) $ 1,008
===== ======= ======= ======= ======= ======= ===== =======
</TABLE>
<TABLE>
<CAPTION>
1995 vs. 1994
--------------------------------------
Increase/(Decrease) Due To:
---------------------------
Total
Rate/ Increase
Volume Rate Volume (Decrease)
------ ---- ------ ----------
<S> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable ..................... $2,746 $(583) $ (77) $2,086
Mortgage-backed securities ........... 1,986 99 28 2,113
Investments .......................... 978 144 55 1,177
Other interest-earning assets ........ 73 373 29 475
Cash surrender value of life insurance 5 (6) -- (1)
------ ----- ----- ------
Total interest-earning assets ..... 5,788 27 35 5,850
====== ===== ===== ======
Interest-Bearing Liabilities:
Certificates of deposit .............. (24) 258 (2) 232
Passbook deposits .................... (297) 18 (2) (281)
Demand and NOW deposits .............. (8) (49) 1 (56)
Money market accounts ................ (37) 51 (3) 11
----- ----- ----- -----
Total deposits .................... (366) 278 (6) (94)
FHLB advances and notes payable ........ 3,674 358 687 4,719
Collateralized mortgage obligations .... (116) 130 (46) (32)
----- ----- ----- -----
Total interest-bearing liabilities 3,192 766 635 4,593
====== ===== ===== =====
Changes to net interest income ......... $2,596 $(739) $(600) $1,257
====== ===== ===== =====
</TABLE>
105
<PAGE>
The following table sets forth the weighted average yields on WesterFed
Financial'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 WesterFed Financial at the dates indicated.
Non-accruing loans have been included in the table as loans carrying a zero
yield.
<TABLE>
<CAPTION>
At September 30, At June 30,
--------------------------------------------------------
1996 1995 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Weighted average yield on:
Loans receivable(1)(2) 8.17% 8.12% 8.12% 8.00% 7.62%
Mortgage-backed securities(1) 7.10 7.07 7.06 7.08 6.66
Investments(1) 6.28 6.37 6.25 6.29 5.30
Other interest-earning assets 5.26 5.72 5.31 5.76 5.91
Cash surrender value of life insurance 5.75 6.50 6.50 6.15 6.50
- -------------------------------------------------------------------------------------------------------------------
Combined weighted average yield on interest-
earning assets 7.70 7.59 7.68 7.48 7.00
- -------------------------------------------------------------------------------------------------------------------
Weighted average rate paid on:
Certificates of deposit 5.81 6.00 5.82 5.88 4.48
Passbook deposits 2.98 3.03 3.00 3.03 2.94
Demand and NOW deposits 1.35 1.97 1.66 1.98 2.02
Money market accounts 3.47 3.47 3.46 3.46 3.13
- -------------------------------------------------------------------------------------------------------------------
Total deposits 4.51 4.70 4.54 4.62 3.86
FHLB advances and notes payable 6.26 6.27 6.26 6.28 5.39
Collateralized mortgage obligations 11.29 11.23 11.27 11.22 11.11
- -------------------------------------------------------------------------------------------------------------------
Combined weighted average rate paid on interest-
bearing liabilities 5.00 5.15 5.01 5.10 4.20
- -------------------------------------------------------------------------------------------------------------------
Interest rate spread 2.70% 2.44% 2.67% 2.38% 2.80%
===================================================================================================================
<FN>
- ----------
(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.
</FN>
</TABLE>
106
<PAGE>
The following table summarizes the major components of WesterFed
Financial's net income and the changes which occurred between the periods shown:
<TABLE>
<CAPTION>
Three Months Ended September 30, 1996
-------------------------------------
(unaudited)
1995
Amount Change Amount
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
Total interest income....................... $10,593 $ 187 $10,406
Total interest expense...................... 5,950 (208) 6,158
------- ------ -------
Net interest income....................... 4,643 395 4,248
Provision for loan losses................... 15 15 ---
------- ------ -------
Net interest income after provision
for loan losses......................... 4,628 380 4,248
------- ------ -------
Fees and service charges.................... 691 49 642
Gains on sale of loans, mortgage-backed
securities and investment securities...... 109 (302) 411
Other non-interest income................... 35 (1) 36
------- ------ -------
Total non-interest income................. 835 (254) 1,089
------- ------ -------
Income before non-interest expense ......... 5,463 126 5,337
Total non-interest expense.................. 5,731 2,132 3,599
------- ------ -------
Income before income taxes ............... (268) (2,006) 1,738
Income taxes ............................... 89 759 (670)
------- ------ -------
Net income......................... $ (179) $(1,247) $ 1,068
======= ======= =======
</TABLE>
Comparison of Operating Results for the Three Months Ended September 30, 1996
and 1995
General. Net income decreased $1.2 million to a loss of $179,000 for
the three month period ended September 30, 1996 from $1.1 million for the three
month period ended September 30, 1995. The $1.2 million decrease in net income
resulted from a $2.3 million one-time special assessment to recapitalize the
Savings Association Insurance Fund (the "SAIF") (1.4 million after tax
effected). Net income was decreased by increases in non-interest expense of $2.1
million and a decrease in non-interest income of $254,000 while increases in net
interest income after provision for loan losses of $380,000 and a reduction in
income tax expense of $759,000 partially offset the decreases to net income. In
addition, the interest rate spread increased to 2.70% at September 30, 1996 from
2.44% at September 30, 1995.
Interest Income. Interest income increased $187,000, or 1.8%, to $10.6
million for the three month period ended September 30, 1996 from $10.4 million
for the same period last year. The increase resulted from an increase in the
average yield on interest-earning assets to 7.83% during the quarter ended
September 30, 1996 from 7.65% during the same period last year, which offset the
effects of a $2.7 million decrease in the average balance of interest-earning
assets to $541.4 million during the quarter ended September 30, 1996 from $544.1
million for the same period last year.
Interest earned on loans receivable increased $1.1 million, or 16.7%,
due primarily to a $48.9 million increase in the average balance of loans
receivable to $370.9 million during the three month period ended September 30,
1996 from $322.0 million for the same period last year. In addition, the average
yield on loans increased to 8.31% during the three month period ended September
30, 1996 from 8.23% for the same period last year. 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 loans being repaid primarily on consumer loans. In
addition, the average rate received on adjustable rate mortgage loans increased
to 8.21% at September 30, 1996 from 7.85% at September 30, 1995.
Interest earned on mortgage-backed securities decreased $600,000 due
primarily to a $35.7 million decrease in the average balance of mortgage-backed
securities outstanding to $102.2 million for the three month period ended
107
<PAGE>
September 30, 1996 from $137.9 million during the same period last year. 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, FHLB stock and other interest
earning assets decreased $282,000 due primarily to a decrease of $15.8 million
in average balances to $68.3 million during the three month period ended
September 30, 1996 from $84.1 million during the same period last year. This
decrease was the result of investing the proceeds of maturing investments into
higher yielding new production mortgage and consumer loans and the purchase of
higher yielding mortgage-backed securities.
Interest Expense. Total interest expense decreased $208,000 to $6.0
million for the three month period ended September 30, 1996 from $6.2 million
for the same period last year. Interest expense on deposits decreased $100,000
due to both a decrease in the average rate paid on deposits to 4.47% during the
three month period ended September 30, 1996 from 4.62% during the same period
last year and a decrease in the average balance of deposits of $600,000 to
$346.1 million during the three month period ended September 30, 1996 from
$346.7 million during the same period last year. Certificates of deposit,
passbook deposits, NOW accounts and money market accounts all decreased in both
average balances and average rate paid. A new non-interest bearing checking
program was implemented during the quarter ended September 30, 1996 which should
further reduce the interest expense related to NOW accounts. Interest expense on
borrowed funds also decreased $72,000 due to both a decrease in average balances
of $3.4 million to $129.5 million during the three month period ended September
30, 1996 from $132.9 million for the same period last year and a decrease in the
average rate paid on FHLB advances to 6.35% for the three months ended September
30, 1996 from 6.40% for the same period last year.
Provisions for Loan Losses. The provision for loan losses increased to
$15,000 for the three month period ended September 30, 1996 as compared to no
provision for the same period last year. Western Bank has begun adding to the
provision for loan losses due to the increase in consumer loans and commercial
real estate loans held in the loan portfolio.
The provision for loan losses is determined by management as the amount
to be added to the allowance for loan losses after net charge-offs have been
deducted to bring the allowance to a level which is considered adequate to
absorb losses inherent in the loan portfolio in accordance with generally
accepted accounting principles.
At September 30, 1996, Western Bank had $1.3 million of non-performing assets
(representing 0.23% of total assets) compared to $715,000 at June 30, 1996
(representing 0.13% of total assets). At September 30, 1996, Western Bank had
allowance for loan losses to non-performing assets of 157.2% as compared to
280.9% at June 30, 1996. Future additions to Western Bank'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
Western Bank'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 decreased $254,000 to $835,000
for the three month period ended September 30, 1996 from $1.1 million for the
same period last year. Gain on sale of loans, mortgage-backed securities, and
investment securities decreased $302,000 while fees and service charges
increased $49,000. The $49,000 increase in service fees was primarily the result
of increases in checking fees and ATM transaction fees.
Non-Interest Expense. Non-interest expense increased $2.1 million to
$5.7 million for the three month period ended September 30, 1996 from $3.6
million for the same period last year. The reason for the increase was a $2.3
million one-time special assessment to recapitalize the SAIF.
The deposits of savings associations, such as Western Bank, are
presently insured by 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"). Financial institutions which are members of the BIF
are experiencing substantially lower deposit insurance premiums because the BIF
has achieved its required level of reserves while the SAIF has not yet achieved
its required reserves. In order to help eliminate this disparity and any
competitive
108
<PAGE>
disadvantage due to disparate deposit insurance premium schedules, legislation
to recapitalize the SAIF was enacted in September, 1996.
The legislation requires a special one-time assessment of approximately
65.7 cents per $100 of SAIF insured deposits held by Western Bank at March 31,
1995. The one-time special assessment resulted in a tax affected charge to
earnings of approximately $1.4 million during the quarter ended September 30,
1996. The legislation is intended to fully recapitalize the SAIF fund so that
commercial bank and thrift deposits will be charged the same FDIC premiums
beginning October 1, 1996. As of such date deposit insurance premiums for highly
rated institutions, such as Western Bank, have been eliminated.
Western Bank, however, will continue to be subject to an assessment to
fund repayment of the FICO obligations. It is anticipated that the FICO
assessment for the SAIF insured institutions will be 6.5 cents per $100 of
deposits while BIF insured institutions will pay 1.3 cents per $100 of deposits
until the year 2000 when the assessment will be imposed at the same rate on all
FDIC insured institutions. Accordingly, as a result of the reduction of the SAIF
assessment, and the resulting FICO assessment, the annual after tax decrease in
assessment costs is expected to be approximately $365,000 based upon a June 30,
1996 assessment base.
Without the $2.3 million SAIF assessment, non-interest expense
decreased $200,000 due primarily to a $109,000 decrease in marketing and
advertising and a $148,000 decrease in other non-interest expense. Non-interest
expense for the three month period ended September 30, 1996 was $3.4 million
without the SAIF assessment, a 5.6% decrease from the $3.6 million for the same
period last year.
Income Taxes. Income tax expense decreased $759,000 due to a reduction
in income before income taxes of $2.0 million.
The following table summarizes the major components of WesterFed
Financial'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
---- ---- ----
Amount Change Amount Change Amount
------ ------ ------ ------ ------
(Dollars in Thousands)
<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
WesterFed Financial has adopted interest rate risk policies in an effort to
protect net interest income from significant increases in short term interest
rates, WesterFed Financial'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
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
109
<PAGE>
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. WesterFed Financial
made no additional provision for loan losses for the fiscal years ended June 30,
1996 and June 30, 1995. At June 30, 1996, WesterFed Financial 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,
WesterFed Financial 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 WesterFed Financial'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
WesterFed Financial'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 $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
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<PAGE>
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.
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.
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
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<PAGE>
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. Western Bank made no additional provision
for loan losses for the fiscal years ended June 30, 1995 and June 30, 1994. At
June 30, 1995, Western Bank 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, WesterFed Financial 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 Western 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.
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<PAGE>
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.
Interest Rate Risk Management
In an attempt to manage its exposure to changes in interest rates,
management closely monitors Western Bank's interest rate risk position. Western
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 Western 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 Western Bank's interest rate
risk position, including simulations of the effect on Western Bank's capital of
various interest rate scenarios.
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<PAGE>
Western Bank has an Investment Committee consisting of certain members
of the senior management which meets at least monthly to review Western Bank's
interest rate risk position using the OTS and Western Bank's internal model
simulating the effect on Western Bank's capital in various interest rate
scenarios. The Investment Committee makes recommendations for adjusting such
position to Western Bank's Asset/Liability Management Committee. The
Asset/Liability Management Committee reviews Western 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, Western 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,
Western 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.
Western 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 Western Bank's one- to four-family residential loan and mortgage-backed
securities portfolio, consisted of ARMs and 15 year or less fixed rate
mortgages. Western 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 Western Bank's interest rate risk position,
Western Bank also sells or converts to Federal Home Loan Mortgage Corporation
("FHLMC") participation certificates ("PCs") newly originated 30-year,
fixed-rate residential loans. Western Bank securitizes such loans to limit
credit risk and increase it's liquidity. Western 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, Western Bank has used interest rate
exchange (i.e., "swap" and "cap") agreements to assist in synthetically
extending the life of interest-bearing liabilities. Under Western Bank's current
investment policy, Western Bank may engage in swap and cap agreements with the
FHLB of Seattle or certain investment firms listed in Western Bank's investment
policy.
At June 30, 1996, Western 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,
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<PAGE>
the swaps and caps have been used to reduce Western 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 Western Bank's cost of funds. During fiscal 1996, the increase in the
cost of funds attributable to these swaps and caps was $331,000. Western Bank's
interest rate caps expire in 1997 and 1999.
At June 30, 1996 Western Bank did not have any interest rate swap
agreements in place.
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 Western Bank's income in the future if interest rates do not
rise significantly. See Note 14 of the Notes to WesterFed Financial 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 Western
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, Western 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 Western Bank's excess risk-based capital of $39.9 million at June
30, 1996, notwithstanding this $2.3 million deduction from capital, Western Bank
would continue to exceed its risk-based capital requirement. See Liquidity and
Capital Resources.
Western 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 Western 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.
<TABLE>
<CAPTION>
Change in Actual at June 30, 1996
Interest Rate Board Limit as Measured by OTS
(Basis Points) % Change -----------------------------------
$ Change % Change
- -------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
+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
</TABLE>
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, Western 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
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<PAGE>
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 Western 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.
In evaluating Western 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
Western Bank'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.
Western Bank'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
---- ---- ----
<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 Western Bank 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, WesterFed Financial'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.
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<PAGE>
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.
Western 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%. Western Bank's regulatory liquidity ratio was 9.3% at June 30,
1996.
Western 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
Western Bank's operating, financing, lending, and investing activities during
any given period. At June 30, 1996, Western Bank's regulatory liquid assets
totaled $35.0 million.
Liquidity management for Western Bank is both a daily and long term
function of WesterFed Financial's management strategy. Excess funds are
generally invested in short-term investments such as FHLB certificates of
deposit. If Western 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, Western 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 Western Bank's
finance subsidiary.
At June 30, 1996, Western 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.
Western 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.
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At September 30, 1996, Western Bank exceeded all of its capital
requirements on a fully phased-in basis. The following table sets forth Western
Bank's compliance with its capital requirements at September 30, 1996.
<TABLE>
<CAPTION>
At September 30, 1996
-----------------------------
Amount(1) Percent
--------- -------
(Dollars in Thousands)
<S> <C> <C>
Tangible Capital:
Capital level(2)..................................... $ 61,811 11.23%
Requirement.......................................... 8,258 1.50
-------- -----
Excess............................................... 53,553 9.73
======== =====
Core Capital:
Capital level........................................ 61,811 11.23
Requirement.......................................... 16,515 3.00
-------- -----
Excess............................................... 45,296 8.23
======== =====
Fully phased-in risk-based capital:
Capital level(3)..................................... 63,740 20.90
Requirement.......................................... 24,399 8.00
-------- -----
Excess............................................... $39,341 12.90%
======== =====
<FN>
- ---------------
(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) Western Bank's investment in excludable subsidiaries is excluded for
purposes of calculating regulatory capital.
(3) Includes $2.0 million of general valuation allowances.
</FN>
</TABLE>
Impact of Inflation and Changing Prices
The WesterFed Financial 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
WesterFed Financial's operations. Unlike most industrial companies, nearly all
the assets and liabilities of WesterFed Financial are monetary in nature. As a
result, interest rates have a greater impact on WesterFed Financial'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 Western Bank, tax considerations, industry standards, economic conditions,
general business practices and other factors. WesterFed Financial's ability to
pay dividends is dependent on the dividend payments it receives from its
subsidiary, Western Bank, which are subject to regulations and Western Bank's
continued compliance with all regulatory capital requirements. See Note 2 of the
Notes to WesterFed Financial's Consolidated Financial Statements for information
regarding limitations of Western Bank's ability to pay dividends to WesterFed
Financial.
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VOTING SECURITIES AND PRINCIPAL HOLDERS OF WESTERFED FINANCIAL
Stockholders of record as of the close of business on January __, 1997
will be entitled to one vote for each share of WesterFed Financial Common Stock
then held. As of that date, WesterFed Financial had ________ shares of WesterFed
Financial Common Stock issued and outstanding. The following table sets forth
information regarding share ownership of: (i) those persons or entities known by
management to beneficially own more than 5% of the WesterFed Financial Common
Stock, (ii) WesterFed Financial's Chief Executive Officer and each other
executive officer who made in excess of $100,000 during fiscal 1996 (the "Named
Officers") and (iii) all directors and executive officers of WesterFed Financial
and Western Bank as a group.
<TABLE>
<CAPTION>
Shares
Beneficially Percent
Beneficial Owner Owned of Class
---------------- ----- --------
<S> <C> <C>
Principal Owners
- ----------------
WesterFed Financial Corporation Employee Stock Ownership Plan and Trust 354,933 8.1%
110 East Broadway
Missoula, Montana 59802-4511(1)
John Hancock Mutual Life Insurance Company, et al. 390,000 8.9
John Hancock Place
P.O. Box 111
Boston, Massachusetts 02117(2)
J. J. Cramer & Co., et al. 387,100 8.8
8th Floor
100 Wall Street
New York, New York 10005(3)
Named Officers and Directors and Executive Officers as a Group(4)
- -----------------------------------------------------------------
Lyle R. Grimes, President and Chief Executive Officer(5) 128,136 2.9
Douglas G. Bardwell, Vice President and Secretary(6) 77,627 1.8
James A. Salisbury, Treasurer and Chief Financial Officer(7) 66,330 1.5
Directors and executive officers of WesterFed Financial and Western Bank as a group 641,216 13.7
(13 persons)(8)
- ----------
<FN>
(1) As reported in Amendment No. Two to a Schedule 13G dated January 29, 1996.
The amount reported represents shares held by the Employee Stock Ownership
Plan and Trust (the "ESOP"), 87,193 of which have been allocated to
accounts of participants. First Bankers Trust Company, Quincy, Illinois,
the trustee of the ESOP, may be deemed to beneficially own the shares held
by the ESOP which have not been allocated to accounts of participants.
Participants in the ESOP are entitled to instruct the trustee as to the
voting of shares allocated to their accounts under the ESOP. Unallocated
shares held in the ESOP's suspense account or allocated shares for which no
voting instructions are received are voted by the trustee in the same
proportion as allocated shares voted by participants.
(2) As reported in Amendment No. One to a Schedule 13G dated January 27, 1995
by John Hancock Mutual Life Insurance Company and certain of its
subsidiaries, including John Hancock Advisers, Inc., a registered
investment adviser, which reported sole voting and dispositive power as to
390,000 shares of the Common Stock held by two mutual funds for which it
acts as investment adviser.
(3) As reported in Amendment No. Five to a Schedule 13D dated July 17, 1996 by
J. J. Cramer & Co. ("JJCC"), Cramer Partners, L.P. ("CPLP"), James J.
Cramer, Karen L. Cramer and Cramer Capital Corporation ("CCC"). JJCC, CPLP
and CCC reported sole voting and dispositive power as to 387,100 shares and
James and Karen Cramer reported shared voting and dispositive power as to
such shares. Mr. Cramer is President of JJCC and CCC. CCC is the general
partner of CPLP.
(4) The address of each Named Officer is the same as that of WesterFed
Financial.
(5) Includes 43,514 shares held directly, 905 shares held in a custodial
account for a minor child, 3,759 shares allocated to the account of Mr.
Grimes under the ESOP, 23,514 shares, subject to restriction, awarded
pursuant to the RRP over which Mr. Grimes has voting and no dispositive
power and 56,444 shares subject to currently exercisable options granted
pursuant to the 1993 Stock Option and Incentive Plan (the "Stock Option
Plan"). Excludes options to purchase 70,000 shares which are not
exercisable within 60 days of _______, 1997.
(6) Includes 28,982 shares held directly, 1,414 shares held by Mr. Bardwell's
spouse, 3,601 shares allocated to the account of Mr. Bardwell under the
ESOP, 2,316 shares held in a custodial account for a minor child, 11,314
shares, subject to
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restriction, awarded pursuant to the RRP over which Mr. Bardwell has voting
and no dispositive power and 30,000 shares subject to currently exercisable
options granted pursuant to the Stock Option Plan. Excludes options to
purchase 14,366 shares which are not exercisable within 60 days of
________, 1997.
(7) Includes 16,062 shares held directly, 2,900 shares held in custodial
accounts or by minor children, 5,000 shares held by a corporation of which
Mr. Salisbury is a director and executive officer, 3,272 shares allocated
to the account of Mr. Salisbury under the ESOP, 9,096 shares, subject to
restriction, awarded pursuant to the RRP over which Mr. Salisbury has
voting and no dispositive power and 30,000 shares subject to currently
exercisable options granted pursuant to the Stock Option Plan. Excludes
options to purchase 7,268 shares which are not exercisable within 60 days
of _________, 1997.
(8) Amount includes shares held directly, as well as shares held jointly with
family members, shares held in retirement accounts, shares allocated to the
ESOP accounts of the group members, held in a fiduciary capacity or by
certain family members, with respect to which shares the group members may
be deemed to have sole or shared voting and/or dispositive power. Amount
also includes an aggregate of 85,894 shares, subject to restriction,
awarded pursuant to the RRP over which the holders have voting but no
dispositive power and an aggregate of 298,341 shares subject to currently
exercisable options granted under the Stock Option Plan. Amount excludes
91,634 shares subject to options which are not exercisable within 60 days
of __________, 1997.
</FN>
</TABLE>
BUSINESS OF SECURITY
General
Security, whose principal office is maintained at 219 North 26th
Street, Billings, Montana, is a Montana corporation. On November 8, 1993,
Security became the holding company of Security, formerly Security Federal
Savings Bank through a holding company reorganization whereby Security Bank
reorganized into a wholly owned subsidiary of Security.
Security Bank, a federally chartered stock savings bank formed under
the laws of the United States, is headquartered in Billings, Montana, and
operates 16 full service offices in Montana. The main office and two branches of
Security Bank are located in Billings and thirteen branch offices are located in
Glasgow, Havre, Kalispell, Laurel, Malta, Missoula (2), Plentywood, Bozeman,
Sidney, Butte, Lewistown and Anaconda, Montana.
On May 12, 1994, Security Bank purchased the assets and assumed the
liabilities of the Butte branch of Montana Bank and the Anaconda and Lewistown
branches of Bank of Montana. The acquisition of these branches gave Security
Bank the opportunity to expand into three new markets in Montana. On January 16,
1996, Security Bank opened a new branch office located in Bozeman, Montana,
bringing the number of full-service locations to 16.
Security Bank was incorporated as a Montana chartered building and loan
association in 1919. In 1932, Security Bank became a member in the FHLB system
and in 1937, obtained deposit insurance from the Federal Savings and Loan
Insurance Corporation (the "FSLIC"). Security Bank converted into a federally
chartered mutual savings and loan association in 1966. Effective November 26,
1986, Security Bank converted to a federally chartered stock savings bank.
Security Bank's principal business historically has been attracting
deposits from the general public through its offices and using those deposits,
together with other available funds, to make mortgage loans secured by
residential and other real estate and to make consumer and other loans. In
recent years, as a result of various factors, Security Bank has used a
substantial portion of its available funds to purchase mortgage-backed
securities and expand commercial and agriculture lending.
Security Bank's largest market is the Billings, Montana metropolitan
area. Billings and other areas in which Security Bank has offices have
experienced considerable economic growth during fiscal years 1992 through 1996.
See "Market Area and Conditions." Like most thrift institutions, Security Bank's
earnings are highly sensitive to changes in market interest rates. See
"Asset/Liability Management."
Security Bank's deposit accounts are insured by the SAIF and BIF of the
FDIC. Security Bank is a member of the FHLB of Seattle and is subject to
comprehensive supervision, regulation and examination by the OTS. It is also
subject to regulations of, among others, the FDIC regarding insurance of
accounts, activities of
120
<PAGE>
subsidiaries and certain other matters, the Federal Housing Finance Board
regarding membership in the FHLB of Seattle, and the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board") governing reserves required
to be maintained against deposits and certain other matters. See "Regulation."
Security Bank has a subsidiary service corporation, S.F.S. Industries,
Inc. ("SFS"), which was formed in 1984. SFS engages in real estate rental and
securities brokerage activities. See "Subsidiary."
Security Bank's revenues are derived principally from interest received
on real estate and other loans and mortgage-backed securities and, to a lesser
extent, from loan origination and other fees and from earnings on investment
securities. The operations of savings institutions in general are materially
affected by general economic conditions, the monetary and fiscal policies of the
federal government and the regulatory policies of governmental authorities.
Deposit flows and costs of funds are influenced by interest rates on competing
investments and general market rates of interest. Lending activities are
affected by the demand for financing of real estate and other types of loans,
which in turn is affected by the interest rates at which such financing may be
offered and other factors affecting loan demand and the availability of funds.
The results of operations of savings banks depend to a large extent on the level
of their "net interest income" (the difference between interest earned on loans,
mortgage-backed securities and investments and the interest paid on deposits and
borrowings). See "Yields Earned and Rates Paid." Even though the relative dollar
amounts of interest income and expense greatly exceed the amount of non-interest
income and expense, Security Bank's earnings are also significantly affected by
non-interest income and expense.
Asset/Liability Management
One of the primary objectives of Security Bank's management in recent
years has been to restructure Security Bank's balance sheet to reduce its
vulnerability to changes in interest rates. Savings banks generally suffer from
a mismatch in the repricing and pricing mechanisms of their assets and
liabilities, with mortgage loan assets tending to be of a much longer term than
deposits, the primary liabilities of savings banks. In periods of rising
interest rates, this mismatch renders savings banks vulnerable to increases in
costs of funds that outstrip increases in returns on loans resulting in a
decrease in interest rate spread.
Various strategies may be used to shorten the effective life of
mortgage loans and other assets, and to lengthen the effective life of
liabilities. Security Bank has actively promoted the origination of
single-family (consisting of one to four separate dwelling units) residential
loans which provide for periodic interest rate adjustments to coincide with
changes in indices of market rates ("ARMS") and other loans with adjustable rate
features or shorter terms.
Security Bank also decided to increase its investment in adjustable
rate mortgage-backed securities to increase its yield on interest-earning
assets, to meet then current and prospective qualified thrift lender tests and
to better match the repricing of its interest-earning assets as compared to its
interest-bearing liabilities. With yields on adjustable rate mortgage-backed
securities at very low levels, Security Bank decided, in the years ended June
30, 1993 and 1994, to invest in fixed-rate mortgage-backed securities with short
to intermediate term weighted average lives. In the years ended June 30, 1994
through 1996, the economy in most of Security Bank's market areas was strong and
loan demand high. Management, therefore, committed the resources to enlarge its
lending department and, as a result of this and the addition of the five new
branches, net loans receivable increased to $184.9 million at June 30, 1996. See
"Security - Management's Discussion and Analysis of Financial Condition and
Results of Operations - Changes in Financial Condition, June 30, 1995 to June
30, 1996." Security Bank's current originations of 30-year fixed-rate
residential mortgage loans are generally originated with the intent of their
resale in the secondary market, however, loans with 15-year maturities may be
originated for Security Bank's portfolio.
Security Bank also engages in commercial and multifamily real estate
lending and consumer and other lending. Commercial and multi-family real estate
lending is generally shorter term and, in recent years, more rate sensitive than
single-family residential lending. Consumer lending is generally shorter term
and, although usually fixed-rate, generally bears higher interest rates.
121
<PAGE>
The ability of Security Bank to originate loans for its portfolio with
interest rate sensitivities or repricing mechanisms more nearly matching those
of its liabilities may be limited by economic factors, demand and the general
level of interest rates. Increases in such rates could significantly reduce the
number of loans, including ARMs, which could be originated by Security Bank
during high interest rate periods. Thus, because a portion of Security Bank's
loan and mortgage-backed securities portfolios presently consist of loans with
interest rates which do not have adjustment features or fluctuate with market
interest rates, Security Bank will remain vulnerable to future increases in such
rates which, if significant and prolonged, could have a material adverse effect.
Moreover, interest rate decreases generally can affect Security Bank's ability
to originate ARMs.
The effect on net interest income (expense) of changes in interest
rates and in the amounts of interest-earning assets and interest-bearing
liabilities is shown in the following table. For each category of
interest-earning asset and interest-bearing liability, information is provided
on changes attributable to (1) changes in volume (changes in volume multiplied
by previous rate), (2) changes in rates (changes in rate multiplied by previous
volume) and (3) change in rate/volume (change in rate multiplied by the change
in volume).
<TABLE>
<CAPTION>
Year Ended June 30, 1996 vs. 1995
------------------------------------------
Increase (Decrease) Due to
Rate Volume Rate/Volume Total
---- ------ ----------- -----
(In thousands)
<S> <C> <C> <C> <C>
Income from interest-earning
assets:
Loans............................. $ 331 $ 2,283 $ 66 $ 2,680
Mortgage-backed securities........ 205 (1,569) (27) (1,391)
Investment securities............. (40) (330) 5 (365)
Other interest-earning assets..... 39 99 (5) 133
------- ------- ---- -------
Total interest income........... 535 483 39 $ 1,057
------- ------- ---- -------
Expense of interest-bearing
liabilities:
Deposits.......................... 1,551 429 (22) 1,958
FHLB borrowings and advances...... 143 (350) (27) (234)
Securities sold under repurchase
agreements...................... 19 214 3 236
------- ------- ---- -------
Total interest expense......... 1,713 293 (46) 1,960
------- ------- ---- -------
Net interest income increase
(decrease)................... $(1,178) $ 190 $ 85 $ (903)
======= ======= ==== =======
</TABLE>
122
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30, 1995 vs. 1994
------------------------------------------
Increase (Decrease) Due to
Rate Volume Rate/Volume Total
---- ------ ----------- -----
<S> <C> <C> <C> <C>
(In thousands)
Income from interest-earning
assets:
Loans............................. $ 353 $ 3,641 $ 177 $ 4,171
Mortgage-backed securities........ 650 1,093 66 1,809
Investment securities............. 17 542 6 565
Other interest-earning assets..... (95) 52 (9) (52)
------ ------- ------ -------
Total interest income........... $ 925 $ 5,328 $ 240 $ 6,493
------ ------- ------ -------
Expense of interest-bearing
liabilities:
Deposits.......................... 319 2,306 96 2,721
FHLB borrowings and advances...... 227 300 80 607
Securities sold under repurchase
agreements...................... 2 248 5 255
------ ------- ------ -------
Total interest expense......... 548 2,854 181 3,583
------ ------- ------ -------
Net interest income increase
(decrease)................... $ 377 $ 2,474 $ 59 $ 2,910
====== ======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30, 1994 vs. 1993
------------------------------------------
Increase (Decrease) Due to
Rate Volume Rate/Volume Total
---- ------ ----------- -----
<S> <C> <C> <C> <C>
(In thousands)
Income from interest-earning
assets:
Loans............................. $ (458) $ 1,666 $ (124) $ 1,084
Mortgage-backed securities........ (914) 239 (23) (698)
Investment securities............. (112) 70 (5) (47)
Other interest-earning assets..... (104) (77) (5) (186)
------ ------- ------ -------
Total interest income........... $(1,588) $ 1,898 $ (157) $ 153
------- ------- ------ -------
Expense of interest-bearing
liabilities:
Deposits.......................... (1,512) 496 (81) (1,097)
FHLB borrowings and advances...... 43 415 52 510
Securities sold under repurchase
agreements...................... -- 23 -- 23
------ ------- ------ -------
Total interest expense......... (1,469) 934 (29) (564)
------ ------- ------ -------
Net interest income increase
(decrease)................... $ (119) $ 964 $ (128) $ 717
====== ======= ====== =======
</TABLE>
123
<PAGE>
Yields Earned and Rates Paid
Security Bank's results of operations depend to a large extent on the
level of its "net interest income." Net interest income depends upon the
difference (referred to as the "interest rate spread") between the yield on
Security Bank's loan, mortgage-backed securities and investment portfolios and
interest-earning cash balances ("interest-earning assets") and the rates paid on
its deposits and borrowings ("interest-bearing liabilities"). Net interest
income is further affected by the relative amounts of Security Bank's
interest-earning assets and its interest-bearing liabilities. When
interest-earning assets approximate or exceed interest-bearing liabilities, any
positive interest rate spread will generate net interest income. When the amount
of interest-earning assets is less than the amount of interest-bearing
liabilities, net interest expense may result even when the spread is positive.
The greater the excess of interest-bearing liabilities over interest-earning
assets, and the higher the weighted average rate borne by the interest-bearing
liabilities, the greater the rate earned on interest-earning assets must be to
attain the break-even point between interest income and interest expense.
Security Bank's ratio of average interest-earning assets to average
interest-bearing liabilities was 1.08 for the year ended June 30, 1994, 1.04 for
the year ended June 30, 1995 and 1.02 for the year ended June 30, 1996.
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<PAGE>
Average Balances and Average Rates Earned and Paid. The following table
sets forth, for the periods indicated, information with regard to (i) average
balances of assets and liabilities, (ii) the total dollar amounts of interest
income on interest-earning assets and interest expense on interest-bearing
liabilities, (iii) resulting yields or costs, (iv) net interest income, and (v)
net interest spread. Nonaccrual loans have been included in the tables as loans
carrying a zero yield. Significant loan origination fees and related costs are
deferred and recognized as income using the interest method over the life of the
loan.
<TABLE>
<CAPTION>
Year Ended June, 30,
------------------------------------------------------------------------------------------
1996 1995 1994
----------------------------- ----------------------------- ------------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate(1) Balance Paid Rate(1) Balance Paid Rate(1)
------- ---- ------- ------- ---- ------- ------- ---- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest earning assets:
Investment securities..................... $ 24,579 $ 1,590 6.47% $ 29,592 $ 1,956 6.61% $ 21,280 $ 1,391 6.53%
Mortgage-backed securities................ 144,703 9,220 6.37 169,744 10,609 6.25 151,149 8,801 5.82
Loans(2).................................. 159,983 14,115 8.82 132,350 11,435 8.64 88,179 7,264 8.24
Other earning assets...................... 6,258 417 6.67 5,317 284 5.34 6,469 336 6.81
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-earning assets........ 335,523 25,342 7.55 337,003 24,284 7.19 267,077 17,792 6.70
Allowance for loan loss................... (1,179) (1,148) (854)
Premises and equipment.................... 8,982 7,728 6,210
Other Assets.............................. 14,454 13,017 7,567
-------- -------- --------
Total assets......................... $357,780 $356,600 $280,000
======== ======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY:
Interest bearing liabilities:
Interest bearing deposits................. $269,298 $13,176 4.89% $270,657 $11,219 3.88% $209,352 $ 8,498 3.74%
Repurchase agreements..................... 9,100 515 5.66 5,940 278 4.68 418 23 --
FHLB Advances............................. 21,821 1,221 5.59 26,876 1,454 5.41 19,878 848 4.27
-------- ------- ---- -------- ------ ---- -------- ------- ----
Total interest-bearing liabilities... 300,219 14,912 4.97 303,473 12,951 4.12 229,648 9,369 3.79
Demand Deposits........................... 18,763 18,493 17,836
Other liabilities......................... 7,866 5,280 4,685
-------- -------- --------
Total liabilities.................... 326,848 327,246 252,169
Shareholders' equity...................... 30,932 29,354 27,831
-------- -------- --------
Total liabilities and Stockholders'
equity........................... $357,780 $356,600 $280,000 $ 8,423
======== ======== ======== =======
Net interest income....................... $10,430 $11,333
======= =======
Net interest spread....................... 2.58% 3.07% 2.91%
==== ==== ====
Net yield on average earning assets....... 3.11% 3.37% 3.19%
==== ==== ====
<FN>
- ----------
(1) Yield rate calculations have been based on more detailed information than
presented and therefore may not recompute exactly due to rounding.
(2) Includes balances for loans held for sale.
</FN>
</TABLE>
125
<PAGE>
Ratios. The table below sets forth certain performance ratios of
Security bank for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Return on assets (net income
divided by average total assets)......... 0.70% 0.77% 0.99% 0.97% 0.74%
Return on equity (net income
divided by average equity)............... 8.26% 9.33% 9.92% 9.51% 7.60%
Equity-to-assets ratio (average
equity divided by average total assets... 8.65% 8.25% 9.94% 10.17% 9.75%
</TABLE>
Market Area and Conditions
Security Bank's primary market area includes the Billings, Montana
metropolitan area, as well as the areas surrounding its offices in Glasgow,
Havre, Kalispell, Laurel, Malta, Missoula, Plentywood, Sidney, Butte, Lewistown,
Anaconda and Bozeman, Montana. Billings is the largest city in Montana. Security
Bank believes that at June 30, 1996 the population of the Billings metropolitan
area was approximately 125,000. The State of Montana generally and Security
Bank's market areas in particular experienced positive economic growth during
fiscal years 1994, 1995 and 1996. Historically, the economy of Montana has, to a
significant extent, been dependent upon agriculture, tourism, mining and
energy-related activities and is affected by various factors, including
agriculture prices and prices of oil and gas and other minerals. There can be no
assurance that the economic conditions in Security Bank's market areas will not
have an adverse impact on its future revenue and earnings prospects. Security
Bank does not currently have any loans made to oil and gas or mineral
exploration or production enterprises.
Lending Activities
General. Historically, Security Bank's primary source of income has
been through its lending activities. Security Bank's interest income from loans
receivable in fiscal years 1994, 1995 and 1996 was approximately 40.6%, 46.8%
and 55.7%, respectively of total interest income.
Security Bank's primary lending activity is the origination of loans
secured by first liens on residential real estate. The mortgage loans made by
Security Bank enable borrowers to purchase, refinance, construct upon or improve
the property securing the loans. Substantially all of the loans underlying
Security Bank's mortgage-backed securities portfolio were secured by first liens
on existing single-family (one to four-unit) residential properties. Security
Bank anticipates that its principal lending business will continue to be the
origination of residential mortgage loans and indirectly through investment in
mortgage-backed securities. However, more emphasis will be placed on origination
of commercial, consumer and agricultural loans than has previously been the
case.
FIRREA effected substantial changes in applicable limitations on loans
to one borrower by providing that the related statutory requirements applicable
to national banks now apply to savings banks, such as Security Bank. In general,
the FIRREA requirements provide that the total loans and extensions of credit by
Security Bank to a customer outstanding at one time may not exceed 15% of
Security Bank's unimpaired capital and unimpaired surplus, plus an additional
10% for loans and extensions of credit fully secured by readily marketable
collateral. See "Regulation - Loans to One Borrower" below. The maximum amount
of loans and extensions of credit which Security Bank could have made to any one
borrower at June 30, 1996 was approximately $4.1 million, plus an additional
$2.7 million of loans and other extensions of credit fully secured by readily
marketable collateral.
As of June 30, 1996, the largest amount outstanding to any single
borrower or related group of borrowers was approximately $3.4 million. The
second largest amount outstanding to any single borrower or related group at
June 30, 1996 was approximately $3.0 million.
At June 30, 1996, Security Bank had an aggregate of approximately $42.1
million of loans in excess of $500,000 outstanding to 37 borrowers. Excluding
the largest loan, the average loan amount was $1,074,000 per borrower.
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<PAGE>
Loan Portfolio Composition. The following table shows the composition
of Security Bank's portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------ ------------------ ------------------ ------------------ ------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-unit.............. $ 68,242 27% $ 67,693 23% $ 59,403 20% $ 47,496 20% $ 34,048 16%
Over four units................ 11,296 4 12,249 4 13,986 5 14,416 6 15,296 7
Construction................... 2,553 1 2,967 1 682 -- 313 -- -- --
Commercial..................... 22,193 7 12,525 4 9,550 3 12,002 5 11,936 6
Agricultural................... 6,020 2 4,390 1 3,519 1 -- -- -- --
Mortgage-backed securities..... 131,256 41 145,616 50 180,395 60 153,339 67 148,418 69
-------- -------- -------- -------- --------
Total real estate loans and
mortgage-backed securities.. 241,560 -- 245,440 -- 267,535 -- 227,566 -- 209,698 --
Agricultural................... 11,552 3 1,778 1 1,188 -- -- -- -- --
Consumer loans................. 42,999 9 29,544 10 19,656 7 5,377 2 3,816 2
Commercial loans............... 24,250 6 17,544 6 11,372 4 732 -- 348 --
-------- --- -------- --- -------- --- -------- --- -------- ---
Total loans receivable and
mortgage-backed securities.. 320,361 100% 294,306 100% 299,751 100% 233,675 100% 213,862 100%
Less:
Unearned discounts and loan
origination fees.............. 333 322 346 384 212
Loans in process............... -------- 33 767 712 270
Allowance for loan losses...... 1,181 1,156 1,139 568 555
-------- -------- -------- -------- --------
Net loans receivable, loans
available-for-sale and
mortgage-backed securities. $318,847 $292,795 $297,499 $232,011 $212,825
======== ======== ======== ======== ========
</TABLE>
127
<PAGE>
The following table shows certain information regarding the maturity of
loans (including loans underlying mortgage-backed securities) included in
Security Bank's loan and mortgage-backed securities portfolios as of June 30,
1996.
<TABLE>
<CAPTION>
Principal repayments contractually due in
---------------------------------------------------------------------------------
1 Year 1-2 2-3 3-5 5-10 10-15 More than
or Less Years Years Years Years Years 15 Years Total
------- ----- ----- ----- ----- ----- --------- -----
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans and
mortgage-backed securities:
Single-family residential
(adjustable rate)........ $ 116 $ 100 $ 456 $ 984 $ 2,009 $ 4,404 $93,169 $101,238
Single-family residential
(fixed rate)............. 2,071 14,274 1,132 43,787 8,428 21,127 7,441 98,260
Other residential......... 163 -- -- 438 4,643 5,501 551 11,296
Commercial................ 1,232 396 1,461 2,327 6,173 8,449 2,155 22,193
Construction loans........ 1,683 -- 91 171 290 266 52 2,553
Agricultural loans........ 1,114 25 250 54 871 253 3,953 6,020
------- ------- ------- ------- ------- ------- -------- --------
Total real estate loans and
mortgage-backed securities.. 6,379 14,795 3,390 47,761 21,914 40,000 107,321 241,560
Consumer loans.............. 8,689 4,055 6,396 17,913 5,176 575 195 42,999
Commercial loans............ 8,212 2,889 2,722 5,018 2,294 2,753 362 24,250
Agricultural loans.......... 7,982 86 653 2,046 695 90 -- 11,552
------- ------- ------- ------- ------- ------- -------- --------
Total..................... $31,262 $21,825 $13,161 $72,738 $30,079 $43,418 $107,878 $320,361
======= ======= ======= ======= ======= ======= ======== ========
</TABLE>
128
<PAGE>
<TABLE>
<CAPTION>
Total amount of principal repayments
contractually due on or after July 1, 1997
------------------------------------------
(in thousands)
<S> <C>
Fixed rate loans and mortgage-backed securities............................ $150,520
Adjustable or floating rate loans (includes approximately $75.8 million
of mortgage-backed securities)............................................. 138,579
--------
Total................................................................. $289,099
</TABLE>
Single-Family Residential Real Estate Lending. The majority of Security
Bank's loans are secured by first liens on single-family residential structures,
which are structures consisting of up to four separate dwelling units.
Regulations permit federal savings banks to make or purchase ARMs,
subject to certain limitations. Adjustable interest rates can cause payment
increases which some borrowers may find difficult to make. Security Bank
currently qualifies borrowers for ARMs at the rate of interest that would be in
effect if the rate were the maximum permitted under the terms of the note
following the first adjustment of the rate of interest, which could result in
loans being made to borrowers who qualify at the qualifying rate but who would
not qualify for the loan following one or more interest rate adjustments.
Security Bank generally requires private mortgage insurance on all ARMs in which
the amount of the loan at origination is in excess of 80% of the appraised value
or purchase price of the real property securing the loan, whichever is less.
Security Bank's single-family residential loan contracts historically
provided for fixed rates of interest and for repayment of principal over 30
years or less. Security Bank's fixed-rate single-family residential loans have
normally remained outstanding for much shorter periods because the borrowers
have prepaid the loans in full upon sale of the security property or upon
refinancing the original loan. Security Bank believes that the average life of
its loans tends to increase during high interest rate periods due to reduced
levels of single-family residence sales and refinancings.
Security Bank is currently offering fixed-rate loans for 15 or 30 year
terms. Security Bank's policy is to sell substantially all of its current
originations of 30 year conventional fixed-rate single-family loans. Such loans
primarily are sold with servicing released to various investors. Security Bank's
30-year fixed-rate FHA-insured and VA-guaranteed mortgage loans are originated
on a forward commitment basis and are sold in the secondary market with
servicing released, primarily to mortgage bankers. See "Sale and Servicing of
Loans."
Security Bank is permitted to lend up to 100% of the appraised value of
the single-family residential real property securing a loan ("loan-to-value
ratio"). However, it is Security Bank's policy generally not to lend more than
95% of the appraised value in the case of first-lien loans, and Security Bank's
policy varies depending on the type of loan. Under Security Bank's current
lending policies, owner-occupied, one-to-two-family residential loans may be
made up to 95% of the purchase price or appraised value of the property,
whichever is less. Owner-occupied, one- to four-family residential loans are
generally required to have private mortgage insurance when the loan-to-value
ratio is over 80%. Insurance in the amount of 20% of the loan is generally
required with loan-to- value ratios between 80% and 95%. Additional limitations
on maximum loan amounts and loan-to-value ratios apply to loans on properties
that have characteristics that may affect marketability, such as properties with
subdivision restrictions, properties with cisterns, rural properties, second
homes and vacation homes.
Security Bank also makes home equity loans on owner-occupied property
for home improvement, debt consolidation and other purposes. For home
improvement loans, the maximum loan-to-value ratio under Security Bank's general
practice is 85% of the value of the property.
In addition to first lien mortgage loans, Security Bank also provides
interim financing for construction of one-to-four-family residential housing.
Under current policies, such construction loans may be made for an initial six
to nine month period in an amount up to 80% of the appraised value of the
completed property with interest paid
129
<PAGE>
on a monthly basis by the borrower. Under current policies, a construction loan
may be renewed for no more than an additional nine months. Construction loans
are reviewed prior to the approval of an extension request to insure that
Security Bank is adequately collateralized and the borrower has a reasonable
plan to repay the loan within the extension period. Generally, construction
loans are made only to experienced home builders or individual borrowers who
have employed third-party general contractors to construct their residence and
have qualified for permanent financing with Security Bank.
Although Security Bank may originate or purchase whole loans or loan
participations secured by real estate located anywhere in the United States, it
generally limits its lending to the State of Montana.
Conventional residential mortgage loans originated by Security Bank
contain a "due-on-sale" clause providing that the unpaid balance may be declared
due and payable upon the sale of the mortgaged property. It is the policy of
Security Bank to enforce due-on-sale clauses vigorously whenever such
enforcement is consistent with applicable law. In connection with FHA-insured
loans, however, assumptions will not be permitted if the contract of sale is
executed less than 12 months (or as stated in the FHA trust indenture) after
either the date that the mortgage was executed or the date of a prior transfer
of the mortgaged property, unless the buyer satisfies FHA's credit requirements.
Security Bank's conventional loans are assumable only with its prior consent.
Security Bank's current policy is to permit assumption of conventional loans
only where the interest rate is increased to the market rate, the borrower
qualifies for the loan and pays an assumption fee.
Multi-Family Residential Lending. Security Bank's residential lending
activities also include loans secured by liens on multi-family residential
structures, which are structures consisting of over four separate dwelling
units.
Multi-family residential structures are generally income producing
properties. Security Bank's multi-family residential lending activity includes
loans for the purchase or refinance of multi-family residential structures and
loans for the construction of such structures. Security Bank's current policy is
that loans on multi-family residential structures may be made up to 75% of
appraised value or purchase price, whichever is less. Underwriting guidelines
require that the stabilized net operating income of the project be equal to at
least 120% of the annual debt service for the loan. Loans on multi-family
residential structures in recent years have been primarily with adjustable
interest rates for terms up to 30 years or fixed rate financing on loans fully
amortized over 15 years.
Commercial Real Estate Lending. Security Bank also makes loans for the
purchase, refinance or construction of commercial real estate structures,
including office buildings, small shopping centers, warehouses and motels.
Commercial real estate loans originated in recent years are usually made on an
adjustable rate basis, and under current lending policies may be made up to 75%
of appraised value. Exceptions to this policy are generally restricted to the
sale of Security Bank's real estate owned or loans issued under the SBA's 504(B)
program. Under this program, the borrower's down payment may be as little as
10%. In this program, Security Bank funds 50% of the acquisition price with the
SBA guaranteed loan financing 40% of the acquisition price in a subordinated
position. While the borrower's equity contribution is limited to 10%, Security
Bank's loan to value ratio does not exceed 50%. In general, total investments in
nonresidential real estate loans may not exceed 400% of a federally chartered
savings institution's capital.
Agricultural Real Estate Lending. The majority of Security Bank's
agricultural real estate loans are secured by first liens on farm and ranch land
located within the State of Montana. Security Bank's current policy is that
loans on agricultural land may be made up to 65% of the appraised value or
purchase price, whichever is less. Underwriting guidelines require that the cash
flow generated by the borrower must be 110% to 125% of the annual debt service,
depending on the leverage position of the borrower. Loans secured by
agricultural land are adjustable rate loans tied to the two, three, or five year
treasury constant maturity index plus a margin established by management. The
loans are amortized up to twenty years.
Consumer Lending. Security Bank is permitted to make both secured and
unsecured consumer loans for any personal or household purpose and loans
reasonably incident to personal or household purposes. In general,
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<PAGE>
loans made under these investment powers, together with investments in corporate
debt securities and commercial paper, may not exceed 30% of a federally
chartered savings institution's total assets.
Security Bank offers a variety of consumer loans, including personal,
savings account, automobile, home improvement and home equity loans. Consumer
loans are generally made on a fixed-rate basis for a maximum term of five years.
Although consumer loans are made on a fixed-rate basis, they usually are for a
shorter term (generally five years or less) and provide for a higher interest
rate than real estate loans. Consequently, Security Bank retains consumer loans
in its portfolio to better match the maturities and repricing mechanisms of its
assets and liabilities.
Commercial and Agricultural Lending. Security Bank 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. Security Bank's total investment in
such loans is limited such that at any one time it generally may not exceed 10%
of assets, as defined in OTS regulations.
Loan Underwriting. In the loan approval process, Security Bank
personnel assess the borrower's ability to repay the loan and the adequacy of
the proposed security in view of the amount and type of the loan and the cash
flow. Cash flow is the difference between the borrower's monthly gross income
less payments for taxes and all fixed monthly obligations including the loan
repayment. Security Bank's loan origination personnel are full time employees of
Security Bank and are paid on a salary or commission basis. In the case of
commissioned loan officers, processing and loan underwriting are handled by
separate personnel. Potential borrowers must submit a written and signed
financial statement or application together with any appropriate documentation
required by Security Bank for the respective loan types. As part of the loan
approval process for the majority of real estate loans, outside appraisers
inspect and appraise the property that would secure the loan. Appraisals must
conform with Security Bank's appraisal policies. Security Bank personnel obtain
information concerning the income, financial condition, employment and credit
history of the applicant. Loans must be approved by various levels of management
depending upon the amount and type of the loan. Under current policies, Security
Bank's Internal Loan Committee, which is comprised of Security Bank's President
and Loan Department Managers, must approve all loans over $250,000. All loan
commitments over $500,000 must be approved by Security Bank's Director Loan
Committee, which consists of three directors of Security Bank. Title insurance
is generally required on all real estate loans and, except for equity loans on
owner-occupied residential property, such insurance must include extended
coverage. Fire and casualty insurance is also required on most real estate
loans, with coverage up to the amount of the loan.
Sale and Servicing of Loans. In addition to originating and purchasing
loans for its loan portfolio, Security Bank participates in secondary mortgage
market activities by selling whole loans to FHLMC, FNMA and various
institutional purchasers. Currently, Security Bank sells substantially all of
its new originations of 30 year fixed-rate loans to institutional purchasers
with servicing released. The sale of loans may generate income or loss at the
time of sale and provide funds for additional lending and other purposes.
Security Bank sold loans in aggregate amounts of approximately $40.7 million,
$19.8 million, and $42.7 million during fiscal years 1996, 1995, and 1994,
respectively.
At June 30, 1996, Security Bank had no mandatory commitments to sell
loans.
In some cases, loans are sold and Security Bank 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. Security
Bank was servicing mortgage loans for others in the amount of $73.2 million at
June 30, 1996.
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.
Security Bank sells mortgage loans and loan participations for cash
proceeds equal to amounts which yield rates based upon the current market rate.
Gain or loss is recognized at the time of sale based upon the net present
131
<PAGE>
value of expected amounts to be received or paid resulting from the difference
between the contractual interest rates and the yield rate agreed to be paid to
the buyer. Excluded from that difference in determining the gain or loss is an
amount equal to the present value of the estimated servicing cost plus a
reasonable profit.
Interest Rates, Points and Fees. Interest rates charged by Security
Bank on loans are affected principally by the demand for such loans and the
supply of money available for lending purposes. These factors are in turn
affected by general economic conditions, monetary policies of the federal
government, including the Federal Reserve Board, legislative tax policies, and
governmental budgetary matters.
In addition to the interest earned on loans, Security Bank charges fees
for originating loans and making loan commitments, loan prepayments, loan
modifications, late payments, changes of property ownership and other
miscellaneous services. The income realized from such fees varies with the
volume of loans made or prepaid, and the rates of fees vary from time to time
depending on the supply of funds and other competitive conditions in the
mortgage markets.
Asset Classification. Federal regulations require savings banks to
review their assets and to classify them as "substandard," "doubtful" or "loss,"
if warranted. If an institution's examiner concludes that the existing aggregate
valuation allowances established by the institution for assets classified as
substandard or doubtful are inadequate, the examiner will determine the need
for, and extent of, any increase necessary in the institution's general
allowances for loan losses, subject to review by the institution's OTS District
Director or his designee. An institution may either establish a specific
valuation allowance for assets classified as a loss equal to 100% of the amount
classified or charge off such amount, in either case adversely affecting
regulatory capital. The regulation also has an asset classification category
entitled "assets deserving special mention." This category includes those assets
that do not justify a classification of substandard, but do possess credit
deficiencies or potential weaknesses that, if not corrected, could weaken such
assets and increase risk in the future. The regulation requires institutions to
classify their assets themselves and to establish prudent general valuation
allowances in accordance with generally accepted accounting principles.
Moreover, an institution is required to set aside adequate valuation allowances
to the extent an affiliate possesses assets that pose a risk to the institution.
In addition, institutions are required to establish liabilities for off-balance
sheet items, such as letters of credit, when a loss becomes probable and
estimable. Finally, the regulation requires an institution's examiner to
consider the system of internal controls employed by the institution in
classifying its assets and to examine both the classified assets and the
allowances for loan losses established by the institution pursuant to the
self-classification procedure. An institution's failure to classify its assets
in a reasonable manner and to establish appropriate valuation allowances will be
considered by the examiner and the District Director in determining the amount
of valuation allowances to be established by the institution.
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<PAGE>
The following table sets forth a breakdown of the allowance for loan
losses.
<TABLE>
<CAPTION>
Percent of loans
Balance at June 30, 1996 in each category
Applicable to Amount to total loans
------ ----------------
<S> <C> <C>
Real estate............. $ 388,710 58%
Commercial.............. 203,681 13
Agricultural............ 131,788 6
Consumer................ 456,687 23
---------- ---
$1,180,866 100%
========== ===
</TABLE>
The following table provides an analysis of loss experience as of the
dates indicated.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance at beginning of year................ $1,156,393 $1,138,942 $ 568,195 $555,468 $445,093
Chargeoffs:
Real estate............................... -- -- -- -- --
Commercial................................ 10,402 2,983 -- -- --
Agriculture............................... -- -- -- -- --
Consumer.................................. 94,604 21,591 10,082 807 11,008
---------- ---------- ---------- -------- --------
105,006 24,574 10,082 807 11,008
Recoveries:
Real estate............................... -- -- -- -- --
Commercial................................ 2,411 2,983 -- -- --
Agriculture............................... -- -- -- -- --
Consumer.................................. 7,069 9,042 829 2,905 2,993
---------- ---------- ---------- -------- --------
9,479 12,025 829 2,905 2,993
Net charge-offs............................. 95,527 12,549 9,253 (2,098) 8,015
Provision charged to expense................ 120,000 30,000 80,000 10,629 118,390
Acquired reserves........................... -- -- 500,000 -- --
---------- ---------- ---------- -------- --------
Balance at end of year...................... $1,180,866 $1,156,393 $1,138,942 $568,195 $555,468
========== ========== ========== ======== ========
Ratio of net charge-offs during the year
to average loans outstanding during
the year.................................. 0.0571% 0.0095% 0.0095% -0.0029% 0.0122%
</TABLE>
133
<PAGE>
The following table sets forth non-accrual loans, accruing loans past
due 90 days or more, restructured loans (loans which are "troubled debt
restructurings" under Statement of Financial Accounting Standards No. 15), and
loans made to facilitate the sale of property acquired in settlement or
foreclosure of delinquent loans as of the dates indicated.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands except percents)
<S> <C> <C> <C> <C> <C>
Total non-performing assets................. $668 $425 $843 $1,948 $3,263
Reserves as a percentage of total loans... 0.62% 0.78% 0.95% 0.71% 0.85%
Reserves as a percentage of non-
performing assets....................... 177% 272% 135% 29% 17%
Non-accrual loans......................... $378 $176 $ 57 $ 17 $ 395
Accruing loans contractually
past due 90 days or more................ 79 -- -- -- --
Restructured loans........................ 268 303 335 522 2,869
Loans to facilitate....................... -- 355 365 374 4,195
---- ---- ---- ------ ------
Total................................... $714 $834 $757 $ 913 $7,459
==== ==== ==== ====== ======
Percent of total assets.................. 0.19% 0.24% 0.22% 0.34% 2.97%
</TABLE>
Restructured loans and loans to facilitate at June 30, 1996 included
approximately $11,000 of commercial real estate loans. Also included in
restructured loans and loans to facilitate at June 30, 1996 was an approximate
$257,000 secured loan by multi-family structures. At June 30, 1996 there were
eleven loans on non-accrual status totaling approximately $378,000.
It is the policy of Security Bank to discontinue accruing interest on
loans when payments have not been received after a predetermined number of days
or when the loan account is in the process of being restructured or
renegotiated. The principal is placed in non-accrual status but no part of the
loan is charged to the reserve at this time. Any accrued interest receivable is
reversed against interest income. The amount of foregone interest income is
tracked and is recognized as income only after payment is received.
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<PAGE>
The following table sets forth, as of the dates indicated, information
regarding delinquent loans.
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Loans delinquent for:
60-89 days............. $530 $207 $265 $ 35 $ 82
90 or more days........ 260 176 57 17 395
---- ---- ---- ----- ----
Total..................... $790 $383 $322 $ 52 $477
==== ==== ==== ===== ====
</TABLE>
The following table sets forth, as of the dates indicated, the amounts
of foreclosed real estate held by Security Bank.
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Foreclosed real estate.... $ 7 $ 1 $ -- $ 61 $2,122
</TABLE>
Deposits and Other Sources of Funds
General. Savings and other types of deposit accounts have traditionally
been a principal source of Security Bank's funds for use in lending and for
other general business purposes. In addition to deposits, Security Bank derives
funds from loan repayments, whole loan and loan participation sales, FHLB
advances and other borrowings. Scheduled loan payments traditionally have been a
relatively stable source of funds, while loan prepayments and deposit flows tend
to vary widely. Borrowings may be used on a short-term basis to compensate for
seasonal reductions in deposits or inflows at less than projected levels and may
be used on a longer term basis to support lending activities. Deposit flows are
affected by the rates of interest offered for deposits in savings institutions
relative to competing investments. The availability of funds from loan sales is
influenced by general market interest rates.
Deposits. Security Bank offers a number of different types of deposit
accounts including savings accounts and a variety of fixed-term certificate
accounts with different maturities and rates. Security Bank also offers a
non-interest bearing, free checking account and NOW and money market deposit
accounts that have minimum balance requirements or service charges if these
requirements are not met.
Deposits in Security Bank decreased $1.7 million from June 30, 1995 to
June 30, 1996, decreased $2.8 million from June 30, 1994 to June 30, 1995, and
increased $87.5 million from June 30, 1993 to June 30, 1994 (including $88.8
million of deposits assumed in the May 1994 branch acquisition).
Security Bank does not currently solicit brokered deposits.
Traditionally, a relatively small amount of Security Bank's depositors
have resided outside of Montana. Deposits are not solicited outside the state.
At June 30, 1996, accounts held by out-of-state depositors totaled approximately
$12.4 million, or approximately 4.3% of Security Bank's total deposits.
135
<PAGE>
The following table sets forth the dollar amount of various types of
deposit accounts at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
No minimum term:
Savings accounts........................... $ 46,016 $ 48,760 $ 62,297 $ 35,699 $ 32,449
Checking/NOW accounts...................... 52,578 50,733 48,285 23,952 22,054
Money market savings and
checking accounts........................ 18,134 16,806 15,547 5,941 6,640
-------- -------- -------- -------- --------
Total no minimum term..................... 116,728 116,299 126,129 65,592 61,143
-------- -------- -------- -------- --------
Fixed term:
3 month certificates....................... 2,777 11,971 11,487 762 1,226
6 month certificates....................... 21,921 18,725 20,904 13,266 15,483
1 year certificates........................ 60,674 65,197 69,626 74,982 82,260
2 year certificates........................ 27,373 23,198 19,252 13,262 14,099
3 year certificates........................ 20,712 21,086 10,365 8,678 8,243
5 year certificates........................ 4,361 10,633 7,076 5,883 5,357
Negotiated rate
certificates ............................ 9,235 9,502 9,991 10,523 12,480
IRA/KEOGH accounts......................... 25,438 14,322 19,047 19,767 18,510
-------- -------- -------- -------- --------
Total fixed-term (1)...................... 172,491 174,634 167,748 147,123 157,658
-------- -------- -------- -------- --------
Total deposits......................... $289,219 $290,933 $293,877 $212,715 $218,801
======== ======== ======== ======== ========
<FN>
(1) Certificates of deposit in excess of $100,000 or more were
approximately $18,163,000, $20,170,000, $17,445,000, $16,502,000 and
$17,963,000 at June 30, 1996, 1995, 1994, 1993, and 1992, respectively.
</FN>
</TABLE>
The following table presents by various interest rate categories the
amounts of Security Bank's time deposits at June 30, 1996, which mature during
the periods indicated.
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------------------------------------
Stated Rate 1997 1998 1999 Thereafter
----------- ---- ---- ---- ----------
(in thousands)
<S> <C> <C> <C> <C>
Under 3% $ 27 -- -- --
3.00% to 3.99% 233 -- -- --
4.00% to 4.99% 13,879 $ 1,175 $ 118 $ 25
5.00% to 5.99% 82,197 9,647 4,685 1,004
6.00% to 6.99% 18,523 9,393 3,216 2,903
7.00% to 7.99% 8,856 13,615 526 2,240
8.00% and over 61 168 -- --
-------- ------- ------ ------
Total $123,776 $33,998 $8,545 $6,172
======== ======= ====== ======
</TABLE>
136
<PAGE>
The following table presents the amounts of time deposits, by various
interest rate categories at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Under 3% $ 27 -- -- -- --
3.00% to 3.99% 233 $ 24 $ 69,085 $ 17,685 $ 3,440
4.00% to 4.99% 15,197 17,390 56,297 82,075 53,512
5.00% to 5.99% 97,533 66,567 31,712 21,557 38,131
6.00% to 6.99% 34,035 64,883 8,245 17,195 42,453
7.00% to 7.99% 25,237 25,559 1,836 6,495 16,015
8.00% and over 229 211 573 2,116 4,107
-------- -------- -------- -------- --------
Total $172,491 $174,634 $167,748 $147,123 $157,658
======== ======== ======== ======== ========
</TABLE>
Borrowings. The FHLB System functions in a reserve capacity for savings
banks and other member institutions. As a member, Security Bank is required to
own capital stock in the FHLB of Seattle and is authorized to apply for advances
from the FHLB on the security of that stock and certain of its real estate
secured loans and other assets. Such borrowings may be made pursuant to
different credit programs offered from time to time by the FHLB of Seattle. Each
credit program has its own interest rate, which may be fixed-rate or
variable-rate, and range of maturities, and the FHLB of Seattle prescribes the
acceptable uses to which such advances may be put, as well as limitations on the
sizes of the advances and repayment provisions. Security Bank may borrow up to
20% of its total assets and may also borrow from other commercial sources. The
advances are subject to a "blanket pledge agreement" whereby substantially all
assets of Security Bank are pledged to the FHLB.
The following table sets forth information concerning Security Bank's
FHLB advances at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
FHLB advances............... $36,792 $19,542 $14,792 $26,542 $3,500
Weighted average interest
rate on FHLB advances
at end of period.......... 5.45% 5.37% 4.691% 4.191% 4.025%
</TABLE>
At June 30, 1996, a FHLB advance totaling $5.5 million is an amortizing
fixed-rate advance due in monthly installments of $250,000 plus interest,
through April, 1998. This advance was obtained to enable Security Bank to
purchase $15.0 million of mortgage-backed securities at a spread over the cost
of the advance. A short-term, fixed rate advance totaling $20.0 million with an
interest rate of 4.71% is due July 5, 1996. FHLB advances totaling $11.3 million
are variable rate with a maturity date of April 25, 1997, but may be repaid at
any time without penalty. For additional information regarding Security Bank's
borrowings see Note 9 of Notes to Security's Consolidated Financial Statements.
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<PAGE>
Other Investments
Income from investments in securities generally provides the third
largest source of income for Security Bank after interest on mortgage-backed
securities and interest and fees on loans. Security Bank is required, under
applicable regulations, to maintain a minimum amount of liquid assets that may
be invested in specified short-term securities and also is permitted to make
certain other securities investments. Under OTS regulations, Security Bank is
permitted to invest in commercial paper having one of the two highest investment
ratings of two nationally recognized investment rating agencies and certain
types of rated corporate debt securities, provided, among other limitations,
that the average maturity of Security Bank's portfolio of such corporate debt
securities does not exceed six years. In addition, under OTS regulations,
Security Bank may invest an amount equal to not more than one percent of its
total assets in commercial paper and corporate debt securities that do not meet
the rating and marketability requirements, but which it has reasonable grounds
to believe will be repaid. The foregoing limitations do not apply, however, to
any corporate debt security that is also a "mortgage-related security" as
defined in the Secondary Mortgage Market Enhancement Act of 1984, which permits
federal savings banks to invest in such mortgage-related securities without a
percentage of assets limitation but subject to such other limitations as may be
prescribed. To date, regulations have not been proposed that would limit
Security Bank's ability to invest in mortgage-related securities, with the
exception of certain mortgage-related derivative products. Security Bank's total
investment in the commercial paper and corporate debt securities of any one
issuer, together with other loans to such issuer, is subject to Security Bank's
limitation on loans to one borrower. Savings banks may not, directly or
indirectly through a subsidiary, acquire or retain any corporate debt security
that was not, when acquired, rated in one of the four highest rating categories
by at least one nationally recognized statistical rating organization, with the
exception of the one percent of total assets referred to above.
At June 30, 1996, Security Bank's carrying value of investment
securities consisted principally of $2.5 million in a U.S. government securities
portfolio mutual fund, $15.3 million in U.S. government and agency securities,
and $2.3 million in municipal bonds.
Security Bank's assets at June 30, 1996 also included approximately
$2.7 million aggregate cash surrender value of life insurance policies of which
Security Bank is the beneficiary covering certain management personnel. Security
Bank prepaid in full the premiums for such policies in fiscal years 1988, 1993
and 1994 at a cost of approximately $1.7 million.
Investment decisions are made by authorized officers of Security Bank
within policies established and approved by its Board of Directors.
Subsidiary
OTS regulations permit federal savings banks to invest in the capital
stock, obligations, or other specified types of securities of subsidiaries
(referred to as "service corporations") and to make loans to such subsidiaries,
and joint ventures in which such subsidiaries are participants, in an aggregate
amount not exceeding 3% of Security Bank's assets, provided that not less than
one-half of the investment which exceeds 1% of assets is used for specified
community or inner-city development purposes. In addition, federal regulations
permit federal savings banks to make specified types of loans to such
subsidiaries (other than special-purpose finance subsidiaries) in which the
institution owns more than 10% of the stock in an aggregate amount not exceeding
50% of the institution's regulatory capital, if its capital is in compliance
with applicable regulations. When an institution fails to meet that standard,
such loans must be included in amounts invested under the general limit, unless
a waiver is obtained from the OTS.
At June 30, 1996, Security Bank had one subsidiary, S.F.S. Industries,
Inc. ("SFS"). Security Bank's investment in the common stock of SFS totaled
$1,149,760 or approximately 0.3% of unconsolidated assets at such date. At June
30, 1996, Security Bank's equity in SFS totaled $522,716.
SFS was formed in 1984 and conducts a securities brokerage business
under the name Security Financial Services in Security Bank's main office and a
real estate rental business.
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<PAGE>
Employees
At June 30, 1996, Security Bank had approximately 167 full-time
equivalent employees, none of whom was represented by a union or other
collective bargaining group. Security Bank believes its relations with its
employees are satisfactory.
Competition
Security Bank faces strong competition both in the attraction of
deposits and in the making of real estate, commercial and consumer loans. The
most direct competition for deposits has come historically from savings
institutions, credit unions and commercial banks located in its principal market
areas. Security Bank's deposit programs also compete with purchases of money
market mutual funds, government securities and other investment alternatives.
Security Bank competes for deposits by offering a variety of deposit accounts at
interest rates based upon market rates of interest, convenient business hours,
and convenient branch locations.
Security Bank's competition for residential real estate loans comes
principally from mortgage bankers, savings institutions, commercial banks and
other institutional lenders. Competition for commercial real estate loans comes
primarily from commercial banks in Billings and commercial banks and savings
institutions in Missoula, Kalispell, Butte, Lewistown and Anaconda. Competition
for consumer loans comes from commercial banks, credit unions, savings
institutions and consumer finance companies. Security Bank competes for loans
principally through the interest rates and loan fees it charges on its loan
programs. Security Bank's competition for loans varies from time to time
depending upon numerous factors including the general availability of lendable
funds and credit, economic conditions, current interest rate levels, volatility
in the mortgage markets and other factors which are not readily predictable.
SUPERVISION AND REGULATION
Security
General. By virtue of its ownership of Security Bank, Security is a
savings and loan holding company within the meaning of Section 10 of the Home
Owners' Loan Act ("HOLA"). As such, Security is registered with and subject to
examination and supervision by the OTS.
Holding Company Structure. HOLA prohibits a savings and loan holding
company, directly or indirectly, from (1) acquiring control (as defined) of
another insured association (or holding company thereof) without prior OTS
approval; (2) acquiring more than 5% of the voting shares of another insured
association (or holding company thereof) which is not a subsidiary, subject to
certain exceptions; or (3) acquiring through merger, consolidation or purchase
of assets, another savings association (whether or not it is insured by the
Savings Association Insurance Fund ("SAIF") or administered by the FDIC) or
holding company thereof, or acquiring all or substantially all of the assets of
such association (or holding company thereof) without prior OTS approval. When
an acquisition would result in a savings and loan holding company controlling
savings associations located in different states, certain other restrictions
apply. A director or officer of a savings and loan holding company or person
owning or controlling more than 25% of such holding company's voting shares may
not acquire control of any SAIF-insured association which is not a subsidiary of
such holding company, unless the OTS approves the acquisition in advance. If the
OTS approves such an acquisition, any holding company controlled by such
officer, director or person is subject to the activities limitations that apply
to multiple savings and loan holding companies, described below, unless certain
supervisory exceptions apply.
Unless and until Security acquires as a separate subsidiary another
savings association, Security will be a unitary savings and loan holding
company. Generally no restrictions apply to the activities of a unitary savings
and loan holding company whose sole subsidiary complies with the qualified
thrift lender ("QTL") test described under "Security Bank--Qualified Thrift
Lender Test" below.
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<PAGE>
If Security acquires as a separate subsidiary another insured
association, Security would then be a multiple savings and loan holding company,
which is subject to limitations specified in HOLA on the types of business
activities in which it may engage, unless all savings association subsidiaries
comply with the QTL test. In addition, if an insured institution subsidiary of a
unitary savings and loan holding company fails to meet the QTL test specified in
HOLA and regulations thereunder, such holding company (1) then becomes subject
to the activity restrictions applicable to multiple savings and loan holding
companies specified in HOLA and (2) must register as a bank holding company
within one year of the failure of its subsidiary to qualify or to requalify
under the QTL test.
Under certain conditions, a savings and loan holding company may
acquire less than controlling or non-controlling interests in non-subsidiary
savings associations with OTS approval. Subject to certain limitations, a
savings and loan holding company also may purchase up to 15% of the shares of a
savings association in a qualified stock issuance. Any such acquisition is not
deemed a controlling interest. Only solvent associations that do not meet their
capital requirements may engage in a qualified stock issuance. In addition, a
savings and loan holding company or its subsidiaries may not acquire more than
5% in the aggregate of the voting stock of any non-subsidiary savings
association or savings association holding company. This 5% limitation does not
apply to certain types of acquisitions, including acquisitions as a bona fide
fiduciary, as an underwriter or in an account solely for trading purposes.
Transactions with Affiliates. Security and its savings bank subsidiary
will be deemed affiliates within the meaning of the Federal Reserve Act, and
transactions between affiliates are subject to certain restrictions. These
restrictions apply to Security and its savings bank subsidiary pursuant to
Section 11 of HOLA. Section 11 of HOLA provides that transactions between an
insured subsidiary of a holding company and its affiliates are subject to the
restrictions applicable to transactions between banks that are members of the
Federal Reserve System and their affiliates under Sections 23A and 23B of the
Federal Reserve Act. Generally, Sections 23A and 23B (1) limit the extent to
which the financial institution or its subsidiaries may engage in "covered
transactions" with an affiliate, as defined, to an amount equal to 10% of such
institution's capital and surplus and an aggregate limit on all such
transactions with all affiliates to an amount equal to 20% of such capital and
surplus and (2) require that all transactions with an affiliate, whether or not
"covered transactions," be on terms substantially the same, or at least as
favorable to the institution or subsidiary, as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and other similar types of
transactions.
In addition to the restrictions in Sections 23A and 23B, OTS
regulations apply three other restrictions to savings banks, including those
that are part of a holding company organization. First, savings banks may not
make any loan or extension of credit to an affiliate unless that affiliate is
engaged only in activities permissible for a national bank. Second, savings
banks may not purchase or invest in affiliate securities except those of a
subsidiary. Finally, the Director of the OTS is granted authority to impose more
stringent restrictions for reasons of safety and soundness.
Regulation of Management. Federal law (1) sets forth the circumstances
under which officers or directors of a financial institution may be removed by
the institution's federal supervisory agency, (2) places restraints on lending
by an institution to its executive officers, directors, or principal
shareholders and their related interests, and (3) prohibits management personnel
from serving as a director or in other management positions of another financial
institution whose assets exceed a specified amount or which has an office within
a specified geographic area.
Commitments to Affiliated Institutions. As a result of the enactment of
the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA"), a depository institution insured by the FDIC can be held liable for
any loss incurred by, or reasonably expected to be incurred by, the FDIC after
August 9, 1989, in connection with (1) the default of a commonly-controlled FDIC
insured depository institution or (2) any assistance provided by the FDIC to any
commonly controlled insured depository institution in danger of default.
Depository institutions are commonly controlled for purposes of this provision
if the institutions are controlled by the same holding company or if one of the
institutions controls the other. "Default" is defined generally as any
adjudication or other official determination pursuant to which a conservator,
receiver, or other legal custodian is appointed. An institution is "in danger of
default" when (1) the institution or insured branch is not likely to be able to
meet the
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demands of depositors or pay obligations in the normal course of business, and
there is no "reasonable prospect" that the institution or branch will be able to
do so without federal assistance; or (2) the institution or insured branch has
incurred or is likely to incur losses that will deplete all or substantially all
of its capital, and there is no "reasonable prospect" that the capital will be
replenished without federal assistance. Security Bank is an FDIC-insured
depository institution within the meaning of FIRREA.
FIRREA contains provisions affecting numerous other aspects of the
operation and regulation of financial institutions as well. Furthermore, FIRREA
empowers the OTS and the FDIC to promulgate regulations implementing the
provisions of FIRREA, including regulations defining certain terms used in the
statute and regulations exercising or defining the limits of regulatory
discretion conferred by the statute.
Tie-In Arrangements. Security and its savings bank subsidiary are
prohibited from engaging in certain tie-in arrangements in connection with any
extension of credit, sale or lease of property or furnishing of services. For
example, with certain exceptions, Security and its savings bank subsidiary may
not condition an extension of credit to a customer on either (1) a requirement
that the customer obtain additional services provided by it or (2) an agreement
by the customer to refrain from obtaining other services from a competitor.
State Law Restrictions. As a corporation chartered under the laws of
the State of Montana, Security may also be subject to certain limitations and
restrictions as provided under applicable Montana corporate law.
Securities Registration and Reporting. The common stock of Security is
registered as a class with the Securities and Exchange Commission ("SEC") under
the Securities Exchange Act of 1934. Thus, Security is subject to the periodic
reporting and proxy solicitation requirements and the insider-trading
restrictions of that Act. The periodic reports, proxy statements, and other
information filed by Security under that Act can be inspected and copied at or
obtained from the Washington, D.C., office of the SEC. In addition, the
securities issued by Security are subject to the registration requirements of
the Securities Act of 1933 and applicable state securities laws unless
exemptions are available.
General. Security Bank, as a federally-chartered savings association,
is subject to federal regulation and oversight by the OTS extending to all
aspects of its operations. Security Bank is further subject to (1) regulation
and examination by the FDIC, which insures the deposits of Security Bank to the
maximum extent permitted by law, and (2) certain requirements established by the
Federal Reserve Board. In addition, Security Bank is subject to regulation
incidental to its membership in the FHLB. The lending, investment, and other
business activities of Security Bank must comply with various federal laws and
regulatory requirements, including requirements governing such matters as
capital standards, reserves against deposits, timing of the availability of
deposited funds, nature and amount of and collateral for loans, mergers,
establishment of branch offices, subsidiary investments and activities, and
general investment authority. The laws and regulations governing Security Bank
generally have been promulgated to protect depositors and not for the purpose of
protecting stockholders of such institutions or their holding companies.
As a creditor and a financial institution, Security Bank is subject to
various regulations promulgated by the Federal Reserve Board. Such regulations
include, without limitation, Regulation B (Equal Credit Opportunity), Regulation
D (Reserves), Regulation E (Electronic Fund Transfers), Regulation Z (Truth in
Lending), Regulation CC (Availability of Funds) and Regulation DD (Truth in
Savings). Furthermore, as creditors of loans secured by real property and as
owners of real property, Security Bank, and other financial institutions, may be
subject to potential liability under various statutes and regulations applicable
to property owners generally, including statutes and regulations relating to the
environmental condition of real property.
The OTS has extensive enforcement authority over all savings banks.
This authority includes, without limitation, the ability to (1) assess civil
money penalties, (2) issue cease-and-desist or removal orders, and (3) initiate
injunctive actions. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Except under
certain circumstances, federal law requires public disclosure of final
enforcement actions by the OTS.
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Grounds for appointment of a conservator or receiver for a savings
association on the basis of an institution's financial condition include: (1)
insolvency, meaning that the assets of the association are less than its
liabilities to depositors and others; (2) substantial dissipation of assets or
earnings through violations of law or unsafe or unsound practices; (3) existence
of an unsafe or unsound condition to transact business; (4) likelihood that the
association will be unable to meet the demands of its depositors or to pay its
obligations in the normal course of business; and (5) insufficient capital or
the incurring or likely incurring of losses that will deplete substantially all
capital with no reasonable prospect of replenishment of capital without federal
assistance.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") requires federal banking regulators to adopt regulations in a number
of areas to ensure bank safety and soundness. These areas include, without
limitation, internal controls, credit underwriting, asset growth, management
compensation, ratios of classified assets to capital, and earnings. Recent
legislation allows federal regulatory agencies to implement these standards
through either guidelines or regulations. FDICIA also contains provisions which
are intended to (1) change independent auditing requirements, (2) restrict the
activities of state-chartered insured banks, (3) amend various consumer banking
laws, (4) limit the ability of "undercapitalized banks" to borrow from the
Federal Reserve Board's discount window, and (5) require regulators to perform
annual on-site bank examinations and set standards for real estate lending.
Loans-to-One Borrower. Security Bank is subject to limitations on the
aggregate amount of loans that it can make to any one borrower. For purposes of
these rules, the term "borrower" includes (1) the person named as borrower or
debtor on the loan and (2) all other persons, including drawers, endorsers or
guarantors, (i) deemed to directly benefit from the loan proceeds or (ii) when a
common enterprise is deemed to exist between the named debtor and such person.
Applicable regulations generally do not permit loans-to-one borrower to exceed
15% of unimpaired capital and surplus; however, loans in an amount equal to an
additional 10% of unimpaired capital and surplus also may be made to a borrower
if the loans are fully secured by readily marketable securities. In certain
circumstances, as set forth in OTS regulations, loans to more than one borrower
must be combined for purposes of these limitations. The OTS by regulation has
amended the loans-to-one borrower rules applicable to savings associations, such
as Security Bank, to permit savings associations meeting certain requirements,
including fully phased-in capital requirements, to extend loans-to-one borrower
in additional amounts under circumstances limited essentially to loans to
develop or complete residential housing units. As of June 30, 1996, Security
Bank was in compliance with applicable loans-to-one-borrower requirements.
Insurance of Accounts. Generally, customer deposit accounts in banks
are insured by the FDIC for up to a maximum amount of $100,000. The FDIC has
adopted a risk-based insurance assessment system. Under this system, a bank or
savings association with deposits insured by the BIF is required to pay an
assessment ranging from $0 to $.27 per $100 of deposits based on the
institution's risk classification. Banks at the zero assessment rate will pay
the statutory minimum of $2,000 for deposit insurance.
The risk classification is based on an assignment of the institution by
the FDIC to one of three capital groups and to one of three supervisory
subgroups. The capital groups are "well capitalized," "adequately capitalized,"
and "undercapitalized." The three supervisory subgroups are Group "A" (for
financially sound institutions with only a few minor weaknesses), Group "B" (for
those institutions with weaknesses which, if uncorrected, could cause
substantial deterioration of the institution and increase risk to the deposit
insurance fund), and Group "C' (for those institutions with a substantial
probability of loss to the fund absent effective corrective action).
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that (1) the institution has
engaged or is engaging in unsafe or unsound practices, (2) is in an unsafe or
unsound condition to continue operations, or (3) has violated any applicable
law. The insurance may be terminated permanently, if the institution has no
tangible capital. If deposit insurance is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals,
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which could result in
termination of the deposit insurance of Security Bank.
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The deposits of savings associations, such as Security Bank, are
presently insured by the SAIF, which together with the BIF, are the two
insurance funds administered by the FDIC. Financial institutions which are
members of the BIF are experiencing substantially lower deposit insurance
premiums because the BIF has achieved its required level of reserves while the
SAIF has not yet achieved its required reserves. In order to help eliminate this
disparity and any competitive disadvantage due to disparate deposit insurance
premium schedules, legislation to recapitalize the SAIF was enacted in September
1996.
The legislation requires a special one-time assessment of approximately
65.7 cents per $100 of SAIF insured deposits held by Security Bank at March 31,
1995. As a result, the one-time special assessment will result in a tax affected
charge to earnings of approximately $838,000 during the quarter ended September
30, 1996. The legislation is intended to fully recapitalize the SAIF fund so
that commercial bank and thrift deposits will be charged the same FDIC premiums
beginning January 1, 1997. As of such date deposit insurance premiums for highly
rated institutions, such as the Bank, have been eliminated.
Security Bank, however, will continue to be subject to an assessment to
fund repayment of the FICO obligations. It is anticipated that the FICO
assessment for SAIF insured institutions will be approximately 6.5 cents per
$100 of deposits while BIF insured institutions will pay approximately 1.5 cents
per $100 of deposits until the year 2000 when the assessment will be imposed at
the same rate on all FDIC insured institutions. Accordingly, as a result of the
reduction of the SAIF assessment and the resulting FICO assessment, the annual
after tax decrease in assessment costs is expected to be approximately $209,000
based upon a September 30, 1996 assessment base.
Regulatory Capital Requirements. Federally insured savings associations
such as Security Bank are required to maintain minimum levels of regulatory
capital. Pursuant to FIRREA, the OTS has established capital standards
applicable to all savings associations. These standards generally must be as
stringent as the comparable capital requirements imposed on national banks. The
OTS also is authorized to impose capital requirements in excess of these
standards on individual associations on a case-by-case basis.
Savings associations must satisfy three different OTS capital
requirements. Under these standards, savings associations must maintain: (1)
"tangible" capital equal to at least 1.5% of adjusted total assets, (2) "core"
capital equal to at least 3% of adjusted total assets (however, savings
associations must generally have core capital equal to 4% of adjusted total
assets to be adequately capitalized for purposes of prompt corrective action,
discussed in more detail below); and (3) "supplementary" capital equal to 8% of
"risk-weighted" assets. For purposes of the regulation, "core capital" is
defined as common stockholders' equity (including retained earnings),
non-cumulative perpetual preferred stock and related surplus, minority interests
in the equity accounts of fully consolidated subsidiaries, certain
non-withdrawable accounts and pledged deposits and "qualifying supervisory
goodwill." Core capital is generally reduced by the amount of a savings
association's intangible assets, although limited exceptions to the deduction of
intangible assets are provided for purchased mortgage servicing rights and
certain other intangibles. Tangible capital is core capital less all intangible
assets, with a limited exception for purchased mortgage servicing rights.
Both core and tangible capital are also reduced by an amount equal to a
savings association's debt and equity investments in subsidiaries engaged in
activities not permissible for national banks (other than subsidiaries engaged
in activities undertaken as agent for customers or in mortgage banking
activities and subsidiary depository institutions or their holding companies).
These requirements did not materially affect the regulatory capital of Security
Bank.
A savings association is allowed to include both core capital and
supplementary capital in the calculation of its total capital for purposes of
the risk-based capital requirements, as long as the amount of supplementary
capital included does not exceed the savings association's core capital.
Supplementary capital consists of (1) certain capital instruments that do not
qualify as core capital and (2) general valuation loan and lease loss allowances
up to a maximum of 1.25% of risk-weighted assets. In determining the required
amount of risk-based capital, total assets, including certain off-balance sheet
items, are multiplied by a risk weight based on the risks inherent in the type
of
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assets. For example, some risk weights assigned by the OTS for certain principal
categories of assets are as follows:
(a) 0% for cash and securities issued by the United States Government
to the extent unconditionally backed by the full faith and credit
of the United States Government;
(b) 20% for securities (other than equity securities) issued by the
United States Government which are not unconditionally backed
by the full faith and credit of the United States Government;
(c) 20% for securities (other than equity securities) issued by
United States Government-sponsored agencies and high quality
mortgage-related securities except for collateralized mortgage
obligation residual classes;
(d) 50% for qualifying residential construction loans, as defined by
OTS regulations; and
(e) 100% for most other loans and investments, including without
limitation, consumer loans, commercial loans, home equity loans,
non-qualifying mortgage loans, residential construction loans,
and certain equity investments.
Off-balance sheet items also are adjusted to take into account certain risk
characteristics. The risk-based capital requirement is 8% of risk-weighted
assets. The OTS requires savings associations to have and maintain a minimum
leverage ratio of core capital in the amount equal to at least 3% of adjusted
total assets.
Interest-Rate-Risk ("IRR") Component. FDICIA requires each federal
banking agency to revise its risk-based capital standards for insured
institutions to ensure that those standards (1) take adequate account of
interest-rate risk ("IRR"), concentration of credit risk and the risks of
nontraditional activities, and (2) reflect the actual performance and expected
risk of loss on multi-family residential loans. In August 1993, the OTS added an
IRR component to its risk-based capital standards, effective January 1, 1994.
The IRR component is a dollar amount, equal to one-half the difference between
an institution's measured exposure and a normal level of exposure, that is
deducted from total capital for the purpose of calculating an institution's
risk-based capital requirement. An association's measured IRR is the change that
occurs in its Net Portfolio Value (NPV) as a result of a 200 basis point
increase or decrease in interest rates (whichever leads to the lower NPV)
divided by the estimated economic value (present value) of its assets. NPV
equals the present value of expected cash inflows from existing assets less the
present value of expected cash outflows from existing liabilities, plus the
present value of net expected cash inflows from existing off-balance sheet
contracts. An institution with a measured IRR of less than 2% has a normal level
of IRR. Only institutions whose measured IRR exceeds 2% are required to maintain
an IRR component. An association is required to maintain capital of at least 8%
of risk-weighted assets, after the IRR component is deducted.
On September 6, 1996, the federal banking agencies published a joint
final rule amending their respective risk-based capital standards to incorporate
a measure for market risk to cover all positions located in an institution's
trading account and foreign exchange and commodity positions wherever located.
This final rule takes effect on January 1, 1997, and implements an amendment to
the Basle Capital Accord that sets forth a supervisory framework for measuring
market risk. The final rule effectively requires banks and bank holding
companies with significant exposure to market risk to measure that risk using
its own internal value-at-risk model, subject to the parameters of the final
rule, and to hold a sufficient amount of capital to support the institution's
risk exposure.
Institutions subject to this final rule must be in compliance with it
by January 1, 1998. This final rule applies to any bank or bank holding company,
regardless of size, whose trading activity equals 10% or more of its total
assets, or whose trading activity equals $1 billion or more. An institution's
trading activity is defined as the sum of its trading assets and trading
liabilities as reported in its most recent call report for a bank, or its most
recent Y-9C Report for a bank holding company. Total assets means quarter-end
total assets. The agencies may require an institution not otherwise subject to
the final rule to comply with it for safety and soundness reasons and may exempt
an institution otherwise subject to the final rule from compliance under certain
circumstances.
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Compliance with Capital Requirements. Failure of Security Bank to
maintain any required level of capital could have a number of adverse
consequences. These consequences include (1) the imposition of numerous
restrictions on the institution's lending, investment, deposit and borrowing
activities, capital expenditures and compensation and employment practices and
(2) possible restrictions on growth of the institution. An institution that does
not have adequate capital or that is not in compliance with a capital directive
may be deemed to be in an unsafe and unsound condition. FIRREA expands the
grounds for appointment of a conservator or receiver for a savings institution
to include being in an unsafe and unsound condition to transact business.
Furthermore, under certain conditions, which include an institution's lack of
any tangible capital, the FDIC may seek to suspend an institution's deposit
insurance. Finally, FDICIA provides that a regulator may treat an "unsafe or
unsound" institution as if it were at a lower capital level, thus subjecting the
institution to greater restrictions on its activities.
The following table sets forth Security Bank's compliance with each of
the above-described regulatory capital requirements at June 30, 1996:
<TABLE>
<CAPTION>
Tangible Core Risk-Based
Capital Capital Capital(1)
------- ------- ----------
<S> <C> <C> <C>
Regulatory capital as a percentage of assets 7.3% 7.3% 14.7%
Minimum capital required as a percentage 1.5% 3.0% 8.0%
Excess regulatory capital as a percentage in
excess of requirement 5.8% 4.3% 6.7%
==== ==== =====
<FN>
(1) Reflects fully phased-in deductions from total capital.
</FN>
</TABLE>
Prompt Corrective Action. Under FDICIA, each federal banking agency is
required to implement a system of prompt corrective action for institutions
which it regulates. The federal banking agencies have adopted substantially
similar regulations, intended to implement this prompt corrective action system.
Under the regulations, an institution is (1) "well capitalized" if it has a
total risk-based capital ratio of 10% or more, a Tier I risk-based capital ratio
of 6% or more, a Tier I leverage capital ratio of 5% or more and is not subject
to specified requirements to meet and maintain a specific capital level for any
capital measure; (2) "adequately capitalized" if it has a total risk-based
capital ratio of 8% or more, a Tier I risk-based capital ratio of 4% or more, a
Tier I leverage capital ratio of 4% or more (3% under certain circumstances) and
does not meet the definition of "well capitalized;" (3) "undercapitalized" if it
has a total risk-based capital ratio of under 8%, a Tier I risk-based capital
ratio of under 4% and a Tier I leverage capital ratio of under 4% (3% under
certain circumstances); (4) "significantly undercapitalized" if it has a total
risk-based capital ratio of under 6%, a Tier I risk-based capital ratio of under
3%, a Tier I leverage capital ratio of under 3%; and (5) "critically
undercapitalized" if it has a ratio of tangible equity to total assets of 2% or
less.
FDICIA and implementing regulations also provide that a federal banking
agency may, after notice and an opportunity for a hearing, reclassify a well
capitalized institution as adequately capitalized. Also, a federal banking
agency may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory action as if it were in the next lower
category if the institution is in an unsafe or unsound condition or is engaging
in an unsafe or unsound practice. The FDIC may not, however, reclassify a
significantly undercapitalized institution as critically undercapitalized.
An institution generally must file a written capital restoration plan
which meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with an appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution becomes subject to various mandatory and
discretionary restrictions on its operations.
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At June 30, 1996, Security Bank was a "well capitalized" institution
under the prompt corrective action regulations of the OTS.
Liquidity Requirements. All savings associations such as Security 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. The liquidity
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 required liquid asset ratio is 5%.
Liquid assets for purposes of this ratio include specified short-term
assets (e.g., cash, certain time deposits, certain banker's acceptances and
short-term United States Government obligations), and long-term assets (e.g.,
United States Government obligations of more than one and less than five years
and state agency obligations with a minimum term of 18 months). Short-term
liquid assets currently must constitute at least 1% of an association's average
daily balance of net withdrawable deposit accounts and current borrowings.
Monetary penalties may be imposed upon associations for violations of liquidity
requirements.
For information concerning Security's compliance with the foregoing
requirements, see the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in Item 7 hereof.
Qualified Thrift Lender Test. In order to avoid certain restrictions on
their operations, all savings associations, such as Security Bank, are required
to meet a qualified thrift lender ("QTL") test. A savings association that does
not meet the QTL test and implementing regulations must either convert to a bank
charter or comply with the following restrictions on its operations: (1) the
association may not engage in any new activity or make any new investment,
directly or indirectly, unless such activity or investment is permissible for a
national bank; (2) the branching powers of the association are restricted to
those of a national bank; (3) the association is not eligible to obtain any
advances from its FHLB without prior OTS approval; and (4) payment of dividends
by the association is subject to the rules regarding payment of dividends by a
national bank. Three years following the date the association ceases to be a
QTL, it must cease any activity and not retain any investment not permissible
for a national bank and immediately repay any outstanding FHLB advances (subject
to safety and soundness considerations).
The QTL test requires that Qualified Thrift Investments represent 65%
of portfolio assets and 70% of tangible assets. Under OTS regulations, portfolio
assets are defined as total assets less intangibles, property used by a savings
association in its business and liquidity investments in an amount not exceeding
20% of assets. Under the amended definition of Qualified Thrift Investments,
liquidity investments and the book value of property used in an association's
business are not considered Qualified Thrift Investments. In addition, Qualified
Thrift Investments do not include any intangible assets. Subject to a 20% of
portfolio assets limit, however, savings associations are able to treat as
Qualified Thrift Investments 200% of their investments in (1) loans to finance
"starter homes;" (2) loans for the construction, development or improvement of
domestic residential housing and community service facilities located within a
"credit-needy area;" and (3) loans to certain small businesses located within
credit-needy areas. A savings association that fails to maintain QTL status will
be permitted to re-qualify one time, and if it fails the QTL test a second time,
it will become immediately subject to all penalties as if all time limits on
such penalties had expired.
At June 30, 1996, approximately 87.02% of Security Bank's assets were
invested in Qualified Thrift Investments, which was in excess of the percentage
required to qualify Security Bank under the QTL test in effect at that time.
Restrictions on Capital Distributions. Generally, FDICIA prohibits an
insured institution from declaring any dividends, making any other capital
distribution, or paying a management fee to a controlling person if, following
the distribution or payment, the institution would be within any of the three
undercapitalized capital adequacy categories (see "Prompt Corrective Action",
above). OTS regulations govern capital distributions by savings associations,
including dividends, stock repurchases, cash-out mergers, capitalization of
holding companies in a reorganization and certain other transactions involving
the pay-out of capital, which may be found by the OTS
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to be subject to the capital distribution regulations. Generally, these
regulations create a safe harbor for specified levels of capital distributions
from associations meeting at least their minimum capital requirements, so long
as such associations notify the OTS and receive no objection to the distribution
from the OTS. Prior OTS approval is required before making any capital
distributions if the associations and/or distributions do not qualify for the
safe harbor.
Generally, Tier 1 associations, which are savings associations that
before and after the proposed distribution meet or exceed their fully phased-in
capital requirements, may make capital distributions during any calendar year up
to the amount that would reduce its surplus capital ratio to no less than
one-half of its surplus capital ratio at the beginning of the calendar year. The
"surplus capital ratio" is defined to mean the percentage by which the
association's ratio of total capital-to-assets exceeds the ratio of its fully
phased-in capital requirement to assets. "Fully phased-in capital requirement"
is defined to mean an association's capital requirement under the statutory and
regulatory standards applicable on December 31, 1994, as modified to reflect any
applicable individual minimum capital requirement imposed upon the association.
At June 30, 1996, Security Bank was a Tier 1 association under the OTS capital
distribution regulation. The amount of allowable distributions was approximately
$8.4 million as of June 30, 1996.
Tier 2 associations, which are associations that before and after the
proposed distribution meet or exceed their current minimum capital requirements,
but do not meet January 1, 1995, capital requirements, or are Tier I
associations which have been placed into Tier II by the OTS, may make capital
distributions over the most recent four quarter period up to a specified
percentage of their net income during that four quarter period, depending on how
close the association is to meeting its fully phased-in capital requirements.
Tier 2 associations that meet the capital requirements in effect on January 1,
1993, (including the 8% risk-based requirement and then-applicable exclusions on
non-permissible subsidiary investments and goodwill) are permitted to make
distributions totalling up to 75% of net income over the four quarter period.
Tier 2 associations that meet the January 1, 1991, capital requirements
(including the 7.2% risk-based requirement and the then-applicable exclusions of
non-permissible subsidiary investments and goodwill) are permitted to make
distributions totalling up to 50% of net income over the four quarter period.
In order to make distributions under these safe harbors, Tier 1 and
Tier 2 associations must submit 30 days written notice to the OTS prior to
making the distribution. The OTS may object to the distribution during that 30-
day period based on safety and soundness concerns. In addition, a Tier 1
association deemed to be in need of more than normal supervision by the OTS may
be downgraded to a Tier 2 or Tier 3 association as a result of such a
determination.
Tier 3 associations are associations that do not meet current minimum
capital requirements, or that have capital in excess of either their fully
phased-in capital requirement or minimum capital requirement but which have been
notified by the OTS that it will be treated as a Tier 3 association because they
are in need of more than normal supervision. Tier 3 associations cannot make any
capital distribution without obtaining OTS approval prior to making such
distributions.
Rules proposed by the OTS in December 1994 would revise and simplify
the OTS capital distribution regulations described above, by conforming the
rules to the prompt corrective action system. At this time, it is unclear
whether the OTS will adopt these proposed rules; and if they are adopted, it is
impossible to predict the impact, if any, of these regulations on Security Bank.
Federal Home Loan Bank System. Security Bank is a member of the FHLB of
Seattle, which is one of the 13 regional FHLBs that administer the home
financing credit functions 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. At
June 30, 1996, advances from the FHLB of Seattle amounted to approximately $36.8
million.
As a member, Security Bank is required to purchase and maintain stock
in the FHLB of Seattle in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar
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<PAGE>
obligations at the beginning of each year. At June 30, 1996, Security Bank had
$3.1 million in FHLB stock, which was sufficient to remain in compliance with
this requirement.
The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
in low- and moderate-income housing projects. These contributions have adversely
affected the level of FHLB dividends paid and could continue to do so in the
future. These contributions also could have an adverse effect on the value of
FHLB stock in the future. Dividends paid by the FHLB of Seattle to Security Bank
for the years ended June 30, 1996 and 1995, totalled $222,285 and $171,418,
respectively.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain reserves against their transaction accounts
(primarily NOW and Super NOW checking accounts) and non-personal time deposits.
Currently, reserves of 3% must be maintained against total transaction accounts
of $49.8 million or less (after a $4.2 million exemption), and an initial
reserve of 10% (subject to adjustment by the Federal Reserve Board to a level
between 8% and 14%) must be maintained against that portion of total transaction
accounts in excess of such amount. At June 30, 1996, Security Bank was in
compliance with applicable requirements.
The balances maintained to meet the reserve requirements imposed by the
Federal Reserve Board may be used to satisfy applicable liquidity requirements.
Because required reserves must be maintained in the form of vault cash or a
non-interest-bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce the earning assets of Security Bank.
Recent Federal Legislation.
Interstate Banking and Branching. The Riegle-Neal Interstate Banking
and Branching Efficiency Act of 1994 (the "Interstate Act") permits nationwide
interstate banking and branching. This legislation generally authorizes
interstate branching and relaxes federal law restrictions on interstate banking.
These new interstate banking and branching powers will be phased in through next
year and individual states have authority to "opt out" of certain of these
provisions. The Interstate Act currently allows states to enact "opting-in"
legislation that (1) permits interstate mergers within their own borders before
June 1, 1997, and (2) permits out-of-state banks to establish de novo branches
within the state. As of September 29, 1995, subject to certain state
restrictions such as age and contingency laws, bank holding companies may
purchase banks in any state. Additionally, beginning June 1, 1997, banks will be
permitted to merge with banks in any other state as long as the home state of
neither merging bank has "opted out." The Interstate Act requires regulators to
consult with community organizations before permitting an interstate institution
to close a branch in a low-income area.
Regulatory Improvement. In 1994, Congress enacted the Community
Development and Regulatory Improvement Act ("Regulatory Improvement Act"), which
among other things, is intended to relieve the regulatory burden on financial
institutions. Certain regulatory procedures are streamlined, and certain
regulatory compliance requirements have been eased.
At this time, the impact that the Interstate Act and the Regulatory
Improvement Act might have on Security and its savings bank subsidiary is
impossible to predict.
Federal Taxation
General. Security and Security Bank will report their income on a
fiscal year basis using the accrual method of accounting and will be subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly Security Bank's reserve for bad debts
discussed below. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to Security Bank or Security.
Tax Bad Debt Reserves. For taxable years beginning prior to January 1,
1996, savings institutions such as Security Bank which met certain definitional
tests primarily relating to their assets and the nature of their business
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("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. Security 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 Security Bank's actual loss experience, or a percentage equal to 8% of
Security Bank's taxable income, computed with certain modifications and reduced
by the amount of any permitted additions to the nonqualifying reserve. Security
Bank's deduction with respect to nonqualifying loans was computed under the
experience method, which essentially allows a deduction based on Security Bank's
actual loss experience over a period of several years. Each year Security 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 or, if the savings association or its
controlled group had assets of less than $500 million, based on actual loss
experience over a period of years. 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, Security Bank's total bad debt reserve for tax
purposes was approximately $5.4 million. At June 30, 1996, the post-1987
reserves were approximately $1.8 million. The related deferred tax liability at
June 30, 1996 was $618,000. The recapture may be suspended for up to two years
if, during those years, the institution satisfies a residential loan
requirement. Security Bank anticipates that it will meet the residential loan
requirement for the taxable year ending June 30, 1997.
Under prior law, if Security 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, Security 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. Among other
things, the qualifying thrift definitional tests required Security 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 Security 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.
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Properties
On June 30, 1996, Security Bank owned all but three of its office
properties having an aggregate net book value of approximately $7.7 million, and
leased the other locations. The following table sets forth information regarding
the offices of Security Bank at June 30, 1996.
Office Location Ownership
- --------------- ---------
Home Office Owned
219 North 26th Street
Billings, MT 59101
Grand Branch Owned
2401 Grand Ave.
Billings, MT 59102
Heights Branch Owned
1546 Main Street
Billings, MT 59105
Laurel Branch Owned
19 Montana Avenue
Laurel, MT 59044
Kalispell Owned
405 Main Street
Kalispell, MT 59901
Missoula Branch Owned
320 West Broadway
Missoula, MT 59802
Rosauers In Store Branch Leased
2350 South Reserve
Missoula, MT 59802
Sidney Branch Owned
221 Second Street NW
Sidney, MT 59270
Havre Branch Owned
324 Third Avenue
Havre, MT 59501
Malta Branch Owned
216 South 2nd Ave. East
Malta, MT 59538
Glasgow Branch Leased
125 Fourth Street South
Glasgow, MT 59230
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Plentywood Branch Owned
102 North Main
Plentywood, MT 59254
Butte Branch Owned
1880 Harrison Avenue
Butte, MT 59701
Lewistown Branch Owned
401 West Main
Lewistown, MT 59457
Anaconda Leased
307 East Park Street
Anaconda, MT 59711
Bozeman(1) Owned
2901 West Main
Bozeman, MT 59715
- ---------
(1) Building is owned by Security Bank subject to a land lease.
Legal Proceedings
There are no pending legal proceedings to which Security or its
subsidiary is a party which, in the opinion of management, are expected to have
a material adverse effect on the financial condition of Security.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF SECURITY
Changes In Financial Condition, June 30, 1996 to September 30, 1996
General. Total assets increased by $10.1 million or 2.7% over the June
30, 1996 level. Stockholders' equity increased $226,749 during the three-month
period ended September 30, 1996. Security Bank's ratio of stockholders' equity
to total assets decreased from 8.25% at June 30, 1996 to 8.09% at September 30,
1996.
Mortgage-backed securities available for sale. Mortgage-backed
securities available for sale decreased $6.9 million from June 30, 1996 to
September 30, 1996. This decrease was primarily due to purchases of $4.9 million
and the change in the unrealized loss of $430,679, offset by sales of $10
million and principal payments of $2.2 million. The proceeds from this decrease
were used to partially fund the increase in net loans receivable.
Mortgage-backed securities held to maturity. Mortgage-backed securities
held to maturity decreased $1.7 million from June 30, 1996 to September 30,
1996, primarily as a result of sales of $255,605 and principal payments of $1.4
million. The proceeds from this decrease were used to partially fund the
increase in net loans receivable.
Loans receivable. Net loans receivable increased $20.8 million from
June 30, 1996 to September 30, 1996. This increase was primarily due to $38
million origination of loans partially offset by principal repayments of $17.1
million and an increase in the reserve for loan losses of $100,694. Proceeds
from the decrease in mortgage-backed securities available for sale and held to
maturity and the increase in advances from Federal Home Loan Bank of Seattle
were used to partially fund this increase.
Classified assets and reserves. Non-performing assets, consisting of
non-accrual loans, accruing loans 90 days or more overdue, and real estate and
other assets acquired by foreclosure or deed-in-lieu thereof, net of related
reserves, amounted to $704,000 at September 30, 1996, as compared to $668,000 at
June 30, 1996. Non-performing assets continue to improve and remain at a very
low level.
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September 30, June 30,
1996 1996
------------- --------
Total reserves for loan and real
estate owned losses: $1,281,560 1,180,866
Reserves as a percentage
of total loans: .62% .63%
Reserves as a percentage of non-
performing assets: 182% 177%
Non-performing assets as a percentage
of total assets: .18% .18%
At September 30, 1996, the recorded investment in impaired loans was $510,000,
all of which were on non-accrual status. Security Bank has not established an
impairment allowance for these loans. The average recorded investment in
impaired loans during the three months ended September 30, 1996 was $444,000.
The amount of interest income recognized on impaired loans during this period
was immaterial.
Advances from Federal Home Loan Bank of Seattle. Advances from Federal
Home Loan Bank of Seattle increased $6.2 million from June 30, 1996 to September
30, 1996. The total available line of credit at the FHLB is 20% of total assets,
$76 million at September 30, 1996. The amount of unused credit with the FHLB is
$33 million at September 30, 1996. This increase was used to partially fund the
increase in net loans receivable.
Stockholders' equity. Stockholders' equity increased $226,749 from June
30, 1996 to September 30, 1996. This increase was comprised of income of $40,162
from the exercise of stock options of $272,839 and a decrease in the unrealized
loss on available for sale securities of $229,085, partially offset by dividends
on common stock of $315,337. The unrealized loss at September 30, 1996 is
comprised of an excess of cost above fair value of $2,159,044 offset by the tax
effect of $798,846.
Changes In Financial Condition, June 30, 1995 to June 30, 1996
Total assets of Security Bank increased $19.6 million or 5.6% over the
June 30, 1995 level. Loans receivable increased $40.8 million, while Security
Bank's portfolio of investments and mortgage-backed securities decreased $21.9
million. Stockholders' equity decreased $180,452 during the year ended June 30,
1996. Security Bank's ratio of stockholders' equity to total assets decreased
from 8.76% at June 30, 1995 to 8.25% at June 30, 1996.
The securities portfolio serves as a primary tool in the management of
interest rate risk in addition to generating interest income and providing a
significant source of liquidity. Security Bank adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," effective July 1, 1994. SFAS No. 115 addresses the
accounting and reporting for investments in equity securities that have readily
determinable fair values and for all investments in debt securities. Security
Bank initially concluded that a portion of its investment securities and
mortgage-backed securities portfolio will be classified as held to maturity and
the remainder of those portfolios will be classified as available for sale.
During the second quarter of 1996, Security Bank reclassified approximately $4.2
million from investments held to maturity and $94.7 million from mortgage-backed
securities held to maturity to available for sale. This transfer is in
accordance with "FASB Special Report--A Guide to Implementation of Statement 115
on Accounting for Certain Investments in Debt and Equity Securities." The
securities were transferred at their fair value and net unrealized gains and
losses of approximately $222,000 were excluded from earnings (net of income tax
effect) and were reported as a separate component of stockholders' equity.
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<PAGE>
As of June 30, 1996, management has identified $20.1 million of
investment securities and $96.6 million of mortgage-backed securities as
available for sale, the remainder of the securities portfolio is classified as
held-to-maturity. There were no securities classified as trading securities as
of June 30, 1996.
Investment securities available for sale increased $6.6 million
primarily due to the transfer of approximately $4.2 million from investment
securities held to maturity, purchases of $20 million, and the change in
unrealized loss and the reserve for permanent impairment of $330,767 partially
offset by sales of $9.1 million and maturities, calls, and principal paydowns of
$8.8 million. A loss of $324,943 was recognized on the sales. The proceeds from
the sales were used to fund purchases of securities and increases in loans
receivable.
Mortgage-backed securities available for sale increased $91.3 million
primarily due to the transfer of approximately $94.7 million from
mortgage-backed securities held to maturity and purchases of $40.3 million
partially offset by sales of $32.9 million, principal payments of $9.2 million,
and the change in unrealized loss of $2.1 million. Security Bank decided to sell
several of its fixed rate mortgage-backed securities as part of its strategy to
reduce exposure to interest rate risk. A gain of $525,484 was recognized on the
sales. The proceeds from the sales were used to fund purchases of securities and
increases in net loans receivable.
Investment securities held to maturity decreased $14.2 million
primarily due to the transfer of approximately $4.2 million to investment
securities available for sale and maturities of $10 million. The proceeds from
the maturities were used to fund purchases of securities and increases in loans
receivable.
Mortgage-backed securities held to maturity decreased $105.6 million
due to the transfer of approximately $94.7 million to mortgage-backed securities
available for sale and maturities and principal paydowns and maturities of
approximately $10.9 million. The proceeds from the maturities and principal
paydowns were used to fund purchases of securities and increases in net loans
receivable.
Net loans receivable increased to $184.9 million at June 30, 1996, an
increase of $40.8 million due primarily to a $119.8 million investment in loans
originated for retention in the portfolio. These additions were partially offset
by principal repayments of $79 million.
Non-performing assets, consisting of non-accrual loans, accruing loans
90 days or more overdue, and real estate and other assets acquired by
foreclosure or deed-in-lieu thereof, net of related reserves, amounted to
$668,000 at June 30, 1996, as compared to $425,000 at June 30, 1995.
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Non-performing assets continue to improve and remain at a very low
level.
At June 30, 1996 At June 30, 1995
---------------- ----------------
Total reserves for loan and real estate
owned losses............................. $1,180,866 $1,156,393
Reserves as a percentage of total loans.... .62% .77%
Reserves as a percentage of non-performing
assets................................... 177% 272%
Non-performing assets as a percentage of
total assets............................. .18% .12%
At June 30, 1996, the recorded investment in impaired loans was
$378,000, all of which were on non-accrual status. Security Bank has not
established an impairment allowance for these loans. The average recorded
investment in impaired loans during the year ended June 30, 1996 was
approximately $233,000. The amount of interest income recognized on impaired
loans during this period was immaterial.
Premises and equipment increased approximately $1.3 million from June
30, 1995 to June 30, 1996. The increase is primarily related to the construction
of a new branch in Bozeman, Montana.
Total liabilities increased $19.8 million from June 30, 1995 to June
30, 1996. Total deposits decreased $1.7 million. Securities sold under
repurchase agreements increased $1.4 million. Advances from the Federal Home
Loan Bank increased $17.2 million. An advance totaling $5.5 million is an
amortizing fixed-rate advance with an interest rate of 4.71% due in monthly
installments of $250,000 plus interest, through April, 1998. This advance,
originated in 1993, was obtained to enable Security Bank to purchase $15 million
of mortgage-backed securities at an attractive spread over the cost of the
advances. A short-term $20 million advance with a 5.44% interest rate is due
July 5, 1996. The balance of $11.3 million is a variable rate cash management
advance that is due April 25, 1997, but may be repaid at any time without
penalty.
Deferred income taxes decreased $455,717 from June 30, 1995 to June 30,
1996. This decrease is due to an increase in the deferred tax asset relating to
the unrealized loss on investment and mortgage-backed securities available for
sale, which offsets the deferred tax liability. At June 30, 1996, this deferred
tax asset is $994,917 and offsets deferred tax liabilities of $1,107,000.
Accrued interest payable increased $884,285 from June 30, 1995 to June
30, 1996. On July 7, 1996, Security Bank underwent an accounting system
conversion. The increase in the accrued interest payable balance is attributable
to the change in the cycle of interest payments between the new and the old
accounting systems.
Accrued expenses and other liabilities increased $2.5 million from June
30, 1995 to June 30, 1996. This increase is primarily related to a higher
balance at June 30, 1996 of outstanding cashier's checks, bank checks, and CD
interest checks and accounts payable.
Stockholders' equity decreased $180,452 from June 30, 1995 to June 30,
1996 as a result of net income of $2,544,304 and proceeds from the exercise of
stock options of $171,923 offset by an increase in the unrealized loss on
available for sale investments and mortgage-backed securities (net of tax
effect) of $1,299,723, a decrease of $615,000 from the purchase and retirement
of 30,000 shares of common stock, and dividends paid on common stock of
$981,956.
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Results of Operations
The major components of Security's consolidated net income for the
three months ended September 30, 1996 and 1995 and the changes which occurred
between periods are summarized in the following table:
<TABLE>
<CAPTION>
1996 Amount 1995 Amount 1994 Amount
----------- ----------- -----------
<S> <C> <C> <C>
Interest income ............ $6,837,694 $6,399,699 $ 437,995
Interest expense ........... 3,770,935 3,806,402 35,467
---------- ---------- ----------
Net interest income ... 3,066,759 2,593,297 473,462
Provision for loan losses .. (150,000) (30,000) (120,000)
Noninterest income ......... 1,271,831 866,083 405,748
Noninterest expense ........ (4,124,428) (2,452,227) (1,672,201)
---------- ---------- ----------
Income before income tax.. 64,162 977,153 (912,991)
Income tax expense ......... (24,000) (352,000) 328,000
---------- ---------- ----------
Net income ............... $ 40,162 $ 625,153 $ (584,991)
========== ========== ==========
</TABLE>
Comparison of Three Months Ended September 30,1996 and September 30, 1995
General. Net income for the quarter ended September 30, 1996 was
$584,991 lower than for the corresponding period in 1995. This decrease was due
to an increase in the provision for loan losses and a substantial increase in
non-interest expense partially offset by increases in net interest income and
non-interest income and a decrease in income tax expense. The increase in
non-interest expense was primarily due to the $1,330,517 SAIF special assessment
and $198,128 in extra expense as a result of the proposed merger with WesterFed
Financial.
Interest income and expense. Interest income for the quarter ended
September 30, 1996 was $437,995 higher than interest income for the same three
month period in 1995. This increase was due to higher average balances of loans
receivable and a higher average yield on interest bearing earning assets,
partially offset by lower average balances of investment securities and
mortgage-backed securities. The average yield on interest earning assets for the
quarter ended September 30, 1996 was 7.66% compared to 7.45% for the prior year
period. Interest expense for the quarter ended September 30, 1996 was $35,467
lower than interest expense for the 1995 period. This decrease was due to the
lower average rate paid on deposits and borrowings and lower average balances of
borrowings, partially offset by higher average balances of deposits for the
quarter ended September 30, 1996. The average rate paid on deposits and
borrowings decreased from 4.91% for the quarter ended September 30, 1995 to
4.67% for the quarter ended September 30, 1996.
Net interest income. Net interest income increased $473,462 for the
quarter ended September 30, 1996 as compared to the same quarter in 1995. The
interest rate spread for the quarter ended September 30, 1996 was 2.99% as
compared to 2.55% for the quarter ended September 30, 1995.
Provision and allowance for loan losses. The provision for loan losses
increased $120,000 in the quarter ended September 30, 1996 as compared to the
same quarter period in 1995. This increase reflects an increase in the amount of
loans outstanding, as well as management's continuing evaluation of the possible
loss exposure in the loan portfolio. The allowance for possible loan losses
increased from $1,180,866 at June 30, 1996 (0.63% of loans receivable) to
$1,281,560 at September 30, 1996 (0.62% of loans receivable) due to the increase
in the provision.
Non-interest income. Non-interest income increased $405,748 in the
quarter ended September 30, 1996 in comparison to the same period in 1995. This
increase is related to increases in fees from customer services of $113,934,
increases in other operating income of $284,156, increases in securities
brokerage services of $14,841 and an increase in net gains from the sale of
mortgage-backed securities, investment securities and other real estate owned of
$1,728, partially offset by decreases in gain on sale of loans held for sale of
$8,911. Included in other
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operating income for the quarter ending September 30, 1996 is a $209,000 gain on
an exchange of land held for a future branch office.
Non-interest expense. Non-interest expense for the quarter ended
September 30, 1996 increased $1,672,201 in comparison to the corresponding
period in 1995. Compensation and benefits increased $138,893 primarily as a
result of the new branch office in Bozeman, Montana, which opened in February,
1996. Occupancy and equipment increased $48,183 again primarily due to the
operation of the new Bozeman branch. The SAIF special assessment was $1,330,517
in the 1996 period with no corresponding expense in 1995. Other non-interest
expense increased $180,296 primarily due to $198,128 in extra expense as a
result of the proposed merger with WesterFed Financial.
Income tax expense. Income tax expense decreased $328,000 for the
quarter ended September 30, 1996 as compared to the same period in 1995. This
decrease was the result of lower pre-tax earnings in the 1996 period.
<TABLE>
<CAPTION>
1996 Amount Change 1995 Amount Change 1994 Amount
----------- ------ ----------- ------ -----------
<S> <C> <C> <C> <C> <C>
Components of net income (in thousands)
Interest income.......................... $25,342 $ 1,059 $24,283 $ 6,491 $17,792
Interest expense......................... 14,912 1,961 12,951 3,582 9,369
------- ------- ------- ------- -------
Net interest income.................... 10,430 (902) 11,332 2,909 8,423
Provision for loan losses................ (120) (90) (30) 50 (80)
Noninterest income....................... 4,014 1,786 2,228 (30) 2,258
Noninterest expense...................... (10,358) (1,134) (9,224) (3,340) (5,884)
------- ------- ------- ------- -------
Income before income tax............... 3,966 (340) 4,306 (411) 4,717
Income tax expense....................... (1,422) 136 (1,558) 404 (1,962)
------- -- ------- -- -------
Net income............................ $ 2,544 $ (204) $ 2,748 $ (7) $ 2,755
======== ======= ======= ======== =======
</TABLE>
Comparison of Years Ended June 30,1996 and June 30, 1995
General. Net income for the year ended June 30, 1996 was $2,544,304
compared to $2,748,032 for the prior year. This decrease was due primarily to
increases in interest expense, noninterest expense and in the provision for loan
losses partially offset by increases in interest income and non-interest income
and decreases in income taxes. Return on average assets was 0.70% in 1996 versus
0.77% for the previous year.
On July 7, 1996, Security Bank underwent an accounting system
conversion. Due to this conversion, a complete recounting of the change in some
account balances is complex. Certain reclassifications have been made to 1995
and 1994 financial statements to conform with 1996 presentations. In some cases
a description of the remainder of the change in a particular account balance,
after description of the material changes, is indeterminable.
Interest Income. Interest income on loans receivable increased $2.7
million from 1995 to 1996. This increase was primarily caused by increases in
loans outstanding and a higher portfolio yield in 1996. The weighted average
yield on the loan portfolio increased from 8.81% in 1995 to 8.84% for 1996.
Interest income on investment securities decreased $365,216 from 1995 to 1996
due to decreases in the amount of investment securities and the average yield.
The weighted average yield on investment securities decreased from 6.61% in 1995
to 6.47% in 1996. Interest income on mortgage-backed securities decreased $1.4
million from 1995 to 1996. This decrease is related to a decrease in the average
outstanding balance of mortgage-backed securities during the year. The weighted
average yield on the portfolio increased from 6.25% in 1995 to 6.37% in 1996.
Interest Expense. Total interest expense increased approximately $2
million from 1995 to 1996. Interest expense on deposits increased approximately
$2 million from 1995 to 1996. This increase is due primarily to an increase in
the average rate paid on deposits from 3.99% in 1995 to 4.51% in 1996 and an
increase in the average outstanding balance of deposits in the 1996 period.
Interest expense on securities sold under repurchase agreement increased
$236,366 from 1995 to 1996. This increase was due to the higher amount of
securities sold under repurchase agreements outstanding in 1996. The average
rate paid on securities sold under repurchase agreements outstanding increased
from 4.68% in 1995 to 5.66% in 1996. Interest expense on advances from the
Federal Home Loan Bank decreased $233,651 from 1995 to 1996. This decrease was
due to the lower average amount of advances outstanding. The average rate paid
on advances increased from 5.37% in 1995 to 5.59% in 1996.
Net Interest Income. Net interest income decreased $902,363 from 1995
to 1996. This decrease was due primarily to the higher average rate paid on
interest-bearing liabilities, partially offset by the higher average balances of
interest-earning assets. The net yield on interest-earning assets decreased from
3.37% in 1995 to 3.11% for 1996.
Provision for Losses on Loans and Permanent Impairment of Investment
Securities. The provision for loan losses increased $90,000 and the provision
for permanent impairment of investment securities decreased $90,000. The change
in the provision for loan losses reflects management's continuing evaluation of
the possible exposure in the loan portfolio. Total non-accrual and renegotiated
loans increased from $425,000 at June 30, 1995 to
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$668,000 at June 30, 1996. The allowance for possible loan losses increased
slightly from $1,156,393 at June 30, 1995 (0.79% of loans receivable) to
$1,180,866 at June 30, 1996 (0.62% of loans receivable) due to the increase in
the provision and net recoveries.
During 1996, Security Bank sold its investment in one of two
investments in mutual funds that were held at June 30, 1995. Prior to the
adoption on July 1, 1994 of the provisions of the Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", Security Bank had
established a reserve for the permanent impairment in the carrying value of this
investment of $245,000. The total reserve for the permanent impairment in the
carrying value of this investment of $335,000 at June 30, 1995 was offset
against the loss on the sale during 1996.
Noninterest Income. Noninterest income increased $1.8 million from 1995
to 1996. This was primarily due to increases in fees for customer services,
securities brokerage services, gain on the sale of loans held for sale, gain on
the sale of mortgage-backed securities available for sale, and other operating
income, partially offset by increases in loss on the sale of investment
securities available for sale. Fees for customer services increased primarily
due to increases in consumer and real estate loan fees and fees charged for
deposit and checking services. Gain on the sale of loans increased due to the
increase in loan originations due primarily to favorable real estate lending
rates.
Gross gains of $525,484 and no losses were realized on the sale of
mortgage-backed securities available for sale during the period ended June 30,
1996. Gross losses of $324,943 and no gains were realized on the sale of
investment securities available for sale during the period. There were no
investment securities held to maturity or mortgage-backed securities held to
maturity sold during the period ended June 30, 1996.
Other operating income increased $380,155 primarily due to increases in
servicing income on loans sold, loan insurance commissions, and ATM servicing
fees for the use of automated teller machines.
Non-interest Expense. Non-interest expenses increased $1.1 million from
1995 to 1996. Compensation and benefits, occupancy and equipment, and other
expenses all increased. Compensation and benefits increased $713,189 primarily
as a result of the expansion of the new Rosauer' s branch in Missoula, Montana,
the new branch in Bozeman, Montana, and the addition of a commercial and
agriculture lending staff to the loan department. Occupancy and equipment
increased primarily due to the costs associated with the operation of the
branches referred to above and expenses relating to the one-time non-recurring
costs of the accounting system conversion that Security Bank underwent during
July of 1995.
Deposit insurance premiums decreased due to the abatement of Bank
Insurance Fund ("BIF") deposit premiums of the Federal Deposit Insurance
Corporation ("FDIC") relating to the approximately $82.4 million of deposits in
the three branches acquired in May 1995. In September 1995, Security Bank
received a refund of approximately $54,000 from the "FDIC" for overpaid "BIF"
premiums relating to these deposits. The FDIC has adopted a risk-based insurance
assessment system. Under this system, a bank or savings association with
deposits insured by the BIF is required to pay an assessment ranging from $0 to
$.27 per $100 of deposits based on the institution's risk classification. Banks
at the zero assessment rate will pay the statutory minimum of $2,000 for deposit
insurance. On the other hand, institutions such as Security Bank, with
SAIF-insured deposits are required to pay an assessment ranging from $.23 to
$.31 per $100 of deposits, based on the institution's risk classification.
Other expenses increased $394,664 due primarily to a $105,729 Butte
Branch litigation settlement paid in June of 1996 and increased costs relating
to the one-time non-recurring costs of the accounting system conversion that
Security Bank underwent during July 1995.
Income Taxes. Income taxes decreased $135,900 from 1995 to 1996,
primarily due to lower pre-tax income in 1996.
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Comparison of Years Ended June 30, 1995 and June 30, 1994
General. Net income for the year ended June 30, 1995 was $2,748,032
compared to $2,755,490 for the prior year. Net interest income increased and
income taxes decreased, offset by an increase in noninterest expense.
Return on average assets was 0.77% in 1995 versus 0.99% the previous year.
Interest Income. Interest income on loans receivable increased $4.2
million from 1994 to 1995. This increase was primarily caused by increases in
loans outstanding and a higher portfolio yield in 1995. The weighted average
yield on the loan portfolio increased from 8.24% in 1994 to 8.81% in 1995.
Interest income on investment securities increased $564,923 from 1994 to 1995
due to increases in the balance of investment securities and the average yield.
The weighted average yield on investment securities increased from 6.53% in 1994
to 6.61% in 1995. Interest income on mortgage-backed securities increased $1.8
million from 1994 to 1995. This increase is related to an increase in the
weighted average yield on the portfolio from 5.82% in 1994 to 6.25% in 1995 and
an increase in the average outstanding balance of mortgage-backed securities
during the year. Even though the balance of mortgage-backed securities at June
30, 1995 was lower than June 30, 1994, the purchase of $49.1 million in May and
June 1994 and the sale of $20.1 million in May 1995 result in a higher average
outstanding balance in fiscal year 1995.
Interest Expense. Total interest expense increased $3.6 million from
1994 to 1995. Interest expense on deposits increased $2.7 million from 1994 to
1995. This increase is due primarily to an increase in the average rate paid on
deposits from 3.74% in 1994 to 3.99% in 1995 and an increase in the average
outstanding balance of deposits in the 1995 period. The acquisition of the three
branches in May 1994 increased deposits by approximately $88.8 million. Such
deposits were outstanding for the entire fiscal year 1995, which resulted in a
higher average balance of deposits in 1995. Interest expense on securities sold
under repurchase agreement increased $254,746 from 1994 to 1995. This increase
is also related to the higher average balance of securities sold under
repurchase agreements outstanding in 1995. Security Bank did not have any
securities sold under repurchase agreements prior to the acquisition of the
three branches in May 1994. Interest expense on advances from the Federal Home
Loan Bank increased $606,584 from 1994 to 1995. This increase was due to the
higher average amount of advances outstanding in 1995, and to an increase in the
average rate paid on advances from 4.27% in 1994 to 5.37% in 1995.
Net Interest Income. Net interest income increased $2.9 million from
1994 to 1995. This increase was due primarily to higher average balances of
interest-earning assets and an increase in the net yield on interest-earning
assets, partially offset by higher average balances of interest-bearing
liabilities. The net yield on interest-earning assets increased from 3.19% in
1994 to 3.37% in 1995.
Provisions for Losses on Loans and Permanent Impairment of Investment
Securities. The provision for loan losses decreased $50,000 and the provision
for permanent impairment of investment securities decreased $155,000. These
changes reflect management's continuing evaluation of the possible loss exposure
in the loan portfolio and the possible permanent impairment of investment
securities. Total non-accrual and renegotiated loans decreased from
approximately $843,000 at June 30, 1994 to approximately $425,000 at June 30,
1995.
At June 30, 1995, Security Bank held investments in two mutual funds.
The reserve for the permanent impairment in the carrying value of these
investments was increased by $90,000 during 1995 to $335,000.
Noninterest Income. Noninterest income decreased $30,412 from 1994 to
1995. This was primarily due to decreases in the gain on sale of loans held for
sale, securities brokerage services, gain on the sale of investment securities,
mortgage-backed securities, other real estate owned, and other operating income,
partially offset by increases in fees for customer services, gain on sale of
real estate held for investment and other operating income. Fees for customer
services increased primarily due to increases in fees charged for deposit and
checking services and a substantial increase in the average outstanding balance
of deposits subject to such fees. Gain on the sale of loans decreased due to the
reduction in loan originations due primarily to rising interest rates.
Non-interest Expenses. Non-interest expenses increased $3.3 million
from 1994 to 1995. Compensation and benefits, advertising, occupancy and
equipment, deposit insurance premiums, data processing services and other
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expenses all increased. Compensation and benefits increased $1.3 million due
primarily to the operation of the three branches acquired in May 1994 for the
full year and the opening of a new branch in March 1995. Occupancy and equipment
increased primarily due to the costs associated with the operation of the
branches referred to above and the remodeling of the main office. Deposit
insurance premiums increased due to the increase in the average outstanding
balance of deposits and as a result of the acquisition of $88.8 million of
deposits in the three branches acquired in May 1994 being subject to deposit
insurance for the entire 1995 fiscal year. Data processing services increased
$513,952 due to costs associated with the operation of the three branches for
the entire year, the opening of the new branch in March 1995 and the
acceleration of depreciation of the in-house computer equipment in anticipation
of the conversion of data processing to an outside servicer. Other expenses
increased $1.0 million due primarily to increased costs, such as amortization of
the purchase premium, associated with the operation of the three new branches
for a full year.
Among factors which could impact general and administrative expenses in
the future are federal deposit insurance premiums. For institutions, such as
Security Bank, whose deposits are insured by both the SAIF and the BIF of the
FDIC, there will potentially be varying impacts on earnings.
Income Taxes. Income taxes decreased $403,752 from 1994 to 1995,
primarily due to lower pre-tax income in 1995 and a decrease in the effective
tax rate as a result of the one-time adjustment in connection with adopting SFAS
No. 109 in the 1994 period.
Liquidity and Capital Resources
Security Bank is subject to federal regulations which require the
maintenance of a daily average balance of liquid assets equal to a percentage,
currently 5%, of net withdrawable deposits and borrowings payable in one year or
less. The liquidity requirement may vary from time to time depending on economic
conditions and deposit flows. As of June 30, 1996 and 1995, Security Bank's
liquidity ratios were 7.24% and 7.54%, respectively. Federal regulations also
require Security Bank to maintain an average daily balance of short-term liquid
assets (generally those having maturities of one year or less) currently equal
to at least 1% of its average daily balance of net withdrawable accounts plus
borrowings payable in one year or less. As of June 30, 1996 and 1995, Security
Bank's short-term liquid asset ratios were 2.61% and 2.73%, respectively. During
fiscal years 1996 and 1995, Security Bank has maintained both liquidity ratios
in accordance with regulatory requirements.
Security Bank's liquidity investments for regulatory purposes totaled
approximately $25.4 million at June 30, 1996 and consisted primarily of cash,
interest-bearing accounts, U.S. government and U.S. government agency
obligations.
Security Bank's primary sources of funds include deposits, loan and
mortgage-backed securities repayments, proceeds from the sale of loans and
mortgage-backed securities, proceeds from the maturities of investment
securities, Federal Home Loan Bank advances, other borrowings and positive cash
flows generated from operations (including interest credited to deposits). For
fiscal year 1996, the excess deposit outflows over deposit receipts (including
securities sold under repurchase agreement and interest credits to deposit
accounts) was approximately $300,000. For fiscal years 1995 and 1994, the excess
of deposit outflows over deposit receipts (including interest credited to
deposit accounts) was $2.8 million and $1.4 million, respectively, disregarding
$88.8 million of deposits assumed in the 1994 acquisition. Loan and
mortgage-backed securities repayments and sales were $130.5 million in 1996,
$71.6 million in 1995 and $147.5 million in 1994. The large increases in loan
and mortgage-backed securities repayments and sales in 1996 and 1994 were
primarily due to increases in loan originations and sales due to the favorable
interest rate environment and refinancing activity which also affected the
principal repayments of mortgage-backed securities. Approximately $32.9 million,
$20.1 million and $16.2 million of mortgage-backed securities were sold during
1996, 1995 and 1994, respectively.
Security Bank uses its sources of funds primarily to fund maturing
savings certificates, savings withdrawals, repay borrowings, purchase
mortgage-backed securities and investment securities, fund existing and
continuing loan commitments, maintain its liquidity and meet operating expenses.
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As required by FIRREA, the OTS issued new capital standards effective
December 7, 1989 which require that a savings association meet three capital
tests, namely, a "tangible capital requirement" (requiring "tangible capital"
equal to at least 1.5% of adjusted total assets), a "leverage ratio requirement"
(currently requiring "core capital" equal to at least 3% of adjusted total
assets) and a "risk-based capital requirement" (requiring "total capital" equal
to 8.0% of risk-weighted assets). At June 30, 1996, Security Bank had tangible
capital of $26.8 million compared to a requirement of $5.5 million, core capital
of $26.8 million compared to a requirement of $11.1 million, and risk-based
capital of $28.0 million compared to a requirement of $15.2 million. The OTS has
adopted amendments to the leverage limit to reflect increases in the capital
requirements applicable to national banks as adopted by the Comptroller of the
Currency. As adopted, only savings associations rated Composite 1 under the OTS
MACRO rating system would be permitted to operate at or near the current minimum
core capital requirement of 3% of adjusted total assets. All other savings
associations are required to meet a minimum core capital requirement of at least
100 to 200 basis points greater than the current 3% minimum requirement.
In determining the amount of additional capital required, the OTS
assesses, on a case by case basis, both the quality of risk management systems
and the level of overall risk in each individual savings institution. Security
Bank anticipates that its core capital requirement will be increased to 4% or 5%
as a result of the new regulation.
Regulations adopted by the OTS and the other banking agencies pursuant
to the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"),
prescribe capital levels for institutions that would be deemed "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized." FDICIA imposes increasingly
stringent restrictions on the activities of institutions at each successively
lower capital level. FDICIA also provides federal banking agencies with
increased powers to take supervisory actions against institutions at the lower
capital levels. Such actions may include changing management, restricting
interest payments, and curtailing transactions with affiliated institutions.
Effective January 1, 1994, the OTS has adopted an amendment to its
capital regulations to require savings associations to maintain additional
capital based on the amount of their exposure to losses from changes in market
interest rates (the "interest rate risk component"). The amount of such capital
must equal 50% of the estimated decline in the market value of an association's
portfolio equity after an immediate 200 basis points increase or decrease
(whichever yields the larger decline) in market interest rates. The market value
of portfolio equity is the net present value of the cash flows from an
association's assets, liabilities, and off-balance-sheet items. Under the new
regulation, net present values are calculated by the OTS based on information
supplied by savings associations in quarterly reports and using discount rates
derived from rates paid on various instruments.
Effect of Inflation and Changing Prices. The financial statements and
related data 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 changes in the relative purchasing power of money over time due to
inflation. The impact of inflation can be found in the increased cost of
Security Bank's operations. The assets and liabilities of a financial
institution are primarily monetary in nature. As a result, interest rates have a
more significant impact on a financial institution's performance than the
effects of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services.
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VOTING SECURITIES AND PRINCIPAL HOLDERS OF SECURITY
Security Ownership of Certain Beneficial Owners
The following table provides information concerning the only persons
known to Security to have beneficial ownership as of October 31, 1996 of more
than 5% of the outstanding Security Common Stock, and each of the named
executive officers and directors of Security and Security Bank as a group.
<TABLE>
<CAPTION>
Name, Address and
Relationship with
Security or Number of Shares Percent of Class
Security Bank Beneficially Owned Beneficially Owned
- ------------------------------- ------------------ ------------------
<S> <C> <C>
TSI, Inc. 361,171 (1) 24.29%
First Montana Title Insurance Company
UAC, Inc.
Paul J. McCann
P.O. Box 2249
Great Falls, MT 59403
Directors and Officers as a Group 164,372 (2) 10.57%
(11 individuals)
<FN>
(1) Mr. McCann, First Montana Title Insurance Company ("FMTIC"), TSI, Inc.
and UAC, Inc. are deemed the beneficial owners of an aggregate of
361,171 shares of Security Common Stock. Mr. McCann, who is a past
director of Security, owns directly and has the sole power to vote and
dispose or direct the disposition of 6,500 shares of such stock. FMTIC
owns directly and has the sole power to vote and dispose or direct the
disposition of 121,000 shares of such stock. TSI, Inc., the parent
company of FMTIC, owns directly and has the sole power to vote and
dispose or direct the disposition of 222,922 shares of such stock and
UAC, Inc., a majority owned subsidiary of TSI, Inc., owns directly and
has the sole power to vote and dispose or direct the disposition of
10,749 shares of such stock.
(2) Includes currently exercisable options to purchase 68,500 shares.
</FN>
</TABLE>
DESCRIPTION OF WESTERFED FINANCIAL COMMON STOCK
The 15,000,000 shares of capital stock authorized by the WesterFed
Financial Certificate of Incorporation are divided into two classes, consisting
of 10,000,000 shares of WesterFed Financial Common Stock (par value $.01 per
share) and 5,000,000 shares of serial preferred stock (par value $.01 per
share). The aggregate par value of the issued shares constitute the capital
account of WesterFed Financial on a consolidated basis.
Each share of the WesterFed Financial Common Stock has the same
relative rights and is identical in all respects with each other share of the
Common Stock. The WesterFed Financial Common Stock represents non-withdrawable
capital, is not be of an insurable type and is not insured by the FDIC.
Under Delaware law, the holders of the Common Stock possess exclusive
voting power in WesterFed Financial. Each stockholder is entitled to one vote
for each share held on all matters voted upon by stockholders, subject to
certain limitations.
No Preemptive Rights. Holders of the WesterFed Financial Common Stock
are not entitled to preemptive rights with respect to any issued shares which
may be issued. The WesterFed Financial Common Stock is not subject to call for
redemption.
Preferred Stock. The Board of Directors of WesterFed Financial are
authorized to issue preferred stock in series and to fix and state the voting
powers, designations, preferences and relative, participating, optional or other
special rights of the shares of each such series and the qualifications,
limitations and restrictions thereof. Preferred stock may rank prior to the
Common Stock as to dividend rights, liquidation preferences, or both, and
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may have full or limited voting rights. The holders of preferred stock will be
entitled to vote as a separate class or series under certain circumstances,
regardless of any other voting rights which such holders may have.
WesterFed Financial has no present plans for the issuance of the
additional authorized shares of Common Stock or for the issuance of any shares
of preferred stock. The authorized but unissued and unreserved shares of Common
Stock are available for general corporate purposes including but not limited to
possible issuance as stock dividends or stock splits, future mergers or
acquisitions, under a cash dividend reinvestment and stock purchase plan, in a
future underwritten or other public offering, or under an employee stock
ownership plan. The authorized but unissued shares of preferred stock will
similarly be available for issuance in future mergers or acquisitions, in a
future underwritten public offering or private placement or for other general
corporate purposes. Except as described above or as otherwise required to
approve the transaction in which the additional authorized shares of Common
Stock or authorized shares of preferred stock would be issued, no stockholder
approval will be required for the issuance of these shares. Accordingly, the
Board of Directors of the WesterFed Financial without stockholder approval, can
issue preferred stock with voting and conversion rights which could adversely
affect the voting power of the holders of Common Stock.
Certain provisions of the WesterFed Financial Certificate may have the
effect of delaying, deferring or preventing a change in control of WesterFed
Financial pursuant to an extraordinary corporate transaction involving WesterFed
Financial, including a merger, reorganization, tender offer, transfer of
substantially all of its assets or a liquidation. See "Certain Anti-takeover
Provisions--Certificate of Incorporation and Bylaws."
RESTRICTIONS ON ACQUISITIONS OF WESTERFED FINANCIAL STOCK AND RELATED
TAKEOVER DEFENSIVE PROVISIONS
This section sets forth a brief discussion of the reasons for, and the
operation and effects of, certain provisions of the WesterFed Financial
Certificate and Bylaws (the "WesterFed Financial Bylaws") which may have certain
anti-takeover effects. This section also summarizes certain provisions of
federal law and Delaware law which may have anti-takeover effects.
Certificate of Incorporation and Bylaws
General. A number of provisions of the WesterFed Financial Certificate
and the WesterFed Financial Bylaws pertain to matters of corporate governance
and certain rights of stockholders. Certain of those provisions may be deemed to
have and may have the effect of making more difficult, costly or time consuming,
and thereby discouraging, a merger, tender offer, proxy contest or other attempt
to assume control of WesterFed Financial and/or change incumbent management and
in certain circumstances may prevent a change in control of WesterFed Financial
even if such a change in control is desired by a majority of WesterFed
Financial's stockholders. The following discussion focuses on certain of such
provisions.
Authorized Shares of Capital Stock. The WesterFed Financial Certificate
permits the WesterFed Financial Board to issue, without the approval of
stockholders but subject to the Board's fiduciary duties and the availability of
authorized but unissued shares, additional shares of WesterFed Financial Common
Stock, or shares of WesterFed Financial Preferred Stock with such rights and
preferences as the WesterFed Financial Board may determine. While the
availability of such shares provides WesterFed Financial with flexibility in
structuring financings and acquisitions and meeting other corporate needs, it
may also, as more fully described below, impede the completion of a transaction
to which the WesterFed Financial Board or management is opposed.
Uncommitted authorized but unissued shares of WesterFed Financial
Common Stock and WesterFed Financial Preferred Stock may be issued from time to
time to such persons and for such consideration as the WesterFed Financial Board
may determine and holders of the then-outstanding shares of WesterFed Financial
Common Stock or WesterFed Financial Preferred Stock may or may not be given the
opportunity to vote thereon, depending upon the nature of any such transactions,
applicable law, the rules and policies of the NASDAQ/NMS and the judgment of the
WesterFed Financial Board regarding the submission of such issuance to WesterFed
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Financial's stockholders. WesterFed Financial stockholders have no preemptive
rights to subscribe to newly issued shares.
Moreover, it is possible that additional shares of WesterFed Financial
Common Stock or WesterFed Financial Preferred Stock would be issued for the
purpose of making an acquisition by an unwanted suitor of a controlling interest
in WesterFed Financial more difficult, time-consuming or costly or to otherwise
discourage an attempt to acquire control of WesterFed Financial. Under such
circumstances, the availability of authorized and unissued shares of WesterFed
Financial Common Stock and WesterFed Financial Preferred Stock may make it more
difficult for WesterFed Financial stockholders to obtain a premium for their
shares. Such authorized and unissued shares could be used to create voting or
other impediments or to frustrate a person seeking to obtain control of
WesterFed Financial through a merger, tender offer, proxy contest or other
means. Such shares could be privately placed with purchasers who might cooperate
with WesterFed Financial in opposing such an attempt by a third party to gain
control of WesterFed Financial. The issuance of new shares of WesterFed
Financial Common Stock or WesterFed Financial Preferred Stock could also be used
to dilute ownership of a person or entity seeking to obtain control of WesterFed
Financial. Although WesterFed Financial does not currently contemplate taking
such action, shares of WesterFed Financial Common Stock or one or more series of
WesterFed Financial Preferred Stock could be issued for the purposes and effects
described above and the WesterFed Financial Board reserves its rights (if
consistent with its fiduciary responsibilities) to issue such stock for such
purposes.
Based on the number of shares of WesterFed Financial Common Stock and
WesterFed Financial Preferred Stock presently authorized for issuance in the
WesterFed Financial Certificate and the number thereof outstanding, WesterFed
Financial is currently limited in its ability to issue shares of WesterFed
Financial Common Stock and WesterFed Financial Preferred Stock, including in
connection with the Merger.
Upon consummation of the Merger, WesterFed Financial will issue up to
____ shares of WesterFed Financial Common Stock.
Classified Board of Directors and Removal of Directors. The WesterFed
Financial Certificate states that the WesterFed Financial Board is to be divided
into three classes, which shall be as nearly equal in number as possible. The
directors of WesterFed Financial in each class hold office for a term of three
years. The WesterFed Financial Certificate provides that a director may be
removed only for cause and then only by the affirmative vote of (i) the holders
of at least a majority of the outstanding shares entitled to vote in an election
of directors, voting as a single class and (ii) not less than a majority of the
directors then in office. If less than the entire Board is to be removed, no one
of the directors may be removed if the votes cast against the removal would be
sufficient to elect a director if such votes were cumulatively voted at an
election of the class of directors of which such director is a part.
A classified board of directors could make it more difficult for
stockholders, including those holding a majority of the outstanding shares, to
force an immediate change in the composition of a majority of the WesterFed
Financial Board. Since the terms of approximately one-third of the incumbent
directors expire each year, at least two annual elections are necessary for the
stockholders to replace a majority of the board, whereas a majority of a
non-classified board may be replaced in one year.
Management of WesterFed Financial believes that the staggered election
of directors helps to promote the continuity of management because approximately
one-third of the WesterFed Financial Board is subject to election each year.
Staggered terms help to assure that in the ordinary course of business
approximately two-thirds of the directors, or more, at any one time have had at
least one year's experience as directors, and moderate the pace of changes in
the WesterFed Financial Board by extending the minimum time required to elect a
majority of directors from one to two years.
Stockholder Vote Required to Approve Business Combinations with
Principal Stockholders. In connection with certain "Business Combinations" (as
defined below) and related transactions between WesterFed Financial and a
"Related Person" (as defined below), the WesterFed Financial Certificate
requires the approval of the holders of at least 75% of WesterFed Financial's
outstanding shares of voting stock voting as a single class unless the
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transaction is approved by the affirmative vote of at least 75% of the directors
who are not affiliated with the Related Person and who were directors at the
time the Related Person became such or unless certain fair price criteria are
met. The WesterFed Financial Certificate defines the term "Related Person"
generally to include any individual or entity which, together with its
"Affiliates" (as that term is defined in the Securities Exchange Act of 1934, as
amended) owns beneficially or controls, directly or indirectly, 10% or more of
the outstanding shares of voting stock of WesterFed Financial.
The WesterFed Financial Certificate defines Business Combination as:
(i) any merger or consolidation of WesterFed Financial or any of its
subsidiaries with or into any Related Person; (ii) any sale, lease, exchange,
mortgage, pledge, transfer, or other disposition other than in the ordinary
course of business to or with a Related Person of any assets of WesterFed
Financial having an aggregate fair market value of $1,000,000 or more; (iii) the
issuance or transfer by WesterFed Financial of any shares of its voting stock or
securities convertible into such shares (other than by way of a pro rata
distribution to all stockholders) to a Related Person; (iv) the adoption of any
plan or proposal for the liquidation or dissolution of WesterFed Financial or
any of its subsidiaries proposed, directly or indirectly, by or on behalf of a
Related Person; (v) any recapitalization, merger or consolidation that would
have the effect of increasing the voting power of a Related Person; (vi) any
merger or consolidation of WesterFed Financial with another person proposed,
directly or indirectly, by or on behalf of a Related Person unless the surviving
or resulting entity has a provision in its governing instrument which is
substantially identical to this provision of the WesterFed Financial
Certificate; and (vii) any agreement, contract or other arrangement or
understanding providing, directly or indirectly, for any of the transactions
described in this paragraph.
Under Delaware law, absent such a supermajority voting provision,
business combinations, including mergers, consolidations and sales of
substantially all of the assets of WesterFed Financial must be approved by the
vote of the holders of a majority of the outstanding shares of WesterFed
Financial Common Stock, subject to certain exceptions. See "--Delaware Law." The
increased stockholder vote required to approve a Business Combination may have
the effect of foreclosing mergers and other business combinations which a
majority of stockholders deem desirable and may place the power to prevent such
a merger or combination in the hands of a minority of stockholders.
Provisions Relating to Meetings of Stockholders. The WesterFed
Financial Certificate and WesterFed Financial Bylaws provide that Special
Meetings of stockholders may only be called by the chairman of the board or the
president and shall be called by either individual at the written request of a
majority of the directors then in office. The WesterFed Financial Certificate
also provides that stockholder action may be taken only at a Special Meeting of
stockholders and not by written consent. Although management of WesterFed
Financial believes that these provisions will discourage stockholder attempts to
disrupt the business of WesterFed Financial between Special Meetings of
stockholders, an additional effect may be to deter hostile takeovers by making
it more difficult for a person or entity to obtain immediate control of
WesterFed Financial between Special Meetings. These provisions may also prevent
stockholders from using a Special Meeting as a forum to address certain other
matters and may discourage takeovers which are desired by stockholders.
Restriction of Maximum Number of Directors and Filling Vacancies on
WesterFed Financial's Board of Directors. The WesterFed Financial Certificate
provides that the number of directors of WesterFed Financial shall be not less
than six nor more than 18, as set forth in the WesterFed Financial Bylaws. The
power to fill vacancies, whether occurring by reason of an increase in the
number of directors or by resignation, is vested in the WesterFed Financial
Board acting by a vote of a majority of directors then in office, even if less
than a quorum. An increase or decrease in the numerical range limitations on
directors of WesterFed Financial may only be accomplished through an amendment
of the WesterFed Financial Certificate, which amendment must be approved by the
affirmative vote of at least two-thirds of the directors then in office and by
the affirmative vote of the holders of at least 75% of the total votes eligible
to be cast at a meeting duly called for that purpose. An increase or decrease in
the number of directors within the numerical range limitations prescribed by the
WesterFed Financial Certificate requires an amendment to the WesterFed Financial
Bylaws, which requires an affirmative vote of at least two-thirds of the
directors then in office or an affirmative vote of at least 75% of the
outstanding capital stock entitled to vote for that purpose. The overall effect
of such provisions may be to prevent a person or entity from immediately
acquiring control of WesterFed Financial through an increase in the number of
WesterFed Financial directors
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followed by election of that person's or entity's nominees to fill the newly
created vacancies. Furthermore, the ability of the WesterFed Financial Board to
fill vacancies resulting from newly created directorships could allow the Board
to retain control of WesterFed Financial by creating new directorships and
filling the vacancies created thereby.
Advance Notice Requirements for Presentation of New Business and
Nominations of Directors at Meetings of Stockholders. The WesterFed Financial
Bylaws generally provide that any stockholder desiring to make a proposal for
new business at a meeting of stockholders must submit written notice which must
be received at the executive offices of WesterFed Financial at least 20 days in
advance of the meeting. The WesterFed Financial Bylaws also provide that
stockholders wishing to nominate candidates for election as directors must
deliver written notice to the secretary of WesterFed Financial at least 15 days
prior to the date of the Special Meeting of stockholders. Adequate advance
notice of stockholder proposals and nominations gives management time to
evaluate such proposals and nominations and to determine whether to recommend to
the stockholders that such proposals be adopted. In certain instances, such
provisions could make it more difficult to oppose management's proposals or
nominations if stockholders believe such proposals or nominations are not in
their best interests.
Supermajority Voting Requirement for Amendment of Certain Provisions of
the Certificate of Incorporation. The WesterFed Financial Certificate may be
amended only if first approved by two-thirds of the directors then in office at
a duly constituted meeting called expressly for that purpose and thereafter
approved by the vote of the holders of a majority of the outstanding shares of
WesterFed Financial Common Stock, except that the provisions of the WesterFed
Financial Certificate governing (i) WesterFed Financial's internal affairs, (ii)
call of Special Meetings, (iii) indemnification, (iv) limitation on the personal
liability of directors, (v) approval for acquisitions of control and offers to
acquire control and (vi) amending the WesterFed Financial Certificate must be
approved by the affirmative vote of the holders of at least 75% of the total
votes eligible to be cast on such matters, and the provisions of the WesterFed
Financial Certificate governing Business Combinations may be amended, added to,
changed or repealed only as provided for therein. This provision is intended to
prevent the holders of less than 75% of the outstanding shares of WesterFed
Financial from circumventing any of the foregoing provisions by amending the
Certificate of Incorporation to delete or modify any one of such provisions.
This provision would enable the holders of more than 25% of WesterFed
Financial's voting stock to prevent amendments to the WesterFed Financial
Certificate even if they were favored by the holders of a majority of the voting
stock.
Control Acquisitions. The WesterFed Financial Certificate provides
that, for as long as Western Bank remains a majority-owned subsidiary of
WesterFed Financial, no person shall acquire beneficial ownership of 10% or more
of the voting stock of WesterFed Financial unless (i) the acquisition received
prior approval, either by the affirmative vote of the holders of at least
two-thirds of the outstanding voting stock or, if first approved by two-thirds
of the directors then in office at a meeting of the directors called for such
purpose, then by the affirmative vote of holders of at least a majority of the
outstanding voting stock (in either case at a stockholder meeting called for
such purpose); and (ii) the acquisition received prior approval by the proper
federal regulatory agencies as provided in the Control Act and the Holding
Company Act.
In the event that beneficial ownership of 10% or more of the voting
stock of WesterFed Financial is acquired by any person in violation of the
aforementioned provisions, (i) WesterFed Financial may institute a private right
of action to enforce the relevant statutory and regulatory provisions under the
Control Act and the Holding Company Act, and (ii) all voting stock of WesterFed
Financial held by such person in excess of 10% of the outstanding voting stock
of WesterFed Financial shall no longer, from and after the date of its
acquisition (A) be entitled to vote on any matter, (B) be entitled to take other
stockholder action, (C) be counted in determining the total outstanding shares
of WesterFed Financial for purposes of any stockholder action, or (D) be
transferable except with the approval of the WesterFed Financial Board or of an
independent trustee appointed thereby (with the proceeds of such sale to be paid
(x) first, to the trustee, for its reasonable fees and expenses, (y) second, to
the acquiring person to cover its tax liability upon such sale, and (z) third,
to WesterFed Financial as to any remaining balance).
This provision would make it impractical for a third party to acquire
beneficial ownership of more than 10% of the outstanding voting stock of
WesterFed Financial without first receiving stockholder and regulatory
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approvals, since any party who acquired shares in excess of the 10% threshold
would lose all significant rights associated with the voting and transfer of
such shares.
Federal Law
Federal law provides that no person or company, directly or indirectly
or acting in concert with one or more persons or companies, or through one or
more subsidiaries, or through one or more transactions, may acquire "control" of
a savings association (which for these purposes includes a holding company
thereof) at any time without the prior approval of, or, in the case of
individuals, written notice to, the OTS. 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. Control of a
savings association or any other company under federal statute includes,
generally, ownership of, control of or holding irrevocable proxies (or any
combination of irrevocable proxies and voting stock) 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.
Among other things, direct or indirect 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 OTS regulations. Such control factors include, among other
things, the acquiror being one of the two largest stockholders of any class of
voting stock. 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. Thus, any person or
company that intends to acquire more than 25% of the WesterFed Financial Common
Stock, or that is subject to a "control factor" as described in the federal
regulations and intends to acquire more than 10% of the WesterFed Financial
Common Stock, may need to notify the OTS and seek prior approval, non-objection
or acceptance of a rebuttal statement.
In applying the "control" test to holders of the WesterFed Financial
Common Stock, Federal law treats the WesterFed Financial Preferred Stock, which
is convertible at any time at the option of the holder into WesterFed Financial
Common Stock, as WesterFed Financial Common Stock on an as-converted basis for
purposes of the 10% or 25% limits on voting stock. Consequently, any person that
intends to acquire ownership or control of some combination of WesterFed
Financial Preferred Stock and WesterFed Financial Common Stock, such that the
10% or 25% limits described above are met, may need to notify the OTS and seek
prior approval, non-objection or acceptance of a rebuttal statement.
Delaware Law
Section 203 of the Delaware General Corporation Law ("DGCL") may have
the effect of significantly delaying a purchaser's acquisition of the entire
equity interest in WesterFed Financial, and accordingly, could delay or
discourage certain takeover attempts. In general, Section 203 of the DGCL
prevents an "Interested Stockholder" (defined generally as a person with 15% or
more of a corporation's outstanding voting stock) from engaging in a "Business
Combination" (defined to include a variety of transactions, including mergers,
as set forth below) with a Delaware corporation such as WesterFed Financial for
three years following the date such person became an Interested Stockholder
unless: (i) before such person became an Interested Stockholder, the board of
directors of the corporation approved either the Business Combination or the
transaction in which the Interested Stockholder became an Interested
Stockholder; (ii) upon consummation of the transaction which resulted in the
Interested Stockholder becoming an Interested Stockholder, the Interested
Stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding stock owned by
directors who are also officers and employee stock plans in which employee
participants do not have the right to determine confidentially whether shares
held subject to the plan will be tendered); or (iii) following the transaction
in which such person became an Interested Stockholder, the Business Combination
is (A) approved by the board of directors of the corporation and (B) authorized
at a meeting of stockholders by the affirmative vote of the holders of 66-2/3%
of the outstanding voting stock of the corporation not owned by the Interested
Stockholder. The restrictions imposed on Interested Stockholders under DGCL
Section 203 do not apply under certain limited circumstances set forth therein,
including certain Business Combinations proposed by an Interested Stockholder
following the announcement or notification of certain extraordinary
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transactions involving the corporation and a person who had not been an
Interested Stockholder during the previous three years or who became an
Interested Stockholder with the approval of a majority of the corporation's
directors.
Section 203 of the DGCL provides that during such three-year period,
the corporation may not merge or consolidate with an Interested Stockholder or
any affiliate or associate thereof, and also may not engage in certain other
transactions with an Interested Stockholder or any affiliate or associate
thereof, including, without limitation, (i) any merger or consolidation of the
corporation or a direct or indirect majority-owned subsidiary of the corporation
with (A) the Interested Stockholder, or (B) with any other corporation if the
merger or consolidation is caused by the Interested Stockholder and as a result
of such merger or consolidation the above limitations of Section 203 are not
applicable to the surviving corporation; (ii) any sale, lease, exchange,
mortgage, pledge, transfer or other disposition (except proportionately as a
stockholder of the corporation) to or with the Interested Stockholder of assets
having an aggregate market value equal to 10% or more of the aggregate market
value of all assets of the corporation determined on a consolidated basis or the
aggregate market value of all the outstanding stock of a corporation; (iii) any
transaction which results in the issuance or transfer by the corporation or by
any majority owned subsidiary thereof of any stock of the corporation of such
subsidiary to the Interested Stockholder, except, among other things, pursuant
to a transaction which effects a pro rata distribution to all stockholders of
the corporation; (iv) any transaction involving the corporation or any majority
owned subsidiary thereof which has the effect of increasing the proportionate
share of the stock of any class or series, or securities convertible into the
stock of any class or series, of the corporation or any such subsidiary which is
owned by the Interested Stockholders (except, among other things, as a result of
immaterial changes due to fractional share adjustments); or (v) any receipt by
the Interested Stockholder of the benefit (except proportionately as a
stockholder of such corporation) of any loans, advances, guarantees, pledges or
other financial benefits provided by or through the corporation.
COMPARISON OF RIGHTS OF WESTERFED FINANCIAL
AND SECURITY STOCKHOLDERS
General
As a result of the Merger, holders of Security capital stock, whose
rights are presently governed by Montana law and the Articles of Incorporation
(the "Security Articles") and Bylaws (the "Security Bylaws") of Security, will
become stockholders of WesterFed Financial, a Delaware corporation. Accordingly,
their rights will be governed by Delaware law ("DGCL"), the WesterFed Financial
Certificate and the WesterFed Financial Bylaws. Certain differences in the
rights of stockholders arise from distinctions between the Security Articles and
Security Bylaws, and the WesterFed Financial Certificate and WesterFed Financial
Bylaws as well as Delaware law and Montana law. The following is a brief
description of those differences. This description does not purport to be a
complete statement of all differences between the rights of stockholders of
Security and WesterFed Financial, and the identification of specific differences
is not meant to indicate that other differences do not exist. However, Security
and WesterFed Financial believe that all of the material differences are
discussed below. The following summary is qualified in its entirety by reference
to Montana law, the DGCL, the Security Articles and Security Bylaws and the
WesterFed Financial Certificate and WesterFed Financial Bylaws.
Each Security stockholder should carefully consider these differences,
including provisions of the Certificate of Incorporation and Bylaws of WesterFed
Financial that may have an anti-takeover effect, in connection with the decision
to vote for or against the adoption and approval of the Merger Agreement.
Capital Stock
The Security Articles authorize the issuance of 10,000,000 shares of
common stock, par value $1.00 per share, and 5,000,000 shares of preferred
stock, par value $1.00 per share. The Security Articles also provide that the
Board may issue the Security Preferred Stock in series, establish from time to
time the number of shares to be included in each series and fix the rights and
preferences of the shares of each series and the qualifications, limitations or
restrictions thereof. As of January __, 1997, Security had no Preferred Stock
issued and outstanding.
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The WesterFed Financial Certificate authorizes the issuance of
10,000,000 shares of common stock, par value $.01 per share, and 5,000,000
shares of preferred stock, par value $.01 per share. The WesterFed Financial
Certificate also provides that the Board may authorize the issuance of WesterFed
Financial Preferred Stock in series, establish from time to time the number of
shares to included in each such series and fix the designation, powers,
preferences and rights of the shares of each such series and any qualifications,
limitations or restrictions thereof. The number of outstanding shares may be
increased or decreased by the affirmative vote of a majority of the Common Stock
holders, without a vote of the holders of the Preferred Stock, unless a vote of
any such holders is required pursuant to the terms of any Preferred Stock
Designation. At January ___1997, there were no shares of WesterFed Financial
Preferred Stock issued and outstanding.
Special Meetings of Stockholders
The Security Bylaws allow for special meetings of the shareholders for
any purpose or purposes, called at any time by the chairman of the board, the
president or a majority of the Board of Directors. Special meetings of
shareholders may also be called by the chairman of the board, the president or
the secretary upon written request signed by the holders of not less than 10% of
all of the outstanding capital stock of Security entitled to vote at the
meeting. The WesterFed Financial Certificate and Bylaws provide for special
meetings only when called by the Board of Directors pursuant to a resolution
adopted by a majority of the total number of directors which WesterFed Financial
would have with no vacancies. Therefore, to the extent a group of WesterFed
Financial shareholders desired to call a special meeting, they would not be
permitted to do so.
Advance Notice Requirements for Nominations of Directors and Presentation of New
Business at Meetings of Stockholders
The Security Articles and Bylaws allow shareholders to nominate
directors and raise new business at the annual meetings with written notice to
the Secretary of Security at least five days prior to the date of the annual
meeting. If a new business proposal is not properly written and filed, such
proposal may not be acted upon and will be laid over for action at an adjourned,
special or annual meeting of the stockholder, taking place 30 days or more
thereafter. The WesterFed Financial Bylaws allow shareholders to nominate
directors and raise new business at annual meetings with written notice, as
described in the Bylaws, to the Secretary of WesterFed Financial at least 30
days prior to the annual meeting (unless notice of the annual meeting was given
less than 40 days in advance of the meeting, in which case the shareholder can
timely file within ten days of the notice). Any business so brought up by a
shareholder must relate to a proper subject for stockholder action. WesterFed
Financial stockholders are therefore subject to a longer notice requirement with
regard to nominations of directors and presentation of new business at
stockholder meetings, as well as a specific requirement that new business
proposals relate to a proper subject for stockholder action.
Cumulative Voting for Election of Directors
Cumulative voting entitles each stockholder to cast a number of votes
in the election of directors equal to the number of such stockholder's shares of
stock multiplied by the number of directors to be elected, and to distribute
such votes in favor of one nominee or among two or more of the nominees to be
elected. The Security Articles allow cumulative voting by stockholders in the
election of directors. The WesterFed Financial Certificate does not provide for
cumulative voting. Accordingly, cumulative voting, which may be considered
desirable by certain stockholders, is not available to WesterFed Financial
stockholders.
Number and Term of Directors
The Security Articles and Bylaws prescribe a Board of Directors
consisting of no fewer than nine directors, and no more than fifteen directors
as fixed by the vote of the Board of Directors; the Board is divided into three
classes, as nearly equal in number as possible. The members of each class are
elected for three year terms and until their successors are elected and
qualified with one class being elected annually.
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The WesterFed Financial Certificate and Bylaws allow the Board of
Directors to determine, by resolution, the number of Directors on the Board.
Absent any designation by the Board of Directors, the number of directors is
six; currently, there are six directors on WesterFed Financial's Board of
Directors. The WesterFed Financial Certificate requires that the Board be
divided into three classes, as nearly equal in number as possible, with the term
of one class expiring each year.
Removal of Directors
The Security Bylaws provides for removal of directors at a shareholder
meeting called expressly for that purpose. A director may be removed for cause
by a vote of the holders of a majority of the shares then entitled to vote. If
less than the entire board is to be removed, no one of the directors may be
removed if the votes cast against the removal would be sufficient to elect,
under cumulative voting, a director in the class of directors of which the
director is a part.
The WesterFed Financial Certificate permits removal of any and all
directors at any time, but only for cause and only by the affirmative vote of
the holders of at least 80% of the voting power of all of the then-outstanding
shares of capital stock of the Corporation entitled to vote generally in the
election of directors, voting together as a single class. Therefore, the
percentage of shareholders required to remove a director is higher for WesterFed
Financial shareholders than for Security shareholders.
Business Combinations with Certain Persons
The Security Articles and Bylaws do not address issues related to
Business Combinations with Affiliates or Interested Shareholders.
The WesterFed Financial Certificate includes a provision which requires
that a "Business Combination" (as defined therein) involving any "Interested
Stockholder" (which generally includes any person or entity owning or
controlling more than 10% of the outstanding voting stock of WesterFed
Financial), must be approved by the holders of at least 80% of the outstanding
shares entitled to vote, unless the Business Combination has been approved in
advance by a majority of the disinterested directors who are unaffiliated with
the Interested Stockholder and were directors prior to the time that the
Interested Stockholder became a Interested Stockholder, or certain fair price
conditions are met. In the event the requisite approval of the disinterested
directors is given, or the fair price conditions are met, the normal voting
requirements of the DGCL would apply. For a more complete description of the
Business Combination provision of the WesterFed Financial Certificate, see
"Certain Anti-takeover Provisions--Certificate of Incorporation and
Bylaws--Stockholder Vote Required to Approve Business Combinations with
Principal Stockholders".
Amendment of Certificate or Articles of Incorporation and Bylaws
The Security Articles give shareholders the sole power to amend, by a
majority vote, the Security Articles, except that the Board of Directors may
amend the Articles without shareholder action under certain circumstances as
provided by Montana law. The Security Bylaws may be amended by a majority of the
full board of directors or by a majority of the votes cast by the shareholders
of the corporation.
The DGCL provides that the certificate of incorporation of a Delaware
corporation may be amended only if first approved by the corporation's board of
directors and thereafter by a majority of the outstanding stock entitled to vote
thereon. The WesterFed Financial Certificate grants full amendment power of the
Certificate to the Corporation as prescribed by Delaware law, except that an 80%
vote of the outstanding shares is required to amend or repeal certain portions
of the Certificate related to capital stock authorization, special meetings of
stockholders, annual meetings of shareholders, the number and terms of
directors, amendment of Bylaws, Business Combinations with and stock purchases
from Interested Shareholders and indemnification of directors. The WesterFed
Financial Certificate expressly empowers the Board of Directors to adopt, amend
or repeal the By-laws of the Corporation. Shareholders can adopt, amend or
repeal the By-laws of the Corporation with an affirmative vote of at least 80%
of the then outstanding shares of WesterFed Financial capital stock generally
entitled to vote for directors.
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WesterFed Financial shareholders, therefore, are subject to
supermajority standards for amending the WesterFed Financial Bylaws and much of
the WesterFed Financial Certificate.
Control Acquisitions
The WesterFed Financial Certificate provides that any person who
beneficially owns 10% or more of the outstanding voting stock of WesterFed
Financial Corporation is not permitted to vote in respect of the shares held in
excess of the 10%. The Security Articles and Bylaws do not contain similar
provisions.
RATIFICATION OF THE ADOPTION OF THE WESTERFED FINANCIAL EQUITY INCENTIVE
PLAN
An equity incentive plan (the "Equity Incentive Plan") has been adopted
by the Board of Directors of WesterFed Financial, effective ____________, 1996,
subject to ratification by stockholders at the WesterFed Financial Special
Meeting. Apart from the replenishing of shares, the Plan is comparable in
structure and purpose to plans adopted by the stockholders of a large number of
public companies and is similar to the WesterFed Financial's 1993 Stock Option
and Incentive Plan approved by WesterFed Financial Stockholders at a Special
Meeting of WesterFed Financial Stockholders held in March 1994. As of January
___ , 1997, awards covering a total of ___________ shares of the _______ shares
of Common Stock reserved for issuance under the 1993 Stock Option and Incentive
Plan have been granted.
Pursuant to the Equity Incentive Plan, ______ shares or ____% of
WesterFed Financial's Common Stock will be reserved for issuance under the
Equity Incentive Plan from authorized but unissued shares. In addition, the
Equity Incentive Plan will include the ______ shares previously authorized by
shareholders which have not been granted under WesterFed Financial's existing
1993 Stock Option and Incentive Plan plus, the number of shares repurchased by
WesterFed Financial in the open market or otherwise with an aggregate price no
greater than the cash proceeds received by WesterFed Financial from the exercise
of shares under the Equity Incentive Plan; plus, any shares surrendered to
WesterFed Financial in payment of the exercise price of options issued under the
Equity Incentive Plan.
The WesterFed Financial Board of Directors proposes that stockholders
approve the new Equity Incentive Plan in order to fulfill WesterFed Financial's
obligation pursuant to the Merger Agreement to assume the outstanding Security
stock options of Security's directors and executive officers. In addition
adoption of the Equity Incentive Plan would increase the number of shares
available for future grants of stock options. The WesterFed Financial Board of
Directors believes that it is appropriate for WesterFed Financial to adopt a
flexible and comprehensive Equity Incentive Plan which permits the granting of a
variety of long-term incentive awards to directors, officers and employees as a
means of enhancing and encouraging the recruitment and retention of those
individuals on whom the continued success of WesterFed Financial depends.
However, because future awards are granted only to persons affiliated with
WesterFed Financial, the adoption of the Equity Incentive Plan could make it
more difficult for a third party to acquire control of WesterFed Financial and
therefore could discourage offers for WesterFed Financial's stock that may be
viewed by WesterFed Financial's stockholders to be in their best interest.
Attached as Appendix VII to this Proxy Statement/Prospectus is the
complete text of the Equity Incentive Plan. The principal features of the Equity
Incentive Plan are summarized below.
Principal Features of the Equity Incentive Plan
The Equity Incentive Plan provides for awards in the form of stock
options, stock appreciation rights ("SARs"), other securities and property and
restricted stock. Each award shall be on such terms and conditions, consistent
with the Equity Incentive Plan, as the committee administering the Equity
Incentive Plan may determine.
Shares may be either authorized but unissued shares or reacquired
shares held by WesterFed Financial in its treasury. Any shares subject to an
award which expires or is terminated unexercised will again be available for
issuance under the Equity Incentive Plan or any other plan of WesterFed
Financial or its subsidiaries. Generally,
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no award or any right or interest therein is assignable or transferable except
under certain limited exceptions set forth in the Plan.
The Equity Incentive Plan is administered by the Compensation Committee
of the Board of Directors of WesterFed Financial. Directors Roemer, Klein, and
Reynolds have been appointed as the present members of the Compensation
Committee. Pursuant to the terms of the Equity Incentive Plan, any director or
employee of WesterFed Financial or its affiliates is eligible to participate in
the Equity Incentive Plan which currently includes approximately 200 persons. In
granting awards under the Equity Incentive Plan, the Compensation Committee
considers, among other things, position and years of service, value of the
participant's services to WesterFed Financial and its subsidiaries and the
responsibilities of such individuals as employees, directors and officers of a
public company.
Stock Options
The term of stock options will not exceed 15 years from the date of
grant. The Compensation Committee may grant either "Incentive Stock Options" as
defined under Section 422 of the Code or stock options not intended to qualify
as such ("Non-Qualified Stock Options").
In general, stock options will not be exercisable after the expiration
of their terms. Unless otherwise determined by the Compensation Committee, in
the event that a participant terminates service (as defined in the Equity
Incentive Plan) to WesterFed Financial, or one of its affiliates, for any reason
other than termination for cause, an exercisable stock option will continue to
be exercisable for three years but in no event after the expiration date of the
option. A stock option will automatically terminate and will no longer be
exercisable as of the date a participant is terminated for cause.
The exercise price for the purchase of shares subject to a stock option
may not be less than 100% of the market value of the shares covered by the
option on the date of grant. The exercise price may be paid in cash or shares of
common stock or other awards, or a combination thereof.
Stock Appreciation Rights
The Compensation Committee may grant SARs at any time, whether or not
the participant then holds stock options, granting the right to receive the
excess of the market value of the shares represented by the SARs on the date
exercised over the exercise price. SARs generally will be subject to the same
terms and conditions and exercisable to the same extent as stock options, as
described above. Upon the exercise of a SAR, the participant will receive the
amount due in cash or shares, or a combination of both, as determined by the
Compensation Committee. SARs may be related to stock options ("tandem SARs"), in
which case the exercise of one will reduce to that extent the number of shares
represented by the other.
Restricted Stock
The Compensation Committee may grant restricted stock, subject to such
restrictions as the Compensation Committee may impose. The holder of restricted
stock may have all of the rights of a stockholder, including the right to
receive dividends and the right to vote the shares. Unless otherwise determined
by the Compensation Committee, all unvested shares of restricted stock shall be
forfeited upon termination of service of the recipient.
The Compensation Committee may, in its discretion, accelerate the time
at which any or all restrictions will lapse, or may remove any or all of the
restrictions. Restrictions may lapse separately or in combination at such time
or times, in such installments or otherwise as the Compensation Committee may
deem appropriate.
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Performance Awards
The Compensation Committee may, in its full discretion, grant
performance awards consisting of cash, stock, other securities or property to
participants under the Equity Incentive Plan based on the achievement of certain
performance goals during specified periods of time.
Effect of Merger and Other Adjustments
Shares as to which awards may be granted under the Equity Incentive
Plan, and shares then subject to awards, will be adjusted by the Compensation
Committee in the event of any merger, consolidation, reorganization,
recapitalization, stock dividend, stock split or other change in the corporate
structure of WesterFed Financial.
In the case of any merger, consolidation or combination of WesterFed
Financial whereby either WesterFed Financial is not the continuing company or
its outstanding shares are converted into or exchanged for different securities,
cash or property, or any combination thereof, any participant to whom a stock
option or SAR has been granted will have the right upon exercise of the option
or SAR to an amount equal to the excess of the market value on the date of
exercise of the consideration receivable in the merger, consolidation or
combination with respect to the shares covered or represented by the stock
option or SAR over the exercise price of the option or SAR multiplied by the
number of shares with respect to which the option or SAR has been exercised.
The restricted period with respect to an award of restricted stock will
lapse, and the stock will become fully vested after a change in control of
WesterFed Financial. A change in control will be deemed to occur when (i) a
person or group becomes the beneficial owner of shares of WesterFed Financial
representing 25% or more of the total number of votes which may be cast for the
election of the Board of Directors of WesterFed Financial, (ii) in connection
with any tender or exchange offer (other than an offer by WesterFed Financial),
merger or other business combination, sale of assets or contested election, or
combination of the foregoing, the persons who are Directors of WesterFed
Financial cease to be a majority of the Board of Directors, or (iii)
stockholders of WesterFed Financial approve a transaction pursuant to which
WesterFed Financial will cease to be an independent publicly-owned company or
pursuant to which substantially all of its assets will be sold.
In addition, unless the Compensation Committee shall have provided
otherwise, in the event of a tender or exchange offer (other than an offer made
by WesterFed Financial) or if the event specified in clause (iii) above occurs,
all outstanding stock options and SARs not fully exercisable will become
exercisable in full.
Amendment and Termination
The Board of Directors of WesterFed Financial may at any time amend,
suspend or terminate the Equity Incentive Plan or any portion thereof but may
not, without the prior approval of the stockholders, make any amendment which
shall (i) change the aggregate number of shares with respect to which awards may
be made under the Plan (except for adjustments upon changes in capitalization)
or (ii) change the persons eligible to participate in the Plan; provided,
further that no such amendment, suspension or termination of the Plan shall be
permitted except in accordance with Rule 16(b) of the Securities Exchange Act of
1934 or any similar or successor provision.
Federal Income Tax Consequences
Under present federal income tax laws, awards under the Equity
Incentive Plan will have the following consequences:
(1) The grant of an award, by itself, will generally neither result in the
recognition of taxable income to the participant nor entitle WesterFed
Financial to a deduction at the time of such grant.
(2) In order to qualify as an "Incentive Stock Option," a stock option awarded
under the Equity Incentive Plan must meet the conditions contained in
Section 422 of the Code, including the requirement that the shares
acquired upon the exercise of the stock option be held for one year after
the date of exercise and two years
172
<PAGE>
after the grant of the option. The exercise of an Incentive Stock Option
will generally not, by itself, result in the recognition of taxable income
to the participant nor entitle WesterFed Financial to a deduction at the
time of such exercise. However, the difference between the exercise price
and the fair market value of the option shares on the date of exercise is
an item of tax preference which may, in certain situations, trigger the
alternative minimum tax. The alternative minimum tax is incurred only when
it exceeds the regular income tax. The alternative minimum tax will be
payable at the rate of 26% on the first $175,000 of "minimum taxable
income" above the exemption amount ($33,750 single person or $45,000
married person filing jointly). This tax applies at a flat rate of 28% on
minimum taxable income more than $175,000 above the applicable exemption
amounts. If a taxpayer has alternative minimum taxable income in excess of
$150,000 (married persons filing jointly) or $112,500 (single person), the
$45,000 or $33,750 exemptions are reduced by an amount equal to 25% of the
amount by which the alternative minimum taxable income of the taxpayer
exceeds $150,000 or $112,500, respectively. Provided the applicable
holding periods described above are satisfied, the participant will
recognize long term capital gain or loss upon the resale of the shares
received upon such exercise.
(3) The exercise of a stock option which is not an Incentive Stock Option will
result in the recognition of ordinary income by the participant on the
date of exercise in an amount equal to the difference between the exercise
price and the fair market value on the date of exercise of the shares
acquired pursuant to the stock option.
(4) The exercise of an SAR will result in the recognition of ordinary income
by the participant on the date of exercise in an amount of cash, and/or
the fair market value on that date of the shares, acquired pursuant to the
exercise.
(5) Holders of Restricted Stock will recognize ordinary income on the date
that the Restricted Stock is no longer subject to a substantial risk of
forfeiture, in an amount equal to the fair market value of the shares on
that date. In certain circumstances, a holder may elect to recognize
ordinary income and determine such fair market value on the date of the
grant of the Restricted Stock. Holders of Restricted Stock will also
recognize ordinary income equal to their dividend or dividend equivalent
payments when such payments are received. Generally, the amount of income
recognized by participants will be a deductible expense for tax purposes
for WesterFed Financial.
(6) WesterFed Financial will be allowed a deduction at the time, and in the
amount of, any ordinary income recognized by the participant under the
various circumstances described above, provided that WesterFed Financial
meets its federal withholding tax obligations.
Awards Under the Equity Incentive Plan
No individuals have been granted awards, or are the intended recipients
of awards pursuant to the Equity Incentive Plan, other than directors and
officers of Security who are entitled, pursuant to the Merger Agreement to
receive WesterFed Financial stock options in place of outstanding Security stock
options. On January ___, 1997, the average of the bid and asked price for
WesterFed Financial's Common Stock on the Nasdaq National Stock Market was $____
per share.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE
RATIFICATION OF THE ADOPTION OF THE EQUITY INCENTIVE PLAN.
ELECTION OF SECURITY DIRECTORS
Information on the Security Board and Nominees
Security's Articles of Incorporation provide that the number of directors
must fall within a range of 9 and 15, the exact number to be determined by
resolution of the Board of Directors.
173
<PAGE>
Directors are elected for a term of three years and until their successors
have been elected and qualified. Security's Articles of Incorporation require
that the terms of the directors be staggered such that approximately one-third
of the directors are elected each year. In accordance with this requirement, the
Board of Directors has nominated Messrs. David W. Jorgenson and William M.
Leslie and Ms. Elaine F. Hine for election as directors for three-year terms to
expire in 1999. If either Messrs. Jorgenson or Leslie or Ms. Hine should refuse
or be unable to serve, your proxy will be voted for such person as shall be
designated by the Board of Directors to replace any such nominee. The Board of
Directors presently has no knowledge that any of the nominees will refuse or be
unable to serve.
Other nominations, if any, may be made only in accordance with the prior
notice provisions contained in the Articles of Incorporation.
The table below sets forth information regarding the Security Board,
including members' terms of office and their beneficial ownership of Security
Common Stock at October 31, 1996.
<TABLE>
<CAPTION>
Number of
Position Shares of
Term of Currently Common Stock
Director Office Held With Beneficially Percent
Director/Age Since Expires Security Owned of Class
- ------------ -------- ------- --------- ------------ --------
<S> <C> <C> <C> <C> <C>
Nominees for Director
- ---------------------
Elaine F. Hine, 51 1995 1996 Sr. VP & Director 20,070(1) 1.34%
David W. Jorgenson, 47 1992 1996 President, CEO and 55,825(2) 3.68%
Director
William M. Leslie, 61 1978 1996 Director 3,800(3) *
Continuing Directors
- --------------------
Earl J. Hanson, 55 1985 1997 Director 100(4) *
George R. Pierce, 49 1982 1997 Director 7,625(5) *
Jack D. Rehberg, 67 1977 1997 Director 29,252(6) 1.97%
Wlliam M. Dimich, 65 1967 1998 Chairman & 14,500(5)(7) *
Director
Harold S. Hanson, 70 1980 1998 Director 18,100(5)(8) 1.21%
Stephen C. Sandels, 59 1995 1998 Director 4,600(5) *
<FN>
- ----------
(1) Includes 788 shares held in a retirement account for the benefit of Mrs.
Hine, 788 shares held in a retirement account for the benefit of Mrs.
Hine's spouse, 200 shares held for Mrs. Hine's daughter, of which Mrs.
Hine is custodian and currently exercisable options to purchase 15,000
shares.
(2) Includes 12,225 shares held in a retirement account for the benefit of Mr.
Jorgenson, 2,550 shares held in trust for Mr. Jorgenson's daughters of
which Mr. Jorgenson is trustee and currently exercisable options to
purchase 30,000 shares.
(3) Includes 600 shares held by Mr. Leslie as Trustee of the Profit-Sharing
Plans and Trusts of Mineral Specialties, Inc. and Quality Concrete Company
and 100 shares held by spouse.
(4) Includes 100 shares held in a retirement account for th e benefit of
Mr. Hanson.
(5) Includes currently exercisable options to purchase 4,500 shares.
(6) Includes 2,177 shares held in a retirement account for the benefit of
Mr. Rehberg and 2,700 shares held in a retirement account for the benefit
of Mr. Rehberg's spouse.
(7) Includes shares held jointly with spouse as to which voting and investment
power is shared.
(8) Includes 6,600 shares held in a retirement account for the benefit of Mr.
Hanson, 2,000 shares held by Mr. Hanson as Trustee for the Trust Fund of
Billings Builders Exchange, Inc., 1,000 shares owned by Plaza Office
Building Partnership, of which Mr. Hanson is a General Partner and 4,000
shares held by Mr. Hanson's spouse.
* Represents less than 1% of Security's outstanding shares.
</FN>
</TABLE>
174
<PAGE>
Nominees for Director
Elaine F. Hine joined Security Bank in 1975 and has served in various
capacities since that time. In 1978 she was elected Vice President and Secretary
in charge of Deposits and Special Services of Security Bank and in 1983 Ms. Hine
was elected Senior Vice President of Security Bank. Ms. Hine has served as
Secretary/Treasurer and a Director of S.F.S. Industries, Inc. ("SFS"), a
wholly-owned subsidiary of Security Bank, FSB and Senior Vice President and
Secretary of Security since its inception. In December 1995 Mrs. Hine was
elected to the Board of Directors.
David W. Jorgenson has held the office of President and Chief Executive
Officer of Security since its formation in 1993. He was elected to serve as
President and Chief Executive Officer of Security Bank and SFS commencing June
1, 1992. He had previously served as Executive Vice President and Chief
Operating Officer of Security Bank from October 1, 1991 until May 31, 1992. Mr.
Jorgenson was employed by United Tote Company, a supplier of computerized
wagering systems and a subsidiary of United Tote, Inc., from January 1989 to
September 30, 1991, as Senior Vice President-Finance. He previously worked at
First Interstate Bank of Billings, N.A. (formerly Security Bank, N.A.) from 1973
to 1989, his last position being Vice President and head of the Banking
Division.
William M. Leslie has served as President and Chairman of the Board of
Quality Concrete Company, a family-owned business, since 1967. He also has been
a part owner of Mineral Specialties, Inc., a family-owned industrial company
since 1964 and is the Chief Executive Officer of Cody Brick & Masonry Supplies
and Rocky Mountain Concrete Products.
Continuing Directors
William M. Dimich has held the position of Chairman of the Board of
Directors of Security since its inception and of Security Bank since January,
1985. He has been employed by Pepsi Cola Bottling Company of Billings since 1950
and has served since 1961 as its Vice President - Sales and Service.
Earl J. Hanson has served as legal counsel to Security and/or Security
Bank since December, 1980. He began his own law firm in June, 1991, which is now
known as Hanson, Roybal, Lee & Todd, PC. Prior to that time, he was a partner in
the law firm of Keefer, Roybal, Hanson, Stacey and Walen beginning in 1978. Mr.
Hanson is not related to Harold S. Hanson.
Harold S. Hanson has also served as a director of SFS since its formation
in June, 1984. He has been an independent consulting engineer since January,
1993 and is also a state legislator. Prior to that time he was the owner and
President of Energy Conservation Consultants, Inc. since 1978. Mr. Hanson is not
related to Earl J. Hanson.
George R. Pierce has been the manager and part owner of Pierce Flooring
since 1975. He is also part owner of Carpet Barn and Pierce Mobile Homes.
Jack D. Rehberg retired as President and Chief Executive Officer of
Security Bank on May 31, 1992. He joined Security Bank in 1975 as an assistant
to the former President. In 1977 he was elected President and Chief Executive
Officer of Security Bank and served in those capacities during his employment.
Mr. Rehberg also had served as the President of SFS, until his retirement, and
continues to serve as a director of SFS.
Stephen C. Sandels retired from the practice of law in 1993. Mr. Sandels
was a partner in the law firm McDermott, Will & Emery, Chicago, Illinois, from
1968 to 1993. Mr. Sandels currently resides in Snowmass Village, Colorado.
175
<PAGE>
Meetings and Committees of the Boards of Directors
Board of Directors
There were ten meetings of the Board of Directors of Security and 12
meetings of the Board of Directors of Security Bank during the fiscal year ended
June 30, 1996. All directors attended more than 75% of such meetings, and of all
committee meetings of which they were members.
Committees
The Board of Directors of Security and/or Security Bank has established
certain standing committees, including an Audit Committee, Nominating Committee,
Compensation Committee and Executive Committee.
Audit Committee. The Audit Committee of the Board of Directors selects the
internal auditor and, subject to the ratification of Security's stockholders,
the independent public accountants for Security, reviews monthly reports of the
internal auditor, reports of the independent public accountant and Office of
Thrift Supervision Reports of Examination and oversees matters relating to
internal control and audit. The Committee also reviews the annual reports to the
Securities and Exchange Commission and to the stockholders and the Annual
Meeting Proxy Statement. Non-employee directors act as the Audit Committee. The
Audit Committee which meets in conjunction with regular Board of Directors
meetings met 12 times during fiscal year ended June 30, 1996.
Nominating Committee. The Nominating Committee of the Board of Directors
is responsible for interviewing and submitting the names of qualified candidates
for director to the Secretary at least twenty days prior to the date of the
Annual Meeting. The Board of Directors acts as the Nominating Committee. The
Nominating Committee met once during the fiscal year ended June 30, 1996.
Security's Articles of Incorporation currently require that stockholders who
wish to nominate candidates for directors must deliver such nominations in
writing to the Secretary at least five days prior to the date of the Annual
Meeting. The Nominating Committee will consider recommendations by stockholders,
but has not established procedures to be followed by stockholders in making such
recommendations. Recommendations should be addressed to the Secretary of
Security and should include biographical and other pertinent data.
Compensation Committee. The Compensation Committee of the Board of
Directors reviews and recommends compensation for the President and Chief
Executive Officer and recommends any changes in the Board of Directors' fees.
The Compensation Committee has been appointed by the Board of Directors to
administer the 1993 Stock Option and Stock Appreciation Rights Plan ("1993 Stock
Option Plan"). The Committee met three times during the fiscal year ended June
30, 1996. The current members of the Compensation Committee are Earl J. Hanson,
William M. Leslie and Jack D. Rehberg.
Executive Committee. The Board of Directors also has an Executive
Committee, which met eight times during the fiscal year ended June 30, 1996. The
Executive Committee, when the Board of Directors is not in session, may exercise
all of the authority of the Board of Directors, with certain exceptions
specified in Security's Bylaws. The Executive Committee consists of the Chief
Executive Officer and two or more directors of Security, as determined by
resolution of the Board of Directors. The Executive Committee does not hold
regular meetings but meets on an as needed basis.
Compensation Committee Interlocks and Insider Participation
Through the Compensation Committee, Security has established the
compensation criteria for officers of Security and/or Security Bank, including
the Executive Officer of Security named in the Summary Compensation Table. The
members of the Compensation Committee are Earl J. Hanson, William M. Leslie and
Jack D. Rehberg, each of whom are directors of Security. Neither of Messrs. E.
Hanson, Leslie or Rehberg serves as an officer or employee of Security or
Security Bank.
176
<PAGE>
Compensation Committee Report
Through the Compensation Committee, Security has established the
compensation criteria for officers of Security and/or Security Bank, including
the Executive Officer of Security named in the Summary Compensation Table below.
Security's compensation philosophy is to provide executive officers with
salaries that are competitive with those paid by institutions of similar size,
performance and circumstances, and with incentive compensation and benefits
which are standard for the industry in this geographical region. Annual
increases to an executive officer's base salary are based, in part, on the
officer's responsibilities, performance of those responsibilities and amounts
which are competitive with similar institutions. The incentive compensation is
closely tied to individual performance in a manner that is intended to encourage
continuous focus on enhancing stockholder value, continued profitability,
teamwork and retention of quality personnel.
As with each of the other executive officers, the compensation paid to Mr.
Jorgenson as President and Chief Executive Officer is a combination of salary
and incentive compensation. To determine Mr. Jorgenson's salary, the
Compensation Committee reviewed information concerning compensation levels of
other financial institutions in the area, and independent financial institution
compensation reviews.
This report has been prepared by the Compensation Committee of the Board
of Directors: Earl J. Hanson, William M. Leslie and Jack D. Rehberg.
Stockholder Return Performance Presentation
Set forth below is a line graph comparing the yearly percentage change in
cumulative total stockholder return on Security's common stock for the last five
fiscal years. Security's yearly percentage change in cumulative total
stockholder return as shown below is compared to the S & P 500 Index and the
NASDAQ Financial Index.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
AMONG SECURITY BANCORP, THE S & P 500 INDEX
AND THE NASDAQ FINANCIAL INDEX
- --------------------------------------------------------------------------------
6/30/91 6/30/92 6/30/93 6/30/94 6/30/95 6/30/96
------- ------- ------- ------- ------- -------
NASDAQ ............. 100 139 183 206 236 307
S&P 500 ............ 100 113 129 131 165 208
Security Bancorp ... 100 142 235 290 317 332
- --------------------------------------------------------------------------------
177
<PAGE>
Compensation of Directors
During the fiscal year ended June 30, 1996, directors were paid $200
for each Board of Directors meeting held and an additional $800 for each Board
of Directors meeting attended. Directors received $200 for each Committee
meeting attended, except for members of the Audit Committee who do not receive
fees.
The 1993 Stock Option Plan provides for, among other things, a one-time
grant of an option to purchase 4,500 shares of Security Common Stock to each of
the six nonemployee directors of Security who had not previously been granted an
option to purchase stock of Security or a subsidiary solely on account of such
nonemployee director's status. The Plan provides for a one-time grant of an
option to purchase 4,500 shares of Common Stock to each nonemployee director of
Security elected or appointed, effective as of the date of his or her election
or appointment. The aggregate number of shares of Common Stock subject to
options granted to nonemployee directors may not exceed 60,000. The nonemployee
directors of Security who each received such one-time grants of options to
purchase 4,500 shares of Common Stock (i.e., options to purchase a total of
27,000 shares of Common Stock) are William M. Dimich, Earl J. Hanson, Harold S.
Hanson, William M. Leslie, George R. Pierce and Stephen C. Sandels. Such options
expire no later than September 5, 2000 except for Mr. Sandels' options which
expire October 25, 2005. The exercise price of such options is $6.875 per share
except for the exercise price of Mr. Sandels' options which are $20.95 per
share. The number of shares subject to, and the exercise price of, options which
have been granted and the maximum number of shares which may be subject to
options under the 1993 Stock Option Plan (including options with respect to
nonemployee directors) are subject to adjustment under certain circumstances set
forth in the 1993 Stock Option Plan. Stephen C. Sandels received a one-time
grants of option to purchase 4,500 shares of common stock. Such options expire
no later than October 25, 2005. The exercise price of such options is $20.975.
Executive Officers
The following table sets forth information with respect to the
executive officers who are not directors of Security, including their beneficial
ownership of Security Common Stock as of October 31, 1996. All executive
officers are elected annually by the Board of Directors and serve at the
discretion of the Board of Directors.
<TABLE>
<CAPTION>
Number and Percent of
Shares of Common Stock
Name/Age Position Held Beneficially Owned
- -------- ------------- ----------------------
<S> <C> <C>
Stanley R. Hill, 51 Senior Vice President- 2,500 (1)(2)
Commercial/Business Division
Manager
Scott W. Sanders, 40 Senior Vice President/Treasurer 8,000 (1)(3)
Retail Lending Manager
<FN>
- ----------
(1) Represents less than 1% of Security's outstanding shares.
(2) Includes currently exercisable options to purchase 2,500 shares.
(3) Includes 500 shares held in a retirement trust for the benefit of
Mr. Sanders and currently exercisable options to purchase 7,500 shares.
</FN>
</TABLE>
Mr. Hill joined Security Bank in 1996 as Senior Vice President/Business
Division Manager of Security Bank and Senior Vice President of Security. From
1990-1995 Mr. Hill was the Vice President/Senior Account Executive for First
Bank Systems, and during 1976-1990, served in various other capacities.
Mr. Sanders joined Security Bank in April, 1992 and was elected Vice
President - Lending Manager in June, 1992. In June 1993 he was elected Senior
Vice President - Lending Manager of Security Bank. Mr. Sanders has also served
as Senior Vice President of Security since its inception. He previously worked
at First American Metro Corp., Vienna, Virginia as Vice President - Special
Assets from May, 1991 to March, 1992; American Security Bank, Washington, D.C.
as Vice President from August, 1988 to May, 1991; and Crossland Mortgage Corp.
as Vice President/Construction Loan Manager from October, 1983 to August, 1988.
178
<PAGE>
Executive Compensation
The following table sets forth certain information concerning compensation
paid or accrued by Security and/or Security Bank for services rendered during
the fiscal years ended June 30, 1996, 1995 and 1994, to or on behalf of
Security's Chief Executive Officer who was the only executive officer of
Security whose total cash compensation exceeded $100,000 for the prior fiscal
year.
<TABLE>
<CAPTION>
Summary Compensation Table
- ----------------------------------------------------------------------------------------------------------------
Long Term Compensation All Other
Compensation
- ---------------------------------------------------------- ------------------------------ --------------------
Annual Compensation Awards Payouts Pension
Plan($)(2) Other(3)
- ---------------------------------------------------------- -------------------- ------- ---------- --------
Other Restricted
Annual Stock LTIP
Name and Principal Year Salary($) Bonus Compensation Awards Options/ Payouts
Position ($) ($)(1) ($) SARs(#) ($) ($) ($)
- ------------------ ---- --------- ----- ------------ ---------- -------- ------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
David W. Jorgenson, 1996 $145,600 -0- -0- -0- -0- -0- $5,400 $19,872
President and Chief 1995 140,000 13,000 -0- -0- 5,000 -0- -0- 14,651
Executive Officer 1994 125,000 12,500 -0- -0- 5,000 -0- 13,800
================================================================================================================
<FN>
(1) The amounts in this table exclude the value of the incidental personal
use of certain perquisites furnished to the executive officer in
connection with his employment by Security and/or Security Bank. Such
perquisites include the business use of automobiles owned by Security
and/or Security Bank and club membership and dues for Mr. Jorgenson.
The estimated value of these benefits did not exceed $50,000 or 10% of
the officer's fiscal year 1996 total salary and bonus as reported in
this table.
(2) The amounts appearing in this column are contributions and credits by
Security and/or Security Bank on behalf of named executive under the
Pension Plan.
(3) The amounts appearing in this column are amounts accrued for the
benefit of the named executive and paid by Security. During the fiscal
year 1996 Security contributed the following amounts for the benefit of
Mr. Jorgenson: (i) $15,555 under the Investment and Deferred
Compensation Plan, (ii) $4,126 under the 401(k) Profit Sharing Plan and
Trust and (iii) $191 in life and disability insurance premiums.
</FN>
</TABLE>
Stock Option Grants
- -------------------
There were no options granted to the named executive officer during the
fiscal year 1996.
Aggregated Stock Option Exercises and Fiscal Year-End Option Value
- ------------------------------------------------------------------
The following table shows stock option exercises by the named executive
officer during fiscal 1996, including the aggregate value of gain on the date of
exercise. In addition, this table includes the number of shares covered by both
exercisable and non-exercisable stock options as of June 30, 1996. Also reported
are the values for "in-the-money" options which represent this positive spread
between the exercise price of any such existing stock options and the year-end
price of the Common Stock.
179
<PAGE>
FY 1996 Stock Option Exercises, Outstanding Grants and Gains as of June 30, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
No. of Shares Covered by Value of In-the-Money
Shares Covered Outstanding Stock Options Outstanding Stock Options
Name by FY 1996 Gain at exercisable/ exercisable/
Exercise Exercise unexercisable unexercisable
Date
- ----------- --------------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
David W. None None 25,000/5,000 $235,600/$7,080
Jorgenson
========================================================================================================
</TABLE>
Employment Contracts
On June 19, 1995, Security and Security Bank, following approval of the
Boards of Directors of the respective companies, entered into an employment
agreement ("Agreement") with David W. Jorgenson to continue to serve as
President and Chief Executive Officer. The Agreement terminates annually on June
19 (the anniversary date of the Agreement) and is renewable on an annual basis
on the anniversary date, and each anniversary date thereafter, upon
recommendation of the Boards of Directors, unless certain advance notice is
given, or upon a change in control (as defined), in which case Mr. Jorgenson
would be entitled to receive three years' annual salary. In June 1996, the
Agreement was extended for an additional year. Under the Agreement, Mr.
Jorgenson receives an annual base salary of $145,600, which is reviewed annually
by the Board of Directors, as well as customary benefits and a discretionary
bonus generally based on his performance and the safety, soundness and
profitability of Security. The Agreement also provides that if Mr. Jorgenson is
discharged other than for cause (as defined) or resigns for good reason (as
defined), he would be entitled to receive salary and benefits for a period of
two years.
Pension Plan
Security Bank has a noncontributory defined benefit pension plan (the
"Pension Plan") which is administered by the Financial Institutions Retirement
Fund (the "Fund"). The Fund is a nonprofit, IRS-qualified tax-exempt pension
plan and trust through which Federal Home Loan Banks, savings and loan
associations, and similar institutions, including Security Bank, may cooperate
in providing for the retirement of their employees. Bank employees who have
completed one year of service for Security Bank are eligible for membership in
the Pension Plan.
After becoming eligible for membership in the Pension Plan, employees
who Security Bank expects will complete 1,000 hours of service in the succeeding
twelve months will be enrolled as active members and will be entitled to accrue
retirement benefits under the Pension Plan. The monthly pension amount to be
received by an employee under the Pension Plan upon retirement is based on an
employee's benefit service and salary. Benefit service includes the period of
employment as an active member in the Pension Plan in addition to any previous
employment prior to the date Security Bank joined the Fund and for which
Security Bank provides credit. Salary for purposes of Security Bank's
contributions to the Pension Plan includes an employee's basic annual salary
rate as of January 1, exclusive of any special payments.
Whether an employee has a vested right to receive retirement benefits
under the Pension Plan depends upon the employee's years of vesting service.
Vesting service includes the period of time beginning from the first day of the
month in which an employee was hired and the last day of the month in which the
employee terminates his or her employment. Vesting service specifically excludes
service performed after an employee has attained the age of 65 and does not
include any period of employment that precedes the earliest date that Security
Bank provided the employee with credit under any pension plan. If an active
member employee has performed 5 or more years of vesting service, he is fully
vested and is entitled to receive 100% of his retirement benefits under the
Pension Plan upon attaining the age of 65, whether or not such employee has
terminated his employment prior to attaining the age of 65. Any employee who has
completed fewer than five years of vesting service will not be vested and will
not be eligible to receive retirement benefits if such employee terminates
service with Security Bank prior to becoming fully vested.
180
<PAGE>
Retirement benefits under the Pension Plan are paid when an employee
entitled to such benefits attains the normal retirement age of 65. Employees who
terminate service with Security Bank prior to age 65, after becoming fully
vested, are entitled to receive early retirement benefits upon attaining the age
of 45, or earlier if such employees were members of the Pension Plan prior to
January 1, 1964. Annual early retirement benefits equal the full amount the
employee would be entitled to receive at the normal retirement age of 65 as
reduced by an early retirement factor, which varies depending on the employee's
age when the retirement allowance is commenced.
The following table illustrates estimated annual benefits payable by
Security Bank upon retirement at age 65 for various levels of compensation and
years of service. The figures included in the table are based on the assumption
that all employees who retire at age 65 will receive retirement benefits until
death, provided that no such employee will receive less than 12 years of
retirement benefits regardless of his or her time of death. Currently, salary is
calculated on the basis of the employee's average salary in the five highest
years of compensation. To determine annual benefits, such salary is then
multiplied by a percentage equal to 2% for each year of service (e.g., 40% of
salary in the case of an employee with 20 years of service). Benefits under the
Pension Plan are not subject to deduction with respect to Social Security
payments or other offsets.
<TABLE>
<CAPTION>
================================================================================
Years of Service
------------------------------------------------------
Salary 15 20 25 30 35
- -------------------- ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
80,000............. 24,000 32,000 40,000 48,000 56,000
100,000............. 30,000 40,000 50,000 60,000 70,000
120,000............. 36,000 48,000 60,000 72,000 84,000
140,000............. 42,000 56,000 70,000 84,000 98,000
160,000............. 48,000 64,000 80,000 96,000 112,000
================================================================================
</TABLE>
During the fiscal year ended June 30, 1996, no funds were paid or
distributed pursuant to the Pension Plan to Mr. Jorgenson, the President and
Chief Executive Officer of Security and Security Bank; current executive
officers, as a group; current directors who are not executive officers, as a
group; or current employees, including all officers who are not executive
officers, as a group. At June 30, 1996, the number of years of credited service
under the Pension Plan for Mr. Jorgenson was four and his defined compensation
for purposes of the Pension Plan was $145,600.
Deferred Compensation Agreements
Security Bank has entered into Deferred Compensation Agreements with
each of Messrs. Jorgenson and Sanders, and Ms. Hine, (collectively, the
"Officers"), respectively dated October 26, 1992, December 1, 1993, and November
23, 1987. Ms. Hine's Deferred Compensation Agreement contains two addenda, dated
March 23, 1993, and December 16, 1993, which provide respectively for disability
payments and for vesting of interests consistent with the Deferred Compensation
Agreements of Messrs. Jorgenson and Sanders. Pursuant to the Deferred
Compensation Agreements, Security Bank has insured the lives of the Officers
with single premium, whole life insurance policies. The Officers have no rights
in or to the insurance policies purchased by Security Bank. Officers who remain
continuously employed by Security Bank until retirement will receive a
retirement benefit which will be paid in monthly installments for a period of 15
years. For the purposes of the Deferred Compensation Agreements, Mr. Jorgenson's
retirement age is 62, Mr. Sanders' retirement age is 60, and Ms. Hine's
retirement age is 52. If the Officers die before the expiration of 15 years, the
unpaid balance will be paid in monthly installments to the Officers'
beneficiaries. If the Officers die before retirement and while employed full
time by Security Bank, the Officers' beneficiaries will receive a preretirement
death benefit payable in monthly installments for a period of 15 years.
Under their respective Deferred Compensation Agreements, Mr. Jorgenson
will receive annual payments of $46,200 for a period of 15 years, Mr. Sanders
will receive annual payments of $24,000 for 15 years, and Ms. Hine will receive
annual payments of $18,480 also for 15 years.
181
<PAGE>
The Officers will forfeit all rights in and to any benefits payable
under the Deferred Compensation Agreements if the Officers (i) die by suicide
(whether sane or insane) within two years of executing the Deferred Compensation
Agreement or (ii) are terminated other than by reason of disability or death
before attaining their respective retirement ages or before having worked three
years for Security Bank. If the Officers have been employed for at least three
years from the time of entering into the Deferred Compensation Agreements, the
Officers will be considered to be vested in 30% of the payments due, with an
additional 10% vesting each succeeding year.
Stock Option Plan
Security Bank's 1990 Stock Option and Stock Appreciation Rights Plan
was amended and restated and adopted by the Board of Directors of Security on
November 22, 1993 as the 1993 Stock Option and Stock Appreciation Rights Plan
(the "1993 Stock Option Plan"). The 1993 Stock Option Plan is intended to
encourage stock ownership by directors and selected officers and employees of
Security and its subsidiaries in order to increase their proprietary interest in
the success of Security and to encourage them to remain in the employ of
Security or its subsidiaries. Pursuant to the 1993 Stock Option Plan, 146,000
shares of Common Stock are reserved for issuance pursuant to the exercise of
options and stock appreciation rights, subject to adjustment as set forth in the
Plan.
The 1993 Stock Option Plan is administered by a committee (the
"Committee") appointed by the Board of Directors, which consists of directors
who are neither full-time employees of Security or eligible to receive
discretionary grants under the 1993 Stock Option Plan. The Board of Directors
has appointed the Compensation Committee to administer the 1993 Stock Option
Plan.
The 1993 Stock Option Plan provides for the grant of "incentive stock
options" as defined under Section 422A(b) of the Internal Revenue Code of 1986,
as amended (the "Code"), and for options to purchase Common Stock that do not so
qualify (referred to herein as "nonqualified" options), as determined in each
individual case by the Committee. The 1993 Stock Option Plan also provides for
the grant of stock appreciation rights, either separately or in tandem with
options.
All full-time employees, including officers, of Security and Security's
subsidiaries are eligible to receive grants of options or stock appreciation
rights under the 1993 Stock Option Plan. The Plan also provides that each
nonemployee director of Security, who has not previously been granted an option
to purchase stock of Security or a subsidiary solely on account of such
nonemployee director's status as a director, receive a one-time grant of an
option to purchase 4,500 shares of Common Stock. See "Election of Directors -
Compensation of Directors" for information regarding the terms of such options.
The Plan provides that each nonemployee director of Security elected or
appointed will receive a one-time grant of an option to purchase 4,500 shares of
Common Stock, effective as of the date of his or her election or appointment,
subject to the availability of shares remaining for grant under the Plan.
Nonemployee director recipients of a one-time grant of an option to purchase
shares of Common Stock will not thereafter be eligible to receive a grant of
options or stock appreciation rights under the 1993 Stock Option Plan or any
other plan of Security or any of its subsidiaries. The aggregate number of
shares of Common Stock subject to options granted to nonemployee directors may
not exceed 60,000 shares.
The price at which Common Stock may be purchased on exercise of options
granted under the 1993 Stock Option Plan is required to be at least equal to the
per share fair market value of the Common Stock on the date the option is
granted. Incentive stock options granted under the 1993 Stock Option Plan to an
employee owning more than 10% of the total combined voting power of all classes
of stock of Security are subject to the further restrictions that such options
must have an option price of at least 110% of the fair market value of the
shares issuable on exercise of the option (determined as of the date the option
is granted) and a term of not more than five years.
In connection with the grant of any option or stock appreciation right,
other than the nondiscretionary option grants to nonemployee directors described
above, the Committee is also authorized, in its sole discretion, to provide the
holder thereof with the right, following a "change of control" of Security, to
exercise such option or stock appreciation right without regard to any
restrictions on exercise that would otherwise apply, or, in the case of an
option, to surrender such option for a cash payment equal to the difference
between the fair market value of the Common Stock subject to the option and the
aggregate exercise price therefor. Generally, a "change in control" will be
deemed to occur if any
182
<PAGE>
person or entity directly or indirectly acquires ownership, control, power to
vote or proxies representing more than 25% of the outstanding voting stock of
Security, or obtains control of the election of a majority of the directors of
Security. The right to exercise a stock appreciation right or option or to
surrender an option for cash in the event of a "change in control" may tend to
discourage or thwart such a "change in control," even if the change in control
would be beneficial to stockholders.
Certain Relationships and Related Transactions
During the fiscal year ended June 30, 1996 many directors and executive
officers of Security and Security Bank and their associates were also customers
of Security Bank. It is anticipated that directors, executive officers, and
their associates will continue to be customers of Security Bank in the future.
All transactions between Security Bank and directors, executive officers, and
their associates were made in the ordinary course of business on substantially
the same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with other persons and in the opinion of
management did not involve more than the normal risk of collectibility or
present other unfavorable features.
The following table sets forth certain information as of June 30, 1996,
with respect to the extension of credit to each of its directors and executive
officers whose aggregate indebtedness to Security or Security Bank exceeded
$60,000 at any time since June 30, 1995.
<TABLE>
<CAPTION>
Largest Aggregate
Nature of Amount Balance as of As of
Name Date of Loan Indebtedness Outstanding since June 30, 1996 Interest October 15, 1996
July 1, 1995 Rate
<S> <C> <C> <C> <C> <C> <C>
William M. Leslie 3/15/95 Commercial line $100,000 $56,000 9.75% $ 115
Director of credit
5/31/94 Consumer loan 17,056 13,164 7.50 --
7/21/89 Real estate 98,361 94,158 9.50 92,876
Jack D. Rehberg 7/24/95 Executive line -- -- 10.25 --
Director of credit
Harold S. Hanson 2/6/96 Commercial 7,000 7,000 8.50 --
Director
10/23/95 R/E 83,738 79,862 8.75 78,514
commercial
3/7/94 Consumer R/E 53,366 48,806 8.00 47,063
6/8/67 Real Estate 3,307 1,340 6.50 --
3/7/94 Consumer $ 15,451 $14,445 9.75% $14,042
</TABLE>
Earl J. Hanson, a director of Security, is in the private practice of
law and during the entire fiscal year ended June 30, 1996 served as legal
counsel to Security and Security Bank. Mr. Hanson received from Security a
monthly retainer of $300 plus payment for services rendered. Aggregate retainer
and legal fees paid by Security to Mr. Hanson for the fiscal year ended June 30,
1996 were $120,104.
RATIFICATION OF ACCOUNTANTS
The Board of Directors has selected KPMG Peat Marwick LLP as Security's
independent public accountants for the fiscal year ended June 30, 1997, and any
interim periods, to audit the books and accounts of Security for that year,
subject to ratification of the selection by Security's stockholders at the
Annual Meeting.
A representative of KPMG Peat Marwick LLP is expected to be present at
the Annual Meeting and to be available to answer appropriate questions. The
representative will also be provided an opportunity to make a statement, if they
so desire.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS RATIFICATION OF THE
SELECTION OF KPMG PEAT MARWICK LLP AS INDEPENDENT PUBLIC ACCOUNTANTS FOR
SECURITY FOR THE FISCAL YEAR ENDED JUNE 30, 1997, AND ANY INTERIM PERIODS.
183
<PAGE>
LEGAL MATTERS
The validity of the shares of WesterFed Financial Common Stock offered
hereby will be passed upon for WesterFed Financial by Silver, Freedman & Taff,
L.L.P. (a partnership including professional corporations), Washington, D.C.
Certain federal tax matters in connection with the Merger will be passed upon
for WesterFed Financial by Silver, Freedman & Taff, L.L.P. and for Security by
Graham & Dunn, Seattle, Washington.
EXPERTS
The Consolidated Financial Statements of WesterFed Financial
Corporation and subsidiaries as of June 30, 1996 and 1995, and for each of the
years in the three-year period ended June 30, 1996, are included herein and in
the registration statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein and upon
the authority of said firm as experts in accounting and auditing. The report of
KPMG Peat Marwick LLP refers to changes in the methods of accounting for
securities and income taxes.
The Consolidated Financial Statements of Security Bancorp and
subsidiary as of June 30, 1996 and 1995, and for each of the years in the
three-year period ended June 30, 1996, are included herein and in the
registration statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing. The report of
KPMG Peat Marwick LLP refers to a change in the method of accounting for
investment and mortgage-backed securities.
STOCKHOLDER PROPOSALS
Security will hold a 1997 Annual Meeting of Stockholders only if the
Merger is not consummated before the time of such meeting, which is presently
expected to be held before June 30, 1997. In such event, any stockholder who
wishes to present proposal for inclusion in the proxy materials for the 1997
Annual Meeting of Stockholders must comply with the rules and regulations of the
SEC then in effect. As disclosed in Security's proxy statement for its 1995
Annual Meeting of Stockholders, any such proposal must have been received by
Security not later than December ____, 1996.
OTHER MATTERS
The Boards of Directors of WesterFed Financial and Security are not
aware of any business to come before the Meetings other than those matters
described above in this Joint Proxy Statement/Prospectus. However, if any other
matter should properly come before the Meetings, it is intended that holders of
the proxies will act in accordance with their best judgment.
By Order of the Board of Directors By Order of the Board of Directors
of Security of WesterFed Financial
David W. Jorgenson Lyle R. Grimes
President/Chief Executive Officer Chairman of the Board
184
<PAGE>
WESTERFED FINANCIAL CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS'
REPORT FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
Independent Auditors' Report...................................................................... WF-1
Consolidated Balance Sheets at June 30, 1996 and 1995............................................. WF-2
Consolidated Statements of Income for the Years Ended June 30, 1996, 1995 and 1994................ WF-3
Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 1996, 1995
and 1994....................................................................................... WF-4
Consolidated Statements of Cash Flows for the Years Ended June 30, 1996, 1995 and 1994............ WF-5
Notes to Consolidated Financial Statements for the Years Ended June 30, 1996, 1995 and
1994............................................................................................ WF-6
CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1995
Consolidated Balance Sheets at September 30, 1996 (unaudited)..................................... WF-30
Consolidated Statements of Income for the Three Months Ended September 30, 1996 and
1995 (unaudited)................................................................................ WF-31
Consolidated Statements of Stockholders' Equity for the Three Month Ended September 30,
1996 (unaudited).............................................................................. WF-32
Consolidated Statements of Cash Flows for the Three Months Ended September 30, 1996 and
1995 (unaudited).................................................................................. WF-33
Notes to Consolidated Financial Statements for the Three Months Ended September 30, 1996
and 1995 (unaudited).............................................................................. WF-34
</TABLE>
WF-0
<PAGE>
Independent Auditor's Report
- --------------------------------------------------------------------------------
[KPMG Peat Marwick Logo]
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."
/s/ KPMG Peat Marwick LLP
Billings, Montana
July 26, 1996, except for note 22 which is as of September 24, 1996, and the
second paragraph of note 12 which is as of September 30, 1996
WF-1
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
(Dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
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.
WF-2
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Consolidated Statements of Income
- --------------------------------------------------------------------------------
(Dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
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.
WF-3
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
- --------------------------------------------------------------------------------
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
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.
WF-4
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
(Dollars in thousands)
<TABLE>
<CAPTION>
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.
WF-5
<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.
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.
WF-6
<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 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.
WF-7
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
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
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.
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.
WF-8
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
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.
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.
WF-9
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
WFSB is in compliance with capital requirements at June 30, 1996, as follows
(dollar amounts in thousands):
Regulatory
Capital
Percent(a) Amount Requirements Excess
---------- ------ ------------ ------
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
====== ========= ======== =======
- ----------
(a) Based upon a percentage of adjusted tangible assets for tangible and
core capital and risk-adjusted assets for risk-based capital.
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.
WF-10
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(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>
<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):
Fair Cost Value
--------- -----
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
======= ======
WF-11
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
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.
(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
---- ----- ------ -----
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.
WF-12
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
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.
(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.
A summary of nonperforming assets at June 30, 1996 and 1995 follows (in
thousands):
1996 1995
---- ----
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
==== ===
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.
WF-13
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
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):
1996 1995 1994
---- ---- ----
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
======= ===== =====
(7) INTEREST RECEIVABLE, NET
A summary of interest receivable at June 30, 1996 and 1995 is as follows (in
thousands):
1996 1995
---- ----
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
====== =====
(8) PREMISES AND EQUIPMENT
Premises and equipment at June 30, 1996 and 1995 is summarized as follows (in
thousands):
1996 1995
---- ----
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
======== ======
(9) DEPOSITS
Deposits at June 30, 1996 and 1995 are summarized as follows (dollar amounts in
thousands):
Weighted Weighted
average average
1996 rate 1995 rate
---- ---- ---- ----
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%
======== ==== ======== ====
WF-14
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
Certificates of deposit at June 30, 1996 mature as follows (in thousands):
Less than One to Four to
one year three years five years
-------- ----------- ----------
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
======== ====== =====
(10) BORROWED FUNDS
Advances from the FHLB and other borrowings at June 30, 1996 and 1995 are
summarized as follows (in thousands):
1996 1995
---- ----
Advances from Federal Home Loan Bank....... $124,663 133,119
Collateralized mortgage obligations........ 1,175 1,585
-------- -------
$125,838 134,704
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.
WF-15
<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):
1996 1995 1994
---- ---- ----
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
====== ===== =====
The effective tax rates for 1996, 1995 and 1994 are 35.9%, 37.5% and 37.7%,
espectively.
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):
1996 1995 1994
---- ---- ----
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
======= ===== =====
WF-16
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
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):
1996 1995
---- ----
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
----- -----
1996 1995
---- ----
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
====== =====
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.
(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
======
WF-17
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
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. On September 30, 1996, the Deposit Insurance Funds Act of 1996 was
signed, which authorizes the FDIC to impose a special assessment on certain
deposits held by thrift institutions. This special assessment, which is based on
$.657 per $100 of outstanding deposits at March 31, 1995, is intended to
recapitalize the SAIF. The assessment of approximately $2.3 million and a
related tax benefit of $900,000 were recorded by the Bank on September 30, 1996.
The assessment is payable no later than November 29, 1996.
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.
(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
WF-18
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
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.
Options Exercise price
------- --------------
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
======= ===============
Options Exercise price
------- --------------
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
======= =============
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.
(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
WF-19
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
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.
Commitments to Extend Credit
Commitments to extend credit at June 30, 1996 and 1995 are as follows (in
thousands):
1996 1995
---- ----
Fixed rate................... $18,654 23,100
Variable rate................ 1,888 1,793
------- ------
$20,542 24,893
======= ======
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:
Notional principal amount Agreement termination Cap
------------------------- --------------------- ---
(in thousands)
$ 25,000 March 1997 6.5% - 10%
10,000 July 1999 6.5% - 7.0%
--------
$ 35,000
==========
The counterparties to the cap agreements are primary dealers or the FHLB of
Seattle.
(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.
WF-20
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
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 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.
WF-21
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(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>
(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.
WF-22
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(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.
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.
WF-23
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
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>
WF-24
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
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.
(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):
1996 1995 1994
---- ---- ----
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
====== ===== =====
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.
WF-25
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(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):
Condensed Balance Sheet 1996 1995
---- ----
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
======== =======
WF-26
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
During the year ended June 30, 1996, dividends of approximately $1,199,000 were
paid by the bank subsidiary to WesterFed.
Condensed Statement of Income 1996 1995
---- ----
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
======== ======
WF-27
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Concluded
- --------------------------------------------------------------------------------
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.
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>
WF-28
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Concluded
- --------------------------------------------------------------------------------
(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.
WF-29
<PAGE>
FINANCIAL STATEMENTS
Consolidated Balance Sheets - September 30, 1996 (Unaudited) and June 30, 1996
(Dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
(Unaudited)
ASSETS
September 30, June 30,
1996 1996
----------------- -----------------
<S> <C> <C>
Cash and due from banks $ 6,256 $ 7,829
Interest-bearing due from banks 6,030 5,470
----------------- -----------------
Cash and cash equivalents 12,286 13,299
Interest-bearing deposits 5,103 3,000
Investment securities available-for-sale 40,223 35,637
Investment securities, at amortized cost (estimated market value of
$6,897 at September 30, 1996 and $9,399 at June 30, 1996) 6,851 9,347
Stock in Federal Home Loan Bank of Seattle, at cost 7,622 7,471
Mortgage-backed securities available-for-sale 42,386 44,909
Mortgage-backed securities, at amortized cost (estimated market
value of $57,913 at September 30, 1996 and $59,278 at June 30, 1996) 58,023 60,038
Loans available-for-sale 4,768 3,967
Loans receivable, net 366,460 364,226
Accrued interest receivable 3,733 3,695
Premises and equipment, net 13,995 13,758
Cash surrender value of life insurance policies 3,220 3,183
Other assets 1,439 1,401
----------------- -----------------
Total assets $ 566,109 $ 563,931
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 342,986 $ 350,212
Borrowed funds 130,351 125,838
Advances from borrowers for taxes and insurance 6,217 3,255
Income taxes 1,899 1,961
Accrued interest payable 1,195 1,219
Accrued expenses and other liabilities 5,172 2,839
----------------- -----------------
Total liabilities 487,820 485,324
Stockholders' Equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized;
none outstanding --- ---
Common stock, $.01 par value, 10,000,000 shares authorized;
4,395,108 shares outstanding at September 30, 1996 and
4,395,204 outstanding at June 30, 1996 46 46
Additional paid-in capital 45,499 45,451
Common stock acquired by ESOP/RRP (3,382) (3,558)
Treasury stock, at cost (3,080) (3,079)
Net unrealized (loss) on securities available-for-sale (196) (226)
Retained earnings, substantially restricted 39,402 39,973
----------------- -----------------
Total stockholders' equity 78,289 78,607
----------------- -----------------
Total liabilities and stockholders' equity $ 566,109 $ 563,931
================= =================
Book value per share $ 17.81 $ 17.88
================= =================
</TABLE>
See accompanying notes to consolidated financial statements.
WF-30
<PAGE>
Consolidated Statements of Income - Three Month Period Ended September 30, 1996
and September 30, 1995 (Unaudited).
(Dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
September 30,
1996 1995
------------------- ------------------
<S> <C> <C>
Interest income:
Loans receivable $ 7,710 $ 6,624
Mortgage-backed securities available-for-sale 729 1,015
Mortgage-backed securities 1,037 1,368
Investment securities available-for-sale 690 858
Investment securities 153 232
Interest-bearing deposits 228 265
Other 46 44
------------------ -------------------
Total interest income 10,593 10,406
Interest expense:
NOW and money market demand 382 446
Savings 474 494
Certificates of deposit 3,009 3,061
Advances from FHLB - Seattle and other borrowed funds 2,085 2,157
------------------ -------------------
Total interest expense 5,950 6,158
Net interest income 4,643 4,248
Provisions for loan losses 15 ---
------------------ -------------------
Net interest income after provision for loan losses 4,628 4,248
------------------ -------------------
Non-interest income
Loan origination fees on loans sold 125 133
Service fees 566 509
Net gain on sale of loans and securities available-for-sale 109 411
Other 35 36
------------------ -------------------
Total non-interest income 835 1,089
------------------ -------------------
Non-interest expenses:
Compensation and employee benefits 1,887 1,884
Net occupancy expense of premises 223 213
Equipment and furnishings expense 192 138
Data processing expenses 165 150
Federal insurance premium 211 201
SAIF special assessment 2,297 ---
Marketing and advertising 36 145
Net expense (income) from operation of real estate owned --- ---
Other 720 868
------------------ -------------------
Total non-interest expense 5,731 3,599
(Loss) income before income taxes (268) 1,738
Income taxes 89 (670)
------------------ ------------------
Net (loss) income (1) $ (179) $ 1,068
================= ===================
Net (loss) income per share $ (0.04) $ 0.25
================= ===================
Dividends per share $ 0 .095 $ 0.075
================== ===================
Weighted average common shares outstanding for earnings per share 4,260,452 4,254,029
================== ===================
</TABLE>
(1) September, 1996 includes approximately $1.4 million SAIF special assessment
net of tax at 38%
See accompanying notes to consolidated financial statements.
WF-31
<PAGE>
Consolidated Statement of Stockholders' Equity for the Three Month Period Ended
September 30, 1996 (Unaudited).
(Dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
Net
Unrealized
Loss on
Additional Securities
Common Paid-In ESOP/ Treasury Retained Available
Stock Capital RRP Stock Earnings for Sale Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996 $ 46 45,451 (3,558) (3,079) 39,973 (226) 78,607
Net loss -- -- -- -- (179) -- (179)
Change in net unrealized
loss on securities
available-for-sale -- -- -- -- -- 30 30
Principal payment made by
ESOP -- 48 57 -- -- -- 105
Amortization of award of
RRP stock -- -- 118 -- -- -- 118
Shares forfeited by RRP
participants (556 shares) -- -- 1 (1) -- -- --
Cash dividends declared
($0.095 per share) -- -- -- -- (392) -- (392)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at
September 30, 1996 $ 46 45,499 (3,382) (3,080) 39,402 (196) 78,289
==================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
WF-32
<PAGE>
Consolidated Statements of Cash Flows for the Three Month Period Ended
September 30, 1996 and September 30, 1995 (Unaudited)
(Dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
September 30,
1996 1995
---------------- -----------------
<S> <C> <C>
Net cash provided by operating activities $ 4,652 $ 6,332
================= =================
Cash flows from investing activities:
Net change in interest-bearing deposits (2,103) 985
Purchases of mortgage-backed securities (983) (990)
Proceeds from sales of mortgage-backed securities --- 3,187
Principal payments on mortgage-backed securities 5,560 6,405
Purchases of investment securities (21,706) (4,913)
Proceeds from maturities of investment securities 19,659 6,162
Principal payments on investment securities 80 ---
Net change in loans receivable (2,116) (15,699)
Purchases of premises and equipment (439) (450)
----------------- -----------------
Net cash used by investing activities (2,048) (5,313)
----------------- -----------------
Cash flows from financing activities:
Net change in deposits excluding interest credited (11,073) 1,658
Proceeds from borrowings 7,000 600
Payments on borrowings (2,506) (4,853)
Net change in advances from borrowers for taxes and insurance 2,962 2,829
----------------- ------------------
Net cash provided (used) by financing activities (3,617) 234
---------------- ------------------
Net increase (decrease) in cash and cash equivalents (1,013) 1,253
Cash and cash equivalents at beginning of period 13,299 15,374
----------------- ------------------
Cash and cash equivalents at end of period $ 12,286 $ 16,627
================= ==================
Supplemental disclosure of cash flow information:
Payments during the period for:
Interest $ 2 ,167 $ 2,189
Income taxes, net 11 ---
</TABLE>
See accompanying notes to consolidated financial statements.
WF-33
<PAGE>
WESTERFED FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles for interim financial information and with instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, the information contained herein reflects
all adjustments necessary to make the results of operations for the
interim periods a fair statement of such operations. All such
adjustments are of a normal recurring nature. Operating results for the
three months ended September 30, 1996 are not necessarily indicative of
the results anticipated for the year ending June 30, 1997. For
additional information, refer to the consolidated financial statements
and footnotes thereto included in WesterFed Financial Corporation's
(the "Company") annual report for the year ended June 30, 1996.
2. CASH EQUIVALENTS
For purposes of the Consolidated Statements of Cash Flows, the
Company considers all cash, daily interest demand deposits,
non-interest bearing deposits with banks, and interest bearing deposits
having original maturities of three months or less to be cash
equivalents.
3. COMPUTATION OF NET INCOME PER SHARE
Net income per common share is based on the weighted average
number of shares outstanding during the period applying the treasury
stock method to common stock equivalents. The weighted average number
of common and common stock equivalents for the three month period ended
September 30, 1996 were 4,260,452. Stock options have been granted,
under the Company's stock option and incentive plan, to purchase
419,707 shares. In addition 189,856 shares of restricted stock have
been issued in accordance with the recognition and retention plan
established by the Company. These stock options and restricted stock
awards are reflected in the income per share computations in the
accompanying financial statements. In addition, there have been 354,933
shares of common stock issued to the Employee Stock Ownership Plan
(ESOP) trust for the benefit of the employees of the Company and its
subsidiaries. ESOP shares that have been committed to be released are
considered outstanding and ESOP shares that have not been committed to
be released are not considered outstanding. At September 30, 1996,
94,288 ESOP shares were committed to be released and were considered in
the earnings per share computations.
4. DIVIDENDS DECLARED
On September 24, 1996 the Board of Directors of the Company
declared a quarterly cash dividend of $0.095 per share, payable on
November 22, 1996 to stockholders of record on November 8, 1996.
WF-34
<PAGE>
5. A comparison of the amortized cost and estimated fair value of
investment and mortgage-backed securities at the dates indicated is
as follows:
<TABLE>
<CAPTION>
HELD-TO-MATURITY
(Dollars in Thousands)
(Unaudited)
September 30, 1996 June 30, 1996
----------------------------------------------- ------------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
--------- ---------- ---------- --------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal Agency obligations $ 3,005 3 (1) 3,007 $ 4,010 2 (7) 4,005
Corporate obligations 3,843 8 --- 3,851 5,333 22 --- 5,355
Other investments 3 36 --- 39 4 35 --- 39
-------- ---- ------ ------ -------- ---- ------ ------
Total investment securities 6,851 47 (1) 6,897 9,347 59 (7) 9,399
Mortgage-backed securities 58,023 328 (438) 57,913 60,038 212 (972) 59,278
-------- ---- ------ ------ -------- ---- ------ ------
$64,874 375 (439) 64,810 $69,385 271 (979) 68,677
======= === === ====== ======== === === ======
AVAILABLE-FOR-SALE
(Dollars in Thousands)
(Unaudited)
September 30, 1996 June 30, 1996
----------------------------------------------- ------------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
--------- ---------- ---------- --------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal Agency obligations $37,962 80 (312) 37,730 $32,841 21 (232) 32,630
Corporate obligations 2,492 9 (8) 2,493 3,000 --- (20) 2,980
Other investments --- --- --- --- 28 --- (1) 27
-------- ---- ------ ------ -------- ---- ------ ------
Total investment securities 40,454 89 (320) 40,223 35,869 21 (253) 35,637
Mortgage-backed securities 42,455 163 (232) 42,386 45,035 154 (280) 44,909
-------- ---- ------ ------ -------- ---- ------ ------
$82,909 252 (552) 82,609 $80,904 175 (533) 80,546
======== ==== ===== ====== ======== ==== ===== ======
</TABLE>
WF-35
<PAGE>
SECURITY BANCORP
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS'
REPORT FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
Independent Auditors' Report of KPMG Peat Marwick, LLP (August 16,
1996, except for Note 20 which is as of September 24, 1996).......... SB-1
Consolidated Balance Sheets for the Years Ended June 30, 1996
and 1995............................................................. SB-2
Consolidated Statements of Income for the Years Ended June 30, 1996,
1995 and 1994........................................................ SB-3
Consolidated Statements of Stockholders' Equity for the Years Ended
June 30, 1994, 1995 and 1996......................................... SB-4
Consolidated Statements of Cash Flows for the Years Ended June 30,
1996, 1995 and 1994.................................................. SB-5
Notes to Consolidated Financial Statements for the Years Ended
June 30, 1996, 1995 and 1994......................................... SB-6
CONSOLIDATED FINANCIAL STATEMENTS AT JUNE 30, 1996 AND FOR THE
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Consolidated Balance Sheets at June 30, 1996 and for the Three
Months Ended September 30, 1996 (unaudited).......................... SB-30
Consolidated Statements of Income for the Three Months Ended
September 30, 1996 and 1995 (unaudited).............................. SB-31
Consolidated Statements of Stockholders' Equity for the Three Months
Ended September 30, 1996............................................. SB-32
Consolidated Statements of Cash Flows for the Three Months Ended
September 30, 1996 and 1995 (unaudited).............................. SB-33
Notes to Consolidated Financial Statements for the Three Months
Ended September 30, 1996 and 1995.................................... SB-35
</TABLE>
SB-0
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors and Stockholders
Security Bancorp:
We have audited the accompanying consolidated balance sheets of Security Bancorp
and subsidiary 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 Company'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 Security Bancorp and
subsidiary 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 discussed in notes to the consolidated financial statements, Security Bancorp
changed its method of accounting for investment securities and mortgage-backed
securities effective July 1, 1994 to adopt the provisions of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
/s/ KPMG Peat Marwick LLP
August 16, 1996, except for note 20 which
is as of September 24, 1996 and the third paragraph
of note 12 which is as of September 30, 1996
SB-1
<PAGE>
SECURITY BANCORP AND SUBSIDIARY
Consolidated Balance Sheets
June 30, 1996 and 1995
<TABLE>
<CAPTION>
Assets 1996 1995
------ ---- ----
<S> <C> <C>
Cash and cash equivalents $ 9,789,678 10,188,922
Investment securities available-for-sale 20,145,344 13,532,426
Mortgage-backed securities available-for-sale 96,551,111 5,291,493
Investment securities held-to-maturity (estimated
market value of $14,110,880 in 1995) -- 14,199,742
Mortgage-backed securities held-to-maturity
(estimated market value of $33,964,081 in 1996
and $139,376,071 in 1995) 34,704,507 140,324,319
Loans held for sale 2,687,034 3,109,038
Loans receivable, net 184,903,699 144,070,550
Stock in Federal Home Loan Bank of Seattle, at cost 3,145,600 2,923,600
Accrued interest receivable 2,584,018 2,346,359
Cash surrender value of life insurance 2,663,427 2,552,466
Real estate held for investment 288,908 297,663
Premises and equipment, net 9,504,502 8,160,469
Goodwill, net of amortization 4,377,500 4,717,500
Other assets 893,744 880,594
------------ -----------
$372,239,072 352,595,141
============ ===========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits $289,219,498 290,933,644
Securities sold under repurchase agreements 7,964,766 6,546,793
Advances from Federal Home Loan Bank 36,791,667 19,541,667
Advances from borrowers for taxes and insurance 880,697 898,179
Income taxes payable 37,728 63,732
Deferred income taxes 112,083 567,800
Accrued interest payable 2,075,161 1,190,876
Accrued expenses and other liabilities 4,453,808 1,968,334
------------ -----------
Total liabilities 341,535,408 321,711,025
------------ -----------
Stockholders' equity:
Preferred stock, $1 par value (5,000,000 shares
authorized; none outstanding) -- --
Common stock, $1 par value (10,000,000 shares
authorized; issued and outstanding 1,462,182
shares in 1996 and 1,479,182 shares in 1995) 1,462,182 1,479,182
Additional paid-in capital 8,765,053 9,191,130
Retained earnings, substantially restricted 22,065,712 20,503,364
Net unrealized loss on securities
available-for-sale (1,589,283) (289,560)
------------ -----------
Total stockholders' equity 30,703,664 30,884,116
------------ -----------
Commitments and contingencies $372,239,072 352,595,141
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
SB-2
<PAGE>
SECURITY BANCORP AND SUBSIDIARY
Consolidated Statements of Income
Three years ended June 30, 1996
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest income:
Loans receivable $14,114,575 11,434,596 7,264,014
Investment securities 1,590,332 1,955,548 1,390,625
Mortgage-backed securities 9,219,551 10,609,552 8,801,085
Other 417,453 284,072 336,374
----------- ---------- ----------
Total interest income 25,341,911 24,283,768 17,792,098
----------- ---------- ----------
Interest expense:
Deposits 13,176,342 11,218,551 8,497,590
Securities sold under repurchase
agreements 514,646 278,280 23,534
Advances from Federal Home Loan Bank 1,220,789 1,454,440 847,856
----------- ---------- ----------
Total interest expense 14,911,777 12,951,271 9,368,980
----------- ---------- ----------
Net interest income 10,430,134 11,332,497 8,423,118
Provision for loan losses 120,000 30,000 80,000
----------- ---------- ----------
Net interest income after
provision for loan losses 10,310,314 11,302,497 8,343,118
----------- ---------- ----------
Non-interest income:
Fees for customer services 1,875,761 1,008,549 414,993
Securities brokerage services 102,522 80,700 149,071
Gain (loss) on sale of investment
securities (324,943) -- 67,265
Provision for permanent impairment
of investment securities -- (90,000) (245,000)
Gain on sale of mortgage-backed
securities 525,484 122,254 183,466
Gain on sale of loans held for sale 774,388 344,523 890,560
Gain on sale of real estate held for
investment -- 80,901 --
Gain on sale of other real estate
owned, net -- -- 75,664
Other operating income 1,061,157 681,002 722,322
----------- ---------- ----------
Total non-interest income 4,014,369 2,227,929 2,258,341
----------- ---------- ----------
Non-interest expense:
Compensation and benefits 4,831,731 4,118,542 2,854,699
Advertising 210,971 230,108 127,318
Occupancy and equipment 1,344,921 1,120,728 811,490
FDIC deposit insurance premiums 475,188 623,281 490,592
Data processing services 749,321 780,432 266,480
Other 2,746,067 2,351,403 1,333,738
----------- ---------- ----------
Total non-interest expense 10,358,199 9,224,494 5,884,317
----------- ---------- ----------
Income before income taxes 3,966,304 4,305,932 4,717,142
Income taxes (1,422,000) (1,557,900) (1,961,652)
----------- ---------- ----------
Net income $ 2,544,304 2,748,032 2,755,490
=========== ========== ==========
Net income per share $ 1.68 1.80 1.82
=========== ========== ==========
Average common and common equivalent
shares 1,515,947 1,525,541 1,518,451
=========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
SB-3
<PAGE>
SECURITY BANCORP AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Three years ended June 30, 1996
<TABLE>
<CAPTION>
Total
Additional Unrealized stock-
Common paid-in Retained holding gains holders'
stock capital earnings (losses), net equity
----- ------- -------- ------------- ------
<S> <C> <C> <C> <C> <C>
Balances at June 30, 1993 $1,468,782 9,079,432 16,709,813 (292,023) 26,966,004
Net income -- -- 2,755,490 -- 2,755,490
Dividends paid ($.5525 per share) -- -- (813,729) -- (813,729)
Change in unrealized loss on
certain marketable equity
securities -- -- -- (714,804) (714,804)
Exercise of stock options 6,100 74,949 -- -- 81,049
---------- --------- ---------- ---------- ----------
Balances at June 30, 1994 1,474,882 9,154,381 18,651,574 (1,006,827) 28,274,010
Effect of change in accounting
for investments and
mortgage-backed securities
at July 1, 1994 -- -- -- 613,107 613,107
Net income -- -- 2,748,032 -- 2,748,032
Dividends paid ($.6075 per share) -- -- (896,242) -- (896,242)
Change in net unrealized loss on
securities available-for-sale -- -- -- 104,160 104,160
Exercise of stock options 4,300 36,749 -- -- 41,049
---------- --------- ---------- ---------- ----------
Balances at June 30, 1995 1,479,182 9,191,130 20,503,364 (289,560) 30,884,116
Net income -- -- 2,544,304 -- 2,544,304
Dividends paid ($.6675 per share) -- -- (981,956) -- (981,956)
Change in net unrealized loss on
securities available-for-sale -- -- -- (1,299,723) (1,299,723)
Exercise of stock options 13,000 158,923 -- -- 171,923
Purchase and retirement of
common stock (30,000) (585,000) -- -- (615,000)
---------- --------- ---------- ---------- ----------
Balances at June 30, 1996 $1,462,182 8,765,053 22,065,712 (1,589,283) 30,703,664
========== ========= ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
SB-4
<PAGE>
SECURITY BANCORP AND SUBSIDIARY
Consolidated Statements of Cash Flows
Three years ended June 30, 1996
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net cash provided by operating activities (note 15) $ 7,184,039 1,769,645 2,872,883
------------ ----------- ------------
Cash flows from investing activities:
Purchases of investment securities available-for-sale (20,003,125) (1,276,000) --
Proceeds from matured or called investment securities
available-for-sale 8,781,943 33,365 --
Proceeds from sales of investment securities available-for-sale 8,472,467 -- 274,265
Purchases of mortgage-backed securities available-for-sale (40,309,672) (1,829,100) --
Proceeds from sales of mortgage-backed securities available-for-sale 32,879,912 20,077,823 16,182,500
Principal payments from mortgage-backed securities available-for-sale 9,157,783 2,837,811 --
Purchases of investment securities held-to-maturity -- (5,204,191) (9,003,606)
Proceeds from maturities of investment securities held-to-maturity 10,000,000 3,000,000 5,105,514
Purchases of mortgage-backed securities held-to-maturity -- -- (103,521,584)
Principal payments from mortgage-backed securities held-to-maturity 9,489,392 13,971,306 60,122,953
Proceeds from matured or called mortgage-backed securities
held-to-maturity 1,290,341 -- --
Origination of loans receivable (119,895,053) (44,056,000) (39,740,719)
Repayment of principal on loans receivable 79,013,194 14,882,216 28,518,117
Purchases of life insurance policies -- -- (105,000)
Proceeds from sales of other real estate owned -- -- 136,817
Decrease in real estate held for investment 8,755 46,400 47,194
Additions to premises and equipment (1,980,532) (1,495,347) (1,269,288)
Acquisition of branch assets -- -- 55,110,104
------------ ----------- ------------
Net cash provided by (used in) investing activities (23,094,595) 988,283 11,857,267
------------ ----------- ------------
Cash flows from financing activities:
Net decrease in deposits and securities sold under repurchase agreements (296,173) (2,782,716) (1,318,633)
Net change in advances from Federal Home Loan Bank 17,250,000 4,750,000 (11,750,000)
Net increase in advances from borrowers for taxes and insurance (17,482) 86,922 20,461
Cash dividends paid on common stock (981,956) (896,242) (813,729)
Exercise of stock options 171,923 41,049 81,049
Purchase and retirement of common stock (615,000) -- --
------------ ----------- ------------
Net cash provided by (used in) financing activities 15,511,312 1,199,013 (13,780,852)
------------ ----------- ------------
Net increase (decrease) in cash and cash equivalents (399,244) 3,956,941 949,298
Cash and cash equivalents at beginning of year 10,188,922 6,231,981 5,282,683
------------ ----------- ------------
Cash and cash equivalents at end of year $ 9,789,678 10,188,922 6,231,981
============ =========== ============
Cash paid for:
Interest $ 14,027,000 12,652,000 9,295,000
Income taxes, net 1,044,000 1,239,000 1,531,000
============ =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
SB-5
<PAGE>
SECURITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
Three years ended June 30, 1996
(1) Summary of Significant Accounting Policies
------------------------------------------
Basis of Presentation
---------------------
The accompanying consolidated financial statements include the accounts of
Security Bancorp (the "Holding Company") and its wholly owned subsidiary,
Security Bank, FSB (the "Bank"). The consolidated financial statements
also include S.F.S. Industries, Inc., a wholly-owned subsidiary of the
Bank. All significant intercompany balances and transactions have been
eliminated in consolidation.
The consolidated financial statements 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 income and expenses for the period.
Actual results could differ significantly from those estimates.
A material estimate that is particularly susceptible to significant change
in the near-term relates to the determination of the allowance for loan
losses. Management believes that the allowance for losses on loans is
adequate. While management uses available information to recognize losses
on loans, future additions to the allowance may be necessary based on
changes in economic conditions. In addition, various regulatory agencies,
as an integral part of their examination process, periodically review the
Bank's allowances for losses on loans. 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.
Reorganization
--------------
During the year ended June 30, 1994, the Board of Directors of Security
Bank, FSB (formerly known as Security Federal Savings Bank) approved a plan
of reorganization whereby Security Bank, FSB became a wholly-owned
subsidiary of Security Bancorp. The plan was approved by stockholders and
regulators and each common share of Security Federal Savings Bank was
exchanged for one common share of Security Bancorp. The reorganization was
a business combination between entities under common control and the
accounting for the transaction is similar to a pooling of interests.
Cash Equivalents
----------------
The Bank considers all cash, daily interest demand deposits,
non-interest-bearing deposits with banks, and time deposits with banks
having original maturities of three months or less to be cash equivalents.
At June 30, 1996, the Bank was required to have aggregate reserves in the
form of cash on hand and deposits with the Federal Reserve Bank of
approximately $850,000.
(Continued)
SB-6
<PAGE>
SECURITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
Investment and Mortgage-Backed Securities
-----------------------------------------
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" (the "Statement").
The Bank adopted the provisions of the Statement as of July 1, 1994 and, in
accordance with the Statement, prior period financial statements have not
been restated to reflect the change in accounting principle and there were
no cumulative adjustments to income. However, the beginning balance of
stockholders' equity was increased by $613,107 (which is net of deferred
income taxes of $383,850) at July 1, 1994 to reflect net unrealized gains
on securities classified as available-for-sale previously carried at the
lower of amortized cost or market. The Bank's accounting policy for
investment and mortgage-backed securities is as follows:
Trading Securities - Trading securities consist of debt and equity
securities that are bought and held principally for the purpose of
selling them in the near term and are reported at fair value, with
unrealized gains and losses included in net income. The Bank did not
hold any trading securities during the year ended June 30, 1996 and
1995.
Securities Held-to-Maturity - Debt securities for which the Bank has
the positive intent and ability to hold are classified as
held-to-maturity and are stated at amortized cost. Mortgage-backed
securities represent participating interests in pools of long-term
first mortgage loans originated and serviced by issuers of the
securities.
Securities Available-for-Sale - Securities not classified as
held-to-maturity or trading and marketable equity securities are
classified as available-for-sale. Securities available-for-sale
include debt and mortgage-backed securities that are held for an
indefinite period of time and are not intended to be held to maturity,
as well as mutual funds. 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 factors related thereto. Available-for-sale
securities are stated at fair value with any unrealized gains and
losses, net of deferred taxes, reported as a separate component of
stockholders' equity.
The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to anticipated maturity dates. Such
amortization and accretion is determined using the interest method and is
included in interest income. Realized gains and losses and declines in
value judged to be other-than-temporary are credited (charged) to net
income. The cost of securities sold is based on the specific identification
method.
The Bank has not entered into any swaps, options or futures contracts.
Included in the U.S. Agency securities are investments in structured notes
which have contractual step-up interest rates, and call features.
Loans Held for Sale
-------------------
Loans identified as held for sale are carried at lower of cost or market
value. Lower of cost or market value adjustments, as well as realized gains
or losses, are recorded in gain on sale of loans, net.
(Continued)
SB-7
<PAGE>
SECURITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
Loans Receivable
----------------
Loans receivable are stated at unpaid principal balances, less unearned
discounts and loan origination fees. Interest on loans is credited to
income as earned. Interest receivable is accrued only if deemed
collectible. Substantially all of the Bank's loan activity is with
customers within the state of Montana.
Significant loan origination fees and related costs are deferred, and the
net fee or cost is recognized in interest income using the interest method
over the contractual life of the loans, adjusted for estimated prepayments
based on the Bank's historical prepayment experience. The amortization of
deferred loan fees and costs and the accretion of unearned discounts on
non-performing loans is discontinued during the periods of non-performance.
Valuation allowances for estimated losses on loans are charged to expense
when losses become probable and can be reasonably estimated. Estimated
losses are determined based on management's judgment, giving effect to
numerous factors including, but not necessarily limited to, general
economic conditions, loan portfolio composition, prior loss experience and
independent appraisals.
Effective 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 residential real estate
and 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, in 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. The amount of the impairment is measured
using cash flows discounted at the loan's effective interest rate, except
when it is determined that the sole source of repayment for the loan is the
operation, or liquidation of the underlying collateral. In such cases, the
current value of the collateral, reduced by anticipated selling costs will
be used instead of discounted cash flows. 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.
The reserve for loan losses, as determined above, includes the reserve for
impaired loans. The Bank's existing policies for evaluating the adequacy of
the reserve for loan losses and policies for discontinuing the accrual of
interest on loans are used to establish the basis for determining whether a
loan is impaired.
The Bank's adoption of the Statements did not have a material impact on
consolidated financial position or results of operations.
Stock in Federal Home Loan Bank
-------------------------------
Federal law requires a member institution of the Federal Home Loan Bank
(FHLB) System to hold common stock of its district FHLB according to
predetermined formulas.
(Continued)
SB-8
<PAGE>
SECURITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
Cash Surrender Value of Life Insurance
--------------------------------------
The Bank has acquired life insurance policies covering certain key
employees and it is the beneficiary of such policies. The Bank makes one
time lump sum payments as key employees are identified. Earnings on the
lump sum payments are expected to exceed future premiums and expenses
associated with the policy and thus result in an increase in the cash
surrender value of the policy.
Other Real Estate Owned
-----------------------
Other real estate owned, which is included in other assets in the
accompanying consolidated balance sheets, represents real estate acquired
through foreclosure or in satisfaction of loans and is initially recorded
at the lower of the related loan balance, less any specific allowance for
loss, or fair value less estimated costs to sell.
Valuations are periodically performed by management and a charge to expense
will occur if the carrying value of the property exceeds its estimated fair
value less estimated costs to sell.
Real Estate Held for Investment
-------------------------------
Real estate held for investment represents an office building held for
future expansion. Real estate held for investment is recorded at the lower
of cost or estimated net realizable value. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets.
Provisions for estimated losses on real estate held for investment are
charged to expense when, in the opinion of management, the carrying value
of the property exceeds its estimated net realizable value.
Premises and Equipment
----------------------
Office premises and equipment are carried at cost less accumulated
depreciation. Depreciation is provided over the estimated useful lives of
30 to 50 years for buildings and improvements, and 3 to 20 years for
furniture and equipment using straight-line and accelerated methods.
Improvements and major repairs are capitalized and ordinary maintenance and
repairs are expensed as incurred. Gains and losses on disposal are
recognized in the year of disposal.
Intangible Assets
-----------------
Goodwill. Goodwill reflects the excess of cost over fair value of net
assets which were acquired during 1994. Note 19 more fully describes
the purchase transaction. Goodwill is amortized over 15 years which
approximates the periods estimated to be benefited from the assets
acquired and liabilities assumed.
Loan Servicing Rights. The cost of loan servicing rights acquired 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 upon 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 the interest method.
(Continued)
SB-9
<PAGE>
SECURITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
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. As of June 30, 1996 and 1995,
approximately $290,000 and $329,000, respectively, of capitalized loan
servicing rights are included in other assets.
On March 31, 1995, the FASB issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and 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 June 1996, the FASB issued SFAS No. 125, "Accounting for 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 generally requires the Bank recognize as separate assets the
rights to service mortgage loans for others, whether the servicing rights
are acquired through purchases or loan originations. Servicing rights are
initially recorded at fair value based upon the present value of estimated
future cash flows. Subsequently, the servicing rights are assessed for
impairment, which is recognized in the statement of earnings in the period
the impairment occurs. For purposes of performing the impairment
evaluation, the related portfolio must be stratified on the basis of
certain risk characteristics including loan type and note rate. 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. The provisions
of SFAS No. 125 apply to transactions occurring after December 31, 1996.
During the year ended June 30, 1996, the Bank sold loans of approximately
$12 million with servicing retained.
Income Taxes
------------
The Holding Company and its subsidiary have elected to file a consolidated
Federal income tax return. State statute prevents filing of a consolidated
Montana income tax return and, accordingly, separate returns are filed by
the Bank and the Holding Company.
Deferred tax assets and liabilities are recognized for the estimated future
consequences attributable to differences between the financial statement
carrying amounts of assets and liabilities and their respective tax bases.
The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in tax expense in the period that includes the enactment
date.
Net Income Per Share
--------------------
Net income per share data is based upon the weighted average number of
shares of common stock and common stock equivalent shares outstanding.
(Continued)
SB-10
<PAGE>
SECURITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
Stock Options and Appreciation Rights
-------------------------------------
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 cost is
measured at the grant date based on the fair 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 the use of 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 certain pro forma disclosures as if the
fair value based method had been applied. The accounting requirements of
SFAS No. 123 are effective for transactions entered into in fiscal years
beginning after December 15, 1995. Pro forma disclosures are required for
fiscal years beginning after December 15, 1995 and must include the effects
of all awards granted in fiscal years beginning after December 15, 1994.
Management has elected to follow the accounting requirements of previous
pronouncements.
Reclassifications
-----------------
Certain reclassifications have been made to 1995 and 1994 financial
statements to conform with 1996 presentation.
(2) Investment Securities and Mortgage-Backed Securities Available-for-Sale
-----------------------------------------------------------------------
The amortized cost, unrealized gains and losses, and approximate fair
values of securities available-for-sale at June 30 are as follows:
<TABLE>
<CAPTION>
1996
--------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Investment securities:
U.S. Treasury securities $ 499,761 136 (6,335) 493,562
U.S. Agency securities 15,000,000 -- (234,782) 14,765,218
Municipal bonds 2,351,000 66,096 (80,475) 2,336,621
Mutual funds 2,792,707 842 (243,606) 2,549,943
----------- ------ ---------- ----------
$20,643,468 67,074 (565,198) 20,145,344
=========== ====== ========== ==========
Mortgage-backed securities:
FNMA certificates $12,056,183 -- (348,701) 11,707,482
GNMA certificates 28,571,048 91,843 (124,410) 28,538,481
FHLMC certificates 56,181,008 -- (1,659,460) 54,521,548
Private issue 1,828,948 -- (45,348) 1,783,600
----------- ------ ---------- ----------
$98,637,187 91,843 (2,177,919) 96,551,111
=========== ====== ========== ==========
</TABLE>
(Continued)
SB-11
<PAGE>
SECURITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
1995
--------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Investment securities:
Municipal bonds $ 2,416,000 58,928 -- 2,474,928
Mutual funds (net of
$335,000 reserve for
permanent impairment) 11,610,317 -- (552,819) 11,057,498
----------- ------ ---------- ----------
$14,026,317 58,928 (552,819) 13,532,426
=========== ====== ========== ==========
Mortgage-backed securities:
FNMA certificates $ 3,439,264 23,131 -- 3,462,395
Private issue 1,829,098 -- -- 1,829,098
----------- ------ ---------- ----------
$ 5,268,362 23,131 -- 5,291,493
=========== ====== ========== ==========
</TABLE>
During the fourth quarter of 1995, the Financial Accounting Standards Board
allowed a "one-time reclassification" of securities accounted for under
SFAS No. 115. The Bank reclassified $4,199,030 of U.S. Treasury and Agency
securities and $94,723,974 of mortgage-backed securities from the
held-to-maturity classification to the available-for-sale classification.
Gross unrealized gains of $375,334 and gross unrealized losses of $153,465
were recorded in stockholders' equity (on a net-of-tax basis).
Gross losses realized on the sale of investment securities
available-for-sale of $659,943 during the year ended June 30, 1996 were
offset by a reserve for permanent impairment of $335,000 recorded in prior
years. No gains were realized on the sale of investment securities
available-for-sale during the year ended June 30, 1996. There were no sales
of investment securities available-for-sale during the year ended June 30,
1995.
Gross gains of $525,484 and $122,254 were realized on the sale of
mortgage-backed securities available-for-sale during the years ended June
30, 1996 and 1995, respectively. No losses were realized on the sale of
mortgage-backed securities available-for-sale during the years ended June
30, 1996 and 1995.
A comparison of the cost and estimated fair values of investment securities
available-for-sale by contractual maturities at June 30, 1996 is as
follows:
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
---- -----
<S> <C> <C>
Due within one year $15,199,989 14,965,343
Due after one year through five years 444,772 440,221
Due after five years through ten years 248,000 251,869
Due after ten years through twenty years 1,958,000 1,937,968
Mutual funds 2,792,707 2,549,943
----------- ----------
$20,643,468 20,145,344
=========== ==========
</TABLE>
Expected maturities of mortgage-backed securities will differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without penalty.
(Continued)
SB-12
<PAGE>
SECURITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(3) Investment Securities Held-to-Maturity
--------------------------------------
The amortized cost, unrealized gains and losses, and approximate fair
values of investment securities held-to-maturity at June 30, 1995 are
summarized as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 699,511 1,145 (6,406) 694,250
U.S. Agency securities 13,497,351 -- (83,601) 13,413,750
Other 2,880 -- -- 2,880
----------- ----- ------- ----------
$14,199,742 1,145 (90,007) 14,110,880
=========== ===== ======= ==========
</TABLE>
There were no sales of investment securities held-to-maturity during the
years ended June 30, 1996 and 1995. A gross gain of $67,265 was realized on
the sale of an investment security during the year ended June 30, 1994.
(4) Mortgage-Backed Securities Held-to-Maturity
-------------------------------------------
The amortized cost, unrealized gains and losses, and estimated fair values
of mortgage-backed securities held-to-maturity at June 30 are summarized as
follows:
<TABLE>
<CAPTION>
1996
--------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
GNMA certificates $ 58,589 1,120 (305) 59,504
FHLMC certificates 2,649,154 1,990 (11,108) 2,640,036
FNMA certificates 310,667 -- (6,810) 303,858
Mortgage pass-through
certificates 31,686,097 6,965 (732,279) 30,960,783
------------ ------- ---------- -----------
$ 34,704,507 10,075 (750,502) 33,964,081
============ ======= ========== ===========
</TABLE>
<TABLE>
<CAPTION>
1995
--------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
GNMA certificates $ 7,752,160 206,284 (900) 7,957,544
FHLMCcertificates 78,007,882 360,838 (639,819) 77,728,901
FNMA certificates 14,472,071 41,713 (98,397) 14,415,387
Mortgage pass-through
certificates 40,092,206 981 (818,948) 39,274,239
------------ ------- ---------- -----------
$140,324,319 609,816 (1,558,064) 139,376,071
=========== ======= ========== ===========
</TABLE>
(Continued)
SB-13
<PAGE>
SECURITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
There were no sales of mortgage-backed securities held-to-maturity during
the years ended June 30, 1996 and 1995. Gross gains of $183,466 and no
losses were realized on sales of mortgage-backed securities during the year
ended June 30, 1994.
Expected maturities of mortgage-backed securities will differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without penalty.
(5) Loans Receivable
----------------
Loans receivable at June 30 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Loans secured by real estate:
Residential $ 74,270,459 73,457,932
Commercial 22,192,949 12,524,581
FHA/VA 7,821,268 9,451,698
Agriculture 6,020,201 4,390,239
Commercial 24,249,838 17,544,460
Agriculture 11,551,597 1,777,601
Auto, other consumer and savings
account loans 42,998,684 29,544,550
------------ -----------
189,104,996 148,691,061
Less:
Unearned discounts and loan
origination fees $ 333,397 322,467
Loans in process -- 32,613
Allowance for loan losses 1,180,866 1,156,393
------------ -----------
187,590,733 147,179,588
Less loans held for sale 2,687,034 3,109,038
------------ -----------
$184,903,699 144,070,550
============ ===========
</TABLE>
The weighted average stated interest rate of loans receivable at June 30,
1996 and 1995 was 8.69% and 8.60%, respectively. The average yield on loans
receivable, including amortization of unearned discounts and loan
origination fees, was 8.84%, 8.81% and 8.03% for the years ended June 30,
1996, 1995 and 1994, respectively.
Loans receivable include approximately $55,522,000 and $57,718,000 in
adjustable rate mortgages at June 30, 1996 and 1995, respectively.
Real estate loans serviced for others totaled approximately $73,224,000 and
$62,718,000 at June 30, 1996 and 1995, respectively.
A summary of activity in the allowance for loan losses follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $1,156,393 1,138,942 568,195
Provision charged to expense 120,000 30,000 80,000
Acquired reserves (note 19) -- -- 500,000
Losses charged against the allowance (105,006) (24,574) (10,082)
Recoveries 9,479 12,025 829
---------- --------- ---------
Balance at end of year $1,180,866 1,156,393 1,138,942
========== ========= =========
</TABLE>
(Continued)
SB-14
<PAGE>
SECURITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
Nonaccrual and renegotiated loans for which interest has been reduced
totaled approximately $668,000, $425,000 and $843,000 at June 30, 1996,
1995 and 1994, respectively. Interest income that would have been recorded
under the original terms of such loans and the interest income actually
recognized for the years ended June 30 are summarized below:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest income that would have been recorded $68,000 39,000 84,000
Interest income recognized 15,000 17,000 68,000
------- ------ ------
Interest income foregone $53,000 22,000 16,000
======= ====== ======
</TABLE>
The Bank is not committed to lend additional funds to debtors whose loans
have been modified. The Bank's impaired loans which include those
non-consumer loans currently reported as non-accrual amounted to
approximately $378,000 at June 30, 1996 and were not subject to a related
allowance for credit losses because of the estimated net realizable value
of loan collateral, guarantees and other factors.
(6) Accrued Interest Receivable
---------------------------
Accrued interest receivable at June 30 is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Loans $ 1,620,757 1,092,385
Mortgage-backed securities 819,397 871,732
Investment securities 143,864 382,242
----------- ----------
$ 2,584,018 2,346,359
=========== ==========
</TABLE>
(7) Premises and Equipment
----------------------
Premises and equipment at June 30 is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Land $ 1,977,767 1,977,767
Buildings and improvements 8,287,988 7,608,861
Furniture, fixtures and equipment 3,069,613 4,048,128
----------- ----------
13,335,368 13,634,756
Less accumulated depreciation 3,830,866 5,474,287
----------- ----------
$ 9,504,502 8,160,469
=========== ==========
</TABLE>
(Continued)
SB-15
<PAGE>
SECURITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(8) Deposits
--------
Deposits at June 30 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------------- --------------------------------
Weighted Weighted
average average
Amount Percent rate Amount Percent rate
------ ------- ---- ------ ------- ----
<S> <C> <C> <C> <C> <C> <C>
Savings $ 46,016,136 15.9% 2.6% $ 48,760,063 16.8% 3.0%
------------ ----- --- ------------ ----- ---
Certificates of deposit:
IRA, Keogh and tax
deferred annuity 25,438,520 8.8 6.2 14,322,492 4.9 6.2
Three month 2,776,729 1.0 4.6 11,970,984 4.1 5.4
Six month 21,920,638 7.5 5.0 18,724,534 6.4 5.6
Twelve month 60,673,744 21.0 5.4 65,197,465 22.4 5.9
Twenty-four month 27,372,695 9.4 6.2 23,198,468 8.0 6.1
Thirty to forty-eight
month 20,711,728 7.2 6.3 21,085,954 7.3 6.3
Over forty-eight month 4,360,769 1.5 5.6 10,633,437 3.6 6.6
Negotiated rate 9,235,875 3.2 5.7 9,501,522 3.3 6.3
------------ ----- --- ------------ ----- ---
172,490,698 59.6 5.7 174,634,856 60.0 5.9
------------ ----- --- ------------ ----- ---
NOW 52,578,022 18.2 1.9 50,733,298 17.4 2.6
Money market 18,134,642 6.3 3.7 16,805,427 5.8 4.0
------------ ----- --- ------------ ----- ---
70,712,664 24.5 2.6 67,538,725 23.2 3.0
------------ ----- --- ------------ ----- ---
$289,219,498 100.0% 4.6% $290,933,644 100.0% 4.8%
============ ===== === ============ ===== ===
</TABLE>
Certificates of deposit in excess of $100,000 were approximately
$18,163,000 and $20,170,000 at June 30, 1996 and 1995, respectively.
Mortgage-backed securities with a carrying value of approximately
$7,945,000 and $9,341,000 were pledged as collateral to secure public funds
on deposit at June 30, 1996 and 1995, respectively.
Certificates of deposit at June 30, 1996 are scheduled to mature as
follows:
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------------------------
Stated Rate 1997 1998 1999 Thereafter
----------- ---- ---- ---- ----------
<S> <C> <C> <C> <C>
Under 3% $ 27,046 -- -- --
3.00% to 3.99% 233,201 -- -- --
4.00% to 4.99% 13,878,734 1,175,062 118,314 25,160
5.00% to 5.99% 82,197,262 9,647,056 4,685,160 1,004,348
6.00% to 6.99% 18,523,189 9,392,613 3,215,588 2,902,508
7.00% to 7.99% 8,855,750 13,614,435 526,181 2,240,388
8.00% and over 60,972 167,731 -- --
------------ ---------- --------- ---------
$123,776,154 33,996,897 8,545,243 6,172,404
============ ========== ========= =========
</TABLE>
(Continued)
SB-16
<PAGE>
SECURITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
Interest expense on deposits for the years ended June 30 is summarized as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
NOW and money market demand $ 1,392,595 838,910 717,124
Savings 2,904,473 2,047,878 1,188,061
Certificates of deposit 8,879,274 8,331,763 6,592,405
----------- ---------- ---------
$13,176,342 11,218,551 8,497,590
=========== ========== =========
</TABLE>
(9) Advances from Federal Home Loan Bank
------------------------------------
Advances from Federal Home Loan Bank at June 30, are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
5.44% short-term advance, due July 5, 1996 $20,000,000 --
6.21% short-term advance, paid in 1996 -- 10,000,000
Variable rate cash management advances,
interest payable monthly, due April 25, 1997 11,250,000 1,000,000
4.71% advance, due in monthly installments of
$250,000 plus interest, through April 1998 5,541,667 8,541,667
----------- ----------
$36,791,667 19,541,667
=========== ==========
</TABLE>
Principal payments on advances from Federal Home Loan Bank for the five
years subsequent to June 30, 1996 are as follows:
<TABLE>
<CAPTION>
Year Ended June 30, Amount
------------------- ------
<S> <C>
1997 $34,250,000
1998 2,541,667
-----------
$36,791,667
===========
</TABLE>
The advances are subject to a "blanket pledge agreement" whereby
substantially all assets of the Bank are pledged to the FHLB.
(10) Income Taxes
A summary of the provision for income taxes for the years ended June 30
follows:
<TABLE>
<CAPTION>
Federal State Total
------- ----- -----
<S> <C> <C> <C>
1996:
Current $ 837,027 226,973 1,064,000
Deferred 326,616 31,384 358,000
---------- ------- ---------
$1,163,643 258,357 1,422,000
========== ======= =========
</TABLE>
(Continued)
SB-17
<PAGE>
SECURITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Federal State Total
------- ----- -----
<S> <C> <C> <C>
1995:
Current $ 893,172 245,728 1,138,900
Deferred 411,976 7,024 419,000
---------- ------- ---------
$1,305,148 252,752 1,557,900
========== ======= =========
1994:
Current $1,391,028 308,824 1,699,852
Deferred 214,237 47,563 261,800
---------- ------- ---------
$1,605,265 356,387 1,961,652
========== ======= =========
</TABLE>
Reasons for differences between the statutory tax rate and the effective
tax rates for the years ended June 30 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory tax rate 34.0% 34.0% 34.0%
State taxes, net of Federal income tax effects 4.3 3.9 5.0
Other (2.4) (1.7) 2.6
---- ---- ----
Effective tax rates 35.9% 36.2% 41.6%
==== ==== ====
</TABLE>
Temporary differences between the financial statement carrying amounts and
the tax bases of assets and liabilities that give rise to significant
portions of the deferred tax liability as of June 30, 1996 and 1995 relate
to the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Deferred loan fees $ 128,000 124,000
Allowance for loan losses 336,000 327,000
Deferred compensation 295,000 266,000
Allowance for permanent impairment
of investments -- 129,000
Other 8,000 20,000
----------- ----------
Total gross deferred tax assets 767,000 866,000
----------- ----------
Deferred tax liabilities:
Cash surrender value of key executive life
insurance policies (166,000) (123,000)
Tax bad debt reserves in excess of base year
amount (618,000) (563,000)
Loans purchased (165,000) (178,000)
Unearned income (127,000) (135,000)
FHLB stock dividends (673,000) (587,000)
Prepaid deposit insurance premium (96,000) --
Other (29,000) (29,000)
----------- ----------
Total gross deferred tax liabilities (1,874,000) (1,615,000)
----------- ----------
Net deferred tax liability before the tax
effect of available-for-sale securities (1,107,000) (749,000)
Deferred tax asset - unrealized loss on
available-for-sale securities 994,917 181,200
----------- ----------
Net deferred tax liability $ (112,083) (567,800)
=========== ==========
</TABLE>
(Continued)
SB-18
<PAGE>
SECURITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
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 projections 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 Holding Company and
the Bank will realize the benefits of these deductible differences.
If certain conditions are met, the Bank is allowed a special bad debt
deduction for income tax purposes. The deduction is based on either a
specified experience formula or a percentage of taxable income before such
deduction (presently 8%). The percentage of taxable income method was used
in preparing the federal income tax return in 1994 and 1995 and will be
used in 1996.
Retained earnings, at June 30, 1996, includes approximately $3,566,000 for
which no provision for Federal income tax has been made. This amount
represents the base year tax bad debt reserve which is essentially an
allocation of earnings to pre-1988 bad debt deductions for income 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. Under current tax regulations, management does not
foresee any changes in its business or operations which would result in a
recapture of its federal bad debt reserve into taxable income.
A deferred tax liability of $618,000 has been recognized by the Bank for
the tax bad debt reserve in excess of the base year reserve. New tax
legislation enacted on August 21, 1996 requires this excess be recaptured
and included in taxable income over a six year period beginning with the
tax return filed for the year ending June 30, 1997 or June 30, 1999 if
certain minimum requirements are met. Also included in the tax legislation
and effective for the 1997 tax return is a discontinuance of the
aforementioned 8% special bad debt deduction.
(11) Employee Benefit Plans
----------------------
Pension Plan. All eligible employees are included in a noncontributory
multi-employer trusteed defined benefit pension plan. Actuarially
determined pension costs are funded as required by the Trustee. The plan
had reached its full-funding limitation and contributions to the plan were
suspended for the three years ended June 30, 1995. Pension expense,
including administrative charges, was approximately $5,000 and $4,000 for
the years ended June 30, 1995 and 1994, respectively. Contributions to the
plan were required during the year ended June 30, 1996. Contributions to
the Plan and administrative charges amounted to approximately $104,000
during the year ended June 30, 1996.
Savings Plan. The Bank adopted an employee savings plan effective July 1,
1993. Full time employees are immediately eligible for the plan. The Bank
matches 50% of an employee's contributions, up to a maximum of 3% of the
participating employee's wages. Savings plan expense for the years ended
June 30, 1996, 1995 and 1994 was approximately $86,000, $58,000 and
$45,000, respectively.
(Continued)
SB-19
<PAGE>
SECURITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
Deferred Compensation Plan. The Bank has entered into deferred compensation
agreements with certain key employees that provide for predetermined
periodic payments over 15 years upon retirement or death. The agreements
specify a vesting schedule whereby the key employees vest 10% per year, but
are not eligible for benefits if termination occurs prior to completing
three years of service beginning on the date of the agreement. In the event
of acquisition of the Bank by a third party, the deferred compensation
agreements require any successor corporation to assume the obligations of
the agreements. Amounts expensed under these agreements to accrue the
estimated liability upon retirement totaled approximately $93,000, $78,000
and $63,000 for the years ended June 30, 1996, 1995 and 1994, respectively.
Executive Employment Agreements. Effective June 19, 1995, the Holding
Company and the Bank entered into an employment agreement with the
President of the Bank. The terms of the agreement include an annual salary
base plus insurance and other benefits and a bonus based on the performance
of the Bank awarded at the Board of Directors' discretion. Upon a change in
control, the Bank has agreed to pay the President, in a single payment,
three times the annual salary and provide certain insurance and other
benefits for a period of two years following a change in control. A change
in control is defined by the agreement as (1) a takeover of the Bank by a
purchase or merger; (2) a purchase of all the assets of the Bank; (3) an
acquisition directly or indirectly of more than 50% of the voting stock of
the Holding Company; or (4) a change in the majority of members of the
Board of Directors of the Holding Company over a period of three
consecutive years. The agreement is for a term of one year, renewable
annually, and was renewed effective June 19, 1996.
On July 1, 1996, the Bank entered into employment agreements with certain
of its other executives. Such agreements have a term of two years and
provide for the continuation of salary payments for a period of 24 months
following a change in control. A change in control is defined as a
situation in which an acquirer directly or indirectly acquires more than
25% of the voting stock of the Holding Company.
Stock Option and Stock Appreciation Rights Plan. The stockholders of the
Holding Company have approved a Stock Option and Stock Appreciation Rights
Plan (the Plan) which provides for the granting of options to purchase
common stock of the Holding Company to directors and key employees. The
Plan is administered by a committee of the Board of Directors (the
"Committee").
Under the terms of the Plan, the number of shares subject to options is
146,000 shares. Options may be granted at an exercise price as determined
by the Committee, subject to a minimum exercise price equal to the fair
market value of a share of common stock at the date the option is granted.
The period during which an option may be exercised shall also be determined
by the Committee, subject to a three year vesting schedule but not later
than ten years from the date of grant.
Stock appreciation rights may be granted either separately or in tandem
with stock options. Exercise of the stock appreciation right entitles the
holder to receive a payment equal to the excess of the fair market value of
the shares surrendered over the exercise price. Payment may be made in cash
or shares of common stock, as determined by the Committee. No stock
appreciation rights have been granted during the three years ended June 30,
1996.
(Continued)
SB-20
<PAGE>
SECURITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
Following a "change in control" of the Holding Company and in connection
with the grant of any options or stock appreciation rights, the Committee
may provide the holder thereof the right to exercise the stock appreciation
rights or to surrender the options in exchange for a cash payment equal to
the difference between the fair value and the option price without regard
to any restrictions of exercise that would otherwise apply. Change in
control is defined by the plan to have occurred if any person or entity
directly or indirectly acquires ownership representing more than 25% of the
voting stock of the Holding Company, or obtains control of the election of
a majority of the directors of the Holding Company.
Changes in stock options and the option price range are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Outstanding at beginning of year 119,700 110,750 94,900
Granted 7,000 19,300 22,200
($20.33-$20.98) ($19.00) ($22.65)
Exercised (13,000) (4,300) (6,100)
($6.50-$10.00) ($6.50-$11.65) ($6.50-$10.00)
Canceled (3,000) (6,050) (250)
--------------- -------------- --------------
Outstanding at end of year 110,700 119,700 110,750
($6.50-$20.98) ($6.50-$22.65) ($6.50-$22.65)
================ ============== ==============
Exercisable at end of year 86,783 84,083 65,317
($6.50-$20.98) ($6.50-$22.65) ($6.50-$11.65)
================ ============== ==============
</TABLE>
(12) Commitments and Contingencies
-----------------------------
Litigation - 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 Company's
consolidated financial position or results of operations.
Data Processing Contract - On July 8, 1995, the Bank entered into a data
processing contract with First Interstate Bank of Commerce for data
processing services. The term of the contract is four years. Data
processing costs under the contract were approximately $749,000 for the
year ended June 30, 1996.
Pending Legislation on SAIF Premiums - The thrift 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 thrift deposits.
On September 30, 1996, the Deposit Insurance Funds Act of 1996 was signed,
which authorizes the FDIC to impose a special assessment on certain
deposits held by thrift institutions. This special assessment, which is
based on $.657 per $100 of outstanding thrift deposits at March 31, 1995,
is intended to recapitalize the SAIF. The special assessment resulted in an
additional after-tax expense of approximately $838,000 which was recorded
by the Bank on September 30, 1996. The assessment is payable no later than
November 29, 1996.
(Continued)
SB-21
<PAGE>
SECURITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(13) Regulatory Capital
-------------------
The Bank is required to meet three FIRREA-enacted capital requirements: a
tangible capital requirement (stockholders' equity adjusted for the effects
of intangibles, investments and advances to nonincludable subsidiaries and
other factors) equal to not less than 1.5% of tangible assets (as defined
in the regulations), a core capital requirement (tangible capital adjusted
for supervisory goodwill and other defined factors) equal to not less than
3% of tangible assets, and a risk-based capital requirement equal to at
least 8.0% of all risk-weighted assets. For risk-weighting, selected assets
are given a risk assignment of 0% to 100%. The Bank's total risk-weighted
assets at June 30, 1996 were $189,952,500.
The following table demonstrates as of June 30, 1996, the extent to which
the Bank exceeds in dollars and in percent, the three minimum capital
requirements.
<TABLE>
<CAPTION>
Regulatory Basis
----------------------------------------
Approximate
Actual requirement Excess
------ ----------- ------
<S> <C> <C> <C>
Tangible capital:
Dollar amount ..................... $26,806,004 5,538,397 21,267,607
Percent of tangible assets ........ 7.3% 1.5% 5.8%
Core capital:
Dollar amount ..................... $26,806,004 11,076,794 15,729,210
Percent of adjusted tangible assets 7.3% 3.0% 4.3%
Risk-based capital:
Dollar amount ..................... $27,986,870 15,196,200 12,790,670
Percent of risk-weighted assets ... 14.7% 8.0% 6.7%
</TABLE>
Failure to comply with applicable regulatory capital requirements can
result in capital directives from the director of the Office of Thrift
Supervision, restrictions on growth, and other limitations on a savings
association's operations.
Generally accepted accounting principles ("GAAP") capital differs from
tangible, core, and risk-based capital at June 30 as a result of the
following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Consolidated capital measured by GAAP ...... $ 30,703,664 30,884,116
Less Holding Company assets ................ 381,049 256,576
------- -------
Bank capital measured by GAAP .............. 30,322,615 30,627,540
Non-includable assets of subsidiary ........ (582,180) (522,716)
Goodwill ................................... (4,377,500) (4,717,500)
Unrealized losses (gains) on certain
available-for-sale securities ............ 1,443,069 (44,361)
--------- -------
Tangible and core capital .................. 26,806,004 25,342,963
---------- ----------
General valuation reserves ................. 1,180,866 1,156,393
--------- ---------
Risk-based capital ......................... $ 27,986,870 26,499,356
============ ==========
</TABLE>
(Continued)
SB-22
<PAGE>
SECURITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(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.
These financial instruments include commitments to extend credit and
involve, to varying degrees, elements of credit risk.
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.
Financial instruments outstanding at June 30, 1996 whose contract amounts
represent credit risk are as follows:
Commitments to extend credit:
Type Amount
---- ------
Fixed rate ............ $1,575,000
Variable rate ......... 11,064,820
----------
$12,639,820
===========
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 fixed expiration dates or other termination
clauses and may require payment of a fee. 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.
(15) Reconciliation of Net Income to Net Cash Provided by Operating Activities
-------------------------------------------------------------------------
The reconciliation of net income to net cash provided by operating
activities for the years ended June 30 follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ................................. $2,544,304 2,748,032 2,755,490
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for:
Loan losses ............................. 120,000 30,000 80,000
Permanent impairment of investment
securities ............................. -- 90,000 245,000
Amortization of:
Premiums and discounts on investment
securities, net-available-for-sale...... 5,650 3,960 --
Premiums and discounts on mortgage-
backed securities, net-available-
for-sale ............................... 152,611 (69,176) --
Premiums and discounts on investment
securities, net-held-to-maturity........ 712 718 35,583
</TABLE>
(Continued)
SB-23
<PAGE>
SECURITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Premiums and discounts on mortgage-backed
securities, net-held-to-maturity ............................. 116,105 (63,793) 342,895
Deferred loan origination fees ................................ (71,290) (185,691) (153,917)
Goodwill ...................................................... 340,000 340,000 42,500
Dividends reinvested in mutual funds .......................... -- -- (272,567)
Origination of loans held for sale .............................. (39,552,694) (20,236,000) (41,226,802)
Proceeds from sales of loans held for sale ...................... 40,749,086 19,834,157 42,688,459
Stock dividends reinvested in FHLB .............................. (222,000) (171,200) (272,100)
Depreciation .................................................... 636,499 630,177 428,229
Net loss (gain) on sales of:
Investment securities ......................................... 324,943 -- (67,265)
Mortgage-backed securities .................................... (525,484) (122,254) (183,466)
Other real estate owned ....................................... -- -- (75,664)
Loans held for sale ........................................... (774,388) (344,523) (890,560)
Change in:
Accrued interest receivable ................................... (237,659) (345,637) (580,381)
Cash surrender value of life insurance ........................ (110,961) (109,499) (100,443)
Other assets .................................................. (13,150) (306,940) (127,403)
Income taxes payable .......................................... (26,004) (89,587) 134,914
Deferred income taxes ......................................... 358,000 419,000 261,800
Accrued interest payable ...................................... 884,285 299,249 74,252
Accrued expenses and other liabilities ........................ 2,485,474 (581,348) (265,671)
--------- -------- --------
Net cash provided by operating activities .............. $ 7,184,039 1,769,645 2,872,883
============ ========= =========
</TABLE>
(16) Noncash Investing and Financing Activities
------------------------------------------
A summary of noncash investing and financing activities for the years ended
June 30 follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Change in unrealized loss on certain
marketable equity securities................... $ -- -- 714,804
Change in net unrealized loss on investment
securities available-for-sale.................. 4,234 (717,267) --
Change in net unrealized loss on mortgage-backed
securities available-for-sale ................. 2,109,206 -- --
One-time reclassification of held-to-maturity
investment securities to available-for-sale.... 4,199,030 -- --
One-time reclassification of held-to-maturity
mortgage-backed securities to
available-for-sale............................. 94,723,974 -- --
========== ========= =======
</TABLE>
(Continued)
SB-24
<PAGE>
SECURITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(17) Disclosures About Fair Value of Financial Instruments
-----------------------------------------------------
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures
About Fair Value of Financial Instruments," requires disclosure of fair
value information about financial instruments, whether or not recognized in
the balance sheet, for which it is practicable to estimate that value. In
cases where quoted market prices are not available, fair values are based
on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. SFAS No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do
not represent the underlying value of the Bank.
The following methods and assumptions were used by the Bank in estimating
the fair value for its financial instruments as defined by SFAS No. 107:
Cash and Cash Equivalents. The carrying amounts for cash and cash
equivalents approximate fair value because they mature in 90 days or less
and do not present unanticipated credit concerns.
Investment Securities and Stock in Federal Home Loan Bank. The fair value
of investment securities is estimated based on bid prices published in
financial newspapers or bid quotations received from securities dealers.
The fair value of stock in Federal Home Loan Bank approximates redemption
value.
Mortgage-Backed Securities. The fair value of mortgage-backed securities is
estimated based upon bid prices published in financial newspapers or bid
quotations received from securities dealers.
Loans Receivable. Fair values are estimated by stratifying the loan
portfolio into groups of loans with similar financial characteristics.
Loans are segregated by type such as real estate, commercial, and consumer,
with each category further segmented into fixed and adjustable rate
interest terms.
The fair value of fixed rate loans is calculated by discounting scheduled
cash flows through the anticipated maturity adjusted for prepayment
estimates. For mortgage loans, the Bank uses the secondary market rates in
effect for loans of similar size to discount cash flows. For other fixed
rate loans, cash flows are discounted at prime rate. Adjustable interest
rate loans are assumed to approximate fair value because they generally
reprice within the near term.
The fair values are adjusted for credit risk based on assessment of risk
identified with specific loans, and risk adjustments on the remaining
portfolio based on credit loss experience. Assumptions regarding credit
risk are judgmentally determined using specific borrower information,
internal credit quality analysis, and historical information on segmented
loan categories for non-specific borrowers.
Cash Surrender Value of Life Insurance. The carrying amount for cash
surrender value of life insurance approximates fair value as policies are
recorded at redemption value.
(Continued)
SB-25
<PAGE>
SECURITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
Accrued Interest Receivable. The fair value of accrued interest receivable
approximates carrying value as the Bank expects to collect accrued interest
in the short term.
Deposits. Under SFAS No. 107, the fair value of deposits with no stated
maturity, such as savings accounts, NOW accounts, and money market
accounts, is equal to the amount payable on demand as of June 30, 1996. The
fair value of certificates of deposit is based on the discounted value of
contractual cash flows. The discount rate is estimated using the rates
currently offered for deposits of similar maturities.
Advances from Federal Home Loan Bank. The carrying amount of short-term
advances and cash management advances from FHLB approximate fair value as
advances are either due in the very short-term or are variable rate and
reprice in the short-term. The fair value of the fixed rate long-term
advance is calculated by discounting scheduled payments using the Bank's
current FHLB long-term borrowing rate.
Accrued Interest Payable. The fair value of accrued interest payable
approximates carrying value as the amounts accrued will be paid to
customers or the Federal Home Loan Bank in the short term.
Commitments to Extend Credit. The fair value of commitments to extend
credit is estimated using the fees currently charged to enter into similar
arrangements. The commitments to extend credit are generally variable
interest rate loans, or are originated with the intent to resell, therefore
no fair value adjustment for interest rates is necessary.
Limitations. Fair value estimates are made at a specific point in time,
based on relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Bank's entire holdings
of a particular financial instrument. Because no market exists for a
significant portion of the Bank's financial instruments, fair value
estimates are based on judgements regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance-sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. Significant assets and
liabilities that are not considered financial instruments include the
securities brokerage services operations, deferred tax assets and
liabilities, property, plant, equipment, and goodwill. In addition, the tax
ramifications related to the realization of the unrealized gains and losses
can have a significant effect on fair value estimates and have not been
considered in the estimates.
(Continued)
SB-26
<PAGE>
SECURITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
The estimated fair values of the Company's financial instruments required
to be disclosed under SFAS No. 107 as of June 30 are as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------------- ---------------------------
Estimated Estimated
Carrying fair Carrying fair
value value value value
----- ----- ----- -----
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents ..................................... $ 9,789,678 9,790,000 10,188,922 10,189,000
Investment securities available-for-sale ...................... 20,145,344 20,145,000 13,532,426 13,532,000
Mortgage-backed securities available-for-sale ................. 96,551,111 96,551,000 5,291,493 5,291,000
Mortgage-backed securities held-to-maturity ................... 34,704,507 33,964,000 140,324,319 139,376,000
Stock in Federal Home Loan Bank ............................... 3,145,600 3,146,000 2,923,600 2,924,000
Loans receivable(a) ........................................... 184,903,699 186,085,000 144,070,550 143,740,000
Loans held for sale ........................................... 2,687,034 2,687,000 3,109,038 3,109,000
Accrued interest receivable ................................... 2,584,018 2,584,000 2,346,359 2,346,000
Cash surrender value of life insurance ........................ 2,663,427 2,663,000 2,552,466 2,552,000
Liabilities:
Deposits and repurchase agreements ............................ 297,184,264 298,824,000 297,480,437 297,394,000
Advances from Federal Home Loan Bank .......................... 36,791,667 36,471,000 19,541,667 19,542,000
Accrued interest payable ...................................... 2,075,161 2,075,000 1,190,876 1,191,000
Off-balance-sheet items:
Commitments to extend credit .................................. -- 81,738 -- 16,000
=========== =========== =========== ===========
<FN>
- ------------
(a) The carrying value is net of the allowance for loan losses and related unearned income.
</FN>
</TABLE>
(18) Holding Company Information (Condensed)
---------------------------------------
The summarized financial information for Security Bancorp is presented
below. Intercompany balances and transactions are noted parenthetically.
Condensed Balance Sheets
<TABLE>
<CAPTION>
June 30,
--------------------------
Assets 1996 1995
------ ---- ----
<S> <C> <C>
Cash (NOW account with subsidiary) $ 354,145 215,262
Investment in subsidiary 30,322,615 30,627,540
Other 26,904 41,314
------ ------
Total assets $30,703,664 30,884,116
=========== ==========
Stockholders' Equity
--------------------
Total stockholders' equity $30,703,664 30,884,116
=========== ==========
</TABLE>
(Continued)
SB-27
<PAGE>
SECURITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
Condensed Statements of Income
<TABLE>
<CAPTION>
June 30,
--------------------------
1996 1995
---- ----
<S> <C> <C>
Cash dividends from subsidiary ....................... $ 1,664,922 1,039,134
Miscellaneous expense ................................ (57,148) (23,048)
------- -------
Income before equity in
undistributed earnings of
subsidiary ...................................... 1,607,774 1,016,086
Equity in undistributed earnings
of subsidiary .................................... 936,530 1,731,946
------- ---------
Income before income taxes ....................... 2,544,304 2,748,032
Income taxes ......................................... -- --
--------- ---------
Net income ....................................... $ 2,544,304 2,748,032
=========== =========
Condensed Statements of Cash Flows
Cash flows from operating activities:
Net income ........................................... $ 2,544,304 2,748,032
Adjustments to reconcile net cash
provided by operating activities:
Decrease in other assets ......................... 14,410 8,651
Decrease in accrued expenses ..................... -- (57,652)
Equity in undistributed income of subsidiary...... (936,530) (1,731,946)
-------- ----------
Net cash provided by operating activities ..... 1,622,184 967,085
--------- -------
Cash flows from financing activities:
Cash dividends paid ................................ (981,956) (896,242)
Stock options exercised and other .................. (501,345) 49,373
-------- ------
Net cash used in financing activities ......... (1,483,301) (846,869)
---------- --------
Net increase in cash ................................. 138,883 120,216
Cash at beginning of year ............................ 215,262 95,046
------- ------
Cash at end of year .................................. $ 354,145 215,262
=========== =======
</TABLE>
(19) Acquisition
-----------
On May 12, 1994, the Holding Company acquired certain assets and assumed
certain liabilities of Montana Bank of Butte, Bank of Montana - Lewistown,
and Bank of Montana Anaconda from Norwest Corporation. These three
locations were operated as branches of Bank of Montana prior to the
acquisition date. The transaction was accounted for as a purchase and,
accordingly, the assets acquired and liabilities assumed were adjusted to
fair value on the date of acquisition and the consolidated statements of
income for the years ended June 30, 1996, 1995 and 1994 include the
branch's results of operations since the date of purchase.
(Continued)
SB-28
<PAGE>
SECURITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
The premium paid by the Holding Company has been allocated solely to
goodwill as it was determined the historical carrying value of the assets
and liabilities of the branches approximated fair value. A summary of the
assets acquired and liabilities assumed at the acquisition date follows:
Cash and cash equivalents......................... $55,110,104
Loans and accrued interest receivable
(net of acquired reserves of $500,000).......... 27,707,137
Fixed assets, net................................. 1,329,706
---------
Total assets acquired...................... 84,146,947
----------
Deposits ......................................... (88,866,545)
Accrued expenses and other liabilities............ (380,402)
--------
Total liabilities assumed.................. (89,246,947)
-----------
Premium paid (goodwill)........................... 5,100,000
Less accumulated amortization..................... 722,500
-------
Goodwill, net of amortization at June 30, 1996.... $ 4,377,500
===========
(20) Subsequent Event
----------------
On September 24, 1996, Security Bancorp signed an agreement to sell all of
its outstanding common stock to WesterFed Financial Corporation
(Westerfed). The total purchase price is approximately $44.0 million,
subject to certain adjustments. Completion of the sales transaction 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. Under the terms of the
agreement, Security Bancorp shareholders may elect to receive for each
share of Security Bancorp common stock $30 in cash, a number of shares of
Westerfed common stock or a combination of cash and stock, provided the
total consideration to Security Bancorp shareholders consists of 55% cash
and 45% stock. Subject to satisfaction of the various conditions, closing
of the acquisition is scheduled to occur on or before March 31, 1997.
(Continued)
SB-29
<PAGE>
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
SECURITY BANCORP AND SUBSIDIARY
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996 JUNE 30,
ASSETS (UNAUDITED) 1996
------ ----------- -----------
<S> <C> <C>
Cash and cash equivalents $8,429,163 $9,789,678
Investment securities available for sale, net, at fair value 19,887,711 20,145,344
Mortgage-backed securities available for sale, net, at fair value 89,638,407 96,551,111
Investment securities held to maturity, at amortized cost 200,000 --
Mortgage-backed securities held to maturity, at amortized cost 33,049,827 34,704,507
Loans held for sale, at lower of cost or market value 1,306,952 2,687,034
Loans receivable, net 205,746,716 184,903,699
Stock in Federal Home Loan Bank of Seattle, at cost 3,208,800 3,145,600
Accrued interest receivable 3,156,075 2,584,018
Cash surrender value of life insurance 2,692,444 2,663,427
Real estate held for investment 287,306 288,908
Premises and equipment, at cost less accumulated depreciation 9,379,059 9,504,502
Goodwill, net of amortization 4,292,500 4,377,500
Other assets 1,033,969 893,744
--------- -------
$382,308,929 $372,239,072
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Deposits 289,335,830 289,219,498
Securities sold under repurchase agreements 8,389,107 7,964,766
Advances from Federal Home Loan Bank of Seattle 42,991,667 36,791,667
Advance payments by borrowers for taxes and insurance 950,215 880,697
Income taxes payable (50,487) 37,728
Deferred income taxes 308,154 112,083
Accrued interest payable 2,130,687 2,075,161
Accrued expenses and other liabilities 7,323,343 4,453,808
--------- ---------
Total Liabilities 351,378,516 341,535,408
----------- -----------
Stockholders' equity:
Preferred stock, $1 par value, 5,000,000 shares authorized, none outstanding -- --
Common stock, $1 par value, 10,000,000 shares authorized; issued and
outstanding 1,484,682 shares 1,484,682 1,462,182
Additional paid-in capital 9,015,392 8,765,053
Retained earnings, substantially restricted 21,790,537 22,065,712
Net unrealized gains (losses) on available for sale securities (1,360,198) (1,589,283)
----------- -----------
Total stockholders' equity 30,930,413 30,703,664
---------- ----------
$382,308,929 $372,239,072
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
SB-30
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
SECURITY BANCORP AND SUBSIDIARY
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1996 1995
---- ----
<S> <C> <C>
Interest income:
Loans receivable $4,350,374 $3,356,299
Investment securities 339,294 474,371
Mortgage-backed securities 2,080,725 2,477,417
Other 67,301 91,612
------ ------
TOTAL INTEREST INCOME 6,837,694 6,399,699
--------- ---------
Interest expense:
Deposits 3,085,711 3,331,793
Securities sold under repurchase agreement 113,850 97,221
Advances from Federal Home Loan Bank of Seattle 571,374 377,388
------- -------
TOTAL INTEREST EXPENSE 3,770,935 3,806,402
--------- ---------
Net interest income 3,066,759 2,593,297
Provision for loan losses 150,000 30,000
------- ------
Net interest income after provision for loan losses 2,916,759 2,563,297
--------- ---------
Non-interest income:
Fees for customer services 588,366 474,432
Securities brokerage services 38,035 23,194
Gain on the sale of investment securities available for sale 319 --
Gain on sale of mortgage-backed securities available for sale 3,456 --
Loss on sale of mortgage-backed securities held to maturity (962) --
Gain on sale of loans held for sale 135,614 144,525
Gain/(loss) on sale of other real estate owned (900) 185
Other operating income, net 507,903 223,747
------- -------
TOTAL NON-INTEREST INCOME 1,271,831 866,083
--------- -------
Non-interest expense:
Compensation and benefits 1,335,916 1,197,023
Advertising 44,646 54,970
Occupancy and equipment 345,529 297,346
FDIC deposit insurance premiums 119,372 110,823
SAIF assessment 1,330,517 --
Data processing services 191,359 215,272
Other 757,089 576,793
------- -------
TOTAL NON-INTEREST EXPENSE 4,124,428 2,452,227
--------- ---------
Income before income taxes 64,162 977,153
Income taxes 24,000 352,000
------ -------
NET INCOME $40,162 $625,153
======= ========
Income and dividends per share:
Weighted average number of shares outstanding 1,511,180 1,528,801
========= =========
Income per share $0.03 $0.41
===== =====
Dividends per share $0.215 $0.1975
====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
SB-31
<PAGE>
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY SECURITY BANCORP AND SUBSIDIARY
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1996
-------------------------------------
UNREALIZED
ADDITIONAL HOLDING GAINS
COMMON PAID-IN RETAINED (LOSSES),
STOCK CAPITAL EARNINGS NET TOTAL
----- ------- -------- --- -----
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1996 $1,462,182 8,765,053 22,065,712 (1,589,283) 30,703,664
Net Income -- -- 40,162 -- 40,162
Dividends paid ($.215 per share) -- -- (315,337) -- (315,337)
Change in net unrealized gain (loss) on
securities available for sale -- -- -- 229,085 229,085
Exercise of stock options 22,500 250,339 -- -- 272,839
------ ------- ---------- ----------- ----------
Balance at September 30, 1996 $1,484,682 9,015,392 21,790,537 (1,360,198) 30,930,413
========== ========= ========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
SB-32
<PAGE>
SECURITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30
-----------------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net Income $40,162 $625,153
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for:
Loan losses 150,000 30,000
Amortization of:
Premiums and discounts on investment
securities, net - held to maturity -- 2,744
Premiums and discounts on investment
securities, net - available for sale 1,479 506
Premiums and discounts on mortgage-backed
securities, net - available for sale 35,266 (5,092)
Premiums and discounts on mortgage-backed
securities, net - held to maturity 22,862 3,599
Deferred loan origination fees (14,376) (22,139)
Goodwill 85,000 85,000
Origination of loans held for sale (7,521,174) (10,174,113)
Proceeds from sales of loans 9,036,870 9,991,658
Stock dividends reinvested in Federal Home Loan Bank of Seattle (63,200) --
Depreciation 172,249 133,336
(Gain)/loss on sale of:
Loans held for sale (135,614) (144,525)
Mortgage-backed securities available for sale (3,456) --
Mortgage-backed securities held to maturity 962 --
Investment securities available for sale (319) --
Change in:
Accrued interest receivable (572,057) (268,220)
Cash surrender value of life insurance (29,017) (18,332)
Other assets (140,225) (3,943)
Income taxes payable (88,215) 382,756
Accrued interest payable 55,526 359,603
Accrued expenses and other liabilities 2,869,535 (224,727)
--------- ---------
Net cash provided by operating activities 3,902,258 753,264
--------- -------
</TABLE>
(Continued)
SB-33
<PAGE>
SECURITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30
------------------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from investing activities:
Purchase of investment securities available for sale -- (5,003,125)
Purchase of mortgage-backed securities available for sale (4,918,750) (16,178,859)
Purchase of investment securities held to maturity (200,000) --
Proceeds from the call of investment securities available for sale 7,118 --
Proceeds from the sale of mortgage-backed securities available for sale 10,014,063 --
Proceeds from the sale of mortgage-backed securities held to maturity 255,605 --
Proceeds from maturities of investment securities available for sale 240,000 95,631
Proceeds from maturities of investment securities held to maturity -- 4,999,930
Principal payments on investment securities available for sale 3,831 --
Principal payments on mortgage-backed securities available for sale 2,216,260 539,374
Principal payments on mortgage-backed securities held to maturity 1,375,251 3,510,988
Origination of loans receivable (38,007,891) (16,700,000)
Repayment of principal on loans receivable 17,029,251 11,763,100
Decrease in real estate held for investment 1,602 3,951
Additions to premises and equipment (46,806) (612,555)
-------- ---------
Net cash used in investing activities (12,030,466) (17,581,565)
------------ ------------
Cash flows from financing activities:
Net increase in deposits 116,332 3,122,098
Net increase in securities sold under repurchase agreements 424,341 --
Net change in advances from Federal Home Loan Bank of Seattle 6,200,000 11,000,000
Net increase in advance payments by borrowers for taxes and insurance 69,518 54,028
Cash dividends paid on common stock (315,337) (292,139)
Exercise of stock options 272,839 --
----------- ----------
Net cash provided by financing activities 6,767,693 13,883,987
----------- ----------
Net decrease in cash and cash equivalents (1,360,515) (2,944,314)
----------- -----------
Cash and cash equivalents at beginning of period 9,789,678 10,188,922
Cash and cash equivalents at end of period $8,429,163 $7,244,608
========== ==========
Cash paid for:
Interest $3,715,409 $3,446,799
Income Taxes, net -- --
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
SB-34
<PAGE>
SECURITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation:
------------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the three months ended September 30, 1996 are not necessarily
indicative of the results anticipated for the year ending June 30, 1997.
For additional information, refer to the consolidated financial statements
and footnotes thereto included in Security Bancorp's annual report on Form
10-K for the year ended June 30, 1996.
2. Organizational Structure:
--------------------------
The accompanying consolidated financial statements include the accounts of
Security Bancorp (the Holding Company) and its wholly owned subsidiary,
Security Bank, FSB (the Bank). The consolidated financial statements also
include S.F.S Industries, Inc., a wholly owned subsidiary of the Bank. All
significant intercompany balances and transactions have been eliminated in
consolidation. S.F.S. Industries, Inc. provides full service brokerage
services.
3. Income Per Share:
-----------------
The income per common share for the three month period ending September
30, 1996 was $0.03, based on the weighted average number of shares of
common stock and common stock equivalent shares outstanding. Income per
common share for the three month period ending September 30, 1995 was
$0.41, based on the weighted average number of shares of common stock and
common stock equivalent shares outstanding. Net income for the three month
period ended September 30, 1996 included non-recurring expenses relating
to the SAIF special premium assessment of $1,330,517 and $198,128 in
expenses relating to the proposed merger with Westerfed Financial
Corporation. After tax income for the three month period ending September
30, 1996 would have been $1,003,208 had these non-recurring expenses not
been incurred. This would have resulted in income per common share of
$0.66 as compared with the $0.03 actually reported. Stock options are
outstanding, under the Security Bancorp 1993 Stock Option and Stock
Appreciation Rights Plan, to purchase 87,700 shares of stock. No stock
options were granted during the three month period ending September 30,
1996. Stock options totaling 22,500 shares were exercised during the same
period. Additionally, 500 stock options lapsed during the three month
period ended September 30, 1996. These stock options are considered common
stock equivalents for computation of the income per share in the
accompanying financial statements.
SB-35
<PAGE>
4. Dividends:
----------
On August 26, 1996, the Board of Directors of Security Bancorp declared a
quarterly cash dividend of $0.165 per share and a bonus dividend of $0.05
per share, paid on September 30, 1996, to stockholders of record on
September 13, 1996.
5. Investment Securities and Mortgage-Backed Securities Available
for Sale:
------------------------------------------------------------------
The amortized cost, unrealized gains and losses, and approximate fair
values of securities available for sale at September 30, 1996 are as
follows:
<TABLE>
<CAPTION>
Gross Gross
unrealized unrealized Estimated
Cost gains losses fair value
---- ----- ------ ----------
<S> <C> <C> <C> <C>
Investment securities:
U. S. Treasury securities $299,809 -- (4,841) 294,968
U. S. Agency securities 15,000,000 -- (152,938) 14,847,062
Municipal bonds 2,311,000 15,341 (132,326) 2,194,015
Mutual funds 2,780,540 883 (229,757) 2,551,666
--------- ------ --------- ---------
$20,391,349 16,224 (519,862) 19,887,711
=========== ====== ========= ==========
Mortgage-backed securities:
Agency mortgage-backed
securities $89,478,363 133,135 (1,788,541) 87,822,957
Private Issue 1,828,916 -- (13,466) 1,815,450
--------- ------- -------- ---------
$91,307,279 133,135 (1,802,007) 89,638,407
=========== ======= =========== ==========
</TABLE>
The amortized cost, unrealized gains and losses, and approximate fair values of
securities available for sale at June 30, 1996 are as follows:
<TABLE>
<CAPTION>
Gross Gross
unrealized unrealized Estimated
Cost gains losses fair value
---- ----- ------ ----------
<S> <C> <C> <C> <C>
Investment securities:
U. S. Treasury securities $499,761 136 (6,335) 493,562
U. S. Agency securities 15,000,000 -- (234,782) 14,765,218
Municipal bonds 2,351,000 66,096 (80,475) 2,336,621
Mutual funds 2,792,707 842 (243,606) 2,549,943
--------- ------ --------- ---------
$20,643,468 67,074 (565,198) 20,145,344
=========== ====== ========= ==========
Mortgage-backed securities:
Agency mortgage-backed
securities $96,808,239 91,843 (2,132,571) 94,767,511
Private Issue 1,828,948 -- (45,348) 1,783,600
--------- -- -------- ---------
$98,637,187 91,843 (2,177,919) 96,551,111
=========== ====== =========== ==========
</TABLE>
Gross gains of $319 and no losses were realized on the sale of investment
securities available for sale during the three months ended September 30,
1996. Gross gains of $3,456 and no losses were realized on mortgage-backed
securities available for sale during the same period. Gross losses of $962
and no gains were realized on the sale of mortgage-backed securities held
to maturity sold during the three month period ended September 30, 1996.
Such sales meet the conditions for being considered maturities for
purposes of the classification of securities under the provisions of
Statement of Financial Accounting Standards No. 115 ("SFAS 115"),
"Accounting for Certain Investments in Debt and Equity Securities."
6. Regulatory Capital:
--------------------
The Bank is required to meet three FIRREA-enacted capital regulations: a
tangible capital requirement (stockholders' equity adjusted for the
effects of intangibles, investments and advances to nonincludable
subsidiaries and other factors) equal to not less than 1.5% of tangible
assets (as defined in the
SB-36
<PAGE>
regulations), a core capital requirement (tangible capital adjusted for
supervisory goodwill and other defined factors) equal to not less than 3%
of tangible assets, and a risk-based capital requirement equal to at least
8.0% of all risk-weighted assets. For risk-weighting, selected assets are
given a risk assignment of 0% to 100%. The Bank's total risk-weighted
assets at September 30, 1996 were $199,017,400.
The following table demonstrates as of September 30, 1996, the extent to
which the Bank exceeds in dollars and in percent, the three minimum
capital requirements.
<TABLE>
<CAPTION>
Excess of Actual
Actual Required over Requirement
------ -------- ----------------
<S> <C> <C> <C>
Tangible Capital:
$ amount $26,796,456 $5,684,172 $21,112,284
% of tangible assets 7.07% 1.5% 5.57%
Core Capital:
$ amount $26,796,456 $11,368,343 $15,428,113
% of adjusted tangible assets 7.07% 3.0% 4.07%
Risk-Based Capital:
$ amount $28,078,016 $15,921,392 $12,156,624
% of risk-weighted assets 14.11% 8.0% 6.11%
</TABLE>
Generally accepted accounting principles (GAAP) capital differs from
tangible, core, and risk-based capital at September 30, 1996 and June 30,
1996 as a result of the following:
September 30, June 30,
1996 1996
---- ----
Consolidated capital measured by GAAP $30,930,413 $30,703,664
Less Holding Company assets 464,724 381,049
------- -------
Bank capital measured by GAAP 30,465,689 30,322,615
Non-includable assets of subsidiary (594,181) (582,180)
Goodwill (4,292,500) (4,377,500)
Unrealized losses on certain available
for sale securities 1,217,448 1,443,069
--------- ---------
Tangible and core capital 26,796,456 26,806,004
General valuation reserves 1,281,560 1,180,866
--------- ---------
Risk-based capital $28,078,016 $27,986,870
=========== ===========
7. SAIF Special Assessment:
-------------------------
The thrift 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 thrift deposits. The Deposit Insurance Funds Act of
1996 ("Funds Act") was enacted in September, 1996. The purpose of the
Funds Act was to impose a special assessment of 0.657% of SAIF-assessable
deposits as of March 31, 1995 in order to recapitalize the SAIF. The
special assessment resulted in an additional after-tax expense of
approximately $838,000 or $0.55 per common share during the quarter ended
September 30, 1996.
8. Recent Accounting Statements:
-----------------------------
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights." SFAS No.
SB-37
<PAGE>
122 generally requires that mortgage banking enterprises, which includes
the Bank, recognize as a separate asset rights to service mortgage loans
for others, regardless of how those servicing rights are acquired.
Additionally, SFAS No. 122 requires that capitalized mortgage servicing
rights be assessed for impairment based on the fair value of the mortgage
servicing rights. The provisions of SFAS No. 122 are to be applied
prospectively in fiscal years beginning after December 31, 1995, to
transactions in which the Bank sells or securitizes mortgage loans with
servicing rights retained and to impairment evaluations of all amounts
capitalized as mortgage servicing rights, including those purchased before
the adoption of this statement. The Bank adopted the provisions of SFAS
No. 122 on July 1, 1996, and adoption did not have a material effect on
the Bank's consolidated financial position or results of operations.
On September 30, 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. The determination of whether an asset is
impaired is based on undiscounted cash flows. An impairment, if any, is
measured based on the fair value of the asset, if readily determinable.
Otherwise impairment would be measured based on the present value of the
expected future net cash flows calculated using either a market interest
rate or the entity's incremental borrowing rate. SFAS No. 121 is effective
for financial statements issued for fiscal years beginning after December
15, 1995, although earlier application is encouraged. The Bank adopted the
provisions of SFAS No. 121 on July 1, 1996 and adoption did 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 an employee stock option whereby compensation cost 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 the use of the "intrinsic value based method" prescribed by
previous pronouncements. 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.
However, most stock option plans have no intrinsic value at the grant
date, and, as such, no compensation cost is recognized under previous
pronouncements. Entities electing to continue use of the accounting
treatment of previous announcements must make certain pro forma
disclosures as if the fair value based method had been applied. SFAS No.
123 is effective for financial statements issued for fiscal years
beginning after December 31, 1995. The Bank adopted the provisions of SFAS
No. 123 on July 1, 1996. Management's current intention is to not adopt
the fair value based method of accounting.
9. Proposed Merger:
-----------------
On September 24, 1996, Security Bancorp signed a definitive agreement to
merge with and into WesterFed Financial Corporation (Westerfed). The total
purchase price is approximately $44.0 million, subject to certain
adjustments. Completion of the merger, which will be treated as a purchase
for accounting purposes, is subject to various approvals by regulators and
shareholders of both companies, as well as the satisfaction of certain
other conditions.
Under the terms of the agreement, Security Bancorp shareholders may elect
to receive for each share of Security Bancorp common stock $30 in cash, a
number of shares of Westerfed common stock or a combination of cash and
stock, provided the total consideration to Security Bancorp shareholders
consists of between 40-45% stock and 55-60% cash. Subject to satisfaction
of the various conditions, closing of the merger is scheduled to occur on
or before March 31, 1997.
SB-38
<PAGE>
Appendix I
================================================================================
AGREEMENT AND PLAN OF MERGER
BETWEEN
WESTERFED FINANCIAL CORPORATION
AND
SECURITY BANCORP
DATED AS OF SEPTEMBER 24, 1996
================================================================================
<PAGE>
AGREEMENT AND PLAN OF MERGER
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I .......................................................................................... 8
SECTION 1.01 EFFECTS OF THE MERGER .............................................................. 8
SECTION 1.02 CONVERSION OF STOCK ................................................................ 9
SECTION 1.03 CONVERSION ELECTION PROCEDURES ..................................................... 9
SECTION 1.04 TIME AND PLACE OF CLOSING .......................................................... 12
SECTION 1.05 EXCHANGE OF SECURITY COMMON STOCK .................................................. 13
SECTION 1.06 MERGER OF SECURITY BANK, FSB ....................................................... 14
ARTICLE II ......................................................................................... 15
SECTION 2.01 ORGANIZATION ....................................................................... 15
SECTION 2.02 AUTHORIZATION ...................................................................... 15
SECTION 2.03 CONFLICTS .......................................................................... 15
SECTION 2.04 ANTI-TAKEOVER PROVISIONS INAPPLICABLE .............................................. 16
SECTION 2.05 CAPITALIZATION ..................................................................... 16
SECTION 2.06 WESTERFED FINANCIAL STATEMENTS; MATERIAL CHANGES ................................... 16
SECTION 2.07 WESTERFED SUBSIDIARIES ............................................................. 17
SECTION 2.08 WESTERFED FILINGS .................................................................. 18
SECTION 2.09 WESTERFED REPORTS .................................................................. 18
SECTION 2.10 COMPLIANCE WITH LAWS ............................................................... 19
SECTION 2.11 DISCLOSURE ......................................................................... 19
SECTION 2.12 LITIGATION ......................................................................... 19
SECTION 2.13 LICENSES ........................................................................... 20
SECTION 2.14 TAXES .............................................................................. 20
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
SECTION 2.15 INSURANCE .......................................................................... 21
SECTION 2.16 LOANS; INVESTMENTS ................................................................. 21
SECTION 2.17 ALLOWANCE FOR POSSIBLE LOAN LOSSES ................................................. 22
SECTION 2.18 WESTERFED BENEFIT PLANS ............................................................ 23
SECTION 2.19 COMPLIANCE WITH ENVIRONMENTAL LAWS ................................................. 24
SECTION 2.20 SUBMISSION OF DOCUMENTS ............................................................ 25
SECTION 2.21 DEFAULTS ........................................................................... 26
SECTION 2.22 OPERATIONS SINCE JUNE 30, 1996 ..................................................... 26
SECTION 2.23 CORPORATE RECORDS .................................................................. 26
SECTION 2.24 UNDISCLOSED LIABILITIES ............................................................ 26
SECTION 2.25 ASSETS ............................................................................. 27
SECTION 2.26 INDEMNIFICATION .................................................................... 27
SECTION 2.27 INSIDER INTERESTS .................................................................. 27
ARTICLE III ........................................................................................ 28
SECTION 3.01 ORGANIZATION ....................................................................... 28
SECTION 3.02 AUTHORIZATION ...................................................................... 28
SECTION 3.03 CONFLICTS .......................................................................... 28
SECTION 3.04 ANTI-TAKEOVER PROVISIONS INAPPLICABLE .............................................. 29
SECTION 3.05 CAPITALIZATION AND STOCKHOLDERS .................................................... 29
SECTION 3.06 SECURITY FINANCIAL STATEMENTS; MATERIAL CHANGES .................................... 30
SECTION 3.07 SECURITY SUBSIDIARIES .............................................................. 30
SECTION 3.08 SECURITY FILINGS ................................................................... 31
SECTION 3.09 SECURITY REPORTS ................................................................... 31
SECTION 3.10 COMPLIANCE WITH LAWS ............................................................... 31
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
SECTION 3.11 DISCLOSURE ......................................................................... 32
SECTION 3.12 LITIGATION ......................................................................... 32
SECTION 3.13 LICENSES ........................................................................... 33
SECTION 3.14 TAXES .............................................................................. 33
SECTION 3.15 INSURANCE .......................................................................... 34
SECTION 3.16 LOANS; INVESTMENTS ................................................................. 34
SECTION 3.17 ALLOWANCE FOR POSSIBLE LOAN LOSSES ................................................. 35
SECTION 3.18 SECURITY BENEFIT PLANS ............................................................. 36
SECTION 3.19 COMPLIANCE WITH ENVIRONMENTAL LAWS ................................................. 38
SECTION 3.20 CONTRACTS AND COMMITMENTS .......................................................... 39
SECTION 3.21 DEFAULTS ........................................................................... 42
SECTION 3.22 OPERATIONS SINCE JUNE 30, 1996 ..................................................... 42
SECTION 3.23 CORPORATE RECORDS .................................................................. 44
SECTION 3.24 UNDISCLOSED LIABILITIES ............................................................ 44
SECTION 3.25 ASSETS ............................................................................. 44
SECTION 3.26 INDEMNIFICATION .................................................................... 45
SECTION 3.27 INSIDER INTERESTS .................................................................. 45
ARTICLE IV ......................................................................................... 46
SECTION 4.01 BUSINESS IN ORDINARY COURSE ........................................................ 46
SECTION 4.02 CONFORMING ACCOUNTING AND RESERVE POLICIES; RESTRUCTURING EXPENSES ................. 49
SECTION 4.03 CERTAIN ACTIONS .................................................................... 50
ARTICLE V .......................................................................................... 51
SECTION 5.01 INSPECTION OF RECORDS; CONFIDENTIALITY ............................................. 50
SECTION 5.02 REGISTRATION STATEMENT; STOCKHOLDER APPROVAL ....................................... 51
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
SECTION 5.03 AFFILIATE LETTERS .................................................................. 52
SECTION 5.04 BROKERS ............................................................................ 52
SECTION 5.05 COOPERATION ........................................................................ 52
SECTION 5.06 REGULATORY APPLICATIONS ............................................................ 52
SECTION 5.07 FINANCIAL STATEMENTS AND REPORTS ................................................... 53
SECTION 5.08 NOTICE ............................................................................. 53
SECTION 5.09 PRESS RELEASE ...................................................................... 53
SECTION 5.10 DELIVERY OF SUPPLEMENTS TO DISCLOSURE SCHEDULES .................................... 53
SECTION 5.11 LITIGATION MATTERS ................................................................. 54
SECTION 5.12 NOTICE OF MATERIAL ADVERSE EFFECT .................................................. 54
SECTION 5.13 OPTIONS; EMPLOYMENT AGREEMENTS; BENEFITS AND RELATED MATTERS ....................... 54
SECTION 5.14 EXTENT OF KNOWLEDGE ................................................................ 55
SECTION 5.15 TAX TREATMENT ...................................................................... 56
SECTION 5.16 STOCK EXCHANGE LISTING ............................................................. 56
SECTION 5.17 DIRECTORS' AND OFFICERS' INDEMNIFICATION INSURANCE ................................. 56
ARTICLE VI ......................................................................................... 56
SECTION 6.01 CONDITIONS TO THE OBLIGATIONS OF WESTERFED ......................................... 56
SECTION 6.02 CONDITIONS TO THE OBLIGATIONS OF SECURITY .......................................... 57
SECTION 6.03 CONDITIONS TO THE OBLIGATIONS OF THE PARTIES ....................................... 58
ARTICLE VII ........................................................................................ 59
SECTION 7.01 TERMINATION ........................................................................ 59
SECTION 7.02 LIABILITIES AND REMEDIES ........................................................... 60
SECTION 7.03 SURVIVAL OF AGREEMENTS ............................................................. 61
SECTION 7.04 AMENDMENT .......................................................................... 61
</TABLE>
iv
<PAGE>
<TABLE>
<S> <C>
SECTION 7.05 WAIVER ............................................................................. 61
ARTICLE VIII ....................................................................................... 62
SECTION 8.01 SURVIVAL ........................................................................... 62
SECTION 8.02 NOTICES ............................................................................ 62
SECTION 8.03 APPLICABLE LAW ..................................................................... 63
SECTION 8.04 HEADINGS, ETC ...................................................................... 63
SECTION 8.05 SEVERABILITY ....................................................................... 63
SECTION 8.06 ENTIRE AGREEMENT; BINDING EFFECT; NON-ASSIGNMENT; COUNTERPARTS ..................... 63
</TABLE>
v
<PAGE>
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER (the "Agreement") being made and
entered into as of the 24th day of September 1996, by and between WesterFed
Financial Corporation, a Delaware corporation ("WesterFed"), and Security
Bancorp, a Montana corporation ("Security").
WITNESSETH THAT:
WHEREAS, WesterFed and Security are registered savings and loan holding
companies under the Home Owner's Loan Act, as amended ("HOLA");
WHEREAS, the Boards of Directors of WesterFed and Security deem it
advisable and in the best interests of the stockholders of WesterFed and
Security that WesterFed and Security become affiliated by causing Security to be
merged with and into, and under the charter of, WesterFed in accordance with the
applicable corporation law of the States of Delaware and Montana ("Corporate
Law") with WesterFed deemed to be the continuing and surviving entity (the
"Merger"), pursuant to which the stockholders of Security (other than holders of
Excluded Shares (as defined in Section 1.02(b)) and Dissenting Shares (as
defined in Section 1.03(i))) will receive shares of common stock, $.01 par value
per share, of WesterFed ("WesterFed Common Stock") or cash, or a combination of
both as provided herein, in exchange for their shares of common stock, $1.00 par
value per share, of Security ("Security Common Stock"); and
WHEREAS, WesterFed and Security desire to make certain representations,
warranties, covenants and agreements in connection with the Merger and also
desire to set forth various conditions precedent to the Merger.
NOW THEREFORE, in consideration of the representations, warranties,
covenants and agreements herein contained, the parties agree as follows:
DEFINITIONS
(A) DEFINITIONS. Capitalized terms used in this Agreement have the
following meanings:
"Acquisition Transaction" means any of the following: (i) a merger or
consolidation, or any similar transaction (other than the Merger) of any company
with either Security or any Security Subsidiary; (ii) a purchase, lease or other
acquisition of all or substantially all the assets of either Security or any
Security Subsidiary; (iii) a purchase or other acquisition of "beneficial
ownership" by any "person" or "group" (as such terms are defined in Section
13(d)(3) of the Securities Exchange Act) (including by way of merger,
consolidation, share exchange, or otherwise) which would cause such person or
group to become the beneficial owner of securities representing more than 24.9%
of the voting power of either Security or any Security Subsidiary, but excluding
the acquisition of beneficial ownership by any employee benefit plan maintained
or sponsored by Security; (iv) a tender or exchange offer to acquire securities
representing 19.9% or
1
<PAGE>
more of the voting power of Security; (v) a public proxy or consent solicitation
made to stockholders of Security seeking proxies in opposition to any proposal
relating to any of the transactions contemplated by this Agreement; (vi) the
filing of an application or notice with the Federal Reserve Board, the OCC, the
OTS, or any other federal or state regulatory authority (which application has
been accepted for processing) seeking approval to engage in one or more of the
transactions referenced in clauses (i) through (iv) above; or (vii) the making
of a bona fide offer to the Board of Directors of Security by written
communication, that is or becomes the subject of public disclosure, to engage in
one or more of the transactions referenced in clauses (i) through (v) above.
"Additional Stock Election Shares" has the meaning assigned to such
term in Section 1.03(e)(i)(B).
"Aggrieved Party" has the meaning assigned to such term in Section
7.02(a).
"Agreement" has the meaning assigned to such term in the introductory
paragraph of this Agreement.
"Average WesterFed Stock Price" means the average (rounded down to the
nearest whole cent) of the closing per-share price of WesterFed Common Stock on
the National Association of Securities Dealers Automated Quotations system
("Nasdaq") for the twenty (20) consecutive trading days commencing on and
including the thirtieth trading day immediately prior to the date of Closing.
"Bank Merger" has the meaning assigned to such term in Section 1.06.
"Bank Plan of Merger" has the meaning assigned to such term in Section
1.06.
"Breaching Party" has the meaning assigned to such term in Section
7.02(a).
"Cash Distribution" has the meaning assigned to such term in Section
1.02(b)(i).
"Cash Election Shares" has the meaning assigned to such term in Section
1.03(b).
"Certificates" has the meaning assigned to such term in Section
1.05(a).
"Certification" has the meaning assigned to such term in Section
1.03(a).
"Change in Control Benefit" has the meaning assigned to such term in
Section 3.18(a).
"Closing" has the meaning assigned to such term in Section 1.04(a).
"Closing Date" has the meaning assigned to such term in Section
1.04(a).
"Code" means the Internal Revenue Code of 1986, as amended.
"Continuing Employees" has the meaning assigned to such term in Section
5.13(d).
2
<PAGE>
"Corporate Law" has the meaning assigned to such term in the recitals
to this Agreement.
"Derivative Securities" means interest rate swaps, caps, floors, option
agreements, and other interest rate management arrangements and other
instruments generally known as "derivatives", "structures notes", "high risk
mortgage derivatives", "capped floating rate notes", or "capped floating rate
mortgage derivatives".
"Dissenting Shares" has the meaning assigned to such term in Section
1.03(i).
"Effective Time" has the meaning assigned to such term in Section
1.01(c).
"Election Deadline" means the date of the Security Stockholders'
Meeting.
"Election Form" has the meaning assigned to such term in Section
1.03(a).
"Environmental Laws" means all laws (civil or common), ordinances,
rules, regulations, guidelines, and orders that: (a) regulate air, water, soil,
and solid waste management, including the generation, release, containment,
storage, handling, transportation, disposition, or management of any Hazardous
Substance; (b) regulate or prescribe requirements for air, water, or soil
quality; (c) are intended to protect public health or the environment; or (d)
establish liability for the investigation, removal, or cleanup of, or damage
caused by, any Hazardous Substance.
"ERISA" means the Employee Retirement Income Security Acts of 1974, as
amended.
"Exchange Agent" means a bank or trust company or affiliate thereof
selected by WesterFed and reasonably acceptable to Security to effect the
exchange of the Certificates for the Merger Consideration.
"Exchange Ratio" means $30.00 divided by the Average WesterFed Stock
Price, except that (a) if the Average WesterFed Stock Price is equal to or less
than $13.05, then the Exchange Ratio shall be 2.2989, (b) if the Average
WesterFed Stock Price is equal to or more than $15.95 but not greater than
$17.50, then the Exchange Ratio shall be 1.8809, (c) if the Average WesterFed
Stock Price exceeds $17.50 and no Triggering Event has occured, then the
Exchange Ratio shall be determined by dividing $32.91 by the Average WesterFed
Stock Price, and (d) if the Average WesterFed Stock Price exceeds $17.50 and a
Triggering Event has occured, then the Exchange Ratio shall be 1.88. The
calculation of the Exchange Ratio shall be rounded to two decimal places.
"Excluded Shares" has the meaning assigned to such term in Section
1.02(b).
"FDIC" means the Federal Deposit Insurance Corporation.
"FHLB" has the meaning assigned to such term in Section 4.01(b)(vi).
3
<PAGE>
"GAAP" means generally accepted accounting principles.
"Hazardous Substance" has the meaning set forth in Section 9601 of the
Comprehensive Environmental Response Compensation and Liability Act of 1980, 42
U.S.C.A., Section 9601 et seq., and also includes any substance now or hereafter
regulated by or subject to any Environmental Laws and any other pollutant,
contaminant, or waste, including petroleum, asbestos, fiberglass, radon, and
polychlorinated biphenyls.
"HOLA" means the Home Owner's Loan Act, as amended.
"Liabilities" has the meaning assigned to such term in Section 2.24.
"Material Adverse Effect" with respect to an entity means any
condition, event, change or occurrence that has or may reasonably be expected to
have a material adverse effect on the condition (financial or otherwise),
properties, assets, business, deposit liabilities, operations or results of
operations, of such entity on a consolidated basis, it being understood that a
Material Adverse Effect shall not include: (i) a change with respect to, or
effect on, such entity and its Subsidiaries resulting from a change in law,
rule, regulation, GAAP or regulatory accounting principles, as such would apply
to the financial statements of such entity on a consolidated basis (ii) a change
with respect to, or effect on, such entity and its Subsidiaries resulting from
expenses (such as legal, accounting and investment bankers' fees) incurred in
connection with this Agreement; (iii) a change with respect to, or effect on,
such entity and its Subsidiaries resulting from any other matter affecting
depository institutions generally including changes in general economic
conditions and changes in prevailing interest and deposit rates; (iv) any
one-time special insurance premium assessed by the FDIC on deposits insured by
the SAIF; or (v) in the case of Security, any financial change resulting from
adjustments taken pursuant to Section 4.02 hereof.
"Maximum Stock Consideration Shares" means the number of shares of
WesterFed Common Stock with a market value (calculated at the Average WesterFed
Stock Price) equal to 45% of the aggregate Merger Consideration.
"Merger" has the meaning assigned to such term in the recitals to this
Agreement.
"Merger Consideration" has the meaning assigned to such term in Section
1.02(b).
"Minimum Stock Consideration Shares" means the number of shares of
WesterFed Common Stock with a market value (calculated at the Average WesterFed
Stock Price) equal to 40% of the aggregate Merger Consideration.
"Mortgaged Premises" has the meanings assigned to such term in Section
2.19(c) and Section 3.19(c), as applicable.
"NASD" means the National Association of Securities Dealers.
4
<PAGE>
"No Election Shares" has the meaning assigned to such term in Section
1.03(c).
"OTS" means the Office of Thrift Supervision.
"Participating Facility" has the meanings assigned to such term in
Section 2.19(c) and Section 3.19(c), as applicable.
"PBGC" has the meaning assigned to such term in Section 2.18(e).
"Proxy Statement" has the meaning assigned to such term in Section
2.03.
"Registration Statement" has the meaning assigned to such term in
Section 2.03.
"REO" has the meaning assigned to such term in Section 2.16(a).
"SAIF" means the FDIC's Savings Association Insurance Fund.
"SEC" means the Securities & Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Security" means Security Bancorp, a Montana corporation.
"Security Bank" has the meaning assigned to such term in Section
3.07(c).
"Security Benefit Plans" has the meaning assigned to such term in
Section 3.18(a).
"Security Common Stock" has the meaning assigned to such term in the
recitals to this Agreement.
"Security Disclosure Schedule" has the meaning assigned to such term in
Section 3.03.
"Security Financial Statements" has the meaning assigned to such term
in Section 3.06.
"Security Permitted Lien" has the meaning assigned to such term in
Section 3.22(c).
"Security Premises" has the meaning assigned to such term in Section
3.19(b).
"Security Qualified Plans" has the meaning assigned to such term in
Section 3.18(b).
"Security Stock Options" has the meaning assigned to such term in
Section 3.05(b).
"Security Stock Option Plan" has the meaning assigned to such term in
Section 3.05(b).
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"Security Stockholders' Meeting" has the meaning assigned to such term
in Section 2.03.
"Security Subsidiary" means each corporation, savings bank,
association, and other entity in which Security owns or controls directly or
indirectly 10% or more of the outstanding equity securities; provided, however,
there shall not be included any such entity acquired in good faith through
foreclosure, or any such entity to the extent that the equity securities of such
entity are owned or controlled in a bona fide fiduciary capacity.
"Stock Distribution" has the meaning assigned to such term in Section
1.02(b)(ii).
"Stock Election Shares" has the meaning assigned to such term in
Section 1.03(b).
"Stockholders' Meetings" means the WesterFed Stockholders' Meeting and
the Security Stockholders' Meeting.
"Subsidiaries" has the meaning assigned to such term in Section 1.02.
"Surviving Corporation" has the meaning assigned to such term in
Section 1.01(a).
"Tax" and "Taxes" include any federal, state, local or foreign income,
leasing, franchise, excise, gross receipts, sales, use, occupational,
employment, real property, ad valorem, tangible and intangible personal property
and state taxes, payments in lieu of taxes, levies, duties, imposts, business,
operations or financial condition assessments, fees, charges and withholdings of
any nature whatsoever, together with any related penalties, fines, additions to
tax and interest thereon.
"Triggering Event" means any of the following: (i) a merger or
consolidation, or any similar transaction (other than the Merger) of any company
with either WesterFed or Western; (ii) a purchase, lease or other acquisition of
all or substantially all the assets of either WesterFed or Western; (iii) a
purchase or other acquisition of "beneficial ownership" by any "person" or
"group" (as such terms are defined in Section 13(d)(3) of the Securities
Exchange Act) (including by way of merger, consolidation, share exchange, or
otherwise) which would cause such person or group to become the beneficial owner
of securities representing more than 24.9% of the voting power of either
WesterFed or Western, but excluding the acquisition of beneficial ownership by
any employee benefit plan maintained or sponsored by WesterFed; (iv) a tender or
exchange offer to acquire securities representing 19.9% or more of the voting
power of WesterFed; (v) the filing of an application or notice with the Federal
Reserve Board, the OCC, the OTS, or any other federal or state regulatory
authority (which application has been accepted for processing) seeking approval
to engage in one or more of the transactions referenced in clauses (i) through
(iv) above; or (vi) the making of a bona fide offer to the Board of Directors of
WesterFed by written communication, that is or becomes the subject of public
disclosure, to engage in one or more of the transactions referenced in clauses
(i) through (v) above.
"WesterFed" means WesterFed Financial Corporation, a Delaware
corporation.
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"WesterFed Benefit Plans" means all compensation, consulting,
employment, termination or collective bargaining, stock option, stock purchase,
stock appreciation right, management recognition plan, life, health, accident or
other insurance, bonus, deferred or incentive compensation, severance or
separation agreements or any other agreements providing any payment or benefit
resulting from a change in control, profit-sharing, retirement, or other
employee benefit plan, practice, policy or arrangement of any kind, oral or
written, covering employees, former employees, directors or former directors of
WesterFed or any WesterFed Subsidiary or their respective beneficiaries,
including any employee benefit plans within the meaning of Section 3(3) of ERISA
which WesterFed or any WesterFed Subsidiary maintains, to which WesterFed or any
WesterFed Subsidiary contributes, or under which any employee, former employee,
director or former director of WesterFed or any WesterFed Subsidiary is covered
or has benefit rights and pursuant to which any liability of WesterFed or any
WesterFed Subsidiary exists or is reasonably likely to occur, provided that the
term "Plan or "Plans" is used in this Agreement for convenience only and does
not constitute an acknowledgment that a particular arrangement is an employee
benefit plan within the meaning of Section 3(3) of ERISA.
"WesterFed Common Stock" has the meaning assigned to such in the
recitals to this Agreement.
"WesterFed Disclosure Schedule" has the meaning assigned to such term
in Section 2.03.
"WesterFed Financial Statements" has the meaning assigned to such term
in Section 2.06.
"WesterFed Option Plans" means the employee and director stock option
plans described in Section 2.18 of the WesterFed Disclosure Schedule.
"WesterFed Premises" has the meaning assigned to such term in Section
2.19(b).
"WesterFed Qualified Plans" has the meaning assigned to such term in
Section 2.18(b).
"WesterFed Stockholders' Meeting" has the meaning assigned to such term
in Section 2.03.
"WesterFed Subsidiary" means each corporation, financial institution
and other entity in which WesterFed own or controls directly or indirectly 10%
or more of the outstanding equity securities, excluding (i) any such entity
acquired in good faith through foreclosure, and (ii) any such entity to the
extent that the equity securities of such entity are owned or controlled in a
bona fide fiduciary capacity.
"Western" means Western Federal Savings Bank of Montana.
(B) GENERAL INTERPRETATION. Except as otherwise expressly provided in
this Agreement or unless the context clearly requires otherwise, the terms
defined in this Agreement include the plural as well as the singular; the words
"hereof," "herein", "hereunder", "in this Agreement" and other words of similar
import refer to this Agreement as a whole and not to any particular Article,
Section or other subdivision; references in this Agreement to Articles,
Sections , Schedules, and Exhibits refer to Articles and Sections of and
Schedules and Exhibits to this Agreement; and
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pronouns used in this Agreement include the masculine, feminine and neuter
gender. Unless the context clearly requires otherwise, whenever the words
"include", "includes", or "including" are used in this Agreement, they shall be
deemed to be followed by the words "without limitation". All accounting terms
used in this Agreement that are not expressly defined in this Agreement have the
respective meanings given to them in accordance with GAAP.
ARTICLE I.
THE MERGER
SECTION 1.01 EFFECTS OF THE MERGER.
(a) SURVIVING CORPORATION. Subject to the terms and conditions
of this Agreement, Security shall be merged with and into, and under the charter
of, WesterFed at the Effective Time in accordance with the Corporate Law with
WesterFed being the continuing and surviving corporation (sometimes referred to
hereinafter as the "Surviving Corporation"), and the separate existence of
Security shall cease.
(b) ADDITIONAL ACTIONS. If, at any time after the Effective
Time, WesterFed shall consider or be advised that any further deeds, assignments
or assurances or any other acts are necessary or desirable to (a) vest, perfect
or confirm, of record or otherwise, in the Surviving Corporation its right,
title or interest in, to or under any of the rights, properties or assets of
Security or (b) otherwise carry out the purposes of this Agreement, Security and
each of its officers and directors, shall be deemed to have granted to the
Surviving Corporation an irrevocable power of attorney to execute and deliver
all such deeds, assignments or assurances and to do all acts necessary or
desirable to vest, perfect or confirm title and possession to such rights,
properties or assets in the Surviving Corporation and otherwise to carry out the
purposes of this Agreement, and the officers and directors of the Surviving
Corporation are authorized in the name of Security or otherwise to take any and
all such action.
(c) EFFECTIVE TIME. The Merger shall become effective when the
Certificate [Articles] of Merger shall be accepted for filing by the Secretaries
of State of the States of Delaware and Montana (the "Effective Time"). On the
Closing Date, the parties shall execute, acknowledge and file, in accordance
with the Corporate Law, the Certificate [Articles] of Merger.
(d) RIGHTS AND LIABILITIES. The Surviving Corporation shall be
called "WesterFed Financial Corporation", and shall possess all of the
properties, privileges, immunities, powers, franchises and rights of a public as
well as a private nature and be subject to all of the liabilities, restrictions
and duties of WesterFed and Security and be governed by the laws of the State of
Delaware.
(e) CERTIFICATE OF INCORPORATION. The Certificate of
Incorporation of WesterFed shall be the Certificate of Incorporation of the
Surviving Corporation until amended in accordance with the provisions thereof
and the applicable Corporate Law.
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(f) BYLAWS. The Bylaws of WesterFed in effect immediately
prior to the Effective Time shall be the Bylaws of the Surviving Corporation
until altered, amended or repealed as provided therein, or in the Certificate of
Incorporation of the Surviving Corporation or the applicable Corporate Law.
(g) DIRECTORS AND OFFICERS. The directors of the Surviving
Corporation shall be the persons who were directors immediately prior to the
Effective Time as well as two current directors of Security selected by
WesterFed after consulting with the Board of Directors of Security. The officers
of the Surviving Corporation shall be the persons who were officers of WesterFed
immediately prior to the Effective Time as well as one current officer of
Security selected by WesterFed after consulting with the Board of Directors of
Security.
SECTION 1.02 CONVERSION OF STOCK. At the Effective Time, by virtue of
the Merger and without any action on the part of WesterFed or Security:
(a) Each share of WesterFed Common Stock that is issued and
outstanding immediately prior to the Effective Time shall remain outstanding.
(b) Subject to Section 1.03 hereof, the shares of Security
Common Stock issued and outstanding immediately prior to the Effective Time
shall cease to be outstanding and shall be converted into either
(i) the right to receive an amount in cash equal to
$30.00 per share (the "Cash Distribution"), or
(ii) the right to receive a number of shares of
WesterFed Common Stock equal to the product of the Exchange
Ratio multiplied by the number of shares of Security Common
Stock to be converted ("Stock Distribution"),
in such proportions as the holder thereof shall elect or be deemed to have
elected as provided in Section 1.03 of this Agreement (the aggregate of the Cash
Distributions and the Stock Distributions payable or issuable pursuant to the
Merger is sometimes hereinafter referred to as the "Merger Consideration");
provided, however, that any shares of Security Common Stock held by Security or
any of its "Subsidiaries" (as defined in Rule 1.02 of Regulation S-X promulgated
by the SEC), or by WesterFed or any of its Subsidiaries, in each case other than
in a fiduciary capacity or as a result of debts previously contracted, shall be
cancelled and shall not be exchanged for the Merger Consideration ("Excluded
Shares").
SECTION 1.03 CONVERSION ELECTION PROCEDURES.
(a) Concurrently with the mailing of the Proxy Statement to
the stockholders of Security, WesterFed shall cause the Exchange Agent to mail
to each holder of record of Security Common Stock a form of election (an
"Election Form") on which such holder shall make the election as provided for in
Section 1.03(b) of this Agreement. Each Election Form provided to a holder of
Security Common Stock shall incorporate a certificate substantially in the form
of Exhibit A hereto (the "Certification"). WesterFed shall cause an Election
Form and other appropriate materials for purposes of making the election
provided for in Section 1.03(b) of
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this Agreement to be sent to each holder of Security Common Stock who Security
advised WesterFed has become a holder after the record date of the Security
Stockholders' Meeting.
(b) Each Election Form shall specify the type and amount of
Merger Consideration receivable for each share of Security Common Stock and
shall permit a holder to elect to receive, as provided in Section 1.02 of this
Agreement, (i) the Cash Distribution for all of his shares (in which case, such
holder's shares shall be deemed to be and shall be referred to herein as "Cash
Election Shares"), (ii) the Stock Distribution for all of his shares (in which
case, such holder's shares shall be deemed to be and shall be referred to herein
as "Stock Election Shares"), or (iii) the Cash Distribution for those shares
designated by the holder as Cash Election Shares and the Stock Distribution for
the holder's remaining shares.
(c) Any shares of Security Common Stock with respect to which
the holder thereof shall not, as of the Election Deadline, have made an election
to receive either the Cash Distribution or the Stock Distribution (such holder's
shares being deemed to be and shall be referred to herein as "No Election
Shares") by submission to the Exchange Agent of an effective, properly completed
Election Form shall be deemed to be Cash Election Shares, except as otherwise
set forth in Section 1.03(e). Any holder of 1% or more of the Security Common
Stock (determined as of the Closing Date) that shall not, on or before the
Election Deadline, have delivered to the Exchange Agent a properly executed
Certification (or such other representations as Silver, Friedman & Taff, L.L.P.,
in its sole discretion, shall deem acceptable) shall be deemed to have made a
timely election to receive the Cash Distribution, and all shares of Security
Common Stock held by such holder shall be deemed to be Cash Election Shares for
all purposes of this Agreement, including this Section 1.03. (The parties
acknowledge that the foregoing sentence will preclude a holder that acquires
additional shares of Security Common Stock and becomes a holder of 1% or more of
such shares after the Election Deadline from receiving the Stock Distribution.)
(d) Any election for purposes of Section 1.03(b) of this
Agreement shall be effective only if the Exchange Agent shall have received a
properly completed Election Form by the Election Deadline. Any Election Form may
be revoked or changed by the person submitting such Election Form or any other
person to whom the subject shares are subsequently transferred by written notice
by such person to the Exchange Agent at or prior to the Election Deadline. All
Election Forms shall be deemed to be revoked if the Exchange Agent is notified
in writing by either WesterFed or Security that this Agreement has been
terminated in accordance with its terms. The Exchange Agent shall have
reasonable discretion to determine when any election, modification or revocation
is received and whether any such election, modification or revocation is
effective, consistent with the duty of the Exchange Agent to give effect to such
elections, modifications or revocations to the maximum extent possible.
(e) As soon as practicable after the Effective Time, WesterFed
shall cause the Exchange Agent to allocate among the holders of Security Common
Stock the rights to receive the Cash Distribution or the Stock Distribution
pursuant to the Merger as follows:
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(i) if the number of shares of WesterFed Common Stock
distributable in respect of the Stock Election Shares is less than the number of
the Minimum Stock Consideration Shares, then
(A) First, all Stock Election Shares will be
converted into the right to receive the Stock Distribution;
(B) Second, the Exchange Agent shall convert all No
Election Shares to Stock Election Shares ("Additional Stock
Election Shares") and exchange the same for the Stock
Distribution, provided that the aggregate number of Stock
Election Shares (including Additional Stock Election Shares)
is equal or approximately equal to the number of Maximum Stock
Consideration Shares; in the event that conversion of all No
Election Shares to Additional Stock Election Shares would
cause the aggregate number of Stock Election Shares (including
Additional Stock Election Shares) to exceed the number of
Maximum Stock Consideration Shares, the number of No Election
Shares converted to Additional Stock Election Shares and
exchanged for the Stock Distribution shall be reduced so that
the aggregate number of Stock Election Shares (including
Additional Stock Election Shares) equals or approximately
equals the number of Maximum Stock Consideration Shares, with
the aggregate Additional Stock Election Shares created upon
the conversion of No Election Shares being allocated pro rata
to each holder of No Election Shares in the proportion that
the total No Election Shares of such holder bear to the total
number of No Election Shares of all holders;
(C) Third, in the event that conversion of all No
Election Shares to Additional Stock Election Shares pursuant
to clause (B) of this Section 1.03(e)(i) would cause the
aggregate number of Stock Election Shares (including
Additional Stock Election Shares) to be less than the number
of Minimum Stock Consideration Shares, the Exchange Agent (in
addition to converting all No Election Shares) shall convert a
number of Cash Election Shares (excluding shares tendered by
holders of less than 100 shares) to Stock Election Shares and
exchange the same for the Stock Distribution such that the
aggregate number of Stock Election Shares (including
Additional Stock Election Shares) shall equal or be
approximately equal to the number of Minimum Stock
Consideration Shares, with the aggregate Stock Election Shares
that are to be created upon the conversion of Cash Election
Shares being allocated pro rata to each holder of Cash
Election Shares in the proportion that the total Cash Election
Shares of such holder bear to the total number of Cash
Election Shares of all holders (excluding each holder of less
than 100 shares); and
(D) Fourth, after the allocations set forth in
clauses (A) through (C) of this Section 1.03(e)(i) have been
made, all remaining shares of Security Common Stock (other
than Dissenting Shares) shall be converted into the Cash
Distribution.
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(ii) if the number of shares of WesterFed Common Stock
distributable in respect of the Stock Election Shares is greater than
the number of Maximum Stock Consideration Shares, then:
(A) all Cash Election Shares (including No Election
Shares) will be converted into the right to receive the Cash
Distribution;
(B) the Exchange Agent will reallocate the Merger
Consideration payable to each holder of Stock Election Shares
pro rata (based upon the number of Stock Election Shares owned
by such holder, as compared with the total number of Stock
Election Shares owned by all holders) such that the holders of
the Stock Election Shares will receive, as Stock
Distributions, the number of shares of WesterFed Common Stock
which in the aggregate will be equal or approximately equal to
the Maximum Stock Consideration Shares and will receive the
balance of the Merger Consideration due to them in cash as
Cash Distributions.
(f) The pro rata computations to be used by the Exchange Agent
pursuant to this Section 1.03(e) shall be made by the Exchange Agent, in the
reasonable exercise of its discretion.
(g) For purposes of this Section , Dissenting Shares shall be
deemed to be Cash Election Shares.
(h) ACTIONS AFFECTING WESTERFED COMMON STOCK. If, prior to the
Effective Time, shares of WesterFed Common Stock shall be changed into a
different number of shares or a different class of shares by reason of any
reclassification, recapitalization, split-up, combination, exchange of shares or
readjustment, or there occurs a distribution of warrants or rights with respect
to WesterFed Common Stock, or a stock dividend, stock split or other general
distribution of WesterFed Common Stock is declared with a record date prior to
the Effective Time, then in any such event the Exchange Ratio shall be
appropriately adjusted.
(i) DISSENTING SHARES. Any shares of Security Common Stock
held by a holder who dissents from the Merger in accordance with the Corporate
Law and becomes entitled to obtain payment for the fair value of such shares of
Security Common Stock pursuant to the applicable provisions of the Corporate Law
shall be herein called "Dissenting Shares." Notwithstanding any other provision
of this Agreement, any Dissenting Shares shall not, after the Effective Time, be
entitled to vote for any purpose or receive any dividends or other distributions
and shall be entitled only to such rights as are afforded in respect of
Dissenting Shares pursuant to the Corporate Law. All payments in respect of
Dissenting Shares shall be from funds of WesterFed and not from the acquired
assets of Security.
SECTION 1.04 TIME AND PLACE OF CLOSING.
(a) CLOSING; CLOSING DATE. The closing of the transactions
contemplated by this Agreement (the "Closing") will be held on a date mutually
agreed upon by WesterFed and Security (the "Closing Date"). In the absence of
such agreement, the Closing shall be held on the
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tenth business day after the last to occur of: (i) the receipt of all consents
and approvals of government regulatory authorities as legally required to
consummate the Merger and the Bank Merger and the expiration of all applicable
statutory waiting periods; and (ii) the requisite approval of the Merger by the
stockholders of Security and WesterFed.
(b) CLOSING LOCATION.The closing shall take place at the
offices of WesterFed or such other place as WesterFed and Security may mutually
agree prior to the Closing Date.
SECTION 1.05 EXCHANGE OF SECURITY COMMON STOCK.
(a) EXCHANGE PROCEDURES. As soon as practicable after the
Effective Time, the Exchange Agent, who shall be appointed by WesterFed, shall
mail to each holder of record of a certificate or certificates (other than
certificates representing Dissenting Shares and Excluded Shares) which as of the
Effective Time represented outstanding shares of Security Common Stock (the
"Certificates"): (i) a form letter of transmittal which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates shall
pass, only upon delivery of the Certificates (or a lost certificate affidavit
and bond in a form reasonably acceptable to the Exchange Agent); and (ii)
instructions for use in effecting the surrender of the Certificates in exchange
for the Merger Consideration. Upon surrender of a Certificate for cancellation
to the Exchange Agent (or a lost certificate affidavit and bond in a form
reasonably acceptable to the Exchange Agent), together with such letter of
transmittal, duly executed, the holder of such Certificate shall be entitled to
receive within ten business days or as soon thereafter as is practicable, the
Merger Consideration, without any interest thereon and subject to any required
withholding of Taxes, into which the shares of Security Common Stock represented
by the Certificate so surrendered shall have been converted pursuant to the
provisions of this Agreement, and the Certificate so surrendered shall forthwith
be delivered to the Surviving Corporation for cancellation. If the Merger
Consideration is to be paid to a person or entity other than the holder in whose
name the Certificate is registered as of the Election Deadline, it shall be a
condition of such payment that the Certificate so surrendered shall be properly
endorsed (or accompanied by an appropriate instrument of transfer) and otherwise
in proper form for transfer, and that the person or entity requesting such
exchange shall pay to the Exchange Agent, in advance, any applicable transfer or
other Taxes.
(b) DELIVERY OF MERGER CONSIDERATION TO EXCHANGE AGENT. At the
Effective Time, WesterFed shall deliver to the Exchange Agent the aggregate
Merger Consideration to be paid for all of the issued and outstanding shares of
Security Common Stock other than Dissenting Shares and Excluded Shares. On an
as-required basis, WesterFed shall promptly and timely tender to the Exchange
Agent additional cash funds required for the payment of cash in lieu of
fractional shares. The Merger Consideration remaining in the hands of the Escrow
Agent for non-surrendered Certificates shall be returned to WesterFed at the
expiration of six months from the Effective Time.
(c) DIVIDENDS AND DISTRIBUTIONS. In the case of the Security
Common Stock to be exchanged for the Stock Distribution, until the applicable
holder surrenders for exchange his/her Certificates, no dividends or other
distributions payable to holders of record of WesterFed
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Common Stock shall be paid thereon; however, upon the surrender of any such
Certificate there shall be paid to the holder, without interest, the full amount
of such dividends or distributions.
(d) FULL PAYMENT. All shares of WesterFed Common Stock issued
to satisfy Stock Distributions in exchange for Security Common Stock shall be
validly issued, fully paid and non-assessable, and shall not be liable to any
further call, nor shall the holder thereof be liable for any further payments
with respect thereto.
(e) FRACTIONAL SHARES. No certificates or scrip representing
fractional shares of WesterFed Common Stock shall be issued upon the surrender
for exchange of Certificates, no dividend or distribution of the Surviving
Corporation shall relate to any fractional share, and such fractional share
interests will not entitle the owner thereof to vote or to any other rights of a
stockholder of the Surviving Corporation. In lieu of any fractional share, the
Exchange Agent or the Surviving Corporation, as the case may be, shall pay to
each holder of shares of Security Common Stock who otherwise would be entitled
to receive a fractional share of WesterFed Common Stock an amount of cash
(without interest) equal to the product achieved when such fraction is
multiplied by $30.00 rounded to the nearest cent.
(f) CLOSING OF TRANSFER BOOKS. At the close of business on the
Election Deadline, the transfer books for Security Common Stock shall be closed,
and no transfer of shares shall thereafter be made on such books. If, after the
Election Deadline, Certificates are presented for transfer to the Exchange
Agent, they shall be held until the Effective Time and cancelled and exchanged
for the Merger Consideration as provided in Section 1.03 subject to the
procedures set forth in Section 1.05(a); provided however, such Certificates
shall be promptly returned if the Closing shall not occur for any reason.
(g) LIST OF SECURITY STOCKHOLDERS. At the Effective Time,
Security shall deliver a certified copy of a list of its stockholders to the
Exchange Agent. If, after the Effective Time, Certificates representing shares
of Security Common Stock are presented to Security or WesterFed, they shall be
canceled and exchanged as provided in this Article I.
SECTION 1.06 MERGER OF SECURITY BANK, FSB. WesterFed and Security
understand that it is the intention of WesterFed to have Security Bank merge
with and into Western (the "Bank Merger") at the Effective Time pursuant to a
plan of merger (the "Bank Plan of Merger") in substantially the form attached
hereto as Exhibit B. Security shall, and it shall cause Security Bank to, take
all such actions as are reasonably requested by WesterFed so that the Bank
Merger shall, at WesterFed's election, become effective at the Effective Time.
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ARTICLE II
REPRESENTATIONS AND WARRANTIES OF WESTERFED
WesterFed represents and warrants to Security that:
SECTION 2.01 ORGANIZATION.
(a) WesterFed is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
all requisite power and authority, corporate and otherwise, to own, operate and
lease its assets, properties and business and to carry on its business
substantially as it has been and is now being conducted. WesterFed is duly
qualified to do business and is in good standing in each jurisdiction where the
character of the assets or properties owned or leased by it or the nature of the
business transacted by it requires that it be so qualified, except where the
failure to so qualify would not have a Material Adverse Effect on WesterFed or
its ability to consummate the transactions contemplated herein. WesterFed has
all requisite corporate power and authority to enter into this Agreement and,
subject to the receipt of all requisite regulatory approvals and the expiration
of applicable waiting periods, and to consummate the transactions contemplated
hereby. WesterFed is duly registered as a savings and loan holding company under
the HOLA.
SECTION 2.02 AUTHORIZATION. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated hereby have
been duly approved and authorized by WesterFed's Board of Directors, and no
other corporate action on the part of WesterFed is required to be taken, except
the approval of this Agreement and the Merger by its stockholders by the
requisite vote required by its Certificate of Incorporation and the Corporate
Law. This Agreement has been duly executed and delivered by WesterFed and
constitutes the valid and binding obligation of WesterFed and is enforceable
against WesterFed in accordance with its terms (except to the extent that
enforceability thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws or equitable principles and
doctrines).
SECTION 2.03 CONFLICTS. Subject to the second sentence of this Section
2.03, the execution and delivery of this Agreement does not, and the
consummation of the transactions contemplated hereby will not, conflict with or
result in any violation, breach or termination of, or default or loss of a
material benefit under, or permit the acceleration of any obligation under, or
result in the creation of any material lien, charge or encumbrance on any of the
property or assets under, any provision of the Certificate of Incorporation or
Bylaws of WesterFed or similar documents of any WesterFed Subsidiary or any
mortgage, indenture, lease, agreement or other instrument, permit, concession,
grant, franchise, license, judgment, order, decree, statute, law, ordinance,
rule or regulation applicable to WesterFed or any WesterFed Subsidiary or their
respective properties, other than any such conflicts, violations or defaults
which (i) will be cured or waived prior to the Effective Time, (ii) are not
material to the conduct of business or operations of WesterFed or any WesterFed
Subsidiary, or (iii) are disclosed in Section 2.03 of that certain confidential
writing delivered by WesterFed to Security within two business days prior to the
date hereof (the "WesterFed Disclosure Schedule"). No consent, approval, order
or
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authorization of, or registration, declaration or filing with, any federal or
state governmental authority is required by or with respect to WesterFed in
connection with the execution and delivery of this Agreement or the consummation
by WesterFed of the transactions contemplated hereby except for: (a) the filing
of all applicable regulatory applications by WesterFed, Security and/or their
respective Subsidiaries for approval of the transactions contemplated by this
Agreement; (b) the filing by WesterFed of the registration statement relating to
the WesterFed Common Stock to be issued pursuant to this Agreement (the
"Registration Statement") with the SEC and various blue sky authorities, which
Registration Statement shall include the prospectus/proxy statement (the "Proxy
Statement") for use in connection with the meetings of stockholders to be held
by WesterFed (the "WesterFed Stockholders' Meeting") and Security (the "Security
Stockholders' Meeting") to vote on this Agreement and the Merger; (c) the filing
of the Certificate [Articles] of Merger with respect to the Merger with the
Secretaries of State of the States of Delaware and Montana; (d) the filing of
Articles of Combination with the OTS with respect to the Bank Merger; (e) any
filings, approvals or no-action letters with or from state securities
authorities; and (f) any anti-trust filings, consents, waivers or approvals.
SECTION 2.04 ANTI-TAKEOVER PROVISIONS INAPPLICABLE. No "business
combination," "moratorium," "control share" or other state anti-takeover statute
or regulation (i) prohibits or restricts WesterFed's ability to perform its
obligations under this Agreement or its ability to consummate the transactions
contemplated hereby, (ii) would have the effect of invalidating or voiding this
Agreement or any provision hereof, or (iii) would subject Security to any
material impediment or condition in connection with the exercise of any of its
rights under this Agreement.
SECTION 2.05 CAPITALIZATION.
(a) The authorized capital stock of WesterFed consists of (i)
10,000,000 shares of WesterFed Common Stock of which, as of the date hereof,
4,395,108 shares were issued and outstanding, and (ii) 5,000,000 shares of
preferred stock, $.01 par value per share, of which none are issued and
outstanding. All of the issued and outstanding shares of WesterFed Common Stock
have been, and all of the shares of WesterFed Common Stock to be issued in the
Merger will be, at the Effective Time, duly and validly authorized and issued,
and are or will be as of the Effective Time, as the case may be, fully paid and
non-assessable. None of the outstanding shares of WesterFed Common Stock has
been issued in violation of any preemptive rights of the current or past
stockholders of WesterFed or are subject to any preemptive rights of the current
or past stockholders of Security, and none of the outstanding shares of
WesterFed Common Stock is or will be entitled to any preemptive rights in
respect of the Merger or any of the other transactions contemplated by this
Agreement.
(b) As of the date hereof, WesterFed does not have outstanding
any securities or rights convertible into or exchangeable for WesterFed Common
Stock or any commitments, contracts, understandings or arrangements by which
WesterFed is or may be bound to issue additional shares of WesterFed Common
Stock, except pursuant to WesterFed Option Plans.
SECTION 2.06 WESTERFED FINANCIAL STATEMENTS; MATERIAL CHANGES.
WesterFed has heretofore delivered to Security its audited consolidated
financial statements for the fiscal years
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ended June 30, 1994, 1995, and 1996 (together, the "WesterFed Financial
Statements"). The WesterFed Financial Statements (a) are true and correct in all
material respects, (b) have been prepared in accordance with GAAP applied on a
consistent basis during the periods involved (except as may be indicated in the
notes thereto), and (c) fairly present the consolidated financial position of
WesterFed as of the dates thereof and the consolidated results of its
operations, stockholders' equity, cash flows and changes in financial position
for the periods then ended. Since June 30, 1996, WesterFed and the WesterFed
Subsidiaries have not undergone or suffered any changes in their respective
condition (financial or otherwise), properties, business or operations which
have been, in any case or in the aggregate, materially adverse to WesterFed on a
consolidated basis except as disclosed in Section 2.06 of the WesterFed
Disclosure Schedule. No facts or circumstances have been discovered from which
it reasonably appears that there is a significant risk and reasonable
probability that WesterFed will suffer or experience a Material Adverse Effect.
SECTION 2.07 WESTERFED SUBSIDIARIES.
(a) All of the WesterFed Subsidiaries as of the date of this
Agreement are listed in Section 2.07 of the WesterFed Disclosure Schedule.
WesterFed owns directly or indirectly all of the issued and outstanding shares
of capital stock of the WesterFed Subsidiaries. Section 2.07 of the WesterFed
Disclosure Schedule sets forth the number of shares of authorized and
outstanding capital stock of the WesterFed Subsidiaries. Except as set forth in
Section 2.07 of the WesterFed Disclosure Schedule, neither WesterFed nor the
WesterFed Subsidiaries owns directly or indirectly any debt or equity securities
or other proprietary interest in any other corporation, joint venture,
partnership, entity, association or other business. No capital stock of any of
the WesterFed Subsidiaries is, or may become required to be, issued (other than
to WesterFed) by reason of any options, warrants, scrip, right to subscribe to,
calls, or commitments of any character whatsoever relating to, or securities or
rights convertible into or exchangeable for, shares of the capital stock of any
WesterFed Subsidiary. All of the shares of capital stock of each WesterFed
Subsidiary held by WesterFed or a WesterFed Subsidiary are fully paid and
non-assessable and are owned free and clear of any claim, lien or encumbrance,
except as disclosed in Section 2.07 of the WesterFed Disclosure Schedule.
(b) Each WesterFed Subsidiary is either a federally-chartered
stock savings bank or a corporation and is duly organized, validly existing and
in good standing under the laws of the jurisdiction in which it is incorporated
or organized, and is duly qualified to do business and in good standing in each
jurisdiction where the character of the assets or properties owned or leased by
it or the nature of the business transacted by it requires it to be so
qualified, except where the failure to so qualify, either individually or in the
aggregate, would not have a Material Adverse Effect on WesterFed or the ability
of WesterFed to consummate the transactions contemplated herein. Each WesterFed
Subsidiary has the corporate power and authority necessary for it to own,
operate or lease its assets, properties and business and to carry on its
business as it has been and is now being conducted.
(c) Western is a member in good standing of the Federal Home
Loan Bank System. All eligible deposit accounts issued by Western are insured by
the FDIC through the SAIF to the full extent permitted under applicable law.
Western is, and at all times since June 1,
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1990 has been, a "domestic building and loan association" as defined in Section
7701(a)(19) of the Code and a "qualified thrift lender" as defined in Section
10(m) of HOLA. The liquidation account established by Western in connection with
its conversion from mutual to stock form has been maintained since its
establishment in accordance with applicable laws and the records with respect to
said account are complete and accurate in all material respects.
SECTION 2.08 WESTERFED FILINGS. WesterFed has previously made
available, or will make available prior to the Effective Time, to Security true,
correct and complete copies of its (i) proxy statements relating to all meetings
of its stockholders (whether special or annual) during calendar years 1994, 1995
and 1996, and (ii) all other reports, as amended, or filings, as amended,
required to be filed under the Securities Exchange Act by WesterFed with the SEC
since January 1, 1994, including reports on Forms 10-K, 10-Q and 8-K.
SECTION 2.09 WESTERFED REPORTS. Since January 1, 1994, each of
WesterFed and the WesterFed Subsidiaries has filed, and will continue to file,
all reports and statements, together with any amendment required to be made with
respect thereto, that it was, or will be required to file with the SEC, the OTS,
the FDIC, the NASD and other applicable banking, securities and other regulatory
authorities (except filings which are not material). As of their respective
dates (and without giving effect to any amendments or modifications filed after
the date of this Agreement with respect to reports and documents filed before
the date of this Agreement), each of such reports and documents, including the
financial statements, exhibits, and schedules thereto, complied in all material
respects with all of the statutes, rules and regulations enforced or promulgated
by the authority with which they were filed and did not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements made therein, in light of the circumstances under
which they were made, not misleading. Except for normal examinations conducted
by the Internal Revenue Service, state and local taxing authorities, the OTS or
the FDIC in the regular course of the business of WesterFed or the WesterFed
Subsidiaries, no federal, state or local governmental agency, commission or
other entity has initiated any proceeding or, to the best knowledge of
WesterFed, investigation into the business or operations of WesterFed or the
WesterFed Subsidiaries within the past three (3) years except as set forth in
Section 2.09 of the WesterFed Disclosure Schedule. There is no unresolved
violation, criticism or exception by the SEC, OTS, FDIC or other agency,
commission or entity with respect to any report or statement referred to herein
that is material to WesterFed on a consolidated basis.
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SECTION 2.10 COMPLIANCE WITH LAWS.
(a) Except as disclosed in Section 2.10 of the WesterFed
Disclosure Schedule, the businesses of WesterFed and the WesterFed Subsidiaries
are not being conducted in violation of any law, ordinance or regulation of any
governmental entity, including any laws affecting financial institutions
(including those pertaining to the Bank Secrecy Act, the investment of funds,
the lending of money, the collection of interest and the extension of credit),
federal and state securities laws, laws and regulations relating to financial
statements and reports, truth-in-lending, truth-in-savings, usury, fair credit
reporting, consumer protection, occupational safety, fair employment practices,
fair labor standards and laws and regulations relating to employee benefits, and
any statutes or ordinances relating to the properties occupied or used by
WesterFed or any WesterFed Subsidiary, except for possible violations which
either singly or in the aggregate do not and, insofar as reasonably can be
foreseen in the future, will not have a Material Adverse Effect on WesterFed.
(b) Except as disclosed in Section 2.10 of the WesterFed
Disclosure Schedule, no investigation or review by any governmental entity with
respect to WesterFed or any WesterFed Subsidiary is pending or, to the best
knowledge of WesterFed, threatened, nor has any governmental entity indicated to
WesterFed an intention to conduct the same, other than normal thrift regulatory
examinations and those the outcome of which will not have a Material Adverse
Effect on WesterFed.
(c) WesterFed and each of the WesterFed Subsidiaries, where
applicable, are in substantial compliance with the applicable provisions of the
Community Reinvestment Act of 1977 and the regulations promulgated thereunder.
As of the date of this Agreement, WesterFed has not been advised of the
existence of any fact or circumstance or set of facts or circumstances which, if
true, would cause WesterFed or any of the WesterFed Subsidiaries to fail to be
in substantial compliance with such provisions. No WesterFed Subsidiary that is
a financial institution has received a rating from an applicable regulatory
authority which is less than "satisfactory."
SECTION 2.11 DISCLOSURE. None of the information supplied by WesterFed
for inclusion in the Proxy Statement or in the Registration Statement, will, in
the case of the Proxy Statement or any amendments thereof or supplements
thereto, at the time of the Stockholders' Meetings or, in the case of the
Registration Statement, at the time it becomes effective and at the Effective
Time, contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The Registration
Statement will comply as to form in all material respects with the provisions of
the Securities Act.
SECTION 2.12 LITIGATION. Except as disclosed in Section 2.12 of the
WesterFed Disclosure Schedule, there is no suit, action, investigation or
proceeding, legal, quasi-judicial, administrative or otherwise, pending or, to
the best knowledge of WesterFed, threatened, against or affecting WesterFed or
any WesterFed Subsidiary, or any of their respective officers, directors,
employees or agents, in their capacities as such, which involves a monetary
demand in excess of $25,000 or requests equitable relief in the form of specific
performance or an injunction, or
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which would materially affect the ability of WesterFed to consummate the
transactions contemplated herein or which is seeking to enjoin consummation of
the transactions provided for herein or to obtain other relief in connection
with this Agreement or the transactions contemplated hereby, nor is there any
judgment, decree, injunction, rule or order of any court, governmental
department, commission agency, instrumentality or arbitrator outstanding against
WesterFed or any WesterFed Subsidiary or any of their respective officers,
directors, employees or agents, in their capacities as such, having, or which,
insofar as reasonably can be foreseen in the future, would have any material
effect on WesterFed or any WesterFed Subsidiary.
SECTION 2.13 LICENSES. WesterFed and the WesterFed Subsidiaries hold
all licenses, certificates, permits, franchises and all patents, trademarks,
service marks, trade names, copyrights or rights thereto, and required
authorizations, approvals, consents, licenses, clearances and orders or
registrations with all appropriate federal, state or other authorities, that are
material to the conduct of their respective businesses as now conducted and as
presently proposed to be conducted.
SECTION 2.14 TAXES.
(a) Except as disclosed in Section 2.14 of the WesterFed
Disclosure Schedule, WesterFed and the WesterFed Subsidiaries have each timely
filed all Tax and information returns required to be filed and have paid (or
WesterFed has paid on behalf of its Subsidiaries), or have accrued on their
respective books and set up an adequate reserve for the payment of, all Taxes
reflected on such returns as required to be paid in respect of the periods
covered by such returns and have accrued on their respective books and set up an
adequate reserve for the payment of all income and other Taxes anticipated to be
payable in respect of periods through the end of the calendar month next
preceding the date hereof. Neither WesterFed nor any WesterFed Subsidiary is
delinquent in the payment of any Tax, assessment or governmental charge. No
deficiencies for any Taxes have been proposed, asserted or assessed against
WesterFed or any WesterFed Subsidiary that have not been resolved or settled,
and no requests for waivers of the time to assess any such Tax are pending or
have been agreed to. The income tax returns of WesterFed and the WesterFed
Subsidiaries have not been audited by the Internal Revenue Service since June
1989 and have not been audited by any state, municipal or other taxing authority
since June 1990. Neither WesterFed nor any WesterFed Subsidiary is a party to
any action or proceeding by any governmental authority for the assessment or the
collection of Taxes. Deferred Taxes of WesterFed and the WesterFed Subsidiaries
have been accounted for in accordance with GAAP.
(b) WesterFed has not filed any consolidated federal income
tax return with an "affiliated group" within the meaning of Section 1504 of the
Code, where WesterFed was not the common parent of the group. Neither WesterFed
nor any WesterFed Subsidiary is or has been a party to any Tax allocation
agreement or arrangement pursuant to which it has any contingent or outstanding
liability to anyone other than WesterFed or a WesterFed Subsidiary.
(c) WesterFed and the WesterFed Subsidiaries have each
withheld amounts from its employees, stockholders or holders of public deposit
accounts in compliance with the Tax withholding provisions of applicable
federal, state
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and local laws, have filed all federal, state and local returns and reports for
all periods for which such returns or reports would be due with respect to
income tax withholding, social security, unemployment taxes, income and other
Taxes and all payments or deposits with respect to such Taxes have been timely
made and, except as set forth in Section 2.14 of the WesterFed Disclosure
Schedule, have notified all employees, stockholders, and holders of public
deposit accounts of their obligations to file all forms, statements and reports
with it in accordance with applicable federal, state and local Tax laws and have
taken reasonable steps to insure that such employees, stockholders and holders
of public deposit accounts have filed all such forms, statements and reports
with it.
SECTION 2.15 INSURANCE. WesterFed and the WesterFed Subsidiaries
maintain insurance with insurers which in the best judgment of management of
WesterFed are sound and reputable, on their respective assets, and upon their
respective businesses and operations, against loss or damage, risks, hazards and
liabilities as in their judgment they deem appropriate. WesterFed and the
WesterFed Subsidiaries maintain in effect all insurance required to be carried
by law or by any agreement by which they are bound. All material claims under
all policies of insurance maintained by WesterFed and the WesterFed Subsidiaries
have been filed in due and timely fashion.
SECTION 2.16 LOANS; INVESTMENTS.
(a) Except as otherwise disclosed in Section 2.16 of the WesterFed
Disclosure Schedule, each material loan reflected as an asset on the WesterFed
Financial Statements as of June 30, 1996 is evidenced by appropriate and
sufficient documentation and constitutes, to the best knowledge of WesterFed,
the legal, valid and binding obligation of the obligor named in such
documentation, enforceable in accordance with its terms except to the extent
that the enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws or equitable principles or doctrines.
Except as set forth in Section 2.16 of the WesterFed Disclosure Schedule, all
such loans are, and at the Effective Time will be, free and clear of any
security interest, lien, encumbrance or other charge. Except as set forth in
Section 2.16 of the WesterFed Disclosure Schedule, there is no loan or other
asset of WesterFed or any WesterFed Subsidiary in excess of $250,000 that has
been classified by examiners, management, the Board of Directors, or others as
"Other Loans Especially Mentioned," "Substandard," "Doubtful" or "Loss" as of
August 31, 1996. Set forth in Section 2.16 of the WesterFed Disclosure Schedule
is a list of all real estate owned through the exercise of creditors rights or
deed in lieu thereof ("REO") by, and in-substance foreclosures of, WesterFed and
the WesterFed Subsidiaries as of August 31, 1996.
(b) All guarantees of indebtedness owed to WesterFed or any
WesterFed Subsidiary, including those of the Federal Housing Administration, the
Small Business Administration, and other state and federal agencies, are, to the
best knowledge of WesterFed, valid and enforceable, except to the extent
enforceability thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws or equitable principles or doctrines
and except as would not have a Material Adverse Effect on WesterFed.
(c) Section 2.16 of the WesterFed Disclosure Schedule sets
forth an accurate and complete list of all Derivative Securities to which
WesterFed or any WesterFed Subsidiary is
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a party or by which any of their properties or assets may be bound, or that are
owned by WesterFed or any WesterFed Subsidiary. Neither WesterFed nor any
WesterFed Subsidiary has purchased any Derivative Security for, or invested in
any Derivative Security any assets of, any account or person for which it acts
as a trustee, fiduciary, or investment advisor. All Derivative Securities to
which WesterFed or any WesterFed Subsidiary is a party or by which any of their
properties or assets may be bound were entered into in the ordinary course of
business and, to the best knowledge of WesterFed, in accordance with applicable
rules, regulations and policies of thrift regulatory authorities and with
counterparties believed to be financially responsible at the time, and are
legal, valid and binding obligations and are in full force and effect. WesterFed
and the WesterFed Subsidiaries have duly performed in all material respects all
of their respective obligations thereunder to the extent that such obligations
to perform have accrued, and to the best knowledge of WesterFed, there are no
material breaches, violations or defaults or allegations or assertions of such
by any party thereunder. None of the transactions contemplated by this Agreement
would permit a counterparty under any Derivative Security, or any party to any
mortgage-backed security financing arrangement, to accelerate, discontinue,
terminate, or otherwise modify any such Derivative Security or arrangement or
would require WesterFed or any WesterFed Subsidiary to recognize any gain or
loss with respect to such Derivative Security or arrangement.
(d) Except as set forth in Section 2.16 of the WesterFed
Disclosure Schedule and except for pledges to secure public and trust deposits,
none of the investments reflected in the WesterFed Financial Statements as of
June 30, 1996 under the heading "Investment Securities," and none of the
investments made by WesterFed and the WesterFed Subsidiaries since June 30,
1996, is subject to any restriction, whether contractual or statutory, which
materially impairs the ability of WesterFed or any WesterFed Subsidiary to
freely dispose of such investment at any time. With respect to all material
repurchase agreements to which WesterFed or any WesterFed Subsidiary is a party,
WesterFed or such WesterFed Subsidiary has a valid, perfected first lien, or
security interest in the government securities or other collateral securing each
such repurchase agreement, and the value of the collateral securing each such
repurchase agreement equals or exceeds the amount of the debt secured by such
collateral under such agreement.
(e) All United States Treasury securities, obligations of
other United States Government agencies and corporations, obligations of any
States of the United States and their political subdivisions, and other
investment securities classified as "held to maturity" and "available for sale"
held by WesterFed and the WesterFed Subsidiaries, as reflected in the WesterFed
Financial Statements as of June 30, 1996, were classified and accounted for in
accordance with F.A.S.B. 115 and the intentions of management.
SECTION 2.17 ALLOWANCE FOR POSSIBLE LOAN LOSSES. The allowance for
possible loan losses shown on the WesterFed Financial Statements as of June 30,
1996, (and as shown on any financial statements to be delivered by WesterFed to
Security pursuant to Section 5.07 hereof), to the best knowledge of WesterFed,
as of such date was (and will be as of such subsequent financial statement
dates) adequate in all respects to provide for possible or specific losses, net
of recoveries relating to loans previously charged off, on loans outstanding,
and contained (or will contain) an additional amount of unallocated reserves for
unanticipated future losses at a level
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considered adequate under the standards applied by applicable federal regulatory
authorities and based upon GAAP applicable to thrift institutions. To the best
knowledge of WesterFed, the aggregate principal amount of loans contained (or to
be contained) in the loan portfolio of WesterFed and the WesterFed Subsidiaries
as of the date of this Agreement (and as of the dates of any financial
statements to be delivered by WesterFed to Security pursuant to Section 5.07
hereof) in excess of such reserve was (and will be) fully collectible.
SECTION 2.18 WESTERFED BENEFIT PLANS.
(a) No WesterFed Benefit Plan is a multi-employer plan within
the meaning of Section 3(37) of ERISA.
(b) Each of the WesterFed Benefit Plans that is intended to be
a pension, profit sharing, stock bonus, thrift, savings or employee stock
ownership plan that is qualified under Section 401(a) of the Code ("WesterFed
Qualified Plans") has been determined by the Internal Revenue Service to qualify
under Section 401(a) of the Code, or an application for determination of such
qualification has been timely made to the Internal Revenue Service prior to the
end of the applicable remedial amendment period under Section 401(b) of the
Code, and, to the best of WesterFed's knowledge, there exist no circumstances
likely to materially adversely affect the qualified status of any such WesterFed
Qualified Plan. All such WesterFed Qualified Plans established or maintained by
WesterFed or any of the WesterFed Subsidiaries or to which WesterFed or any of
the WesterFed Subsidiaries contribute are in compliance in all material respects
with all applicable requirements of ERISA, and are in compliance in all material
respects with all applicable requirements (including qualification and
non-discrimination requirements in effect as of the Effective Time) of the Code
for obtaining the Tax benefits the Code thereupon permits with respect to such
WesterFed Qualified Plans. All accrued contributions and other payments required
to be made by WesterFed or any WesterFed Subsidiary to any WesterFed Benefit
Plan through June 30, 1996 have been made or reserves adequate for such purposes
as of such date have been set aside therefor and reflected in the WesterFed
Financial Statements as of June 30, 1996. Neither WesterFed nor any WesterFed
Subsidiary is in material default in performing any of its respective
contractual obligations under any of the WesterFed Benefit Plans or any related
trust agreement or insurance contract, and there are no material outstanding
liabilities of any such Plan other than liabilities for benefits to be paid to
participants in such Plan and their beneficiaries in accordance with the terms
of such Plan.
(c) Under each WesterFed Qualified Plan that is a defined
benefit plan, as of the last day of the most recent plan year, the actuarially
determined present value of all "benefit liabilities", within the meaning of
Section 4001(a)(16) of ERISA (as determined on the basis of the actuarial
assumptions contained in the Plan's most recent actuarial valuation) did not
exceed the then current value of the assets of such Plan, and there has been no
material change in the financial condition of such Plan since the last day of
the most recent plan year.
(d) There is no pending or, to the best knowledge of
WesterFed, threatened litigation or pending claim (other than benefit claims
made in the ordinary course) by or on behalf of or against any of the WesterFed
Benefit Plans (or with respect to the administration of
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any of the such Plans) now or heretofore maintained by WesterFed or any
WesterFed Subsidiary which allege violations of applicable state or federal law
which are reasonably likely to result in a liability on the part of WesterFed or
any WesterFed Subsidiary or any such Plan.
(e) WesterFed and the WesterFed Subsidiaries and all other
persons having fiduciary or other responsibilities or duties with respect to any
WesterFed Benefit Plan are and have since the inception of each such Plan been
in substantial compliance with, and each such Plan is and has been operated in
substantial accordance with, its provisions and in substantial compliance with
the applicable laws, rules and regulations promulgated by the Department of
Labor, the Pension Benefit Guaranty Corporation ("PBGC") and the Internal
Revenue Service under ERISA, the Code or any other applicable law.
Notwithstanding the foregoing, no representation is made with respect to
compliance by a third party insurance company. No "reportable event" (as defined
in Section 4043(b) of ERISA) has occurred with respect to any WesterFed
Qualified Plan. Neither WesterFed, any WesterFed Subsidiary nor any WesterFed
Benefit Plan has incurred or is reasonably likely to incur any liability for any
"prohibited transactions" (as defined in Section 406 of ERISA or Section 4975(c)
of the Code), or any material liability under Section 601 of ERISA or Section
4980B of the Code.
(f) WesterFed and the WesterFed Subsidiaries have filed or
caused to be filed, and will continue to file or cause to be filed, in a timely
manner all filings pertaining to each WesterFed Benefit Plan with the Internal
Revenue Service, the PBGC, the Department of Labor, and as prescribed by the
Code or ERISA, or regulations issued thereunder. All such filings, as amended,
were complete and accurate in all material respects as of the dates of such
filings, and there were no misstatements or omissions in any such filing which
would be material to the financial condition of WesterFed on a consolidated
basis. Notwithstanding the foregoing, no representation is made with respect to
filings by a third party insurance company.
SECTION 2.19 COMPLIANCE WITH ENVIRONMENTAL LAWS.
(a) Except as set forth in Section 2.19 of the WesterFed
Disclosure Schedule: (i) to the best knowledge of WesterFed, the operations of
WesterFed and each of the WesterFed Subsidiaries comply in all material respects
with all applicable past and present Environmental Laws; (ii) to the best
knowledge of WesterFed, none of the operations of WesterFed or any WesterFed
Subsidiary, no assets presently or formerly owned or leased by WesterFed or any
WesterFed Subsidiary and no Mortgaged Premises or a Participating Facility are
subject to any judicial or administrative proceedings alleging the violation of
any past or present Environmental Law, nor are they the subject of any claims
alleging damages to health or property, pursuant to which WesterFed, any
WesterFed Subsidiary or any owner of a Mortgaged Premises or a Participating
Facility would be liable in law or equity; (iii) none of the operations of
WesterFed or any WesterFed Subsidiary, no assets presently owned or, to the best
knowledge of WesterFed, formerly owned by WesterFed or any WesterFed Subsidiary,
and, to the best knowledge of WesterFed, no Mortgaged Premises or Participating
Facility, is the subject of any federal, state or local investigation evaluating
whether any remedial action is needed to respond to a release or threatened
release of any Hazardous Substance, or any other substance into the environment,
nor has WesterFed or any WesterFed Subsidiary, or, to the best knowledge of
WesterFed, any owner of a Mortgaged Premises or a Participating Facility, been
directed to conduct such investigation,
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formally or informally, by any governmental agency, nor has WesterFed or any
WesterFed Subsidiary, or, to the best knowledge of WesterFed, any owner of a
Mortgaged Premises or a Participating Facility, agreed with any governmental
agency or private person to conduct any such investigation; and (iv) neither
WesterFed or any WesterFed Subsidiary, nor, to the best knowledge of WesterFed,
any owner of a Mortgaged Premises or a Participating Facility has filed any
notice under any Environmental Law indicating past or present treatment, storage
or disposal of a hazardous or toxic waste or reporting a spill or release of a
Hazardous Substance, or any other substance into the environment.
(b) With respect to real property presently or formerly owned
(including REO) or currently leased by WesterFed or any WesterFed Subsidiary
(the "WesterFed Premises"), to the best knowledge of WesterFed: (i) no part of
the WesterFed Premises has been used for the generation, manufacture, unlawful
handling, unlawful storage, or unlawful disposal of Hazardous Substances; (ii)
except as set forth in Section 2.19 of the WesterFed Disclosure Schedule, the
WesterFed Premises do not contain any underground storage tank; and (iii) the
WesterFed Premises do not contain and are not contaminated by any quantity of a
Hazardous Substance from any source. With respect to any underground storage
tank listed in Section 2.19 of the WesterFed Disclosure Schedule as an exception
to the foregoing, to the best knowledge of WesterFed, such underground storage
tank located on a WesterFed Premises is being maintained in compliance with the
Environmental Laws, and has not been the source of any release of a Hazardous
Substance into the environment, unless otherwise set forth in Section 2.19 of
the WesterFed Disclosure Schedule.
(c) For purposes of this Section 2.19, "Mortgaged Premises"
shall mean each (i) real property interest (including any fee or leasehold
interest) which is encumbered or affected by any mortgage, deed of trust, deed
to secure debt or other similar document or instrument granting to WesterFed or
any WesterFed Subsidiary a lien on or security interest in such real property
interest, and (ii) any other real property interest upon which is situated
assets or other property affected or encumbered by any document or instrument
granting to WesterFed or any WesterFed Subsidiary a lien thereon or security
interest therein. For purposes of this Section , "Participating Facility" means
any property in which WesterFed or any WesterFed Subsidiary participates in the
management of such property and, where the context requires, includes the owner
or operator of such property.
SECTION 2.20 SUBMISSION OF DOCUMENTS. Section 2.20 of the WesterFed
Disclosure Schedule contains, and shall be supplemented by WesterFed, as
required by Section 5.10 hereof, so as to contain at the Closing Date, copies of
each of the following documents, certified by an officer of WesterFed to be true
and correct copies of such documents on the dates of such certificates.
(a) The Certificate of Incorporation, Charters and Bylaws and
specimen certificates of each type of security issued by WesterFed and each
WesterFed Subsidiary.
(b) All judgments, orders, injunctions, court decrees or
settlement agreements arising out of or relating to the labor and employment
practices or decisions of WesterFed or any
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WesterFed Subsidiary which, by their terms, continue to bind or affect WesterFed
or any WesterFed Subsidiary.
(c) All orders, decrees, memorandums, agreements or
understandings with regulatory agencies binding upon or affecting the current
operations of WesterFed or any WesterFed Subsidiary or any of their directors or
officers in their capacities as such.
SECTION 2.21 DEFAULTS. There has not been any default in any material
obligation to be performed by WesterFed or any WesterFed Subsidiary under any
material contract or commitment, and neither WesterFed nor any WesterFed
Subsidiary has waived, and will not waive prior to the Effective Time, any
material right under any material contract or commitment. To the best knowledge
of WesterFed, no other party to any material contract or commitment is in
default in any material obligation to be performed by such party.
SECTION 2.22 OPERATIONS SINCE JUNE 30, 1996. Between June 30, 1996 and
the date of this Agreement, except as set forth in Section 2.22 of the WesterFed
Disclosure Schedule, there has not been:
(a) any payment of dividends by WesterFed or any other
distribution to its stockholders generally, other than the payment on August 20,
1996, of a dividend in the aggregate amount of $0.123 per share;
(b) any creation or assumption of indebtedness (including the
extension or renewal of any existing indebtedness, or the increase thereof) by
WesterFed or any WesterFed Subsidiary for borrowed money, or otherwise, other
than in the ordinary course of business, none of which (except those which are
being disputed in good faith) is in default;
(c) any change in WesterFed's independent auditors, historic
methods of accounting (other than as required by GAAP or regulatory accounting
principles), or in its system for maintaining its equipment and real estate; or
(d) any event or condition of any character (other than
changes in legal, economic or other conditions which are not specially or
uniquely applicable to WesterFed or any WesterFed Subsidiary) materially
adversely affecting the business, assets, deposit liabilities, operations or
financial condition of WesterFed on a consolidated basis.
SECTION 2.23 CORPORATE RECORDS. The corporate record books, transfer
books and stock ledgers of WesterFed and each WesterFed Subsidiary are complete
and accurate in all material respects and reflect all meetings, consents and
other material actions of the organizers, incorporators, stockholders, Boards of
Directors and committees of the Boards of Directors of WesterFed and each such
WesterFed Subsidiary, and all transactions in their respective capital stocks,
since their respective inceptions.
SECTION 2.24 UNDISCLOSED LIABILITIES. All of the obligations or
liabilities (whether accrued, absolute, contingent, unliquidated or otherwise,
whether due or to become due, and regardless of when asserted) arising out of
transactions or events heretofore entered into, or any action or inaction,
including Taxes with respect to or based upon transactions or events
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heretofore occurring, that are required to be reflected, disclosed or reserved
against in audited consolidated financial statements in accordance with GAAP
("Liabilities") have, in the case of WesterFed and the WesterFed Subsidiaries,
been so reflected, disclosed or reserved against in the audited consolidated
financial statements of WesterFed as of June 30, 1996 or in the notes thereto,
and WesterFed and the WesterFed Subsidiaries have no other Liabilities except
(a) Liabilities incurred since June 30, 1996 in the ordinary course of business,
or (b) as disclosed in Section 2.24 of the WesterFed Disclosure Schedule.
SECTION 2.25 ASSETS.
(a) WesterFed and the WesterFed Subsidiaries have good, and
marketable title to their real properties, including leaseholds, and their other
assets and properties, all as reflected as owned or held by WesterFed in the
WesterFed Financial Statements dated as of June 30, 1996, and those acquired
since such date, except for (i) assets and properties disposed of since such
date in the ordinary course of business, and (ii) liens that, in the aggregate,
except as set forth in Section 2.25 of the WesterFed Disclosure Schedule, are
not material to the assets of WesterFed on a consolidated basis. All buildings,
structures, fixtures and appurtenances comprising part of the real properties of
WesterFed and the WesterFed Subsidiaries (whether owned or leased) are in good
operating condition and have been well maintained, reasonable wear and tear
excepted. Title to all real property owned by WesterFed and the WesterFed
Subsidiaries is held in fee simple, except as otherwise noted in the WesterFed
Financial Statements dated as of June 30, 1996 or as set forth in Section 2.25
of the WesterFed Disclosure Schedule. WesterFed and the WesterFed Subsidiaries
have title or other rights to its assets sufficient in all material respects for
the conduct of their respective businesses as presently conducted, and except as
set forth in the WesterFed Financial Statements dated as of June 30, 1996, or in
Section 2.25 of the WesterFed Disclosure Schedule, free, clear and discharged of
and from any and all liens, charges, encumbrances, security interests and/or
equities which are material to WesterFed or any WesterFed Subsidiary.
(b) All leases pursuant to which WesterFed or any WesterFed
Subsidiary, as lessee, leases real or personal property which are material to
the business of WesterFed on a consolidated basis are, to the best knowledge of
WesterFed, valid, effective, and enforceable against the lessor in accordance
with their respective terms. There is not under any of such leases any existing
default, or any event which, with notice or lapse of time or both, would
constitute a default, with respect to WesterFed or any WesterFed Subsidiary, or
to the best knowledge of WesterFed, the other party.
SECTION 2.26 INDEMNIFICATION. To the best knowledge of WesterFed,
except as set forth in Section 2.26 of the WesterFed Disclosure Schedule, no
action or failure to take action by any director, officer, employee or agent of
WesterFed or any WesterFed Subsidiary has occurred which would give rise to a
claim by any such person for indemnification from WesterFed or any WesterFed
Subsidiary under the corporate indemnification provisions of the charter,
bylaws, or Corporate Law applicable to such entity on the date of this
Agreement.
SECTION 2.27 INSIDER INTERESTS. All outstanding loans and other
contractual arrangements (including deposit relationships) between WesterFed or
any WesterFed Subsidiary
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and any of its officers, directors or employees conform to applicable rules and
regulations and requirements of all applicable regulatory agencies which were in
effect when such loans and other contractual arrangements were entered into.
Except as set forth in Section 2.27 of the WesterFed Disclosure Schedule, no
officer, director or employee of WesterFed or any WesterFed Subsidiary has any
material interest in any property, real or personal, tangible or intangible,
used in or pertaining to the business of WesterFed or any WesterFed Subsidiary.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF SECURITY
Security represents and warrants to WesterFed that:
SECTION 3.01 ORGANIZATION. Security is a corporation duly organized,
validly existing and in good standing under the laws of the State of Montana and
has all requisite power and authority, corporate and otherwise, to own, operate
and lease its assets, properties and business and to carry on its business
substantially as it has been and is now being conducted. Security is duly
qualified to do business and is in good standing in each jurisdiction where the
character of the assets or properties owned or leased by it or the nature of the
business transacted by it requires that it be so qualified, except where the
failure to so qualify would not have a Material Adverse Effect on Security or
its ability to consummate the transactions contemplated herein. Security has all
requisite corporate power and authority to enter into this Agreement and,
subject to receipt of all requisite regulatory approvals and the expiration of
any applicable waiting periods, to consummate the transactions contemplated
hereby. Security is duly registered as a savings and loan holding company under
HOLA.
SECTION 3.02 AUTHORIZATION. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated hereby have
been duly approved and authorized by Security's Board of Directors, and no other
corporate action on the part of Security is required to be taken, except the
approval of this Agreement and the Merger by the stockholders of Security by the
requisite vote required by its Articles of Incorporation and the Corporate Law.
This Agreement has been duly executed and delivered by Security and constitutes
the valid and binding obligation of Security and is enforceable against Security
in accordance with its terms (except to the extent that enforceability thereof
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or similar laws or equitable principles or doctrines).
SECTION 3.03 CONFLICTS. Subject to the second sentence of this Section
3.03, the execution and delivery of this Agreement does not, and the
consummation of the transactions contemplated hereby will not, conflict with or
result in any violation, breach or termination of, or default or loss of a
material benefit under, or permit the acceleration of any obligation under, or
result in the creation of any material lien, charge or encumbrance on any
property or assets under, any provision of the Articles of Incorporation or
Bylaws of Security or similar documents of any Security Subsidiary, or any
mortgage, indenture, lease, agreement or other instrument, permit, concession,
grant, franchise, license, judgment, order, decree, statute, law, ordinance,
rule or regulation applicable to Security or any Security Subsidiary or their
respective properties, other
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than any such conflicts, violations or defaults which (i) will be cured or
waived prior to the Effective Time, (ii) are not material to the conduct of
business or operations of Security or any Security Subsidiary, or (iii) are
disclosed in Section 3.03 of that certain confidential writing delivered by
Security to WesterFed within two business days prior to the date hereof (the
"Security Disclosure Schedule"). No consent, approval, order or authorization
of, or registration, declaration or filing with, any federal or state
governmental authority is required by or with respect to Security in connection
with the execution and delivery of this Agreement or the consummation by
Security of the transactions contemplated hereby except for: (a) the filing of
all applicable regulatory applications by WesterFed, Security and/or their
respective Subsidiaries for approval of the transactions contemplated by this
Agreement, (b) the filing by WesterFed of the Registration Statement with the
SEC and various blue sky authorities, (c) the filing of the Certificate
[Articles] of Merger with respect to the Merger with the Secretaries of State of
the States of Delaware and Montana, (d) the filing of Articles of Combination
with the OTS with respect to the Bank Merger, (e) any filings, approvals or
no-action letters with or from state securities authorities, and (f) any
anti-trust filings, consents, waivers or approvals.
SECTION 3.04 ANTI-TAKEOVER PROVISIONS INAPPLICABLE. No "business
combination," "moratorium," "control share" or other state anti-takeover statute
or regulation, (i) prohibits or restricts Security's ability to perform its
obligations under this Agreement, or its ability to consummate the transactions
contemplated hereby, (ii) would have the effect of invalidating or voiding this
Agreement or any provision hereof, or (iii) would subject WesterFed to any
material impediment or condition in connection with the exercise of any of its
rights under this Agreement.
SECTION 3.05 CAPITALIZATION AND STOCKHOLDERS.
(a) The authorized capital stock of Security consists of (i)
10,000,000 shares of Security Common Stock, $1.00 par value, of which, as of the
date of this Agreement, 1,466,682 shares were issued and outstanding and no
shares were held as treasury, and (ii) 5,000,000 shares of preferred stock,
$1.00 par value, of which none are issued and outstanding. All of the issued and
outstanding shares of Security Common Stock have been duly and validly
authorized and issued, and are fully paid and non-assessable. None of the
outstanding shares of Security Common Stock has been issued in violation of any
preemptive rights of current or past stockholders or are subject to any
preemptive rights of the current or past stockholders of Security. All of the
issued and outstanding shares of Security Common Stock will be entitled to vote
to approve this Agreement and the Merger.
(b) As of the date of this Agreement, Security has 146,000
shares of Security Common Stock reserved for issuance under Security's 1993
Stock Option and Stock Appreciation Rights Plan (the "Security Stock Option
Plan") for the benefit of employees and directors of Security and Security Bank,
pursuant to which options covering 105,700 shares of Security Common Stock are
outstanding (the "Security Stock Options") with an average exercise price of
$14.00 per share. Except as set forth in this Section , there are no shares of
capital stock or other equity securities of Security outstanding and no
outstanding options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into or exchangeable for, shares of the capital stock of Security,
or contracts,
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commitments, understandings, or arrangements by which Security is or may be
bound to issue additional shares of its capital stock or options, warrants, or
rights to purchase or acquire any additional shares of its capital stock.
SECTION 3.06 SECURITY FINANCIAL STATEMENTS; MATERIAL CHANGES. Security
has heretofore delivered to WesterFed its audited, consolidated financial
statements for fiscal years ended June 30, 1996, June 30, 1995, and June 30,
1994 (together the "Security Financial Statements"). The Security Financial
Statements (a) are true and correct in all material respects, (b) have been
prepared in accordance with GAAP applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto), and (c)
fairly present the consolidated financial position of Security as of the dates
thereof and the consolidated results of its operations, stockholders' equity,
cash flows and changes in financial position for the periods then ended. Since
June 30, 1996, Security and the Security Subsidiaries have not undergone or
suffered any changes in their respective condition (financial or otherwise),
properties, business or operations which have been, in any case or in the
aggregate, materially adverse to Security on a consolidated basis except as
disclosed in Section 3.06 of the Security Disclosure Schedule. No facts or
circumstances have been discovered from which it reasonably appears that there
is a significant risk and reasonable probability that Security will suffer or
experience a Material Adverse Effect.
SECTION 3.07 SECURITY SUBSIDIARIES.
(a) All of the Security Subsidiaries as of the date of this
Agreement are listed in Section 3.07 of the Security Disclosure Schedule.
Security owns directly or indirectly all of the issued and outstanding shares of
capital stock of the Security Subsidiaries. Section 3.07 of the Security
Disclosure Schedule sets forth the number of shares of authorized and
outstanding capital stock of the Security Subsidiaries. Except as set forth in
Section 3.07 of the Security Disclosure Schedule, neither Security nor the
Security Subsidiaries own directly or indirectly any debt or equity securities,
or other proprietary interest in any other corporation, joint venture,
partnership, entity, association or other business. No capital stock of any of
the Security Subsidiaries is or may become required to be issued (other than to
Security) by reason of any options, warrants, scrip, rights to subscribe to,
calls, or commitments of any character whatsoever relating to, or securities or
rights convertible into or exchangeable for, shares of the capital stock of any
Security Subsidiary. There are no contracts, commitments, understandings or
arrangements relating to the rights of Security to vote or to dispose of shares
of the capital stock of any Security Subsidiary. All of the shares of capital
stock of each Security Subsidiary held by Security or any Security Subsidiary
are fully paid and non-assessable and are owned free and clear of any claim,
lien or encumbrance, except as disclosed in Section 3.07 of the Security
Disclosure Schedule.
(b) Each Security Subsidiary is either a federally-chartered
stock savings bank or a corporation and is duly organized, validly existing and
in good standing under the laws of the jurisdiction in which it is incorporated
or organized, and is duly qualified to do business and in good standing in each
jurisdiction where the character of the assets or properties owned or leased by
it or the nature of the business transacted by it requires it to be so
qualified, except where the failure to so qualify, either individually or in the
aggregate, would not have a Material
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Adverse Effect on Security or its ability to consummate the transactions
contemplated herein. Each Security Subsidiary has the corporate power and
authority necessary for it to own, operate or lease its assets, properties and
business and to carry on its business substantially as it has been and is now
being conducted.
(c) Security Bank, FSB ("Security Bank") is a member in good
standing of the Federal Home Loan Bank System. All eligible deposit accounts
issued by Security Bank are insured by the FDIC through the SAIF to the full
extent permitted under applicable law. Security Bank is, and at all times since
June 1, 1990 has been, a "domestic building and loan association" as defined in
Section 7701(a)(19) of the Code and a "qualified thrift lender" as defined in
Section 10(m) of HOLA. The liquidation account established by Security Bank in
connection with its conversion from mutual to stock form has been maintained
since its establishment in accordance with applicable laws and the records with
respect to said account are complete and accurate in all material respects.
SECTION 3.08 SECURITY FILINGS. Security has previously made available,
or will make available prior to the Effective Time, to WesterFed true, correct,
and complete copies of the (i) proxy statements relating to all meetings of
stockholders (whether special or annual) of Security during calendar years 1994,
1995 and 1996, and (ii) all other reports, as amended, or filings, as amended,
required to be filed under the Securities Exchange Act by Security with the SEC
since January 1, 1994, including reports on Forms 10-K, 10-Q and 8-K.
SECTION 3.09 SECURITY REPORTS. Since January 1, 1994, each of Security
and the Security Subsidiaries has filed, and will continue to file, all reports
and statements, together with any amendment required to be made with respect
thereto, that it has, or will be, required to file with the SEC, the OTS, the
FDIC, and the NASD. As of their respective dates (and without giving effect to
any amendments or modifications filed after the date of this Agreement with
respect to reports and documents filed before the date of this Agreement), each
of such reports and documents, including the financial statements, exhibits, and
schedules thereto, complied in all material respects with all of the statutes,
rules and regulations enforced or promulgated by the authority with which they
were filed and did not contain any untrue statement of a material fact or omit
to state any material fact necessary in order to make the statements made
therein, in light of the circumstances under which they were made, not
misleading. Except for normal examinations conducted by the Internal Revenue
Service, state and local taxing authorities, the OTS or the FDIC in the regular
course of the business of Security or the Security Subsidiaries, no federal,
state or local governmental agency, commission or other entity has initiated any
proceeding or, to the best knowledge of Security, investigation into the
business or operations of Security or the Security Subsidiaries within the past
three (3) years except as set forth in Section 3.09 of the Security Disclosure
Schedule. There is no unresolved violation, criticism or exception by the SEC,
OTS, FDIC or other agency, commission or entity with respect to any report or
statement referred to herein that is material to Security or any Security
Subsidiary.
SECTION 3.10 COMPLIANCE WITH LAWS.
(a) Except as disclosed in Section 3.10 of the Security
Disclosure Schedule, the businesses of Security and the Security Subsidiaries
are being conducted, in all material
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respects, in compliance with all laws, ordinances or regulations of governmental
authorities, including laws affecting financial institutions (including those
pertaining to the Bank Secrecy Act, the investment of funds, the lending of
money, the collection of interest and the extension of credit), federal and
state securities laws, laws and regulations relating to financial statements and
reports, truth-in-lending, truth-in-savings, usury, fair credit reporting,
consumer protection, occupational safety, fair employment practices, fair labor
standards and laws and regulations relating to employee benefits, and any
statutes or ordinances relating to the properties occupied or used by Security
or any Security Subsidiary, except for possible violations which, singly or in
the aggregate, do not and, insofar as reasonably can be foreseen in the future,
will not have a Material Adverse Effect on Security.
(b) Except as disclosed in Section 3.10 of the Security
Disclosure Schedule, no investigation or review by any governmental entity with
respect to Security or any Security Subsidiary is pending or, to the best
knowledge of Security, threatened, nor has any governmental entity indicated to
Security an intention to conduct the same, other than normal thrift regulatory
examinations and those the outcome of which will not have a Material Adverse
Effect on Security.
(c) Security and each of the Security Subsidiaries, where
applicable, are in substantial compliance with the applicable provisions of the
Community Reinvestment Act of 1977 and the regulations promulgated thereunder.
As of the date of this Agreement, Security has not been advised of the existence
of any fact or circumstance or set of facts or circumstances which, if true,
would cause Security or any of the Security Subsidiaries to fail to be in
substantial compliance with such provisions. Security Bank does not have a
rating from an applicable regulatory authority which is less than
"satisfactory."
SECTION 3.11 DISCLOSURE. None of the information supplied by Security
for inclusion in the Proxy Statement or in the Registration Statement, will, in
the case of the Proxy Statement or any amendments thereof, at the time of the
Stockholders' Meetings or, in the case of the Registration Statement, at the
time it becomes effective and at the Effective Time, contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading.
SECTION 3.12 LITIGATION. Except as disclosed in Section 3.12 of the
Security Disclosure Schedule, there is no suit, action, investigation or
proceeding, legal, quasi-judicial, administrative or otherwise, pending or, to
the best knowledge of Security threatened, against or affecting Security or any
Security Subsidiary, or any of their respective officers, directors, employees
or agents, in their capacities as such, which is seeking equitable relief or
damages against Security, any Security Subsidiary, or any of their respective
officers, directors, employees or agents, in their capacities as such, in excess
of $25,000, or which would materially affect the ability of Security to
consummate the transactions contemplated herein or which is seeking to enjoin
consummation of the transactions provided for herein or to obtain other relief
in connection with this Agreement or the transactions contemplated hereby, nor
is there any judgment, decree, injunction, rule or order of any court,
governmental department, commission, agency, instrumentality or arbitrator
outstanding against Security or any Security Subsidiary or any of
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their respective officers, directors, employees or agents, in their capacities
as such, having, or which, insofar as reasonably can be foreseen in the future,
would have any such effect.
SECTION 3.13 LICENSES. Security and the Security Subsidiaries hold all
licenses, certificates, permits, franchises and all patents, trademarks, service
marks, trade names, copyrights or right thereto, and required authorizations,
approvals, consents, licenses, clearances and orders or registrations with all
appropriate federal, state or other authorities, that are material to the
conduct of their respective businesses as now conducted and as presently
proposed to be conducted.
SECTION 3.14 TAXES.
(a) Except as disclosed in Section 3.14 of the Security
Disclosure Schedule, Security and the Security Subsidiaries have each timely
filed all Tax and information returns required to be filed and have paid (or
Security has paid on behalf of its Subsidiaries), or have accrued on their
respective books and set up an adequate reserve for the payment of, all Taxes
reflected on such returns as required to be paid in respect of the periods
covered by such returns and have accrued on their respective books and set up an
adequate reserve for the payment of all income and other Taxes anticipated to be
payable in respect of periods through the end of the calendar month next
preceding the date hereof. Neither Security nor any Security Subsidiary is
delinquent in the payment of any Tax, assessment or governmental charge. No
deficiencies for any Taxes have been proposed, asserted or assessed against
Security or any Security Subsidiary that have not been resolved or settled and
no requests for waivers of the time to assess any such Tax are pending or have
been agreed to. The income tax returns of Security and Security Subsidiaries
have not been audited by the Internal Revenue Service, state, municipal or other
taxing authority for any of the last three (3) years. Neither Security nor any
Security Subsidiary is a party to any action or proceeding by any governmental
authority for the assessment or the collection of Taxes. Deferred Taxes of
Security and the Security Subsidiaries have been accounted for in accordance
with GAAP.
(b) Security has not filed any consolidated federal income tax
return with an "affiliated group" (within the meaning of Section 1504 of the
Code) where Security was not the common parent of the group. Neither Security
nor any Security Subsidiary is, or has been, a party to any Tax allocation
agreement or arrangement pursuant to which it has any contingent or outstanding
liability to anyone other than Security or any Security Subsidiary.
(c) Security and the Security Subsidiaries have each withheld
amounts from its employees, stockholders, or holders of public deposit accounts
in compliance with the Tax withholding provisions of applicable federal, state
and local laws, have filed all federal, state and local returns and reports for
all periods for which such returns or reports would be due with respect to
income tax withholding, social security, unemployment taxes, income and other
Taxes and all payments or deposits with respect to such Taxes have been timely
made and except as set forth in Section 3.14 of the Security Disclosure
Schedule, have notified all employees, stockholders and holders of public
deposit accounts of their obligations to file all forms, statements and reports
with it in accordance with applicable federal, state and local Tax laws and
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have taken reasonable steps to insure that such employees, stockholders and
holders of public deposit accounts have filed all such forms statements and
reports with it.
SECTION 3.15 INSURANCE. Security and the Security Subsidiaries maintain
insurance with insurers which in the best judgment of management of Security are
sound and reputable, on their respective assets, and upon their respective
businesses and operations, against loss or damage, risks, hazards and
liabilities as in their judgment they deem appropriate. Security and the
Security Subsidiaries maintain in effect all insurance required to be carried by
law or by any agreement by which they are bound. All material claims under all
policies of insurance maintained by Security and the Security Subsidiaries have
been filed in due and timely fashion.
SECTION 3.16 LOANS; INVESTMENTS.
(a) Except as otherwise disclosed in Section 3.16 of the
Security Disclosure Schedule, each material loan reflected as an asset on the
Security Financial Statements dated as of June 30, 1996, is evidenced by
appropriate and sufficient documentation and constitutes, to the best knowledge
of Security, the legal, valid and binding obligation of the obligor named in
such documentation, enforceable in accordance with its terms except to the
extent that the enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws or equitable principles or doctrines.
Except as set forth in Section 3.16 of the Security Disclosure Schedule, all
such loans are, and at the Effective Time will be, free and clear of any
security interest, lien, encumbrance or other charge. Except as set forth in
Section 3.16 of the Security Disclosure Schedule, there is no loan or other
asset of Security or of any Security Subsidiary in excess of $250,000 that has
been classified by examiners, management, the Board of Directors, or others as
"Other Loans Especially Mentioned," "Substandard," "Doubtful" or "Loss" as of
August 31, 1996. Set forth in Section 3.16 of the Security Disclosure Schedule
is a complete list of the REO and in-substance foreclosures of Security and the
Security Subsidiaries as of August 31, 1996.
(b) All guarantees of indebtedness owed to Security or any
Security Subsidiary, including those of the Federal Housing Administration, the
Small Business Administration, and other state and federal agencies, are, to the
best knowledge of Security, valid and enforceable, except to the extent
enforceability thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws or equitable principles or doctrines
and except as would not have a Material Adverse Effect on Security.
(c) Section 3.16 of the Security Disclosure Schedule sets
forth an accurate and complete list of all Derivative Securities to which
Security or any Security Subsidiary is a party or by which any of their
properties or assets may be bound, or that are owned by Security or any Security
Subsidiary. Neither Security nor any Security Subsidiary has purchased any
Derivative Security for, or invested in any Derivative Security any assets of,
any account or person for which it acts as a trustee, fiduciary, or investment
advisor. All Derivative Securities to which Security or any Security Subsidiary
is a party or by which any of their properties or assets may be bound were
entered into in the ordinary course of business and, to the best knowledge of
Security, in accordance with then-customary practice and applicable rules,
regulations and policies of thrift regulatory authorities and with
counterparties believed to be financially responsible at the time
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and are legal, valid and binding obligations and are in full force and effect.
Security and the Security Subsidiaries have duly performed in all material
respects all of their respective obligations thereunder to the extent that such
obligations to perform have accrued, and to the best knowledge of Security,
there are no material breaches, violations or defaults or allegation or
assertions of such by any party thereunder. None of the transactions
contemplated by this Agreement would permit a counterparty under any Derivative
Security or any party to any mortgage-backed security financing arrangement to
accelerate, discontinue, terminate or otherwise modify any such Derivative
Security or arrangement or would require Security or any Security Subsidiary to
recognize any gain or loss with respect to such Derivative Security or
arrangement.
(d) Except as set forth in Section 3.16 of the Security
Disclosure Schedule and except for pledges to secure public and trust deposits,
none of the investments reflected in the Security Financial Statements dated as
of June 30, 1996 under the heading "Investment Securities, " and none of the
investments made by Security and the Security Subsidiaries since June 30, 1996,
is subject to any restriction, whether contractual or statutory, which
materially impairs the ability of Security or any Security Subsidiary to freely
dispose of such investment at any time. With respect to all material repurchase
agreements to which Security or any Security Subsidiary is a party, Security or
such Subsidiary has a valid, perfected first lien or security interest in the
government securities or other collateral securing each such repurchase
agreement, and the value of the collateral securing each such repurchase
agreement equals or exceeds the amount of the debt secured by such collateral
under such agreement. Except as set forth in Section 3.16 of the Security
Disclosure Schedule, neither Security nor any Security Subsidiary has sold or
otherwise disposed of any assets in a transaction in which the acquirer of such
assets or other person has a right of recourse (other than with respect to
warranty of title) against Security or any Security Subsidiary or the right,
either conditionally or absolutely, to require Security or any Security
Subsidiary to repurchase or otherwise reacquire any such assets. Set forth in
Section 3.16 of the Security Disclosure Schedule is a complete and accurate list
of each investment and debt security, mortgage-backed and related securities,
marketable equity securities and securities purchased under agreements to resell
owned by Security or any Security Subsidiary, showing as of August 31, 1996, the
carrying values and estimated fair values of investment and debt securities, the
gross carrying value and estimated fair value of the mortgage-backed and related
securities and the estimated cost and estimated fair value of the marketable
equity securities.
(e) All United States Treasury securities, obligations of
other United States Government agencies and corporations, obligations of States
of the United States and their political subdivisions, and other investment
securities classified as "held to maturity" and "available for sale" held by
Security and the Security Subsidiaries, as reflected in the Security Financial
Statements dated as of June 30, 1996, were classified and accounted for in
accordance with F.A.S.B. 115 and the intentions of management.
SECTION 3.17 ALLOWANCE FOR POSSIBLE LOAN LOSSES. The allowance for
possible loan losses shown on the Security Financial Statements dated as of June
30, 1996 (and as shown on any financial statements to be delivered by Security
to WesterFed pursuant to Section 5.07 hereof), to the best knowledge of
Security, as of such date was (and will be as of such subsequent
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financial statement dates) adequate in all respects to provide for possible or
specific losses, net of recoveries relating to loans previously charged off, on
loans outstanding, and contained or will contain an additional amount of
unallocated reserves for unanticipated future losses at a level considered
adequate under the standards applied by applicable federal regulatory
authorities and based upon GAAP applicable to thrift institutions. To the best
knowledge of Security, the aggregate principal amount of loans contained (or to
be contained) in the loan portfolio of Security and the Security Subsidiaries as
of the date of this Agreement (and as of the dates of any financial statements
to be delivered by Security to WesterFed pursuant to Section 5.07 hereof) in
excess of such reserve was (and will be) fully collectible.
SECTION 3.18 SECURITY BENEFIT PLANS.
(a) Section 3.18 of the Security Disclosure Schedule contains
a list and a true and correct copy (or, a description with respect to any oral
employee benefit plan, practice, policy or arrangement), including all
amendments thereto, of each compensation, consulting, employment, termination or
collective bargaining, stock option, stock purchase, stock appreciation right,
life, health, accident or other insurance, bonus, deferred or incentive
compensation, severance or separation agreements or any other agreements
providing any payment or benefit resulting from a change in control, profit
sharing, retirement, or other employee benefit plan, practice, policy or
arrangement of any kind, oral or written, covering employees, former employees,
directors or former directors of Security or any Security Subsidiary or their
respective beneficiaries, including any employee benefit plans within the
meaning of Section 3(3) of ERISA, which Security or any Security Subsidiary
maintains, to which Security or any Security Subsidiary contributes, or under
which any employee, former employee, director or former director of Security or
any Security Subsidiary is covered or has benefit rights and pursuant to which
any liability of Security or any Security Subsidiary exists or is reasonably
likely to occur (the "Security Benefit Plans"). Except as set forth in Section
3.18 of the Security Disclosure Schedule, Security and the Security Subsidiaries
neither maintain nor have entered into any Security Benefit Plan or other
document, plan or agreement which contains any change in control provisions
which would cause an increase or acceleration of benefits or benefit
entitlements to employees or former employees of Security or any Security
Subsidiary or their respective beneficiaries, or other provisions which would
cause an increase in the liability of Security or any Security Subsidiary or to
WesterFed or any WesterFed Subsidiary as a result of the transactions
contemplated by this Agreement or any related action thereafter (a "Change in
Control Benefit"). The term "Security Benefit Plans" as used herein refers to
all plans contemplated under the preceding sentences of this Section 3.18,
provided that the term "Plan" or "Plans" is used in this Agreement for
convenience only and does not constitute an acknowledgment that a particular
arrangement is an employee benefit plan within the meaning of Section 3(3) of
ERISA. Except as disclosed in the Disclosure Schedule of Security, no Security
Benefit Plan is a multi-employer plan within the meaning of Section 3(37) of
ERISA.
(b) Each of the Security Benefit Plans that is intended to be
a pension, profit sharing, stock bonus, thrift, savings plan that is qualified
under Section 401(a) of the Code ("Security Qualified Plans") has been
determined by the Internal Revenue Service to qualify under Section 401(a) of
the Code, or an application for determination of such qualification has been
timely made to the Internal Revenue Service prior to the end of the applicable
remedial
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amendment period under Section 401(b) of the Code (a copy of each such
determination letter or pending application is included in Section 3.18 of the
Security Disclosure Schedule) and, to the best of Security's knowledge, there
exist no circumstances likely to materially adversely affect the qualified
status of any such Security Qualified Plan. All such Security Qualified Plans
established or maintained by Security or any of the Security Subsidiaries or to
which Security or any of the Security Subsidiaries contribute are in compliance
in all material respects with all applicable requirements of ERISA, and are in
compliance in all material respects with all applicable requirements (including
qualification and non-discrimination requirements in effect as of the Effective
Time) of the Code for obtaining the Tax benefits the Code thereupon permits with
respect to such Security Qualified Plans. All accrued contributions and other
payments required to be made by Security or any Security Subsidiary to any
Security Benefit Plan through June 30, 1996, have been made or reserves adequate
for such purposes as of June 30, 1996, have been set aside therefor and will be
reflected in the Security Financial Statements dated as of June 30, 1996.
Neither Security nor any Security Subsidiary is in material default in
performing any of its respective contractual obligations under any of the
Security Benefit Plans or any related trust agreement or insurance contract, and
there are no material outstanding liabilities of any such Plan other than
liabilities for benefits to be paid to participants in such Plan and their
beneficiaries in accordance with the terms of such Plan.
(c) Under each Security Qualified Plan that is a defined
benefit plan, as of the last day of the most recent plan year, the actuarially
determined present value of all "benefit liabilities", within the meaning of
Section 4001(a)(16) of ERISA (as determined on the basis of the actuarial
assumptions contained in the Plan's most recent actuarial valuation) did not
exceed the then current value of the assets of such Plan, and there has been no
material change in the financial condition of such Plan since the last day of
the most recent plan year.
(d) There is no pending or, to the best knowledge of Security,
threatened litigation or pending claim (other than benefit claims made in the
ordinary course) by or on behalf of or against any of the Security Benefit Plans
(or with respect to the administration of any such Plans) now or heretofore
maintained by Security or any Security Subsidiary which allege violations of
applicable state or federal law which are reasonably likely to result in a
liability on the part of Security or any Security Subsidiary or any such Plan.
(e) Security and the Security Subsidiaries and all other
persons having fiduciary or other responsibilities or duties with respect to any
Security Benefit Plan are and have since the inception of each such Plan been in
substantial compliance with, and each such Plan is and has been operated in
substantial accordance with, its provisions and in substantial compliance with
the applicable laws, rules and regulations governing such Plan, including the
rules and regulations promulgated by the Department of Labor, the PBGC and the
Internal Revenue Service under ERISA, the Code or any other applicable law.
Notwithstanding the foregoing, no representation is made with respect to
compliance by a third party insurance company. No "reportable event" (as defined
in Section 4043(b) of ERISA) has occurred with respect to any Security Benefit
Plan. No Security Benefit Plan has engaged in or been a party to a "prohibited
transaction" (as defined in Section 406 of ERISA or Section 4975(c) of the
Code). All Security Benefit Plans that are group health plans have been operated
in compliance with the
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group health plan continuation requirements of Section 4980B of the Code and
Section 601 of ERISA.
(f) Neither Security nor any Security Subsidiary has made any
payments, or is or has been a party to any agreement or any Security Benefit
Plan, that under any circumstances could obligate it to make payments that are
or will not be deductible because of Sections 162(m) or 280G of the Code.
(g) Section 3.18 of the Security Disclosure Schedule describes
any obligation that Security or any Security Subsidiary has to provide health or
welfare benefits to retirees or other former employees, directors or their
dependents (other than rights under Section 4980B of the Code or Section 601 of
ERISA), including information as to the number of retirees, other former
employees or directors and dependents entitled to such coverage and their ages.
(h) Section 3.18 of the Security Disclosure Schedule lists:
(i) each officer and director of Security and any Security Subsidiary who is
eligible to receive a Change in Control Benefit, showing the amount of each such
Change in Control Benefit, estimated compensation for 1996 based upon
compensation received to the date of this Agreement, the individual's
participation in any bonus or other employee benefit plan, and such individual's
compensation from Security or any Security Subsidiary for each of the calendar
years 1991 through 1995 as reported by Security or a Security Subsidiary on Form
W-2 or Form 1099; (ii) each other employee of Security or the Security
Subsidiaries who may be eligible for a Change in Control Benefit, showing the
number of years of service of each such employee together with his or her
estimated compensation for 1996; and (iii) a listing of each Security Stock
Option, showing the holder thereof, the number of shares, the exercise price per
share, the vesting dates thereof, and a copy of the option agreements relating
thereto.
(i) Security and the Security Subsidiaries have filed or
caused to be filed, and will continue to file or cause to be filed, in a timely
manner all filings pertaining to each Security Benefit Plan with the Internal
Revenue Service, the PBGC, and the Department of Labor, as prescribed by the
Code or ERISA, or regulations issued thereunder. All such filings, as amended,
were complete and accurate in all material respects as of the dates of such
filings, and there were no misstatements or omissions in any such filing which
would be material to the financial condition of Security on a consolidated
basis. Notwithstanding the foregoing, no representation is made with respect to
filings by a third party insurance company.
SECTION 3.19 COMPLIANCE WITH ENVIRONMENTAL LAWS.
(a) Except as set forth in Section 3.19 of the Security
Disclosure Schedule: (i) to the best knowledge of Security, the operations of
Security and each of the Security Subsidiaries comply in all material respects
with all applicable past and present Environmental Laws; (ii) to the best
knowledge of Security, none of the operations of Security or any Security
Subsidiary, no assets presently or formerly owned or leased by Security or any
Security Subsidiary and no Mortgaged Premises or Participating Facility are
subject to any judicial or administrative proceedings alleging the violation of
any past or present Environmental Law, nor are they the subject of any claims
alleging damages to health or property, pursuant to which
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Security, any Security Subsidiary or any owner of a Mortgaged Premises or a
Participating Facility would be liable in law or equity; (iii) none of the
operations of Security or any Security Subsidiary, no assets presently owned or,
to the best knowledge of Security, formerly owned by Security or any Security
Subsidiary, and to the best knowledge of Security, no Mortgaged Premises or a
Participating Facility, is the subject of any federal, state or local
investigation evaluating whether any remedial action is needed to respond to a
release or threatened release of any Hazardous Substance, or any other substance
into the environment, nor has Security or any Security Subsidiary, or, to the
best knowledge of Security, any owner of a Mortgaged Premises or a Participating
Facility, been directed to conduct such investigation, formally or informally,
by any governmental agency, nor has Security or any Security Subsidiary, or, to
the best knowledge of Security, any owner of a Mortgaged Premises or a
Participating Facility, agreed with any governmental agency or private person to
conduct any such investigation; and (iv) neither Security nor any Security
Subsidiary, nor, to the best knowledge of Security, any owner of a Mortgaged
Premises or a Participating Facility has filed any notice under any
Environmental Law indicating past or present treatment, storage of disposal of a
Hazardous Substance or reporting a spill or release of a Hazardous Substance, or
any other substance into the environment.
(b) With respect to real property presently or formerly owned
(including REO) or currently leased by Security or any Security Subsidiary (the
"Security Premises") to the best knowledge of Security: (i) no part of the
Security Premises has been used for the generation, manufacture, unlawful
handling, unlawful storage, or unlawful disposal of Hazardous Substances; (ii)
except as disclosed in Section 3.19 of the Security Disclosure Schedule, the
Security Premises do not contain any underground storage tank; and (iii) the
Security Premises do not contain and are not contaminated by any quantity of a
Hazardous Substance from any source. With respect to any underground storage
tank listed in Section 3.19 of the Security Disclosure Statement as an exception
to the foregoing, to the best knowledge of Security, such underground storage
tank located on a Security Premises is being maintained in compliance with the
Environmental Laws, and has not been the source of any release of a Hazardous
Substance into the environment, unless otherwise set forth in Section 3.19 of
the Security Disclosure Schedule.
(c) For purposes of this Section 3.19, "Mortgaged Premises"
shall mean each (i) real property interest (including any fee or leasehold
interest) which is encumbered or affected by any mortgage, deed of trust, deed
to secure debt or other similar document or instrument granting to Security or
any Security Subsidiary a lien on or security interest in such real property
interest and (ii) any other real property interest upon which is situated assets
or other property affected or encumbered by any document or instrument granting
to Security or any Security Subsidiary a lien thereon or security interest
therein. For purposes of this Section 3.19, "Participating Facility" means any
property in which Security or any Security Subsidiary participates in the
management of such property and, where the context requires, includes the owner
or operator of such property.
SECTION 3.20 CONTRACTS AND COMMITMENTS. Section 3.20 of the Security
Disclosure Schedule contains, and shall be supplemented by Security, as required
by Section 5.10 hereof, so as to contain at the Closing Date, copies of each of
the following documents, certified by an
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officer of Security to be true and correct copies of such documents on the dates
of such certificates:
(a) A list of each outstanding loan or commitment to extend
credit to any officer or director of Security or any Security Subsidiary, as
well as a listing of all deposits or deposit surrogates, including the amount,
type and interest being paid thereon, to which Security or any Security
Subsidiary is a party under which it may (contingently or otherwise) have any
liability involving any officer or director of Security or any Security
Subsidiary;
(b) A list of each outstanding letter of credit and each
commitment to issue a letter of credit in excess of $25,000 to which Security or
any Security Subsidiary is a party and/or under which it may (contingently or
otherwise) have any liability;
(c) A list of each contract or agreement (not otherwise
included in the Security Disclosure Schedule or specifically excluded therefrom
in accordance with the terms of this Agreement) involving goods, services or
occupancy and which (i) has a term of more than six months, (ii) cannot be
terminated on thirty days (or less) written notice without penalty, and (iii)
involves an annual expenditure by Security or any Security Subsidiary in excess
of $25,000;
(d) A list of each contract or commitment (other than Security
Permitted Liens) affecting ownership of, title to, use of, or any interest in,
real property which is currently owned by Security or any Security Subsidiary,
and a list of all real property owned, leased or licensed by Security or any
Security Subsidiary.
(e) A list of all fees, salaries, bonuses and other forms of
compensation, including country club memberships, automobiles available for
personal use, and credit cards available for personal use, provided by Security
or any Security Subsidiary to any employee, officer, or director or former
employee, officer or director of Security or any Security Subsidiary who earns
in excess of $35,000 annually.
(f) A list of each commitment made by Security or any Security
Subsidiary to or with any of its officers, directors or employees extending for
a period of more than six months from the date hereof or providing for earlier
termination only upon the payment of a penalty or equivalent thereto.
(g) The Articles of Incorporation, Charters and Bylaws and
specimen certificates of each type of security issued by Security and each
Security Subsidiary.
(h) A list of each other contract or commitment providing for
payment based in any manner upon outstanding loans or profits of Security or any
Security Subsidiary.
(i) A list of all powers of attorney granted by Security or
any Security Subsidiary which are currently in force.
(j) A list of all policies of insurance currently maintained
by Security or any Security Subsidiary and a list and description of all
unsettled or outstanding claims of Security or any Security Subsidiary which
have been, or to the best knowledge of Security, will be, filed with
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the companies providing insurance coverage for Security or any Security
Subsidiary (except for routine claims for health benefits).
(k) Each collective bargaining agreement to which Security or
any Security Subsidiary is a party and all affirmative action plans or programs
covering employees of Security or any Security Subsidiary, as well as all
employee handbooks, policy manuals, rules and standards of employment
promulgated by Security or any Security Subsidiary.
(l) Each lease or license with respect to real or personal
property, whether as lessor, lessee, licensor or licensee, with annual rental or
other payments due thereunder in excess of $10,000 to which Security or any
Security Subsidiary is a party, which does not expire within six months from the
date hereof and cannot be terminated upon thirty days (or less) written notice
without penalty.
(m) All employment, consulting and professional services
contracts to which Security or any Security Subsidiary is a party.
(n) All judgments, orders, injunctions, court decrees or
settlement agreements arising out of or relating to the labor and employment
practices or decisions of Security or any Security Subsidiary which, by their
terms, continue to bind or affect Security or any Security Subsidiary.
(o) All orders, decrees, memorandums, agreements or
understandings with regulatory agencies binding upon or affecting the current
operations of Security or any Security Subsidiary or any of their directors of
officers in their capacities as such.
(p) All trademarks, trade names, service marks, patents, or
copyrights, whether registered or the subject of an application for
registration, which are owned by Security or any Security Subsidiary or licensed
from a third party.
(q) All policies formally adopted by the Board of Directors of
Security or any Security Subsidiary as currently in effect with respect to
environmental matters and copies of all policies that have been in effect during
the last five (5) years regarding the performance of environmental
investigations of properties accepted as collateral for loans, including the
effective dates of all such policies.
(r) Each other agreement to which Security or any Security
Subsidiary is a party (which does not expire within six months from the date
hereof and cannot be terminated upon thirty days (or less) written notice
without penalty) which individually during its term could commit Security or any
Security Subsidiary to an expenditure (either individually or through a series
of installments) in excess of $25,000 or which creates a material right or
benefit to receive payments, goods or services, not referred to elsewhere in
this Section 3.20, including:
(i) each agreement of guaranty or
indemnification running to any person;
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(ii) each agreement containing any covenant
limiting the right of Security or any
Security Subsidiary to engage in any line of
business or to compete with any person;
(iii) each agreement with respect to any license,
permit and similar matter that is necessary
to the operations of Security or any
Security Subsidiary;
(iv) each agreement that requires the consent or
approval of any other party in order to
consummate the Merger or the Bank Merger;
(v) each agreement relating to the servicing of
loans and each mortgage forward commitment
and similar agreement pursuant to which
Security or any Security Subsidiary sells to
others mortgages which it originates;
(vi) each contract relating to the purchase or
sale of financial or other futures, or any
put or call option relating to cash,
securities or commodities and each
Derivative Security and each agreement or
arrangement described in Section 3.16(d)
hereof; and
(vii) each contract or agreement (with the
exception of the Federal National Mortgage
Association or Federal Home Loan Mortgage
Corporation Seller's Guide), including each
contract or agreement pursuant to which
Security or any Security Subsidiary has
sold, transferred, assigned or agreed to
service any loan, which provides for any
recourse obligation on the part of Security
or any Security Subsidiary; the name and
address of each person which might or could
have been entitled to recourse against
Security or any Security Subsidiary; and the
monetary amount of each actual or potential
recourse obligation under each such contract
or agreement.
SECTION 3.21 DEFAULTS. There has not been any default in any material
obligation to be performed by Security or any Security Subsidiary under any
material contract or commitment, and neither Security or any Security Subsidiary
has waived, and will not waive prior to the Effective Time, any material right
under any material contract or commitment. To the best knowledge of Security, no
other party to any material contract or commitment is in default in any material
obligation to be performed by such party.
SECTION 3.22 OPERATIONS SINCE JUNE 30, 1996. Between June 30, 1996 and
the date of this Agreement, except as set forth in Section 3.22 of the Security
Disclosure Schedule, there has not been:
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(a) any material increase in the compensation payable or to
become payable by Security or any Security Subsidiary to any executive officer
or director other than normal annual salary and bonus increases;
(b) any payment of dividends or other distributions by
Security to its stockholders or any redemption by Security of its capital stock;
(c) any mortgage, pledge or subjection to lien, charge or
encumbrance of any kind of or on any asset, tangible or intangible, of Security
or any Security Subsidiary, except the following (each of which, whether arising
before or after the date hereof, is herein referred to as a "Security Permitted
Lien"): (i) liens arising out of judgments or awards in respect of which
Security or any Security Subsidiary is in good faith prosecuting an appeal or
proceeding for review and in respect of which it has secured a subsisting stay
of execution pending such appeal of proceeding; (ii) liens for Taxes,
assessments, and other governmental charges or levies, the payment of which is
not past due, or as to which Security or any Security Subsidiary is diligently
contesting in good faith and by appropriate proceeding either the amount thereof
or the liability therefor or both; (iii) deposits, liens or pledges to secure
payments of worker's compensation, unemployment insurance, pensions, or other
social security obligations, or the performance of bids, tenders, leases,
contracts (other than contracts for the payment of money), public or statutory
obligations, surety, stay or appeal bonds, or similar obligations arising in the
ordinary course of business; (iv) zoning restrictions, easements, licenses and
other restrictions on the use of real property or any interest therein, or minor
irregularities in title thereto, which do not materially impair the use of such
property in the operation of the business of Security or any Security Subsidiary
or the merchantability or the value of such property or interest therein for the
purpose of such business; (v) purchase money mortgages or other purchase money
or vendor's liens or security interest (including finance leases), provided that
no such mortgage, lien or security interest shall extend to or cover any other
property of Security or any Security Subsidiary other than that so purchased;
and (vi) pledges and liens given to secure deposits and other liabilities of
Security or any Security Subsidiary arising in the ordinary course of its
banking business;
(d) any creation or assumption of indebtedness (including the
extension or renewal of any existing indebtedness, or the increase thereof) by
Security or any Security Subsidiary for borrowed money, or otherwise, other than
in the ordinary course of business, none of which (except those which are being
disputed in good faith) is in default;
(e) the establishment of any new, or increase in the formula
for contributions to or benefits under any existing, retirement, pension, profit
sharing, stock bonus, savings or thrift plan, or any similar plan, whether
funded or unfunded and whether qualified or unqualified (within the meaning of
the Code) by Security or any Security Subsidiary;
(f) any action by Security or any Security Subsidiary seeking
any cancellation of, or decrease in the insured limit under, or increase in the
deductible amount or the insured's retention (whether pursuant to coinsurance or
otherwise) of or under, any policy of insurance maintained directly or
indirectly by Security or any Security Subsidiary on any of their respective
assets or businesses, including fire and other hazard insurance on its assets,
automobile liability
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insurance, general public liability insurance, and directors' and officers'
liability insurance; and if an insurer takes any such action, Security shall
promptly notify WesterFed;
(g) any change in Security's independent auditors, historic
methods of accounting (other than as required by GAAP or regulatory accounting
principles), or in its system for maintaining its equipment and real estate;
(h) any purchase, whether for cash or secured or unsecured
obligations (including finance leases) by Security or any Security Subsidiary,
of any fixed asset which either (i) has a purchase price individually or in the
aggregate in excess of $25,000, or (ii) is outside of the ordinary course of
business;
(i) any sale or transfer of any asset in excess of $25,000 of
Security or any Security Subsidiary or outside of the ordinary course of
business with the exception of loans and marketable securities that are held for
sale and sold in the ordinary course of business at market prices;
(j) any cancellation or compromise of any debt to, claim by or
right of, Security or any Security Subsidiary except in the ordinary course of
business;
(k) any amendment or termination of any material contract or
commitment to which Security or any Security Subsidiary is a party, other than
in the ordinary course of business;
(l) any material damage or destruction to any material assets
or property of Security or any Security Subsidiary whether or not covered by
insurance; or
(m) any event or condition of any character (other than
changes in legal, economic or other conditions which are not specially or
uniquely applicable to Security or any Security Subsidiary) materially adversely
affecting the business, assets, deposit liabilities, operations or financial
condition of Security on a consolidated basis.
SECTION 3.23 CORPORATE RECORDS. To the best knowledge of Security's
management, the corporate record books, transfer books and stock ledgers of
Security and each Security Subsidiary are complete and accurate in all material
respects and reflect all meetings, consents and other material actions of the
organizers, incorporators, stockholders, Boards of Directors and committees of
the Boards of Directors of Security and each Security Subsidiary, and all
transactions in their respective capital stocks, since their respective
inceptions.
SECTION 3.24 UNDISCLOSED LIABILITIES. All Liabilities of Security and
the Security Subsidiaries have been reflected, disclosed or reserved against in
Security Financial Statements dated as of June 30, 1996 or in the notes thereto,
and Security and the Security Subsidiaries have no other Liabilities except (a)
Liabilities incurred since June 30, 1996 in the ordinary course of business, and
(b) as disclosed in Section 3.24 of the Security Disclosure Schedule.
SECTION 3.25 ASSETS.
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(a) Security and the Security Subsidiaries have good and
marketable title to their real properties, including any leaseholds, and their
other assets and properties, all as reflected as owned or held by Security or
any Security Subsidiary in the Security Financial Statements dated as of June
30, 1996, and those acquired since such date, except for (i) assets and
properties disposed of since such date in the ordinary course of business, and
(ii) Security Permitted Liens none of which, in the aggregate, except as set
forth in Section 3.25 of the Security Disclosure Schedule, are material to the
assets of Security on a consolidated basis. All buildings, structures, fixtures
and appurtenances comprising part of the real properties of Security and the
Security Subsidiaries (whether owned or leased) are in good operating condition
and have been well maintained, reasonable wear and tear excepted. Title to all
real property owned by Security and the Security Subsidiaries is held in fee
simple, except as otherwise noted in the Security Financial Statements dated as
of June 30, 1996, or as set forth in Section 3.25 of the Security Disclosure
Schedule. Security or the Security Subsidiaries have title or other rights to
its assets sufficient in all material respects for the conduct of their
respective businesses as presently conducted, and except as set forth in the
Security Financial Statements dated as of June 30, 1996 or in Section 3.25 of
the Security Disclosure Schedule, free, clear and discharged of and from any and
all liens, charges, encumbrances, security interests and/or equities which are
material to Security or any Security Subsidiary.
(b) All leases pursuant to which Security or any Security
Subsidiary, as lessee, leases real or personal property which are material to
the business of Security on a consolidated basis are, to the best knowledge of
Security, valid, effective, and enforceable against the lessor in accordance
with their respective terms. There is not under any of such leases any existing
default, or any event which with notice or lapse of time or both would
constitute a default, with respect to either Security or any Security
Subsidiary, or to the best knowledge of Security, the other party. Except as
disclosed in Section 3.25 of the Security Disclosure Schedule, none of such
leases contains a prohibition against assignment by Security or any Security
Subsidiary, by operation of law or otherwise, or any other provision which would
preclude the surviving entity in the Merger and Bank Merger or any WesterFed
Subsidiary from possessing and using the leased premises for the same purposes
and upon the same rental and other terms upon the consummation of the Merger and
the Bank Merger as are applicable to the use by Security or any Security
Subsidiary as of the date of this Agreement.
SECTION 3.26 INDEMNIFICATION. To the best knowledge of Security, except
as set forth in Section 3.26 of the Security Disclosure Schedule, no action or
failure to take action by any director, officer, employee or agent of Security
or any Security Subsidiary has occurred which would give rise to a claim or a
potential claim by any such person for indemnification from Security or any
Security Subsidiary under the corporate indemnification provisions of the
charter, bylaws, or Corporate Law applicable to Security or any Security
Subsidiary on the date of this Agreement.
SECTION 3.27 INSIDER INTERESTS. All outstanding loans and other
contractual arrangements (including deposit relationships) between Security or
any Security Subsidiary and any officer, director or employee of Security or any
Security Subsidiary conform to the applicable rules and regulations and
requirements of all applicable regulatory agencies which were in effect when
such loans and other contractual arrangements were entered into. Except as set
forth in
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Section 3.27 of the Security Disclosure Schedule, no officer, director or
employee of Security or any Security Subsidiary has any material interest in any
property, real or personal, tangible or intangible, used in or pertaining to the
business of Security or any Security Subsidiary.
ARTICLE IV.
COVENANTS OF SECURITY
SECTION 4.01 BUSINESS IN ORDINARY COURSE.
(a) Without the prior written consent of WesterFed, Security
shall not declare or pay any dividend or make any other distribution with
respect to its capital stock whether in cash, stock or other property, after the
date of this Agreement except regular periodic dividends in amounts (or, if
applicable, with such increases in amounts), and at points of time, not
inconsistent with past practices; provided, however, that (i) the foregoing
shall not be construed to prohibit the payment of the dividend declared by
Security on September 11, 1996, and (ii) the declaration of the last dividend by
Security prior to consummation of the Merger and the payment thereof shall be
coordinated with WesterFed so as to preclude duplication of dividend benefits.
(b) Security and the Security Subsidiaries shall continue to
carry on, after the date hereof, their respective businesses and the discharge
or incurring of obligations and liabilities, only in the usual, regular and
ordinary course of business, as heretofore conducted, and by way of
amplification and not limitation, Security and each of the Security Subsidiaries
will not, without the prior written consent of WesterFed:
(i) issue any capital stock or any options,
warrants, or other rights to subscribe for
or purchase capital stock or any securities
convertible into or exchangeable for any
capital stock, except pursuant to options
outstanding on the date hereof under the
Security Stock Option Plan;
(ii) directly or indirectly redeem, purchase or
otherwise acquire any capital stock or
ownership interests of Security or any of
the Security Subsidiaries;
(iii) effect a reclassification, recapitalization,
split-up, exchange of shares, readjustment
or other similar change in or to any capital
stock or otherwise reorganize or
recapitalize;
(iv) change its Articles of Incorporation,
Charter, or Bylaws;
(v) enter into any employment agreement (except
as otherwise permitted pursuant in Section
5.13(b) of this Agreement), severance
agreement, change of control agreement, or
plan relative to the foregoing; or grant any
increase (other than ordinary and normal
increases consistent with past practices) in
the
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compensation payable or to become payable to
directors, officers or employees except as
required by law; pay or agree to pay any
bonus inconsistent with past practices, or
adopt or make any material change in any
bonus, insurance, pension, or other Security
Benefit Plan; or, except as required by law
or necessary in connection with insurance
requirements, adopt any change to any
Security Qualified Plan;
(vi) except for the short-term renewal of Federal
Home Loan Bank ("FHLB") advances outstanding
at the date of this Agreement, raising
short-term funds against its existing line
of credit with the FHLB, and engaging in
repurchase transactions and deposit-taking
in the ordinary course of its business,
borrow or agree to borrow any funds or
indirectly guarantee or agree to guarantee
any obligations of others;
(vii) make or commit to make any new loan or
letter of credit or any new or additional
discretionary advance under any existing
line of credit, in a principal amount in
excess of $500,000 or that would increase
the aggregate credit outstanding to any one
borrower (or group of affiliated borrowers)
to more than $1,500,000 (excluding for this
purpose any accrued interest or overdrafts),
without the prior written consent of
WesterFed acting through its Chief Executive
Officer in a written notice to Security,
which approval shall not be unreasonably
withheld and approval or rejection shall be
given within two business days after
delivery by Security to such officer of
WesterFed of the complete loan package;
(viii) make any changes in its policies concerning
which persons may approve loans;
(ix) enter into any securities transaction for
its own account or purchase or otherwise
acquire any investment security for its own
account, provided that (A) Security and the
Security Subsidiaries may enter into
transactions for its own account involving,
and purchase or sell for its own account,
U.S. Treasury obligations and securities
issued or guaranteed by the Government
National Mortgage Association, the Federal
National Mortgage Association or the Federal
Home Loan Mortgage Corporation, (B) Security
and the Security Subsidiaries may make
deposits in an overnight account at the FHLB
of Seattle, and (C) WesterFed's consent to
transactions otherwise restricted by this
paragraph (ix) shall not be unreasonably
withheld or delayed;
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(x) increase or decrease the rate of interest
paid on time deposits or on certificates of
deposit, except in a manner and pursuant to
policies consistent with past practices;
(xi) enter into, modify or extend any agreement,
contract or commitment out of the ordinary
course of business or having a term in
excess of six months and involving an
expenditure in excess of ten thousand
dollars ($25,000), other than letters of
credit, loan agreements, deposit agreements,
and other lending, credit and deposit
documents made in the ordinary course of
business;
(xii) except in the ordinary course of business,
place on any of its assets or properties any
mortgage, pledge, lien, charge, or other
encumbrance;
(xiii) cancel any material indebtedness owing to it
or any material claims which it may possess
or waive any rights of material value;
(xiv) sell or otherwise dispose of any real
property or any material amount of tangible
or intangible personal property other than
(A) properties acquired in foreclosure or
otherwise in the ordinary collection of
indebtedness owed to Security Bank, (B)
student loans, or (C) loans which are held
for sale by Security Bank and are sold in
the secondary market within sixty (60) days
of origination;
(xv) foreclose upon or otherwise take title to or
possession or control of any real property
without first obtaining a phase one
environmental report thereon; provided,
however, that Security Bank and its
Subsidiaries shall not be required to obtain
such a report with respect to single family,
non-agricultural residential property of one
acre or less to be foreclosed upon unless it
has reason to believe that such property
might contain Hazardous Substances;
(xvi) knowingly or willfully commit any act or
fail to commit any act which will cause a
material breach of any material agreement,
contract or commitment;
(xvii) violate any law, statute, rule, governmental
regulation, or order, which violation might
have a Material Adverse Effect on Security;
(xviii) purchase any real or personal property or
make any capital expenditure where the
amount paid or committed therefor is in
excess of twenty-five thousand dollars
($25,000), except for outstanding
commitments set forth in Section 3.20 of the
Security Disclosure Schedule;
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(xix) in the case of Security Bank, voluntarily
make any material changes in or to its asset
and deposit mix;
(xx) engage in any activity or transaction
outside the ordinary course of business;
(xxi) enter into or acquire, or modify, amend or
extend the terms of any existing,
Derivative Securities; or
(xxii) enter into any new, or modify, amend or
extend the terms of any existing, contracts
relating to the purchase or sale of
financial or other futures, or any put or
call option relating to cash, securities or
commodities.
(c) Security and the Security Subsidiaries shall not, without
the prior written consent of WesterFed, willfully engage in any transaction or
willfully take any action that would render untrue any of the representations
and warranties of Security contained in Article III hereof, if such
representations and warranties were given as of the date of such transaction or
action.
(d) Security will, and will cause each of the Security
Subsidiaries to, use its best efforts to maintain its respective properties and
assets in their present state of repair, order and condition, reasonable wear
and tear excepted, and to maintain and keep in full force and effect all
policies of insurance presently in effect, including the insurance of accounts
with the FDIC. Security will, and will cause each of the Security Subsidiaries
to, take all requisite action (including the making of claims and the giving of
notices) pursuant to its directors' and officers' liability insurance policy or
policies in order to (i) increase by $1,000,000 the amount of coverage available
under such policy or policies, and (ii) preserve all rights thereunder with
respect to all matters known by Security which could reasonably give rise to a
claim prior to the Effective Time.
(e) Security shall promptly notify WesterFed in writing of the
occurrence of any matter or event known to and directly involving Security or
any Security Subsidiary that is reasonably likely to result in a Material
Adverse Effect on Security or impair the ability of Security to consummate the
transactions contemplated herein.
(f) Security shall not make or cause to be made any material
change to the credit underwriting policies of Security Bank without the prior
written consent of WesterFed, which consent shall not be unreasonably withheld
or delayed.
(g) Security shall provide to WesterFed such reports on
litigation involving Security and each of the Security Subsidiaries as WesterFed
shall reasonably request, provided that Security shall not be required to
divulge information to the extent that, in the good faith opinion of its
counsel, by doing so, it would risk waiver of the attorney-client privilege to
its detriment.
SECTION 4.02 CONFORMING ACCOUNTING AND RESERVE POLICIES; RESTRUCTURING
EXPENSES. At the request of WesterFed, Security shall cause Security Bank,
immediately prior to
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Closing and after satisfaction or waiver of the conditions to Closing set forth
in Article VI hereof, to establish and take such reserves and accruals as
WesterFed reasonably shall request to conform Security Bank's loan, accrual,
reserve and other accounting policies to the policies of Western; provided,
however, that such requested conforming adjustment shall not be taken into
account in determining whether Security has experienced a Material Adverse
Effect.
SECTION 4.03 CERTAIN ACTIONS. Neither Security nor any of the Security
Subsidiaries shall (a) solicit, initiate, or encourage or take any other action
to facilitate (including by way of the disclosing or furnishing of any
information that it is not legally obligated to disclose or furnish) any inquiry
or the making of any proposal relating to any Acquisition Transaction, or (b)(i)
solicit, initiate, or encourage or take any other action to facilitate any
inquiry or proposal, or (ii) enter into any agreement, arrangement, or
understanding (whether written or oral) regarding any proposal or transaction,
providing for or requiring it to abandon, terminate or fail to consummate this
Agreement, or compensating it or any of the Security Subsidiaries under any of
the instances described in this clause. Security shall immediately instruct and
otherwise use its best efforts to cause its directors, officers, employees,
agents, advisors (including any investment banker, attorney, or accountant
retained by it or any of the Security Subsidiaries), consultants and other
representatives to comply with such prohibitions. Security shall immediately
cease and cause to be terminated any existing activities, discussions, or
negotiations with any parties conducted heretofore with respect to such
activities. Notwithstanding anything in this Agreement to the contrary, Security
may provide information at the request of or enter into negotiations with a
third party with respect to an Acquisition Transaction if the Board of Directors
of Security determines, in good faith after consultation with counsel, that the
exercise of its fiduciary duties to Security's stockholders under applicable law
requires it to take such action; provided, however, that Security may not, in
any event, provide to such third party any information which it has not provided
to WesterFed. Security shall promptly notify WesterFed orally and in writing in
the event it receives any such inquiry or proposal and shall provide reasonable
detail of all relevant facts relating to such inquiries. Nothing in this
Agreement shall prohibit accurate disclosure by Security in any document
(including the Proxy Statement and the Registration Statement) or other
disclosure under applicable law if in the opinion of the Board of Directors of
Security, disclosure is appropriate under applicable law.
ARTICLE V.
ADDITIONAL AGREEMENTS
SECTION 5.01 INSPECTION OF RECORDS; CONFIDENTIALITY.
(a) WesterFed and Security shall each afford to the other and
to the other's accountants, counsel and other representatives (and their
respective Subsidiaries) full access during normal business hours during the
period prior to the Effective Time to all of their respective properties, books,
contracts, commitments and records, including all attorneys' responses to
auditors' requests for information, and accountants' work papers, developed by
either of them or their respective Subsidiaries or their respective accountants
or attorneys, and will permit each other and their respective representatives to
discuss such information directly with each other's officers, directors,
employees, attorneys and accountants. WesterFed and
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Security shall each use their best efforts to furnish to the other all other
information concerning its business, properties and personnel as such other
party may reasonably request. Any failure to comply with this covenant shall be
disregarded if promptly corrected without material adverse consequences to the
other party. The availability or actual delivery of information shall not affect
the representations, warranties, covenants, and agreements of the party
providing such information that are contained in this Agreement or in any
certificates or other documents delivered pursuant hereto. Nothing in this
Section 5.01(a) shall be construed to obligate WesterFed or Security to take any
action or omit to take any action to the extent that, in the good faith opinion
of its counsel, such action or omission would risk waiver of the attorney-client
privilege.
(b) In the event that this Agreement is terminated, each party
shall return all non-public documents furnished hereunder, shall destroy all
documents or portions thereof prepared by such other party that contain
non-public information furnished by the other party pursuant hereto and, in any
event, shall hold all non-public information confidential unless or until such
information is or becomes a matter of public knowledge or is or becomes known to
the party receiving the information through persons other than the party
providing such information.
(c) Security shall consider in good faith any request by
WesterFed to allow a representative of WesterFed to attend as an observer (i)
any meeting of the Board of Directors of Security and the Security Subsidiaries,
(ii) any meeting of any committee of either such Board, including the audit and
executive committees thereof, or (iii) any other meeting of Security officials
at which policy is being made, except for any such meeting if and to the extent
that any amendment to this Agreement or the merits of any Acquisition
Transaction described in Section 4.03 hereof is discussed. Security shall give
reasonable notice to WesterFed of any such meeting and, if known, the agenda for
or business to be discussed at such meeting. Security shall provide to WesterFed
all written information provided to the directors on all such boards and
committees in connection with all such meetings or otherwise provided in writing
to the directors, and shall provide any other written financial reports or other
analysis prepared for senior management of Security. In the event that Security
grants any request by WesterFed to participate in any such meeting, it is
understood by the parties that WesterFed's representative will not have any
voting rights with respect to matters discussed at these meetings and that
WesterFed is not managing the business or affairs of Security or any Security
Subsidiary. All information obtained by WesterFed at or in connection with these
meetings shall be treated as confidential to the extent provided in Section
5.01(b) hereof.
SECTION 5.02 REGISTRATION STATEMENT; STOCKHOLDER APPROVAL. As soon as
practicable after the date of this Agreement, WesterFed shall file the
Registration Statement with the SEC, and Security and WesterFed shall use their
best efforts to cause the Registration Statement to become effective under the
Securities Act. WesterFed will take any action required to be taken under the
applicable blue sky or securities laws in connection with the issuance of the
shares of WesterFed Common Stock in the Merger. Each party shall furnish all
information concerning it and the holders of its capital stock as the other
party may reasonably request in connection with such action. WesterFed and
Security shall call the Stockholders' Meetings as soon as reasonably practicable
after the Registration Statement is declared effective by the SEC for the
purpose of voting upon this Agreement and the Merger. In connection with the
Stockholders' Meetings, (a)
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WesterFed and Security shall jointly prepare the Proxy Statement as part of the
Registration Statement and WesterFed and Security shall mail the Proxy Statement
to their respective stockholders, and (b) the Board of Directors of WesterFed
and Security shall recommend to their respective stockholders the approval of
this Agreement and the Merger; provided, however, that such recommendation by
Security may be withdrawn, modified, or amended, or not made at all, after the
receipt by Security of an offer to effect an Acquisition Transaction with
Security to the extent the Board of Directors of Security reasonably determines
that, in the exercise of its fiduciary obligations after consultation with
counsel, it has a duty to do so.
SECTION 5.03 AFFILIATE LETTERS. Security shall use its best efforts to
obtain and deliver to WesterFed as promptly as practicable after (and shall use
its reasonable best efforts to obtain and deliver within five (5) business days
after) the date hereof a signed representation letter substantially in the form
of Exhibit C from each executive officer and director of Security and each
stockholder of Security who Security reasonably believes is an "affiliate" of
Security within the meaning of such term as used in Rule 145 under the
Securities Act and shall use its best efforts to obtain and deliver to WesterFed
a signed representation letter substantially in the form of Exhibit C from any
person who becomes an executive officer or director of Security or any
stockholder who becomes such an "affiliate" after the date hereof as promptly as
practicable after (and shall use its reasonable best efforts to obtain and
deliver within five business days after) such person achieves such status.
SECTION 5.04 BROKERS. Each of WesterFed and Security represents, as to
itself and its Subsidiaries, that no agent, broker, investment banker or other
firm or person or officer or director of either is or will be entitled to any
broker's or finder's fee or any other commission, bonus or similar fee in
connection with any of the transactions contemplated by this Agreement, other
than as to WesterFed, Alex. Brown & Sons Incorporated and as to Security,
Montgomery Securities, which has provided advice to Security at its request in
connection with the Merger.
SECTION 5.05 COOPERATION. Each party to this Agreement covenants that
it will use its best efforts to bring about the transactions contemplated by
this Agreement as soon as practicable, unless this Agreement is terminated as
provided herein. Subject to the terms and conditions herein provided, each of
the parties hereto agrees to use all reasonable efforts to take, or cause to be
taken, all action, and to do, or cause to be done, all things necessary, proper
or advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Agreement at the earliest
practicable time. In case at any time after the Effective Time any further
action is necessary or desirable to carry out the purposes of this Agreement,
the proper officers and/or directors of WesterFed or Security or their
respective Subsidiaries, as the case may be, shall take all such necessary
action. Each party shall use its reasonable best efforts to preserve for itself
and the other party each available legal privilege with respect to the
confidentiality of their negotiations and related communications, including the
attorney-client privilege.
SECTION 5.06 REGULATORY APPLICATIONS. WesterFed, Security and/or their
respective Subsidiaries shall, as soon as practicable after the date of this
Agreement, file all necessary applications with all applicable regulatory
authorities, and shall use their best efforts to respond as promptly as
practicable to all inquiries received concerning said applications. In the event
the
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Merger or Bank Merger is challenged or opposed by any administrative or legal
proceeding, whether by the United States Department of Justice or otherwise, the
determination of whether and to what extent to seek appeal or review,
administrative or otherwise, or other appropriate remedies shall be made by
WesterFed. The party filing an application shall deliver a copy thereof to the
other party in advance of filing and copies of all responses or written
communications from regulatory authorities relating to the Merger, the Bank
Merger or this Agreement (to the extent permitted by law), and the filing party
shall also deliver a final copy of each regulatory application to the other
party promptly after it is filed with the appropriate regulatory authority. Each
party shall advise the other party periodically of the status of each regulatory
application.
SECTION 5.07 FINANCIAL STATEMENTS AND REPORTS. From the date of this
Agreement and prior to the Effective Time: (a) each party will deliver to the
other, not later than ninety (90) days after the end of any fiscal year, its
Annual Report on Form 10-K (and all schedules and exhibits thereto) for the
fiscal period then ended prepared in conformity with GAAP, and not later than
forty-five (45) days after the end of any fiscal quarter, its thrift financial
reports as filed with the OTS; (b) each party will deliver to the other not
later than forty-five (45) days after the end of each quarter, its Report on
Form 10-Q for such quarter as filed with the SEC, which shall be prepared in
conformity with GAAP and the rules and regulations of the SEC; and (c) each
party will deliver to the other any and all other material reports filed with
the SEC, the FDIC, the OTS, or any other regulatory agency within five (5)
business days of the filing of any such report.
SECTION 5.08 NOTICE. At all times prior to the Effective Time, each
party shall promptly notify the other in writing of the occurrence of any event
which will or may result in the failure to satisfy any of the conditions
specified in Sections 6.01 or 6.02. In the event that either party becomes aware
of the occurrence or impending occurrence of any event which would constitute or
cause a breach by it of any of its representations and warranties, covenants or
agreements herein in any material respect, or would have constituted or caused a
breach by it of its representations and warranties, covenants or agreements
herein in any material respect, had such an event occurred or been known prior
to the date hereof, said party shall immediately give detailed and written
notice thereof to the other party, and shall, unless the same has been waived in
writing by the other party, use its reasonable efforts to remedy the same within
30 days, provided that such efforts, if not successful, shall not be deemed to
satisfy any condition precedent to the Merger.
SECTION 5.09 PRESS RELEASE. Except as provided in Section 4.03(a) or as
otherwise reasonably determined by a party to comply with its legal obligations,
at all times prior to the Effective Time, each party shall mutually agree with
the other prior to the issuance of any press release or other information to the
press or any third party for general circulation with respect to this Agreement
or the transactions contemplated hereby.
SECTION 5.10 DELIVERY OF SUPPLEMENTS TO DISCLOSURE SCHEDULES. Five (5)
business days prior to the Effective Time, each party will supplement or amend
its Disclosure Schedule with respect to any matter hereafter arising which, if
existing or occurring at or prior to the date of this Agreement, would have been
required to be set forth or described in such Disclosure Schedule or which is
necessary to correct any information in the Disclosure Schedule or in any
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representation and warranty made by the disclosing party which has been rendered
inaccurate thereby. For purposes of determining the accuracy of the
representations and warranties of WesterFed and Security contained,
respectively, in Articles II and III hereof in order to determine the
fulfillment of the conditions set forth in Sections 6.01(a) and 6.02(a) as of
the date of this Agreement, the Disclosure Schedule of each party shall be
deemed to include only that information contained therein on the date it is
initially delivered to the other party.
SECTION 5.11 LITIGATION MATTERS. Security will consult with WesterFed
about any proposed settlement, or any disposition of, any litigation involving
amounts in excess of $10,000.
SECTION 5.12 NOTICE OF MATERIAL ADVERSE EFFECT. WesterFed shall
promptly notify Security in writing of the occurrence of any matter or event
known to and directly involving WesterFed or any WesterFed Subsidiary that is
reasonably likely to result in a Material Adverse Effect on WesterFed or impair
the ability of WesterFed to consummate the transactions contemplated herein.
SECTION 5.13 OPTIONS; EMPLOYMENT AGREEMENTS; BENEFITS AND RELATED
MATTERS.
(a) SECURITY STOCK OPTIONS HELD BY NON-EMPLOYEES. At the
Effective Time, by virtue of the Merger, and without any action on the part of
any person or entity, each Security Stock Option outstanding on the date hereof
and remaining outstanding immediately prior to the Effective Time and held by a
holder who is not an employee of Security or any Security Subsidiary immediately
prior to the Effective Time shall be converted into and become a right to
receive from WesterFed, whether or not the option is then exercisable or vested,
a cash payment in an amount equal to the product of (A) the number of shares of
Security Common Stock subject to such option immediately prior to the Effective
Time, and (B) the excess, if any, of $30 over the exercise price per share of
such option, net of any cash which must be withheld under federal and state
income and employment tax requirements. Such cash payments shall be in
consideration of, and shall result in, the settlement and cancellation of all
such options. As a condition to the receipt of a cash payment in cancellation of
options, each such holder of a Security Stock Option shall execute a
cancellation agreement in the form of Exhibit D.
(b) SECURITY STOCK OPTIONS HELD BY EMPLOYEES. At the Effective
Time, by virtue of the Merger, and without any action on the part of any person
or entity, each Security Stock Option outstanding on the date hereof and
remaining outstanding immediately prior to the Effective Time and held by a
holder who is an employee of Security or a Security Subsidiary immediately prior
to the Effective Time shall be converted into and become, upon the election of
such holder, either the right to receive cash on the terms set forth in Section
5.13(a) or an option to purchase shares of WesterFed Common Stock on the same
terms as are in effect with respect to the Security Stock Option immediately
prior to the Effective Time, except that (i) each such converted option will be
exercisable solely for shares of WesterFed Common Stock, (ii) the number of
shares of WesterFed Common Stock subject to such converted option shall be equal
to the number of shares of Security Common Stock subject to the Security Stock
Option immediately prior to the Effective Time multiplied by the Exchange Ratio,
the product being rounded, if necessary, up or down to the nearest whole share,
and (iii) the per-share exercise price under each such converted option shall be
adjusted by dividing the per-share exercise price of the
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Security Stock Option by the Exchange Ratio, and rounding up to the nearest
cent. The failure of any holder of a Security Stock Option to deliver to
WesterFed prior to the Effective Time written evidence of the election referred
to in this Section 5.13(b) shall be deemed to be an election by such holder to
receive, in exchange for such Security Stock Option, an option to purchase
shares of WesterFed Common Stock on the terms set forth in this Section 5.13(b).
As soon as practicable after the Effective Time, WesterFed shall take all action
necessary to register under the Securities Act the shares of WesterFed Common
Stock subject to options resulting from the conversion of Security Stock Options
pursuant to this Section 5.13(b).
(c) WRITTEN AGREEMENTS WITH EMPLOYEES. Simultaneously with the
execution of this Agreement, Western and the seven (7) Security/Security Bank
employees listed in Exhibit E shall execute new employment agreements in the
form attached to Exhibit E, which new employment agreements shall supersede and
replace the existing employment agreements of said employees at the Effective
Time.
(d) CONTINUING EMPLOYEES. To the extent permitted by
applicable law, the former employees of Security and the Security Subsidiaries
who become employees of WesterFed or any WesterFed Subsidiary (the "Continuing
Employees") shall continue to participate in the Security Benefit Plans.
WesterFed or any WesterFed Subsidiary may amend or terminate any Security
Benefit Plan at any time, provided, that if the termination or amendment
adversely affects the benefits provided to the Continuing Employees, WesterFed
or a WesterFed Subsidiary shall provide the Continuing Employees with benefits
that are substantially equivalent to the benefits being received by other
similarly situated employees of WesterFed or a WesterFed Subsidiary under
comparable plans then in effect. Neither WesterFed nor any WesterFed Subsidiary
shall amend any Security Qualified Plan in a manner which adversely affects the
benefits to participants therein, except (i) to comply with applicable laws and
regulations including the Code and ERISA, or (ii) when a similar amendment is
being made to a comparable WesterFed Qualified Plan. Nothing herein shall
preclude WesterFed or a WesterFed Subsidiary from terminating a Security
Qualified Plan or merging a Security Qualified Plan into a WesterFed Qualified
Plan, provided that in doing so WesterFed complies with the applicable
comparability test under the Code, ERISA and any other applicable laws and
regulations and the other provisions of this paragraph. Whenever a Continuing
Employee becomes a participant in a WesterFed Benefit Plan, such Continuing
Employee shall receive full credit for his past service with Security or a
Security Subsidiary for purposes of determining eligibility to participate in
and the vesting benefits of such WesterFed Benefit Plan (but not for the purpose
of accrual of benefits thereunder). In such regard, years of service with
Security or any Security Subsidiary shall be deemed service with WesterFed or a
WesterFed Subsidiary. Continuing Employees will not be subject to any exclusion
or penalty for pre-existing conditions that were covered under the Security
health plan immediately prior to the Effective Time or any waiting period
relating to coverage under the WesterFed health plan.
SECTION 5.14 EXTENT OF KNOWLEDGE. For purposes of this Agreement and
any other certificate or document delivered by one party to the other pursuant
hereto, the "best knowledge" of WesterFed or Security shall be limited to
matters actually known to each of its directors and each of its officers holding
the position of Senior Vice President or above.
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SECTION 5.15 TAX TREATMENT. Neither Security or any of the Security
Subsidiaries, nor WesterFed or any of the WesterFed Subsidiaries, shall
voluntarily take any action which would disqualify the Merger or Bank Merger as
a "reorganization" pursuant to Section 368(a) of the Code.
SECTION 5.16 STOCK EXCHANGE LISTING. WesterFed shall use its best
efforts to list on the Nasdaq National Market, subject to official notice of
issuance, the shares of WesterFed Common Stock to be issued in the Merger.
SECTION 5.17 DIRECTORS' AND OFFICERS' INDEMNIFICATION INSURANCE. For a
period of six years following the Effective Time, WesterFed shall indemnify,
defend and hold harmless the present and former directors, officers and
employees of Security and the Security Subsidiaries (each, an "Indemnified
Party") against all costs or expenses (including reasonable attorneys' fees),
judgments, fines, losses, claims, damages or liabilities incurred in connection
with any claim, action, suit, proceeding or investigation, whether civil,
criminal, administrative or investigative, and arising out of matters existing
or occurring at or prior to the Effective Time (including the transactions
contemplated by this Agreement and the agreements executed pursuant to this
Agreement), whether asserted or claimed prior to, at or after the Effective
Time, to the fullest extent that Security would have been permitted under
Montana law and its Articles of Incorporation or Bylaws in effect on the date of
this Agreement to indemnify such person (and WesterFed will also advance
expenses as incurred to the fullest extent permitted under applicable law so
long as the person to whom expenses are advanced provides an undertaking to
repay such advances if it is ultimately determined that such person is not
entitled to indemnification); provided, however, that (a) any determination
required to be made with respect to whether a person's conduct complies with the
standards set forth under Montana law and Security's Articles of Incorporation
and Bylaws shall be made by independent counsel mutually agreed upon between
WesterFed and the Indemnified Party, and (b) WesterFed shall be obligated
pursuant to this Section 5.17 to pay for only one firm of counsel for all
Indemnified Parties, unless an Indemnified Party shall have reasonably
concluded, based on the advice of counsel, that in order to be adequately
represented, separate counsel is necessary for such Indemnified Party, in which
case WesterFed shall be obligated to pay for such separate counsel. WesterFed
shall cause the persons serving as officers and directors of Security and the
Security Subsidiaries immediately prior to the Effective Time to be covered for
a period of six years following the Effective Time by the directors' and
officers' liability insurance policy maintained by WesterFed and Western
(provided that WesterFed may substitute or cause Security to substitute therefor
single premium tail coverage with a policy limit equal to Security's existing
annual coverage limit) with respect to acts or omissions occurring prior to the
Effective Time which were committed by such officers and directors in their
capacity as such, provided that the additional premium cost to WesterFed does
not exceed 300% of Security's present annual premium cost and that the insurance
is available.
ARTICLE VI.
CONDITIONS
SECTION 6.01 CONDITIONS TO THE OBLIGATIONS OF WESTERFED.
Notwithstanding any other provision of this Agreement, the obligations of
WesterFed to consummate the Merger are subject
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to the following conditions precedent (except as to those which WesterFed may
choose to waive in writing):
(a) Subject to the cure provisions set forth in Section 5.08,
all of the representations and warranties made by Security in this Agreement and
in any documents or certificates provided by Security shall have been true and
correct in all material respects as of the date of this Agreement and as of the
Effective Time as though made on and as of the Effective Time, except (i) to the
extent that such representations and warranties are by their express provisions
made as of a specified date, in which case such representations and warranties
shall have been true and correct in all material respects as of such specified
date, and (ii) for information contained in a subsequent Disclosure Schedule of
Security relating to an event or series of events arising after the date hereof
which does not have a Material Adverse Effect on Security;
(b) Subject to the cure provisions set forth in Section 5.08,
Security shall have performed in all material respects all obligations and shall
have complied in all material respects with all agreements and covenants
required by this Agreement to be performed or complied with by it prior to or at
the Effective Time;
(c) Since the date hereof, Security shall not have suffered a
Material Adverse Effect;
(d) WesterFed shall have received the opinion of Graham &
Dunn, counsel to Security, in form and substance satisfactory to WesterFed;
(e) WesterFed shall have received from Hanson, Roybal, Lee &
Todd, Montana counsel for Security, a written opinion satisfactory in form and
substance to WesterFed, dated the Closing Date, with respect to (i) the
corporate status, corporate authority, good standing, capitalization, and
litigation proceedings of Security, (ii) the enforceability of the Agreement,
and (iii) and such other matters with respect to which legal opinions are
customarily given in transactions such as the Merger; and
(f) WesterFed shall have received a certificate signed by the
President and Chief Executive Officer of Security, dated as of the Effective
Time, certifying that based upon his best knowledge, the conditions set forth in
Sections 6.01(a), (b), and (c) hereof have been satisfied.
SECTION 6.02 CONDITIONS TO THE OBLIGATIONS OF SECURITY. Notwithstanding
any other provision of this Agreement, the obligations of Security to consummate
the Merger are subject to the following conditions precedent (except as to those
which Security may choose to waive in writing):
(a) Subject to the cure provisions set forth in Section 5.08,
all of the representations and warranties made by WesterFed in this Agreement
and in any documents or certificates provided by WesterFed shall have been true
and correct in all material respects as of the date of this Agreement and as of
the Effective Time as though made on and as of the Effective Time, except (i) to
the extent that such representations and warranties are by their
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express provisions made as of a specified date, in which case such
representations and warranties shall have been true and correct in all material
respects as of such specified date, and (ii) for information contained in a
subsequent Disclosure Schedule of WesterFed relating to an event or series of
events arising after the date hereof which does not have a Material Adverse
Effect on WesterFed;
(b) Subject to the cure provisions set forth in Section 5.08,
WesterFed shall have performed in all material respects all obligations and
shall have complied in all material respects with all agreements and covenants
required by this Agreement to be performed or complied with by it prior to or at
the Effective Time;
(c) Since the date hereof, WesterFed shall not have suffered a
Material Adverse Effect;
(d) Security shall have received the opinion of Silver,
Freedman & Taff, L.L.P., counsel to WesterFed, in form and substance
satisfactory to Security; and
(e) Security shall have received a certificate signed by the
President and Chief Executive Officer of WesterFed, dated as of the Effective
Time, that based upon his best knowledge, the conditions set forth in Sections
6.02(a), (b), and (c) have been satisfied.
SECTION 6.03 CONDITIONS TO THE OBLIGATIONS OF THE PARTIES.
Notwithstanding any other provision of this Agreement, the obligations of
WesterFed on the one hand, and Security on the other hand, to consummate the
Merger are subject to the following conditions precedent (except as to those
which WesterFed or Security may choose to waive in writing):
(a) Each party to this Agreement shall have received from its
financial advisor a written fairness opinion, dated on or about the date on
which the Proxy Statement is distributed to such party's stockholders, to the
effect that the Merger Consideration is fair to such party's stockholders from a
financial point of view;
(b) As of the date of this Agreement, each member of the Board
of Directors of Security and any executive officer who is a stockholder of
Security owning 1,000 shares or more of Security Common Stock shall have
executed and delivered to WesterFed a Stockholder Voting Agreement in the form
of Exhibit F;
(c) As of the date of this Agreement, Security and WesterFed
shall execute and deliver to each other Stock Option Agreement #1 and Stock
Option Agreement #2, in the forms of Exhibits G and H, respectively;
(d) As of the date of the Agreement, the new employment
agreements referred to in Section 5.13(c) shall have been executed and delivered
by the parties named therein;
(e) No preliminary or permanent injunction or other order by
any federal or state court which prevents the consummation of the Merger or Bank
Merger shall have been issued and shall remain in effect;
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(f) The parties shall have received all applicable regulatory
approvals and consents to consummate the transactions contemplated in this
Agreement and all required waiting periods shall have expired;
(g) The Registration Statement shall have been declared
effective under the Securities Act and no stop orders shall be in effect and no
proceedings for such purpose shall be pending or threatened by the SEC;
(h) Each of WesterFed and Security shall have received from
Silver, Friedman & Taff, L.L.P. a written opinion, dated the Closing Date,
substantially to the effect that the Merger and the Bank Merger will each
constitute a "reorganization" within the meaning of Section 368(a) of the Code.
(i) The WesterFed Common Stock to be issued to holders of
Security Common Stock shall have been approved for listing on the Nasdaq
National Market subject to official notice of issuance; and
(j) There shall not have been any action taken or any statute,
rule, regulation or order enacted, promulgated or issued or deemed applicable to
the Merger by any federal or state government or governmental agency or
instrumentality or court, which would prohibit WesterFed's ownership or
operation of all or a material portion of the business or assets of Security, or
would compel WesterFed or Western to dispose of all or a material portion of the
business or assets of Security Bank or would prohibit the Bank Merger, as a
result of this Agreement, or which would render WesterFed or Security unable to
consummate the transactions contemplated by this Agreement;
ARTICLE VII.
TERMINATION; AMENDMENT; WAIVER
SECTION 7.01 TERMINATION. This Agreement may be terminated at any time
prior to the Effective Time:
(a) By the mutual written consent of the Boards of Directors
of WesterFed and Security;
(b) At any time prior to the Effective Time, by WesterFed or
Security if there shall have been a final judicial or regulatory determination
(as to which all periods for appeal shall have expired and no appeal shall be
pending) that any material provision of this Agreement is illegal, invalid or
unenforceable (unless the enforcement thereof is waived by the affected party)
or denying any regulatory application the approval of which is a condition
precedent to either party's obligations hereunder;
(c) At any time on or before the date specified in 7.01(f)
hereof, by WesterFed or Security in the event that any of the conditions
precedent to the obligations of the other party
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to the Merger or Bank Merger are rendered impossible to be satisfied or
fulfilled by said date (other than by reason of a breach by the party seeking to
terminate);
(d) By either party at any time after the stockholders of
WesterFed or Security fail to approve this Agreement and the Merger by the
required vote at the respective Stockholders' Meetings;
(e) By WesterFed or Security, in the event of a material
breach by the other party of any representation, warranty, covenant or agreement
contained herein or in any Schedule or document delivered pursuant hereto, which
breach would result in the failure to satisfy the closing condition set forth in
Section 6.01(a) or 6.01(b), in the case of WesterFed, or Section 6.02(a) or
6.02(b), in the case of Security, and which breach cannot be or is not cured
within thirty (30) days after written notice of such breach is given by the
non-breaching party to the party committing such breach; or
(f) By either party on or after 270 days following the date of
this Agreement, in the event the Merger has not been consummated by such date
(provided that the terminating party is not then in material breach of any
representation, warranty, covenant or other agreement contained herein); or
(g) By Security if:
(i) the Average WesterFed Stock Price
is less than $11.75; and
(ii) the Board of WesterFed does not
increase the Exchange Ratio such
that the shareholders of Security
who are entitled to exchange their
shares for WesterFed Common Stock
will receive a Stock Distribution
equal to $27.01 per share based
upon the Average WesterFed Stock
Price.
In the event either party elects to effect any termination
pursuant to Section 7.01(b) through 7.01(g) above, it shall give written notice
to the other party hereto specifying the basis for such termination and
certifying that such termination has been approved by the vote of a majority of
the members of its Board of Directors.
SECTION 7.02 LIABILITIES AND REMEDIES.
(a) In the event that this Agreement is terminated by a party
(the "Aggrieved Party") solely by reason of the willful material breach by the
other party ("Breaching Party") of any of its representations, warranties,
covenants or agreements contained herein, then the Aggrieved Party shall be
entitled to such remedies and relief against the Breaching Party as are
available at law or in equity. Moreover, the Aggrieved Party without terminating
this Agreement shall be entitled to specifically enforce the terms hereof
against the Breaching Party in order to cause the Merger and the Bank Merger to
be consummated. Each party acknowledges that there is not an adequate remedy at
law to compensate the other party relating to the non-consummation of the Merger
and the Bank Merger. To this end, each party, to the extent permitted by law,
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irrevocably waives any defense it might have based on the adequacy of a remedy
at law which might be asserted as a bar to specific performance, injunctive
relief or other equitable relief.
(b) Except as provided in Section 7.02(a), each of the parties
to this Agreement shall bear its own costs, fees and expenses incurred in
connection with this Agreement and the transactions contemplated hereby;
provided, however, all application and filing fees to be paid by either party to
regulatory authorities in connection with the transactions contemplated by this
Agreement and the printing and mailing costs of the Proxy Statement shall be
shared equally by the parties.
SECTION 7.03 SURVIVAL OF AGREEMENTS. In the event of termination of
this Agreement by either WesterFed or Security as provided in Section 7.01, this
Agreement shall forthwith become void and have no effect except that the
agreements contained in Sections 5.01(b) and 7.02 hereof shall survive the
termination hereof.
SECTION 7.04 AMENDMENT. This Agreement may be amended by the parties
hereto by action taken by their respective Boards of Directors at any time
before or after approval hereof by their stockholders but, after such
stockholder approval, no amendment shall be made which changes the form of
consideration or the value of the consideration to be received by the
stockholders of Security without the approval of the stockholders of Security.
This Agreement may not be amended except by an instrument in writing signed on
behalf of each of the parties hereto. WesterFed and Security may, without
approval of their respective Boards of Directors, make such changes to this
Agreement, not inconsistent with the purposes hereof, as may be required to
effect or facilitate any regulatory approval or acceptance of the Merger, the
Bank Merger or this Agreement or to effect or facilitate any regulatory or
governmental filing or recording required for the consummation of any of the
transactions contemplated hereby.
SECTION 7.05 WAIVER. Any term, provision or condition of this Agreement
(other than the requirement of stockholders' approval) may be waived in writing
at any time by the party which is entitled to the benefits hereof. Each and
every right granted to any party hereunder, or under any other document
delivered in connection herewith or therewith, and each and every right allowed
it by law or equity, shall be cumulative and may be exercised from time to time.
The failure of either party at any time or times to require performance of any
provision hereof shall in no manner affect such party's right at a later time to
enforce the same. No waiver by any party of a condition or of the breach of any
term, covenant, representation or warranty contained in this Agreement, whether
by conduct or otherwise, in any one or more instances shall be deemed to be or
construed as a further or continuing waiver of any such condition or breach or a
waiver of any other condition or of the breach of any other term, covenant,
representation or warranty of this Agreement. No investigation, review or audit
by WesterFed of Security or Security of WesterFed prior to or after the date
hereof shall estop or prevent either party from exercising any right hereunder
or be deemed to be a waiver of any such right.
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ARTICLE VIII.
GENERAL PROVISIONS
SECTION 8.01 SURVIVAL. None of the representations, warranties,
covenants and agreements of the parties in this Agreement or in any instrument
delivered by the parties pursuant to this Agreement (other than the agreements,
covenants and obligations set forth herein which are contemplated to be
performed after the Effective Time) shall survive the Effective Time, provided
that no such representations, warranties or covenants shall be deemed to be
terminated or extinguished so as to deprive WesterFed or Security (or any of
their respective directors, officers, employees or agents) of any defense in law
or equity which otherwise would be available against the claims of any person,
including any stockholder or former stockholder of either WesterFed of Security,
the aforesaid representations, warranties, and covenants being material
inducements to consummation by WesterFed, Security and the Surviving Corporation
of the Merger contemplated hereby.
SECTION 8.02 NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered personally, by
facsimile transmission or by registered or certified mail to the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice) and shall be deemed to be delivered on the date so delivered:
(a) if to WesterFed: Lyle R. Grimes
President and Chief Executive Officer
WesterFed Financial Corporation
100 East Broadway
Missoula, Montana 59802
copy to: Silver, Freedman & Taff
1100 New York Avenue, Suite 700 East
Washington, D.C. 20005
Attn: Barry Taff
(b) if to Security: David W. Jorgenson
President and Chief Executive Officer
Security Bancorp
219 North 26th Street
Billings, Montana
copy to: Graham & Dunn
1420 Fifth Avenue
Suite 3300
Seattle, WA 98101
Attention: Stephen M. Klein
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SECTION 8.03 APPLICABLE LAW. This Agreement shall be construed and
interpreted according to the laws of the State of Delaware without regard to
conflicts of laws principles thereof, except to the extent that the federal laws
of the United States apply.
SECTION 8.04 HEADINGS, ETC. The article headings and section headings
contained in this Agreement are inserted for convenience only and shall not
affect in any way the meaning or interpretation of this Agreement.
SECTION 8.05 SEVERABILITY. If any term, provision, covenant, or
restriction contained in this Agreement is held by a final and unappealable
order of a court of competent jurisdiction to be invalid, void, or
unenforceable, then the remainder of the terms, provisions, covenants, and
restrictions contained in this Agreement shall remain in full force and effect,
and shall in no way be affected, impaired, or invalidated unless the effect
would be to cause this Agreement to not achieve its essential purposes.
SECTION 8.06 ENTIRE AGREEMENT; BINDING EFFECT; NON-ASSIGNMENT;
COUNTERPARTS. Except as otherwise expressly provided herein, this Agreement
(including the documents and instruments referred to herein) (a) constitutes the
entire agreement between the parties hereto and supersedes all other prior
agreements and undertakings, both written and oral, between the parties, with
respect to the subject matter hereof; and (b) is not intended to confer upon any
other person any rights or remedies hereunder except as specifically provided
herein. This Agreement shall be binding upon and inure to the benefit of the
parties named herein and their respective successors. Neither this Agreement nor
any of the rights, interests or obligations hereunder shall be assigned by any
party hereto without the prior written consent of the other party hereto. This
Agreement may be executed in two or more counterparts which together shall
constitute a single agreement.
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
executed as of the day and year first above written.
WESTERFED FINANCIAL CORPORATION
By: /s/ Lyle R. Grimes
-------------------------------------
Lyle R. Grimes
President and Chief Executive Officer
/s/ Wendy Lambson
- -------------------------------------
Wendy Lambson, Secretary
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SECURITY BANCORP
By: /s/ David W. Jorgenson
-------------------------------------
David W. Jorgenson
President and Chief Executive Officer
/s/ Elaine F. Hine
- -------------------------------------
Elaine F. Hine, Secretary
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Appendix II
[ALEX. BROWN & SONS LETTERHEAD]
September 24, 1996
The Board of Directors
WesterFed Financial Corporation
100 East Broadway
Missoula, MT 59801
Dear Sirs:
WesterFed Financial Corporation ("WesterFed") and Security Bancorp
("Security") have entered into an Agreement and Plan of Merger dated as of
September 24, 1996 (the "Agreement") providing for the merger of Security with
and into WesterFed (the "Merger"). Pursuant to the Agreement, each share of
Security common stock, par value $1.00 per share ("Security Common Stock"), will
be converted into $30.00 per share in cash, or, to the extent Security
shareholders elect to receive some or all of the consideration in WesterFed
common stock, par value $.01 per share ("WesterFed Common Stock"), into
approximately $30.00 in value of WesterFed Common Stock, subject to certain
adjustments and limitations set forth in the Agreement. You have requested our
opinion as to the fairness, from a financial point of view, to the holders of
WesterFed Common Stock of the consideration to be paid by WesterFed to the
holders of Security Common Stock.
Alex. Brown & Sons Incorporated ("Alex. Brown"), as a customary part of
its investment banking business, is engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, private placements and valuations for estate, corporate and other
purposes. We have acted as financial advisor to the Board of Directors of
WesterFed in connection with the transaction described above and will receive a
fee for our services, a portion of which is contingent upon consummation of the
Merger. Alex. Brown regularly publishes research reports regarding the financial
services industry and the businesses and securities of publicly owned companies
in that industry.
In connection with this opinion, we have reviewed certain publicly
available financial information concerning WesterFed and Security and certain
internal financial analyses and other information furnished to us by WesterFed
and Security. We have also held discussions with members of the senior
management of WesterFed and Security regarding the business and prospects of
their respective financial institutions. In addition, we have (i) reviewed the
reported price and trading activity of the WesterFed Common Stock and the
Security Common Stock, (ii) compared certain financial and stock market
information of WesterFed and Security, respectively, with similar information of
certain comparable companies whose securities are publicly traded, (iii)
reviewed the Agreement, (iv) reviewed the financial terms of certain recent
business combinations which we deemed comparable in whole or in part, (v)
reviewed the potential pro forma impact of the Merger on WesterFed's financial
condition, operating results and per share figures and (vi) performed such other
studies and analyses and considered such other factors as we deemed appropriate.
<PAGE>
The Board of Directors
WesterFed Financial Corporation
September 24, 1996
We have not independently verified the information described above and
for purposes of this opinion have assumed the accuracy, completeness and
fairness thereof. With respect to information relating to the prospects of
WesterFed and Security (including, without limitation, projected cost savings
from the Merger), we have assumed that such information reflects the best
currently available estimates and judgments of the respective managements of
WesterFed and Security as to the likely future financial performance of
WesterFed and Security. In addition, we have not made an independent evaluation
or appraisal of the assets or liabilities of WesterFed or Security, nor have we
been furnished with any such evaluation or appraisal. Our opinion is based on
market, economic and other conditions as they exist and can be evaluated as of
the date of this letter.
Our opinion expressed herein was prepared for the use of the Board of
Directors of the Company and does not constitute a recommendation to the
Company's shareholders as to how they should vote at the shareholders' meeting
in connection with the Merger. We hereby consent, however, to the inclusion of
this opinion as an exhibit to any proxy or registration statement distributed in
connection with the Merger.
Based upon and subject to the foregoing, it is our opinion that, as of
the date of this letter, the consideration to be paid by WesterFed to the
holders of Security Common Stock is fair, from a financial point of view, to the
holders of WesterFed Common Stock.
Very truly yours,
ALEX. BROWN & SONS INCORPORATED
By: /s/ Jean-Luc Servat
--------------------------
Jean-Luc Servat
Managing Director
<PAGE>
Appendix III
September 24, 1996
Board of Directors
Security Bancorp
219 North 26th Street
Billings, MT 59101
Members of the Board:
We understand that Security Bancorp, a Montana corporation
("Security"), and WesterFed Financial Corporation, a Deleware corporation
(WesterFed"), propose to enter an Agreement and Plan of Merger dated September
24, 1996 (the "Merger Agreement"), pursuant to which Security will be merged
with and into WesterFed, which will be the surviving entity (the "Merger").
Pursuant to the Merger, as more fully described in the draft Merger Agreement
dated September 19, 1996 provided to us by Security, and as further described to
us by management of Security, we understand that each oustanding share of common
stock, $1.00 par value per share, of Security ("Security Common Stock"), will at
the option of the Shareholder be exchanged for (i) $30.00 cash; (ii) that number
of shares of the Common stock, $.01 par value per share, of WesterFed
("WesterFed Common Stock"), equal to (a) $30.00 divided by the Average WesterFed
Stock Price (as defined in the Merger Agreement) if the Average WesterFed Stock
Price is equal to or greater than $13.05 and less than or equal to $15.95, (b)
2.2989 if the Average WesterFed Stock Price is equal to or less than $13.05, (c)
1.8809 if the Average WesterFed Stock Price is equal to or greater than $15.95
but not greater than $17.50,(d) $32.91 divided by the Average WesterFed Stock
Price if such price is greater than $17.50 and no Triggering Event has occured,
and (e) 1.88 if the Average WesterFed Stock Price is greater than $17.50 and a
Triggering Event has occured, or (iii) a combination of (i) and (ii) above,
subject to certain adjustments and limitations (the "Consideration"). The terms
and conditions of the Merger are set forth in more detail in the Merger
Agreement.
<PAGE>
Security Bancorp
September 24, 1996
Page 2
You have asked for our opinion as investment bankers as to whether the
Consideration to be received by the shareholders of Security pursuant to the
Merger Agreement is fair to such shareholders from a financial point of view, as
of the date hereof. We were not requested to nor did we solicit or assist
Security in soliciting indications of interest from third parties for all or any
part of Security.
In connection with our opinion, we have, among other things: (i)
reviewed certain publicly available financial and other data with respect to
Security and WesterFed, including the audited, consolidated financial statements
for the fiscal years ended June 30, 1994 and 1995 prepared in accordance with
generally accepted accounting principles as applied to financial institutions
(GAAP) and preliminary audited consolidated financial statements for fiscal year
ended June 30, 1996 prepared in accordance with GAAP and certain other relevant
financial and operating data relating to Security and WesterFed made available
to us from published sources and from the internal records of Security and
WesterFed; (ii) reviewed the draft Merger Agreement dated September 19, 1996,
(iii) reviewed the certain publicly available information concerning the trading
of, and the trading market for, Security Common Stock and WesterFed Common
Stock; (iv) compared WesterFed from a financial point of view with certain other
companies in the thrift industry which we deemed to be relevant; (v) considered
the financial terms, to the extent publicly available, of selected recent
business combinations which we deemed to be comparable, in whole or in part, to
the Merger; (vi) reviewed and discussed with representatives of the management
of Security and WesterFed certain information of a business and financial nature
regarding Security and WesterFed, furnished to us by them, including financial
forecasts prepared by their respective managements and related assumptions of
Security and WesterFed; (vii) made inquiries regarding and discussed the Merger
and the Merger Agreement and other matters related thereto with Security's
counsel; and (viii) performed such other analyses and examinations as we have
deemed appropriate.
In connection with our review, and with your consent, we have not
assumed any obligation independently to verify the foregoing information and
have relied on its being accurate and complete in all material respects. With
respect to the financial forecasts for Security and WesterFed provided to us by
their respective managements, upon their advice and with your consent we have
assumed for purposes of our opinion that the forecasts have been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of their respective managements as to the future financial performance
of Security and WesterFed and that they provide a reasonable basis upon which we
can form our opinion. We have also assumed that there have been no material
changes in Security's or WesterFed's assets, financial condition, results of
operations, business or prospects since the respective dates of their
last financial statements made available to us. We have relied on advice of
counsel to Security as to all legal matters with respect to Security, the Merger
and the Merger Agreement. We have assumed that the Merger will be consummated in
a manner that complies in all respects with the applicable provisions of the
Securities Act of 1993 (the "Securities Act"), the
<PAGE>
Security Bancorp
September 24, 1996
Page 3
Securities Exchange Act of 1934 and all other applicable federal and state
statutes, rules and regulations. In addition, we have not assumed responsibility
for reviewing any individual credit files, or making an independent evalution,
appraisal or physical inspection of any of the assets or liabilities (contingent
or otherwise) of Security or WesterFed, nor have we been furnished with any such
appraisals. We are not experts in the evaluation of loan portfolios for purposes
of assessing the adequacy of the allowances for losses with respect thereto and
have assumed, with your consent, that such allowances for each of Security and
WesterFed are in the aggregate adequate to cover such losses. You have informed
us, and we have assumed, that the Merger will be recorded as a purchase under
GAAP. Finally, our opinion is based on economic, monetary and market and other
conditions as in effect on, and the information made available to us as of, the
date hereof. Accordingly, although subsequent developments may affect this
opinion, we have not asumed any obligation to update, revise or reaffirm this
opinion.
We have further assumed with your consent that the Merger will be
consummated in accordance with the terms described in the Merger Agreement,
without any further amendments thereto, and without waiver by Security of any of
the conditions to its obligations thereunder.
We have acted as financial advisor to Security in connection with the
Merger and will receive a fee for our services, including rendering this
opinion, a significant portion of which is contingent upon the consummation of
the Merger.
Based upon the foregoing and in reliance theron, it is our opinion as
investment bankers that the Consideration to be received by the shareholders of
Security is fair to such shareholders from a financial point of view, as of the
date hereof.
This opinion is directed to the Board of Directors of Security in its
consideration of the Merger and is not a recommendation to any shareholder as to
how such shareholder should vote with respect to the Merger. Further, this
opinion adresses only the financial fairness of the Consideration to the
shareholders and does not address any other aspect of the Merger. This opinion
may not be used or referred to by Security, or quoted or disclosed to any person
in any manner, without our prior written consent, which consent is hereby given
to the inclusion of this opinion in any proxy statement or registration
statement filed with the Securities and Exchange Commission in connection with
the Merger. In furnishing this opinion, we do not admit that we are experts
within the meaning of term "experts" as used in the Securities Act and the rules
and regulations promulgated thereunder, nor do we admit that this opinion
constitutes a report or valuation within the meaning of Section 11 of the
Securities Act.
Very truly yours
MONTGOMERY SECURITIES
<PAGE>
Appendix IV
STOCK OPTION AGREEMENT #1
THIS STOCK OPTION AGREEMENT #1 (the "Agreement") is dated as of
September 24, 1996 between WesterFed Financial Corporation ("WesterFed"), a
Delaware corporation registered as a savings and loan holding company under the
Home Owner's Loan Act, as amended ("HOLA"), and Security Bancorp ("Bancorp"), a
Montana corporation registered as a savings and loan holding company under the
HOLA.
WITNESSETH
WHEREAS, the Boards of Directors of WesterFed and Bancorp have approved
an Agreement and Plan of Merger dated as of the date hereof (the "Merger
Agreement"), providing for the merger of Bancorp with and into WesterFed (the
"Merger"); and
WHEREAS, to further induce WesterFed to enter into the Merger
Agreement, WesterFed has required that Bancorp agree, and Bancorp has agreed, to
grant to WesterFed the option set forth herein to purchase shares of Bancorp's
authorized but unissued common stock, par value $1.00 per share ("Bancorp Common
Stock").
NOW THEREFORE, in consideration of the premises herein contained, the
parties agree as follows:
l. Definitions. Capitalized terms defined in the Merger Agreement and
used herein shall have the same meaning as in the Merger Agreement.
2. Grant of Options. Subject to the terms and conditions set forth
herein, Bancorp hereby grants to WesterFed an unconditional, irrevocable option
(the "Option") to purchase up to 390,642 shares of Bancorp Common Stock (the
"Option Shares") at an exercise price of $26.00 per share (with the number of
Option Shares and exercise price per share being subject to adjustment pursuant
to Section 7 hereof), payable in cash as provided in Section 4 hereof; provided,
however, that in the event Bancorp issues or agrees to issue any shares of
Bancorp Common Stock (except for shares issued pursuant to options outstanding
on the date hereof under Bancorp's 1993 Stock Option and Stock Appreciation
Rights Plan ("Bancorp Stock Options")) after the date hereof at a price less
than $26.00 per share (as adjusted pursuant to Section 7 hereof), the exercise
price with respect to the Option Shares shall be equal to such lesser price;
provided further, that in no event shall the aggregate number of Option Shares
issuable under the Option exceed 19.9% of the number of shares of Bancorp Common
Stock then issued and outstanding after giving effect to the issuance of Bancorp
Stock Options and the Option Shares.
3. Exercise of Option.
(a) Expiration of Option. Subject to compliance with applicable
provisions of law, WesterFed may exercise the Option, in whole or in part, at
any time or from time to time after the occurrence of a Purchase Event (as
defined below); provided, however, that to the extent the Option shall not have
been previously exercised, it shall terminate and be of no further force and
effect
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upon the earliest to occur of the following: (i) the Effective Time; (ii) the
termination of the Merger Agreement after approval of the Merger by the Bancorp
stockholders, except a termination by WesterFed pursuant to Section 7.01(e) of
the Merger Agreement; (iii) the termination of the Merger Agreement by Bancorp
pursuant to Section 7.01(e) thereof; (iv) the termination of the Merger
Agreement after the stockholders of WesterFed reject the Merger; (v) any other
termination of the Merger Agreement pursuant to Section 7.01 thereof except a
termination by WesterFed under Section 7.01(e), if no Purchase Event shall have
occurred prior to such termination; (vi) except as set forth in clauses (ii) and
(iii) of this Section 3(a), on the 730th day after the termination of the Merger
Agreement (such 730-day period after termination of the Merger Agreement is
referred to herein as the "Post-Termination Period") if no Purchase Event has
occurred during the term of the Merger Agreement or during the Post-Termination
Period; (vii) on the 730th day after the discontinuance of all Purchase Events
that occurred during the term of the Merger Agreement or during the
Post-Termination Period if a Purchase Event occurred during any such period; or
(viii) termination of the Option as provided in Section 10(b) hereof.
(b) Purchase Event. As used herein, "Purchase Event" shall mean any
person (other than WesterFed or its Subsidiaries) shall have commenced or
initiated an Acquisition Transaction. If more than one of the transactions
giving rise to a Purchase Event under this Section 3(b) is undertaken or
effected, then all such transactions shall give rise only to one Purchase Event,
which Purchase Event shall be deemed continuing for all purposes hereof until
all such transactions are abandoned. As used in this Agreement, "person" shall
have the meanings specified in Sections 3(a)(9) and 13(d)(3) of the Securities
Exchange Act of 1934, as amended.
(c) Notice of Purchase Event. Bancorp shall notify WesterFed promptly
in writing of the occurrence of any Purchase Event; provided, however, that the
giving of such notice by Bancorp shall not be a condition to the right of
WesterFed to exercise the Option.
(d) Notice of Exercise. In the event WesterFed wishes to exercise the
Option, it shall send to Bancorp a written notice (the date of which being
herein referred to as the "Notice Date") specifying (i) the total number of
shares it will purchase pursuant to such exercise, and (ii) a place and date not
earlier than ten business days nor later than twenty business days from the
Notice Date for the closing of such purchase (the "Closing Date").
Notwithstanding the foregoing, if prior notification to or approval of the OTS
or any other regulatory agency is required in connection with such purchase,
WesterFed shall promptly file the required notice or application for approval
and shall expeditiously process the same, and the period of time that otherwise
would run pursuant to the preceding sentence shall run instead from the date on
which any required notification periods have expired or been terminated or such
approvals have been obtained and any requisite waiting period or periods shall
have passed. Any exercise of the Option shall be deemed to occur on the Notice
Date relating thereto.
4. Payment and Delivery of Certificates.
(a) Payment. At the closing referred to in Section 3(d) hereof,
WesterFed shall pay to Bancorp the aggregate purchase price for the shares
purchased pursuant to the exercise of the Option in immediately available funds
by a wire transfer to a bank designated by Bancorp;
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provided that the failure or refusal of Bancorp to designate such a bank account
shall not preclude WesterFed from exercising the Option.
(b) Delivery of Certificate. At such closing, simultaneously with the
delivery of cash as provided in subsection (a), Bancorp shall deliver to
WesterFed a certificate or certificates representing the number of shares of
Bancorp Common Stock purchased by WesterFed, which certificates may bear the
legend set forth in Section 4(c) below, and WesterFed shall deliver to Bancorp a
letter agreeing that WesterFed will not offer to sell or otherwise dispose of
such shares in violation of this Agreement or applicable law or in a manner that
would result in WesterFed becoming an "underwriter" within the meaning of that
term under the Securities Act of 1933, as amended (the "Securities Act").
Bancorp shall pay all expenses and any and all United States federal, state and
local taxes and other charges that may be payable in connection with the
preparation, issuance and delivery of stock certificates under this Section 4 in
the name of WesterFed or its assignee, transferee or designee. Upon the giving
by WesterFed to Bancorp of the written notice of exercise of the Option provided
for under Section 3(d) above and the tender of the applicable purchase price in
immediately available funds, WesterFed shall be deemed to be the holder of
record of the shares of Bancorp Common Stock issuable upon such exercise,
notwithstanding that the stock transfer books of Bancorp shall then be closed or
that certificates representing such shares of Bancorp Common Stock shall not
then be actually delivered to WesterFed.
(c) Restrictive legend. Certificates for Bancorp Common Stock delivered
at a closing hereunder may be endorsed with a restrictive legend that shall read
substantially as follows:
"The transfer of the shares represented by this certificate is
subject to certain provisions of an agreement between the registered
holder hereof and the Issuer, a copy of which agreement is on file at
the principal place of business of the Issuer, and to resa1e
restrictions arising under the Securities Act of 1933, as amended, and
any applicable state securities laws. A copy of such agreement will be
mailed to the holder hereof without charge within five days after the
receipt by the Issuer of a written request."
It is understood that (i) the reference to the resale restrictions of the
Securities Act in the above legend shall be removed by delivery of substitute
certificate(s) without such reference if WesterFed shall have delivered to
Bancorp a copy of a letter from the staff of the SEC, or an opinion of counsel,
in form and substance reasonably satisfactory to Bancorp, to the effect that
such legend is not required for purposes of the Securities Act; (ii) the
reference to the provisions of this Agreement in the above legend shall be
removed by delivery of substitute certificate(s) without such reference if the
shares have been sold or transferred in compliance with the provisions of this
Agreement and under circumstances that do not require the retention of such
reference; and (iii) the legend shall be removed in its entirety if the
conditions in the preceding clauses (i) and (ii) are both satisfied. In
addition, such certificates shall bear any other legend as may be required by
law.
5. Bancorp Representations. Bancorp hereby represents and warrants to
WesterFed as follows:
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(a) Reservation of Shares. Bancorp has taken all necessary corporate
action to authorize and reserve for issuance a sufficient number of shares of
Bancorp Common Stock to satisfy its obligations upon the exercise of the Option
without additional authorization of Bancorp Common Stock after giving effect to
all other options, warrants, convertible securities and other rights to purchase
Bancorp Common Stock. Bancorp shall not, by charter amendment or through
reorganization, consolidation, merger, dissolution or sale of assets or by any
other voluntary act, avoid or seek to avoid the observance or performance of any
of the covenants, stipulations or conditions to be observed or performed
hereunder by Bancorp.
(b) Duly Authorized Shares. The shares of Bancorp Common Stock to be
issued upon exercise, in whole or in part, of the Option, when paid for as
provided herein, will be duly authorized, validly issued, fully paid and
nonassessable, and will be delivered free and clear of all claims, liens,
encumbrances and security interests and will not be subject to any preemptive
rights.
(c) Additional Actions. Bancorp shall promptly take all reasonable
action as may from time to time be required to be taken by it (including (A)
complying with all pre-merger notification, reporting and waiting period
requirements applicable to it and (B) in the event that, under the HOLA or a
state thrift or banking law, prior approval of or notice to the OTS or to any
state or other federal regulatory authority is necessary before the Option may
be exercised, cooperating fully with WesterFed in preparing such applications or
notices and providing such information to the applicable regulatory body as may
be required) in order to permit WesterFed to exercise the Option and Bancorp
duly and effectively to issue shares of Bancorp Common Stock pursuant thereto.
Bancorp shall promptly take all other reasonable action provided herein to
protect the rights of WesterFed against dilution as set forth in Section 7.
6. WesterFed Representations. WesterFed hereby represents and warrants
to Bancorp that WesterFed shall not transfer or otherwise dispose of any shares
purchased by WesterFed pursuant to this Agreement except in a transaction
registered or exempt from registration under the Securities Act.
7. Adjustment Upon Changes in Capitalization.
(a) Stock Dividends. In the event of any change in the outstanding
Bancorp Common Stock by reason of stock dividends, split- ups, mergers,
recapitalizations, combinations, exchanges of shares, or the like (but excluding
any exercise of Bancorp Stock Options)(each an "Adjustment Event"), the type and
number of shares subject to the Option, or the purchase price per share, as the
case may be, shall be adjusted appropriately, and proper provision shall be made
in the agreements governing any such transaction so that WesterFed shall receive
upon exercise of the Option the number and class of shares, other securities or
property that WesterFed would have received in respect of the shares of Bancorp
Common Stock subject to the Option if the Option had been exercised and the
Bancorp Common Stock subject to the Option had been issued to WesterFed
immediately prior to such Adjustment Event or the record date therefor, as
applicable.
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(b) Issuance of Additional Shares. In the event that any additional
shares of Bancorp Common Stock are issued after the date of this Agreement
(other than pursuant to this Agreement or in connection with an Adjustment Event
or the exercise of Bancorp Stock Options), the number of shares subject to the
Option shall be adjusted after such issuance, so that it equals 19.9% of the
number of shares of Bancorp Common Stock then issued and outstanding after
giving effect to the issuance of the Option Shares; provided, however, that
nothing contained in this Section 7 shall be deemed to authorize Bancorp to
issue any shares of its Common Stock in breach of the provisions of the Merger
Agreement; and provided further, that in no event shall the number of shares
subject to the Option exceed 19.9% of Bancorp's issued and outstanding Common
Stock, after giving effect to the issuance of Bancorp Stock Options and the
Option Shares.
8. Registration Rights.
(a) Registration Procedure. If requested by WesterFed at any time
during the four-year period beginning on the date of the first acquisition of
any of the Option Shares, Bancorp, as expeditiously as possible, will use its
best efforts to effect the registration of the Option Shares, on a form of
general use under the Securities Act, in order to permit the sale or other
disposition of such shares in accordance with the intended method of sale or
other disposition requested by WesterFed and by any underwriter selected by
WesterFed; provided, however, that Bancorp shall not be required to register the
Option Shares under the Securities Act (i) on more than one occasion during any
calendar year or on more than two occasions during the term of this Agreement,
(ii) prior to the earlier of termination of the Merger Agreement pursuant to
Section 7 thereof or the occurrence of a Purchase Event, or (iii) within 120
days after the effective date of a registration with respect to which WesterFed
exercised "piggy-back" rights under this Section 8(a). The registrations
effected under this Section 8(a) shall be at Bancorp's expense. In connection
with such registrations or any piggy-back registrations, each party shall pay
the fees and expenses of its own legal counsel, and WesterFed shall pay all
underwriting discounts and commissions applicable to the sale of Option Shares.
WesterFed shall provide such information as may be necessary for Bancorp's
preparation of the registration statement. Bancorp will use its best efforts to
cause such registration statement first to become effective and then to remain
effective for such period not in excess of 180 days from the day such
registration statement first becomes effective or such shorter time as may be
reasonably necessary to effect such sales or other dispositions. The obligations
of Bancorp hereunder to file a registration statement and to maintain its
effectiveness may be suspended for one or more periods of time that do not
exceed 180 days in the aggregate if the Board of Directors of Bancorp shall have
determined that the filing of such registration statement or the maintenance of
its effectiveness would require a special audit of Bancorp or any of its
Subsidiaries or the disclosure of nonpublic information that would materially
and adversely affect Bancorp. In addition to the foregoing, WesterFed shall have
unlimited piggy-back registration rights relating to the Option Shares in
connection with any registration of an underwritten public offering of Bancorp
Common Stock, and the costs of such piggy-back registration shall be borne by
Bancorp. The foregoing notwithstanding, if, at the time of any request by
WesterFed for piggy-back registration of the Option Shares as provided above, in
the good faith judgment of the managing underwriter or managing underwriters,
or, if none, the sole underwriter or underwriters of such offering, the
inclusion of the Option Shares would interfere with the successful marketing of
the shares of Bancorp Common Stock offered by Bancorp, the number of shares
represented by Option Shares
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<PAGE>
which are to be covered in the registration statement may be reduced; provided,
however, that after any such required reduction of the number of Option Shares
to be included in such offering for the account of WesterFed shall constitute at
least 5% of the total number of shares to be sold by WesterFed and Bancorp in
such offering in the aggregate; and provided further, that if such reduction
occurs, then Bancorp shall file a registration statement for the balance as
promptly as practical and no reduction shall thereafter occur.
(b) Registration Indemnification. In connection with the filing of any
such registration statement, Bancorp shall indemnify and hold harmless WesterFed
or its transferee against any losses, claims, damages or liabilities, joint or
several, to which WesterFed or its transferee may become subject, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in any registration statement, including any
prospectus included therein, or any amendment or supplement thereto, or arise
out of or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading; and Bancorp shall reimburse WesterFed or its transferee
for any legal or other expense reasonably incurred by WesterFed or its
transferee in connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that Bancorp shall not be liable
in any case to the extent that any such loss, claim, damage or liability arises
out of or is based upon an untrue statement or omission or an alleged untrue
statement or omission made in such registration statement, and any prospectus
included therein, or any amendment or supplement thereto, in reliance upon and
in conformity with written information furnished by or on behalf of WesterFed or
its transferee specifically for use in the preparation thereof. WesterFed or its
transferee shall indemnify and hold harmless Bancorp to the same extent as set
forth in the immediately preceding sentence but only with reference to written
information furnished by or on behalf of WesterFed or its transferee for use in
the preparation of such registration statement, and any prospectus included
therein, or any amendment or supplement thereto; and WesterFed or its transferee
shall reimburse Bancorp for any legal or other expenses reasonably incurred by
Bancorp in connection with investigation or defense of any such loss, claim,
damage, liability or action.
9. Severability. If any term, provision, covenant or restriction
contained in this Agreement is held by a court or a federal or state regulatory
agency of competent jurisdiction to be invalid, void or unenforceable, the
remainder of the terms, provisions and covenants and restrictions contained in
this Agreement shall remain in full force and effect, and shall in no way be
affected, impaired or invalidated. If for any reason such court or regulatory
agency determines that the Option will not permit the holder to acquire the full
number of Option Shares provided in Section 2 hereof (as adjusted pursuant to
Section 7 hereof), it is the express intention of Bancorp to allow the holder to
acquire such lesser number of shares as may be permissible, without any
amendment or modification hereof.
10. Miscellaneous.
(a) Expenses. Except as otherwise provided herein, each of the parties
hereto shall bear and pay all costs and expenses incurred by it or on its behalf
in connection with the
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transactions contemplated hereunder, including fees and expenses of its own
financial consultants, investment bankers, accountants and counsel.
(b) Stock Option Agreement #2. The parties are contemporaneously
entering into Stock Option Agreement #2 pursuant to which separate option rights
are being granted by Bancorp to WesterFed. Notwithstanding anything contained
herein to the contrary, if WesterFed acquires any option shares under Stock
Option Agreement #2, then its rights under this Agreement shall cease and this
Agreement shall have no further force or effect.
(c) Entire Agreement. Except as otherwise expressly provided herein,
this Agreement contains the entire agreement between the parties with respect to
the transaction contemplated hereunder and supersedes all prior arrangements or
understandings with respect thereto, written or oral. The terms and conditions
of this Agreement shall inure to the benefit of and be binding upon the parties
hereto and their respective successors and assigns. Nothing in this Agreement,
expressed or implied, is intended to confer upon any party, other than the
parties hereto, and their respective successors and assigns, any rights,
remedies, obligations or liabilities under or by reason of this Agreement,
except as expressly provided herein.
(d) Assignment. Neither of the parties hereto may assign any of its
rights or obligations under this Agreement or the Option to any other person,
without the express written consent of the other party, except that in the event
a Purchase Event shall have occurred and be continuing WesterFed may assign in
whole or in part the Option, and its rights and obligations hereunder.
(e) Notices. All notices or other communications which are required or
permitted hereunder shall be in writing and sufficient if delivered personally
or by reliable overnight courier or sent by registered or certified mail,
postage prepaid, addressed as follows:
If to WesterFed: Lyle R. Grimes
President and Chief Executive Officer
WesterFed Financial Corporation
100 East Broadway
Missoula, Montana 59802
with a copy to: Silver, Freedman & Taff, L.L.P.
1100 New York Avenue, N.W.
Seventh Floor, East Tower
Washington, D.C. 20005
Attn: Barry P. Taff, P.C.
If to Bancorp: David W. Jorgenson
President and Chief Executive Officer
Security Bancorp
219 North 26th Street
Billings, Montana
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with a copy to: Graham & Dunn
1420 Fifth Avenue
Suite 3300
Seattle, Washington 98101
Attn: Stephen M. Klein
A party may change its address for notice purposes by written notice to the
other party hereto. All such notices and communications shall be deemed
delivered when received by all parties entitled to such receipt hereunder.
(f) Extension of Time. All time periods specified herein shall be
extended, if necessary, by the length of time required for any necessary
governmental approval to be sought and received or governmental notice to be
given and the waiting period to expire, provided that any governmental
application or notice shall be made or given promptly. All of the parties hereto
shall use their best efforts to secure any required governmental approval and to
give any required governmental notice. Notwithstanding anything to the contrary
contained herein, no party shall be required to proceed with any transaction
described herein if any required governmental approval is not obtained or if,
upon the giving of any required governmental notice, the notified governmental
agency prohibits any such transaction. If any required governmental approval is
not obtained or if a governmental agency prohibits any such transaction upon
receipt of a required notice, the decision to appeal such governmental action
shall be solely that of WesterFed; provided, however, that WesterFed shall bear
all of the costs and expenses, including legal and accounting fees, incurred by
any of the parties hereto in prosecuting such an appeal. Periods of time that
otherwise would run under the terms of this Agreement shall also be extended to
the extent necessary to avoid liability under Section 16(b) of the Securities
Exchange Act of 1934, as amended.
(g) Counterparts. This Agreement may be executed in any number of
counterparts, and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.
(h) Specific Performance. The parties agree that damages would be an
inadequate remedy for a breach of the provisions of this Agreement by Bancorp
and that this Agreement may be enforced by WesterFed through injunctive or other
equitable relief.
(i) Governing Law. This Agreement shall be governed by and construed in
accordance with the law of the State of Montana applicable to agreements made
and entirely to be performed within such state and such federal laws as may be
applicable.
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IN WITNESS WHEREOF, each of the parties hereto has executed this
Agreement as of the day and year first above written.
WESTERFED FINANCIAL CORPORATION
BY: /s/ Lyle R. Grimes
--------------------------------
Lyle R. Grimes
President and Chief Executive Officer
SECURITY BANCORP
BY: /s/ David W. Jorgenson
-----------------------------------
David W. Jorgenson
President and Chief Executive Officer
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Appendix V
STOCK OPTION AGREEMENT NUMBER #2
THIS STOCK OPTION AGREEMENT #2 (the "Agreement") is dated as of
September 24, 1996 between WesterFed Financial Corporation ("WesterFed"), a
Delaware corporation registered as a savings and loan holding company under the
Home Owner's Loan Act, as amended ("HOLA"), and Security Bancorp ("Bancorp"), a
Montana corporation registered as a savings and loan holding company under the
HOLA.
W I T N E S S E T H
WHEREAS, the Boards of Directors of WesterFed and Bancorp have approved
an Agreement and Plan of Merger dated as of the date hereof (the "Merger
Agreement"), providing for the merger of Bancorp with and into WesterFed (the
"Merger"); and
WHEREAS, to further induce WesterFed to enter into the Merger
Agreement, WesterFed has required that Bancorp agree, and Bancorp has agreed, to
grant to WesterFed the option set forth in Stock Option Agreement No. #1, of
even date herewith ("Stock Option Agreement #1") to purchase certain shares of
Bancorp's authorized but unissued common stock, par value $1.00 per share
("Bancorp Common Stock"), and to separately grant to WesterFed the option set
forth herein to purchase certain shares of Bancorp's Common Stock upon the terms
and conditions set forth herein.
NOW THEREFORE, in consideration of the premises herein contained, the
parties agree as follows:
1. Definitions. Capitalized terms defined in the Merger Agreement and
used herein shall have the same meaning as in the Merger Agreement.
2. Grant of Options. Subject to the terms and conditions set forth
herein, Bancorp hereby grants to WesterFed an unconditional, irrevocable option
(the "Option") to purchase up to 100,000 shares of Bancorp Common Stock (the
"Option Shares") at an exercise price of $24.00 per share (with the number of
Option Shares and exercise price per share being subject to adjustment pursuant
to Section 7 hereof), payable in cash as provided in Section 4 hereof; provided,
however, that in the event Bancorp issues or agrees to issue any shares of
Bancorp Common Stock (except for shares issued pursuant to options outstanding
on the date hereof under Bancorp's 1993 Stock Option and Stock Appreciation
Rights Plan ("Bancorp Stock Options")) after the date hereof at a price less
than $24.00 per share (as adjusted pursuant to Section 7 hereof), the exercise
price with respect to the Option Shares shall be equal to such lesser price;
provided further, that in no event shall the aggregate number of Option Shares
issuable under the Option exceed 5.98% of the number of shares of Bancorp Common
Stock then issued and outstanding after giving effect to the issuance of Bancorp
Stock Options and the Option Shares.
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3. Exercise of Option.
(a) Expiration of Option. Subject to compliance with applicable
provisions of law, WesterFed may exercise the Option, in whole or part, at any
time or from time to time following the failure of Bancorp Stockholders to
approve the Merger Agreement at a duly held stockholder meeting or the failure
of Bancorp to hold a meeting to vote on the Merger (each such event, a "Purchase
Event"), provided that to the extent the Option shall not have been previously
exercised, it shall terminate and be of no further force and effect upon the
earliest to occur of the following: (i) the Effective Time; (ii) termination of
the Merger Agreement by Bancorp pursuant to Section 7.01(e) thereof; (iii) on
the date two years after termination of the Merger Agreement, pursuant to
provisions of the Merger Agreement other than Section 7.01(e); or (iv)
termination of the Option as provided in Section 10(b) hereof.
(b) Notice of Stockholder Vote. Bancorp shall notify WesterFed promptly
in writing of the failure to achieve the requisite approval of Bancorp
stockholders of the Merger Agreement; provided, however, that the giving of such
notice by Bancorp shall not be a condition to the right of WesterFed to exercise
the Option.
(c) Notice of Exercise. In the event WesterFed wishes to exercise the
Option, it shall send to Bancorp a written notice (the date of which being
herein referred to as the "Notice Date") specifying (i) the total number of
shares it will purchase pursuant to such exercise, and (ii) a place and date not
earlier than ten business days nor later than twenty business days from the
Notice Date for the closing of such purchase (the "Closing Date").
Notwithstanding the foregoing, if prior notification to or approval of the OTS
or any other regulatory agency is required in connection with such purchase,
WesterFed shall promptly file the required notice or application for approval
and shall expeditiously process the same, and the period of time that otherwise
would run pursuant to the preceding sentence shall run instead from the date on
which any required notification periods have expired or been terminated or such
approvals have been obtained and any requisite waiting period or periods shall
have passed. Any exercise of the Option shall be deemed to occur on the Notice
Date relating thereto.
4. Payment and Delivery of Certificates.
(a) Payment. At the closing referred to in Section 3(c) hereof,
WesterFed shall pay to Bancorp the aggregate purchase price for the shares
purchased pursuant to the exercise of the Option in immediately available funds
by a wire transfer to a bank designated by Bancorp; provided that the failure or
refusal of Bancorp to designate such a bank account shall not preclude WesterFed
from exercising the Option.
(b) Delivery of Certificate. At such closing, simultaneously with the
delivery of cash as provided in subsection (a), Bancorp shall deliver to
WesterFed a certificate or certificates representing the number of shares of
Bancorp Common Stock purchased by WesterFed, which certificates may bear the
legend set forth in Section 4(c) below, and WesterFed shall deliver to Bancorp a
letter agreeing that WesterFed will not offer to sell or otherwise dispose of
such shares in violation of this Agreement or applicable law or in a manner that
would result in WesterFed becoming an "underwriter" within the meaning of that
term under the Securities Act of 1933, as
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amended (the "Securities Act"). Bancorp shall pay all expenses and any and all
United States federal, state and local taxes and other charges that may be
payable in connection with the preparation, issuance and delivery of stock
certificates under this Section 4 in the name of WesterFed or its assignee,
transferee or designee. Upon the giving by WesterFed to Bancorp of the written
notice of exercise of the Option provided for under Section 3(c) above and the
tender of the applicable purchase price in immediately available funds,
WesterFed shall be deemed to be the holder of record of the shares of Bancorp
Common Stock issuable upon such exercise, notwithstanding that the stock
transfer books of Bancorp shall then be closed or that certificates representing
such shares of Bancorp Common Stock shall not then be actually delivered to
WesterFed.
(c) Restrictive Legend. Certificates for Bancorp Common Stock delivered
at a closing hereunder may be endorsed with a restrictive legend that shall read
substantially as follows:
"The transfer of the shares represented by this certificate is
subject to certain provisions of an agreement between the registered
holder hereof and the Issuer, a copy of which agreement is on file at
the principal office of the Issuer, and to resale restrictions arising
under the Securities Act of 1933, as amended, and any applicable state
securities laws. A copy of such agreement will be mailed to the holder
hereof without charge within five days after the receipt by the Issuer
of a written request."
It is understood that (i) the reference to the resale restrictions of the
Securities Act in the above legend shall be removed by delivery of substitute
certificate(s) without such reference if WesterFed shall have delivered to
Bancorp a copy of a letter from the staff of the SEC, or an opinion of counsel,
in form and substance reasonably satisfactory to Bancorp, to the effect that
such legend is not required for purposes of the Securities Act; (ii) the
reference to the provisions of this Agreement in the above legend shall be
removed by delivery of substitute certificate(s) without such reference if the
shares have been sold or transferred in compliance with the provisions of this
Agreement and under circumstances that do not require the retention of such
reference; and (iii) the legend shall be removed in its entirety if the
conditions in the preceding clauses (i) and (ii) are both satisfied. In
addition, such certificates shall bear any other legend as may be required by
law.
5. Bancorp Representations. Bancorp hereby represents and warrants to
WesterFed as follows:
(a) Reservation of Shares. Bancorp has taken all necessary corporate
action to authorize and reserve for issuance a sufficient number of shares of
Bancorp Common Stock to satisfy its obligations upon the exercise of the Option
without additional authorization of Bancorp Common Stock after giving effect to
all other options, warrants, convertible securities and other rights to purchase
Bancorp Common Stock. Bancorp shall not, by charter amendment or through
reorganization, consolidation, merger, dissolution or sale of assets or by any
other
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voluntary act, avoid or seek to avoid the observance or performance of any of
the covenants, stipulations or conditions to be observed or performed hereunder
by Bancorp.
(b) Duly Authorized Shares. The shares of Bancorp Common Stock to be
issued upon exercise, in whole or in part, of the Option, when paid for as
provided herein, will be duly authorized, validly issued, fully paid and
nonassessable, and will be delivered free and clear of all claims, liens,
encumbrances and security interests and will not be subject to any preemptive
rights.
(c) Additional Actions. Bancorp shall promptly take all reasonable
action as may from time to time be required to be taken by it (including (A)
complying with all pre-merger notification, reporting and waiting period
requirements applicable to it, and (B) in the event that, under the HOLA or a
state thrift or banking law, prior approval of or notice to the OTS or to any
state or other federal regulatory authority is necessary before the Option may
be exercised, cooperating fully with WesterFed in preparing such applications or
notices and providing such information to the applicable regulatory body as may
be required) in order to permit WesterFed to exercise the Option and Bancorp
duly and effectively to issue shares of Bancorp Common Stock pursuant thereto.
Bancorp shall promptly take all other reasonable action provided herein to
protect the rights of WesterFed against dilution as set forth in Section 7.
6. WesterFed Representations. WesterFed hereby represents and warrants
to Bancorp that WesterFed will not transfer or otherwise dispose of any shares
purchased by WesterFed pursuant to this Agreement except in a transaction
registered or exempt from registration under the Securities Act.
7. Adjustment Upon Changes in Capitalization.
(a) Stock Dividends. In the event of any change in the outstanding
Bancorp Common Stock by reason of stock dividends, split-ups, mergers,
recapitalizations, combinations, exchanges of shares, or the like (but excluding
any exercise of Bancorp Stock Options)(each an "Adjustment Event"), the type and
number of shares subject to the Option, or the purchase price per share, as the
case may be, shall be adjusted appropriately, and proper provision shall be made
in the agreements governing any such transaction so that WesterFed shall receive
upon exercise of the Option the number and class of shares, other securities or
property that WesterFed would have received in respect of the shares of Bancorp
Common Stock subject to the Option if the Option had been exercised and the
Bancorp Common Stock subject to the Option had been issued to WesterFed
immediately prior to such Adjustment Event or the record date therefor, as
applicable.
(b) Issuance of Additional Shares. In the event that any additional
shares of Bancorp Common Stock are issued after the date of this Agreement
(other than pursuant to this Agreement or in connection with an Adjustment Event
or the exercise of Bancorp Stock Options), the number of shares subject to the
Option shall be adjusted after such issuance, so that it equals 4.85% of the
number of shares of Bancorp Common Stock then issued and outstanding after
giving effect to the issuance of the Option Shares; provided, however, that
nothing contained in this Section 7 shall be deemed to authorize Bancorp to
issue any shares of its
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Common Stock in breach of the provisions of the Merger Agreement; and provided
further, that in no event shall the number of shares subject to the Option
exceed 4.85% of Bancorp's issued and outstanding Common Stock, after giving
effect to the issuance of Bancorp Stock Options and the Option Shares.
8. Registration Rights.
(a) Registration Procedure. If requested by WesterFed at any time
during the four-year period beginning on the date of the first acquisition of
any of the Option Shares, Bancorp, as expeditiously as possible, will use its
best efforts to effect the registration of the Option Shares, on a form of
general use under the Securities Act, in order to permit the sale or other
disposition of such shares in accordance with the intended method of sale or
other disposition requested by WesterFed and by any underwriter selected by
WesterFed; provided, however, that Bancorp shall not be required to register the
Option Shares under the Securities Act (i) on more than one occasion during any
calendar year or on more than two occasions during the term of this Agreement,
(ii) prior to the earlier of termination of the Merger Agreement pursuant to
Section 7 thereof or the occurrence of a Purchase Event, or (iii) within 120
days after the effective date of a registration with respect to which WesterFed
exercised "piggy-back" rights under this Section 8(a). The first registration
effected under this Section 8(a) shall be at Bancorp's expense; provided,
however, that WesterFed shall reimburse Bancorp for actual accountable
out-of-pocket expenses up to a maximum of $25,000. If a second registration is
requested hereunder by WesterFed, it shall be paid for equally by WesterFed and
Bancorp. In connection with such registrations or any piggy-back registrations,
each party shall pay the fees and expenses of its own legal counsel, and
WesterFed shall pay all underwriting discounts and commissions applicable to the
sale of Option Shares. WesterFed shall provide such information as may be
necessary for Bancorp's preparation of the registration statement. Bancorp will
use its best efforts to cause such registration statement first to become
effective and then to remain effective for such period not in excess of 180 days
from the day such registration statement first becomes effective or such shorter
time as may be reasonably necessary to effect such sales or other dispositions.
The obligations of Bancorp hereunder to file a registration statement and to
maintain its effectiveness may be suspended for one or more periods of time that
do not exceed 180 days in the aggregate if the Board of Directors of Bancorp
shall have determined that the filing of such registration statement or the
maintenance of its effectiveness would require a special audit of Bancorp or any
of its Subsidiaries or the disclosure of nonpublic information that would
materially and adversely affect Bancorp. In addition to the foregoing, WesterFed
shall have unlimited piggy-back registration rights relating to the Option
Shares in connection with any registration of an underwritten public offering of
Bancorp Common Stock, and the costs of such piggy-back registration shall be
borne by Bancorp. The foregoing notwithstanding, if, at the time of any request
by WesterFed for piggy-back registration of the Option Shares as provided above,
in the good faith judgment of the managing underwriter or managing underwriters,
or, if none, the sole underwriter or underwriters, of such offering, the
inclusion of the Option Shares would interfere with the successful marketing of
the shares of Bancorp Common Stock offered by Bancorp, the number of shares
represented by Option Shares which are to be covered in the registration
statement may be reduced; provided, however, that after any such required
reduction of the number of Option Shares to be included in such offering for the
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account of WesterFed shall constitute at least 5% of the total number of shares
to be sold by WesterFed and Bancorp in such offering in the aggregate; and
provided further, that if such reduction occurs, then Bancorp shall file a
registration statement for the balance as promptly as practical and no reduction
shall thereafter occur.
(b) Registration Indemnification. In connection with the filing of any
such registration statement, Bancorp shall indemnify and hold harmless WesterFed
or its transferee against any losses, claims, damages or liabilities, joint or
several, to which WesterFed or its transferee may become subject, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in any registration statement, including any
prospectus included therein, or any amendment or supplement thereto, or arise
out of or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading; and Bancorp shall reimburse WesterFed or its transferee
for any legal or other expense reasonably incurred by WesterFed or its
transferee in connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that Bancorp shall not be liable
in any case to the extent that any such loss, claim, damage or liability arises
out of or is based upon an untrue statement or omission or an alleged untrue
statement or omission made in such registration statement, and any prospectus
included therein, or any amendment or supplement thereto, in reliance upon and
in conformity with written information furnished by or on behalf of WesterFed or
its transferee specifically for use in the preparation thereof. WesterFed or its
transferee shall indemnify and hold harmless Bancorp to the same extent as set
forth in the immediately preceding sentence but only with reference to written
information furnished by or on behalf of WesterFed or its transferee for use in
the preparation of such registration statement, and any prospectus included
therein, or any amendment or supplement thereto; and WesterFed or its transferee
shall reimburse Bancorp for any legal or other expenses reasonably incurred by
Bancorp in connection with investigation or defense of any such loss, claim,
damage, liability or action.
9. Severability. If any term, provision, covenant or restriction
contained in this Agreement is held by a court or a federal or state regulatory
agency of competent jurisdiction to be invalid, void or unenforceable, the
remainder of the terms, provisions and covenants and restrictions contained in
this Agreement shall remain in full force and effect, and shall in no way be
affected, impaired or invalidated. If for any reason such court or regulatory
agency determines that the Option will not permit the holder to acquire the full
number of Option Shares provided in Section 2 hereof (as adjusted pursuant to
Section 7 hereof), it is the express intention of Bancorp to allow the holder to
acquire such lesser number of shares as may be permissible, without any
amendment or modification hereof.
10. Miscellaneous.
(a) Expenses. Except as otherwise provided herein, each of the parties
hereto shall bear and pay all costs and expenses incurred by it or on its behalf
in connection with the transactions contemplated hereunder, including fees and
expenses of its own financial consultants, investment bankers, accountants and
counsel.
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(b) Stock Option Agreement #1. The parties are contemporaneously
entering into Stock Option Agreement #1 pursuant to which separate option rights
are being granted by Bancorp to WesterFed. Notwithstanding anything contained
herein to the contrary, if WesterFed acquires any option shares under Stock
Option Agreement #1, then its rights under this Agreement shall cease and this
Agreement shall have no further force or effect.
(c) Entire Agreement. Except as otherwise expressly provided herein,
this Agreement contains the entire agreement between the parties with respect to
the transactions contemplated hereunder and supersedes all prior arrangements or
understandings with respect thereto, written or oral. The terms and conditions
of this Agreement shall inure to the benefit of and be binding upon the parties
hereto and their respective successors and assigns. Nothing in this Agreement,
expressed or implied, is intended to confer upon any party, other than the
parties hereto and their respective successors and assigns, any rights,
remedies, obligations or liabilities under or by reason of this Agreement,
except as expressly provided herein.
(d) Assignment. Neither of the parties hereto may assign any of its
rights or obligations under this Agreement or the Option to any other person,
without the express written consent of the other party, except that in the event
the Option becomes exercisable, WesterFed may assign in whole or in part the
Option, and its rights and obligations hereunder, to one or more third parties
approved by Bancorp, which approval shall not be unreasonably withheld or
delayed.
(e) Notices. All notices or other communications which are required or
permitted hereunder shall be in writing and sufficient if delivered personally
or by reliable overnight courier or sent by registered or certified mail,
postage prepaid, addressed as follows:
If to WesterFed: Lyle R. Grimes
President and Chief Executive Officer
WesterFed Financial Corporation
100 East Broadway
Missoula, Montana 59802
with a copy to: Silver, Freedman & Taff, L.L.P.
1100 New York Avenue, N.W.
Seventh Floor, East Tower
Washington, D.C. 20005
Attn: Barry P. Taff, P.C.
If to Bancorp: David W. Jorgenson
President and Chief Executive Officer
Security Bancorp
219 North 26th Street
Billings, Montana
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with a copy to: Graham & Dunn
1420 Fifth Avenue
Suite 3300
Seattle, Washington 98101
Attn: Stephen M. Klein
A party may change its address for notice purposes by written notice to the
other party hereto. All such notices and communications shall be deemed
delivered when received by all parties entitled to such receipt hereunder.
(f) Extension of Time. All time periods specified herein shall be
extended, if necessary, by the length of time required for any necessary
governmental approval to be sought and received or governmental notice to be
given and the waiting period to expire, provided that any governmental
application or notice shall be made or given promptly. All of the parties hereto
shall use their best efforts to secure any required governmental approval and to
give any required governmental notice. Notwithstanding anything to the contrary
contained herein, no party shall be required to proceed with any transaction
described herein if any required governmental approval is not obtained or if,
upon the giving of any required governmental notice, the notified governmental
agency prohibits any such transaction. If any required governmental approval is
not obtained or if a governmental agency prohibits any such transaction upon
receipt of a required notice, the decision to appeal such governmental action
shall be solely that of WesterFed; provided, however, that WesterFed shall bear
all of the costs and expenses, including legal and accounting fees, incurred by
any of the parties hereto in prosecuting such an appeal. Periods of time that
otherwise would run under the terms of this Agreement shall also be extended to
the extent necessary to avoid liability under Section 16(b) of the Securities
Exchange Act of 1934, as amended.
(g) Counterparts. This Agreement may be executed in any number of
counterparts, and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.
(h) Specific Performance. The parties agree that damages would be an
inadequate remedy for a breach of the provisions of this Agreement by Bancorp
and that this Agreement may be enforced by WesterFed through injunctive or other
equitable relief.
(i) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Montana applicable to agreements made
and entirely to be performed within such state and such federal laws as may be
applicable.
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IN WITNESS WHEREOF, each of the parties hereto has executed this
Agreement as of the day and year first above written.
WESTERFED FINANCIAL CORPORATION
BY: /s/ Lyle R. Grimes
-----------------------------
Lyle R. Grimes
President and Chief Executive Officer
SECURITY BANCORP
BY: /s/ David W. Jorgenson
-----------------------------
David W. Jorgenson
President and Chief Executive Officer
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APPENDIX VI
35-1-827 RIGHT TO DISSENT. --(1) A shareholder is entitled to dissent from and
obtain payment of the fair value of the1 shareholder's shares in the event of
any of the following corporate actions:
(a) consummation of a plan of merger to which the corporation is a
party if:
(i) shareholder approval is required for the merger by 35-1-815 or the
articles of incorporation and the shareholder is entitled to vote on the merger;
or
(ii) the corporation is a subsidiary that is merger with its parent
corporation under 35- 1-818;
(b) consummation of a plan of share exchange to which the corporation
is a party as the corporation whose shares will be acquired if the shareholder
is entitled to vote on the plan;
(c) consummation of a sale or exchange of all or substantially all of
the property of the corporation other than in the usual and regular course of
business if the shareholder is entitled to vote in the sale or exchange,
including a sale in dissolution but not including a sale pursuant to court order
or a sale for cash pursuant to a plan by which all or substantially all of the
net proceeds of the sale will be distributed to the shareholders within 1 year
after the date of sale;
(d) an amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's share because it:
(i) alters or abolishes a preferential right of the shares;
(ii) creates, alters, or abolishes a right in respect of redemption,
including a provision with respect to a sinking fund for the redemption or
repurchase of the shares;
(iii) alters or abolishes a preemptive right of the holder of the
shares to acquire shares or other securities;
(iv) excludes or limits the right of the shares to be voted on any
matter or to2 cumulate votes, other than a limitation by dilution through
issuance of shares or other securities with similar voting rights; or
(v) reduces the number of shares owned by the shareholder to a fraction
of a share if the fractional share so created is to be acquired for cash under
35-1-621; or
(e) any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, by laws, or a resolution of the board of
directors provides that voting or nonvoting shareholders are entitled to dissent
and obtain payment for their shares.
- --------
Ch. 249, L. '93, eff. 10-1-93, added matter in italic and deleted 1"his" and 2
"accumulated."
<PAGE>
(2) A shareholder entitled to dissent and to obtain payment for2 shares
under 35-1-826 through 35-1-839 may not challenge the corporate action creating
the shareholder's entitlement unless the action is unlawful or fraudulent with
respect to the shareholder of the corporation. (Last amended by Ch. 249, L. '93,
eff. 10-1-93.)
35-1-828 DISSENT BY NOMINEES AND BENEFICIAL OWNERS.-- (1) A record shareholder
may assert dissenters' rights as to fewer than all the shares registered in his
name only if he dissents with respect to all shares beneficially owned by any
one person and notifies the corporation in writing of the name and address of
each person on whose behalf he asserts dissenters' rights. The rights of a
partial dissenter under this subsection are determined as if the shares as to
which he dissents and his other shares were registered in the names of different
shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to shares
held on his behalf only if;
(a) he submits to the corporation the record shareholder's written
consent to the dissent not later than the time the beneficial shareholder
asserts dissenters' rights; and
(b) he does so with respect to all shares of which he is the beneficial
shareholder or over which he has power to direct the vote.
35-1-829 NOTICE OF DISSENTERS' RIGHTS.--(1) If a proposed corporate action
creating dissenters' rights under 35-1-827 is submitted to a vote at a
shareholders' meeting, the meeting notice must state that shareholders are or
may be entitled to assert dissenters' rights under 35-1-826 through 35-1-839 and
must be accompanied by a copy of 35-1-826 through 85-1- 839.
(2) If a corporate action creating dissenters' rights under 35-1-827 is
taken without a vote of shareholders, the corporation shall give written
notification to all shareholders entitled to assert dissenters' rights that the
action was taken and shall send them the dissenters' notice described in
35-1-831.
35-1-830 NOTICE OF INTENT TO DEMAND PAYMENT.--(1) If proposed corporate action
creating dissenters' rights under 35-1-827 is submitted to a vote at a
shareholders' meeting, a shareholder who wishes to assert dissenters' rights:
(a) shall deliver to the corporation before the vote is taken written
notice of his intent to demand payment for his shares if the proposed action is
effectuated; and
(b) may not vote his shares in favor of the proposed action.
(2) A shareholder who does not satisfy the requirements of subsection
(1)(a) is not entitled to payment for his shares under 35-1-826 through
35-1-389.
- --------
Ch. 249, L. '93, eff. 10-1-93, added matter in italic and deleted 1 "his" and 2
"accumulate."
<PAGE>
35-1-831 DISSENTERS' NOTICE.--(1) If proposed corporate action creating
dissenters' rights under 35-1-827 is authorized at a shareholders' meeting, the
corporation shall deliver a written dissenters' notice to all shareholders who
satisfied the requirements of 35-1-830.
(2) The dissenters' notice must be sent no later than 10 days after the
corporate action was taken and must:
(a) state where the payment demand must be sent and where and when
certificates for certified shares must be deposited;
(b) inform shareholders of uncertified shares to what extend transfer
of the shares will be restricted after the payment is received;
(c) supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the terms of the proposed
corporate action and that requires the person asserting the dissenters' rights
to certify whether or not he acquired beneficial ownership of the shares before
that date;
(d) set a date by which the corporation must receive the payment
demand, which may not be fewer than 30 nor more than 60 days after the date the
required notice under subsection (1) is delivered; and
(e) be accompanied by a copy of 35-1-826 through 35-1-839.
<PAGE>
APPENDIX VII
WesterFed Financial Corporation
Equity Incentive Plan
1. Plan Purpose. The purpose of the Plan is to promote the long-term
interests of the Corporation and its stockholders by providing a means for
attracting and retaining directors, advisory directors, officers and employees
of the Corporation and its Affiliates.
2. Definitions. The following definitions are applicable to the Plan:
"Affiliate" -- means any "parent corporation" or "subsidiary
corporation" of the Corporation as such terms are defined in Section 425(e) and
(f), respectively, of the Code.
"Award" -- means the grant by the Committee of an Incentive Stock
Option, a Non-Qualified Stock Option, a Stock Appreciation Right, Restricted
Stock or other property or securities, or any combination thereof, as provided
in the Plan.
"Award Agreement" -- means the agreement evidencing the grant of
an Award made under the Plan.
"Cause" -- means Termination of Service by reason of personal
dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving
personal profit, intentional failure to perform stated duties or gross
negligence.
"Code" -- means the Internal Revenue Code of 1986, as amended.
"Committee" -- means the Committee referred to in Section 3
hereof.
"Corporation" -- means WesterFed Financial Corporation, a
Delaware corporation, and any successor thereto.
"Incentive Stock Option" -- means an option to purchase Shares
granted by the Committee which is intended to qualify as an Incentive Stock
Option under Section 422(b) of the Code. Unless otherwise set forth in the Award
Agreement any Option which does not qualify as an Incentive Stock Option for any
reason shall be deemed a Non-Qualified Stock Option.
"Market Value" -- means the average of the high and low quoted
sales price on the date in question (or, if there is no reported sale on such
date, on the last preceding date on which any reported sale occurred) of a Share
on the Composite Tape for New York Stock Exchange-Listed Stocks, or, if on such
date the Shares are not quoted on the Composite Tape, on the New York Stock
Exchange, or if the Shares are not listed or admitted to trading on such
Exchange, on the principal United States securities exchange registered under
the Securities Exchange Act of 1934 (the "Exchange Act") on which the Shares are
listed or admitted to
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trading, or, if the Shares are not listed or admitted to trading on any such
exchange, the mean between the closing high bid and low asked quotations with
respect to a Share on such date on the Nasdaq Stock Market, or any similar
system then in use, or, if no such quotations are available, the fair market
value on such date of a Share as the Committee shall determine.
"Non-Qualified Stock Option" -- means an option to purchase
Shares granted by the Committee which does not qualify, for any reason, as an
Incentive Stock Option under Section 422(b) of the Code.
"Option" -- means an Incentive Stock Option or a Non-Qualified
Stock Option.
"Participant" -- means any director, advisory director, officer
or employee of the Corporation or any Affiliate who is selected by the Committee
to receive an Award.
"Plan" -- means this 1996 Stock Option and Incentive Plan of the
Corporation.
"Related" -- means (i) in the case of a Right, a Right which is
granted in connection with, and to the extent exercisable, in whole or in part,
in lieu of, an Option or another Right and (ii) in the case of an Option, an
Option with respect to which and to the extent a Right is exercisable, in whole
or in part, in lieu thereof.
"Restricted Stock" -- means Shares awarded to a Participant by
the Committee pursuant to Section 5(c) hereof.
"Right" -- means a Stock Appreciation Right.
"Shares" -- means the shares of common stock of the Corporation.
"Stock Appreciation Right" -- means a stock appreciation right
with respect to Shares granted by the Committee pursuant to the Plan.
"Termination of Service" -- means cessation of service, for any
reason, whether voluntary or involuntary, as a director, advisory director,
officer or employee of the Corporation or any of its Affiliates.
3. Administration. The Plan shall be administered by a Committee
consisting of two or more members of the Board of Directors of the Corporation,
each of whom (i) shall be an outside director as defined under Section 162(m) of
the Code and the regulations thereunder and (ii) shall be a Non-Employee
Director as defined under Rule 16(b) of the Securities Exchange Act of 1934 or
any similar or successor provision. The members of the Committee shall be
appointed by the Board of Directors of the Corporation. Except as limited by the
express provisions of the Plan or by resolutions adopted by the Board of
Directors of the Corporation, the Committee shall have sole and complete
authority and discretion to (i) select Participants and grant Awards; (ii)
determine the number of Shares to be subject to types of Awards generally, as
well as to individual Awards granted under the Plan; (iii) determine the terms
and conditions upon which Awards shall be granted under the Plan; (iv) prescribe
the form and terms of instruments evidencing such grants; and (v) establish from
time to time regulations for the
2
<PAGE>
administration of the Plan, interpret the Plan, and make all determinations
deemed necessary or advisable for the administration of the Plan.
A majority of the Committee shall constitute a quorum, and the acts of
a majority of the members present at any meeting at which a quorum is present,
or acts approved in writing by a majority of the Committee without a meeting,
shall be acts of the Committee.
4. Shares Subject to Plan.
(a) Subject to adjustment by the operation of Section 6, the
maximum number of shares with respect to which Awards may be made under the Plan
is _________ shares plus (i) _________ shares authorized but unissued under
prior Corporation stock option plans; plus (ii) the number of shares repurchased
by the Corporation in the open market or otherwise with an aggregate price no
greater than the cash proceeds received by the Corporation from the exercise of
Shares under the Plan; plus (iii) any Shares surrendered to the Corporation in
payment of the exercise price of Options issued under the Plan. The Shares with
respect to which Awards may be made under the Plan may be either authorized and
unissued shares or previously issued shares reacquired and held as treasury
shares. Shares which are subject to Related Rights and Related Options shall be
counted only once in determining whether the maximum number of Shares with
respect to which Awards may be granted under the Plan has been exceeded. An
Award shall not be considered to have been made under the Plan with respect to
any Option or Right which terminates or with respect to Restricted Stock which
is forfeited, and new Awards may be granted under the Plan with respect to the
number of Shares as to which such termination or forfeiture has occurred.
(b) During any calendar year, no Participant may be granted
Awards under the Plan with respect to more than 50,000 Shares, subject to
adjustment as provided in Section 6.
5. Awards.
(a) Options. The Committee is hereby authorized to grant Options
to Participants with the following terms and conditions and with such additional
terms and conditions not inconsistent with the provisions of the Plan as the
Committee shall determine, including the granting of Options in tandem with
other Awards under the Plan:
(i) Exercise Price. The exercise price per Share for an Option
shall be determined by the Committee; provided, however, that such
exercise price shall not be less than 100% of the Market Value of a
Share on the date of grant of such Option.
(ii) Option Term. The term of each Option shall be fixed by
the Committee, but shall be no greater than 15 years.
(iii) Time and Method of Exercise. The Committee shall
determine the time or times at which an Option may be exercised in
whole or in part and the method or methods by which, and the form or
forms (including, without
3
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limitation, cash, Shares, other Awards or any combination thereof,
having a market value on the exercise date equal to the relevant
exercise price) in which, payment of the exercise price with respect
thereto may be made or deemed to have been made.
(iv) Incentive Stock Options. Incentive Stock Options may be
granted by the Committee only to employees of the Corporation or its
Affiliates.
(v) Termination of Service. Unless otherwise determined by the
Committee and set forth in the Award Agreement evidencing the grant of
the Option, upon Termination of Service of the Participant for any
reason other than for Cause, all Options then currently exercisable
shall remain exercisable for three years following such Termination of
Service. Upon Termination of Service for Cause, all Options not
previously exercised shall immediately be forfeited.
(b) Stock Appreciation Rights. A Stock Appreciation Right shall, upon
its exercise, entitle the Participant to whom such Stock Appreciation Right was
granted to receive a number of Shares or cash or combination thereof, as the
Committee in its discretion shall determine, the aggregate value of which (i.e.,
the sum of the amount of cash and/or Market Value of such Shares on date of
exercise) shall equal (as nearly as possible, it being understood that the
Corporation shall not issue any fractional shares) the amount by which the
Market Value per Share on the date of such exercise shall exceed the exercise
price of such Stock Appreciation Right, multiplied by the number of Shares with
respect to which such Stock Appreciation Right shall have been exercised. A
Stock Appreciation Right may be Related to an Option or may be granted
independently of any Option as the Committee shall from time to time in each
case determine. In the case of a Related Option, such Related Option shall cease
to be exercisable to the extent of the Shares with respect to which the Related
Stock Appreciation Right was exercised. Upon the exercise or termination of a
Related Option, any Related Stock Appreciation Right shall terminate to the
extent of the Shares with respect to which the Related Option was exercised or
terminated.
(c) Restricted Stock. The Committee is hereby authorized to grant
Awards of Restricted Stock to Participants with the following terms and
conditions and with such additional terms and conditions not inconsistent with
the provisions of the Plan as the Committee shall determine:
(i) Restrictions. Shares of Restricted Stock shall be subject
to such restrictions as the Committee may impose (including, without
limitation, any limitation on the right to vote a Share of Restricted
Stock or the right to receive any dividend or other right or property
with respect thereto), which restrictions may lapse separately or in
combination at such time or times, in such installments or otherwise as
the Committee may deem appropriate.
(ii) Stock Certificates. Any Restricted Stock granted under
the Plan shall be evidenced by issuance of a stock certificate or
certificates, which certificate or certificates shall be held by the
Corporation. Such certificate or
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<PAGE>
certificates shall be registered in the name of the Participant and
shall bear an appropriate legend referring to the restrictions
applicable to such Restricted Stock.
(iii) Forfeiture; Delivery of Shares. Except as otherwise
determined by the Committee, upon Termination of Service during the
applicable restriction period, all Shares of Restricted Stock at such
time subject to restriction shall be forfeited and reacquired by the
Corporation; provided, however, that the Committee may waive in whole
or in part any or all remaining restrictions with respect to Shares of
Restricted Stock. Shares representing Restricted Stock that is no
longer subject to restrictions shall be delivered to the holder thereof
promptly after the applicable restrictions lapse or are waived.
(d) Performance Awards. The Committee is hereby authorized to
grant performance Awards to Participants subject to the terms of the Plan and
any applicable Award Agreement. A performance Award granted under the Plan (i)
may be denominated or payable in cash, Shares (including, without limitation,
Restricted Stock), other securities, other Awards or other property and (ii)
shall confer on the holder thereof the right to receive payments, in whole or in
part, upon the achievement of such performance goals during such performance
periods as the Committee shall establish. Subject to the terms of the Plan and
any applicable Award Agreement, the performance goals to be achieved during any
performance period, the length of any performance period, the amount of any
performance Award granted and the amount of any payment or transfer to be made
pursuant to any performance Award shall be determined by the Committee.
6. Adjustments Upon Changes in Capitalization. In the event of any
change in the outstanding Shares subsequent to the effective date of the Plan by
reason of any reorganization, recapitalization, stock split, stock dividend,
combination or exchange of shares, merger, consolidation or any change in the
corporate structure or Shares of the Corporation, the maximum aggregate number
and class of shares and exercise price of the Award, if any, as to which Awards
may be granted under the Plan and the number and class of shares and exercise
price of the Award, if any, with respect to which Awards have been granted under
the Plan shall be appropriately adjusted by the Committee, whose determination
shall be conclusive. Any Award which is adjusted as a result of this Section 6
shall be subject to the same restrictions as the original Award.
7. Effect of Merger on Options or Rights. In the case of any merger,
consolidation or combination of the Corporation (other than a merger,
consolidation or combination in which the Corporation is the continuing
corporation and which does not result in the outstanding Shares being converted
into or exchanged for different securities, cash or other property, or any
combination thereof), any Participant to whom an Option or Right has been
granted shall have the additional right (subject to the provisions of the Plan
and any limitation applicable to such Option or Right), thereafter and during
the term of each such Option or Right, to receive upon exercise of any such
Option or Right an amount equal to the excess of the fair market value on the
date of such exercise of the securities, cash or other property, or combination
thereof, receivable upon such merger, consolidation or combination in respect of
a Share over the exercise price of such Right or Option, multiplied by the
number of Shares with respect to which such Option or Right shall have been
exercised. Such amount may be payable fully in cash,
5
<PAGE>
fully in one or more of the kind or kinds of property payable in such merger,
consolidation or combination, or partly in cash and partly in one or more of
such kind or kinds of property, all in the discretion of the Committee.
8. Effect of Change in Control. Each of the events specified in the
following clauses (i) through (iii) of this Section 8 shall be deemed a "change
of control": (i) any third person, including a "group" as defined in Section
13(d)(3) of the Securities Exchange Act of 1934, shall become the beneficial
owner of shares of the Corporation with respect to which 25% or more of the
total number of votes for the election of the Board of Directors of the
Corporation may be cast, (ii) as a result of, or in connection with, any cash
tender offer, merger or other business combination, sale of assets or contested
election, or combination of the foregoing, the persons who were directors of the
Corporation shall cease to constitute a majority of the Board of Directors of
the Corporation, or (iii) the stockholders of the Corporation shall approve an
agreement providing either for a transaction in which the Corporation will cease
to be an independent publicly-owned corporation or for a sale or other
disposition of all or substantially all the assets of the Corporation. Upon a
change in control, unless the Committee shall have otherwise provided in the
Award Agreement, any restricted period with respect to Restricted Stock awarded
to such Participant shall lapse and all Shares awarded as Restricted Stock shall
become fully vested in the Participant to whom such Shares were awarded. If a
tender offer or exchange offer for Shares (other than such an offer by the
Corporation) is commenced, or if the event specified in clause (iii) above shall
occur, unless the Committee shall have otherwise provided in the Award
Agreement, all Options and Stock Appreciation Rights granted and not fully
exercisable shall become exercisable in full upon the happening of such event;
provided, however, that no Option or Stock Appreciation Right which has
previously been exercised or otherwise terminated shall become exercisable.
9. Assignments and Transfers. No Award granted under the Plan shall be
transferable otherwise than by will, the laws of descent and distribution or
pursuant to a qualified domestic relations order, except an Award may be
transferred by gift to any member of the Participant's immediate family or to a
trust for the benefit of one or more of such immediate family members if the
Committee so specifies in the Award Agreement. During the lifetime of an Award
recipient, an Award shall be exercisable only by the Award recipient unless it
has been transferred as permitted hereby, in which case it shall be exercisable
only by such transferee. For the purpose of this Section 9 a Participant's
"immediate family" shall mean the Participant's spouse, children and
grandchildren.
10. Employee Rights Under the Plan. No person shall have a right to be
selected as a Participant nor, having been so selected, to be selected again as
a Participant and no officer, employee or other person shall have any claim or
right to be granted an Award under the Plan or under any other incentive or
similar plan of the Corporation or any Affiliate. Neither the Plan nor any
action taken thereunder shall be construed as giving any employee any right to
be retained in the employ of the Corporation or any Affiliate.
11. Delivery and Registration of Stock. The Corporation's obligation to
deliver Shares with respect to an Award shall, if the Committee so requests, be
conditioned upon the receipt of a representation as to the investment intention
of the Participant to whom such Shares are to be delivered, in such form as the
Committee shall determine to be necessary or advisable
6
<PAGE>
to comply with the provisions of the Securities Act of 1933 or any other
federal, state or local securities legislation. It may be provided that any
representation requirement shall become inoperative upon a registration of the
Shares or other action eliminating the necessity of such representation under
such Securities Act or other securities legislation. The Corporation shall not
be required to deliver any Shares under the Plan prior to (i) the admission of
such Shares to listing on any stock exchange on which Shares may then be listed,
and (ii) the completion of such registration or other qualification of such
Shares under any state or federal law, rule or regulation, as the committee
shall determine to be necessary or advisable.
12. Withholding Tax. Upon the termination of the restricted period with
respect to any shares of Restricted Stock (or at any such earlier time, if any,
that an election is made by the Participant under Section 83(b) of the Code, or
any successor provision thereto, to include the value of such shares in taxable
income), the Corporation shall have the right to require the Participant or
other person receiving such shares to pay the Corporation the amount of any
taxes which the Corporation is required to withhold with respect to such shares,
or, in lieu thereof, to retain or sell without notice, a sufficient number of
shares held by it to cover the amount required to be withheld. The Corporation
shall have the right to deduct from all dividends paid with respect to shares of
Restricted Stock the amount of any taxes which the Corporation is required to
withhold with respect to such dividend payments.
The Corporation shall have the right to deduct from all amounts paid in
cash with respect to the exercise of a Right under the Plan any taxes required
by law to be withheld with respect to such cash payments. Where a Participant or
other person is entitled to receive Shares pursuant to the exercise of an Option
or Right pursuant to the Plan, the Corporation shall have the right to require
the Participant or such other person to pay the Corporation the amount of any
taxes which the Corporation is required to withhold with respect to such Shares,
or, in lieu thereof, to retain, or sell without notice, a number of such Shares
sufficient to cover the amount required to be withheld.
All withholding decisions pursuant to this Section 12 shall be at the
sole discretion of the Committee or the Corporation.
13. Amendment or Termination.
(a) The Board of Directors of the Corporation may amend, alter,
suspend, discontinue, or terminate the Plan without the consent of shareholders
or Participants, except that any such action will be subject to the approval of
the Corporation's shareholders if, when and to the extent such shareholder
approval is necessary or required for purposes of any applicable federal or
state law or regulation or the rules of any stock exchange or automated
quotation system on which the Shares may then be listed or quoted, or if the
Board of Directors of the Corporation, in its discretion, determines to seek
such shareholder approval.
(b) Except with respect to Awards granted pursuant to Section
5(e) of the Plan, the Committee may waive any conditions of or rights of the
Corporation or modify or amend the terms of any outstanding Award. The Committee
may not, however, amend, alter, suspend, discontinue or terminate any
outstanding Award without the consent of the Participant or holder thereof,
except as otherwise herein provided.
7
<PAGE>
14. Effective Date and Term of Plan. The Plan shall become effective
upon its adoption by the Board of Directors of the Corporation, and the approval
of the Plan by the shareholders of the Corporation. It shall continue in effect
for a term of fifteen years unless sooner terminated under Section 13 hereof.
8
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 20. Indemnification of Directors and Officers
Section 145 of the General Corporation Law of Delaware empowers
WesterFed to indemnify, subject to the standards therein prescribed, any person
in connection with any action, suit or proceeding brought or threatened by
reason of the fact that such person is or was a director, officer, employee or
agent of WesterFed or is or was serving as such with respect to another
corporation or other entity at the request of WesterFed. Section Eleven of
WesterFed's Certificate of Incorporation provides that each person who was or is
made a party to (or is threatened to be made a party to) or is otherwise
involved in any action, suit or proceeding by reason of the fact that such
person is or was a director, officer, employee or agent of WesterFed or acting
at the request of WesterFed as a director, officer, employee or agent of another
corporation or other entity shall be indemnified and held harmless by WesterFed
to the fullest extent authorized by the General Corporation Law of Delaware
against all expenses, liability and loss (including without limitation
attorney's fees, judgments, fines and amounts paid in settlement) reasonably
incurred by such person in connection therewith. The rights conferred by Section
Eleven are contractual rights and include the right to be paid by WesterFed the
expenses incurred in defending such action, suit or proceeding in advance of the
final disposition thereof.
Section Twelve of WesterFed's Certificate of Incorporation provides
that WesterFed's directors will not be personally liable to WesterFed or its
stockholders for monetary damages resulting from breaches of their fiduciary
duty as directors except (i) for any breach of the duty of loyalty to WesterFed
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the General Corporation Law of Delaware (which makes directors
liable for unlawful dividends or unlawful stock repurchases or redemptions) or
(iv) for transactions from which directors derive improper personal benefit.
WesterFed maintains directors and officers liability insurance.
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<PAGE>
Item 21. Exhibits and Financial Statement Schedules
The following Exhibits are filed as part of this Registration
Statement.
2.1 Agreement and Plan of Merger, dated as of September 24, 1996
(included as Appendix I to the Proxy Statement/Prospectus).
4.1 Certificate of Incorporation (incorporated by reference as an
Exhibit to WesterFed's Registration Statement No. 33-69168).*
4.2 Bylaws of WesterFed Financial Corporation (incorporated by
reference as an Exhibit to WesterFed's Registration Statement No.
33-69168).*
4.3 Specimen common stock certificate (incorporated by reference as an
Exhibit to WesterFed's Registration Statement No. 33-69168).*
5 Opinion of Silver, Freedman & Taff, L.L.P. as to legality of the
securities being registered.
8 Opinion of Silver, Freedman & Taff, L.L.P. regarding federal
income tax consequences of the transaction.**
10.1 Employment Agreement of David W. Jorgenson.
10.2 Employment Agreement of Elaine F. Hine.
10.3 Employment Agreement of Stanley R. Hill.
10.4 Employment Agreement of Scott W. Sanders.
10.5 Stock Option Agreement # 1 of WesterFed Financial Corporation
(included as Appendix II to the Proxy Statement/Prospectus).
10.6 Stock Option Agreement # 2 of WesterFed Financial Corporation
(included as Appendix III to the Proxy Statement/Prospectus).
10.7 Form of WesterFed Financial Corporation's Equity Investment Plan
(included as Appendix VII to the Proxy Statement/Prospectus).
21.1 Subsidiaries of WesterFed Financial Corporation.
21.2 Subsidiaries of Security Bancorp.
23.1 Consents of KPMG Peat Marwick LLP.
23.2 Consent of Silver, Freedman & Taff, L.L.P. (included in Exhibit
5).
23.3 Consent of Alex. Brown & Sons Incorporated (contained in the
Fairness Opinion included as Appendix IV to the Proxy
Statement/Prospectus).
23.4 Consent of Montgomery Securities (contained in the Fairness
Opinion included as Appendix V to the Proxy Statement/Prospectus).
24 Power of Attorney (contained on signature page).
27 Financial Data Schedule of WesterFed Financial Corporation.
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<PAGE>
99.1 Form of Proxy Card of WesterFed Financial Corporation.
99.2 Form of Proxy Card of Security Bancorp.
99.3 Form of Election of Security Bancorp Stockholders.
- ------------------------
* Registrant hereby agrees to furnish a copy of the instrument to the SEC upon
request.
** To be filed by amendment.
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<PAGE>
Item 22. Undertakings
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the Registration Statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
WesterFed's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) The undersigned registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
(d) WesterFed undertakes that every prospectus (i) that is filed pursuant to
paragraph (c) immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities and at that
time shall be deemed to be the initial bona fide offering thereof.
(e) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
WesterFed pursuant to the foregoing provisions, or otherwise, WesterFed has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by WesterFed of expenses incurred or
paid by a
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<PAGE>
director, officer or controlling person of WesterFed in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, WesterFed
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
(f) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
(g) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through the
date of responding to the request.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of
Chesterfield, State of Missouri, on November 19, 1996.
WESTERFED FINANCIAL CORPORATION
By:/s/Lyle R. Grimes
----------------------------
Lyle R. Grimes
President, Chief Executive
Officer and Chairman of
the Board
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
We, the undersigned directors and officers of the Registrant, hereby
severally constitute and appoint Lyle R. Grimes, our true and lawful attorney
and agent, to do any and all things in our names in the capacities indicated
below which Lyle R. Grimes may deem necessary or advisable to enable the
Registrant to comply with the Securities Act of 1933, as amended, and any rules,
regulations and requirements of the Securities and Exchange Commission, in
connection with the registration statement on Form S-4 relating to the offering
of the registrant's common stock, including specifically, but not limited to,
power and authority to sign for us in our names in the capacities indicated
below this registration statement and any and all amendments (including
post-effective amendments) thereto; and, we hereby approve, ratify and confirm
all that Lyle R. Grimes shall do or cause to be done by virtue thereof.
By: /s/Lyle R. Grimes By: /s/James A. Salisbury
----------------- ---------------------
Lyle R. Grimes James A. Salisbury
President, Chief Executive Officer and Treasurer and Chief Financial
Chairman of the Board Officer
(Principal Executive Officer) (Principal Financial and
Accounting Officer)
Date: November 19, 1996 Date: November 19, 1996
------------------ -----------------
By: /s/Dr. Marvin Reynolds By: /s/Dr. Otto G. Klein, Jr.
---------------------- ------------------------
Dr. Marvin Reynolds Dr. Otto G. Klein, Jr.
Director Director
Date: November 19, 1996 Date: November 19, 1996
----------------- -----------------
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<PAGE>
By: /s/John E. Roemer By: /s/Laurie C. DeMarois
----------------- ---------------------
John E. Roemer Laurie C. DeMarois
Director Director
Date: November 19, 1996 Date: November 19, 1996
----------------- -----------------
By: /s/Robert F. Burke
------------------
Robert F. Burke
Director
Date: November 19, 1996
-----------------
II-7
<PAGE>
EXHIBIT INDEX
The following Exhibits are filed in connection with the Registration Statement
of WesterFed Financial Corporation on Form S-4, pursuant to the requirements of
Item 601 of Regulation S-K:
Exhibit No.
2.1 Agreement and Plan of Merger, dated as of September 24, 1996 (included as
Appendix I to the Proxy Statement/Prospectus).
4.1 Certificate of Incorporation (incorporated by reference as an exhibit to
WesterFed Financial Corporation's Registration Statement No. 33-69168).*
4.2 Bylaws of WesterFed Financial Corporation (incorporated by reference as
an exhibit to WesterFed Financial Corporation's Registration Statement
No. 33-69168). *
4.3 Specimen common stock certificate (incorporated by reference as an
exhibit to WesterFed Financial Corporation's Registration Statement No.
33-69168).*
5 Opinion of Silver, Freedman & Taff, L.L.P. as to the legality of the
securities being registered.
8 Opinion of Silver, Freedman & Taff, L.L.P. regarding federal income tax
consequences of the transaction.**
10.1 Employment Agreement of David W. Jorgenson.
10.2 Employment Agreement of Elaine F. Hine.
10.3 Employment Agreement of Stanley R. Hill.
10.4 Employment Agreement of Scott W. Sanders.
10.5 Stock Option Agreement # 1 of WesterFed Financial Corporation (included
as Appendix II to the Proxy Statement/Prospectus).
10.6 Stock Option Agreement # 2 of WesterFed Financial Corporation (included
as Appendix III to the Proxy Statement/Prospectus).
10.7 Form of WesterFed Financial Corporation's Equity Investment Plan
(included as Appendix VII to the Proxy Statement/Prospectus).
21.1 Subsidiaries of WesterFed Financial Corporation.
21.2 Subsidiaries of Security Bancorp.
23.1 Consents of KPMG Peat Marwick LLP.
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<PAGE>
23.2 Consent of Silver, Freedman & Taff, L.L.P. (included in Exhibit 5).
23.3 Consent of Alex. Brown & Sons Incorporated (contained in the Fairness
Opinion included as Appendix IV to the Proxy Statement/Prospectus).
23.4 Consent of Montgomery Securities (contained in the Fairness Opinion
included as Appendix V to the Proxy Statement/Prospectus).
24 Power of Attorney (contained on signature page).
27 Financial Data Schedule of WesterFed Financial Corporation.
99.1 Form of Proxy Card of WesterFed Financial Corporation.
99.2 Form of Proxy Card of Security Bancorp.
99.3 Form of Election of Security Bancorp Stockholders.
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* Registrant hereby agrees to furnish a copy of the instrument to the SEC upon
request.
** To be filed by amendment.
II-9
EXHIBIT 5
November 15, 1996
WesterFed Financial Corporation
100 East Broadway
Missoula, Montana 59802
Re: Registration Statement on Form S-4
Members of the Board of Directors:
We have examined (i) the Agreement and Plan of Merger by and between
WesterFed Financial Corporation (the "Company"), and Security Bancorp (the
"Merger Agreement"), (ii) the Registration Statement on Form S-4 (the
"Registration Statement") filed by the Company with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"Securities Act"), and the Proxy Statement/Prospectus, relating to the issuance
by the Company of up to 1,660,000 shares of common stock, par value $.01 per
share (the "Common Stock"), in the manner set forth in the Registration
Statement and the Proxy Statement/Prospectus, (iii) the Company's Certificate of
Incorporation and Bylaws and (iv) records of the Company's corporate proceedings
relative to its organization and to the issuance of the Common Stock.
We have examined originals, or copies identified to our satisfaction,
of such corporate records of the Company and have made such examinations of law
as we have deemed relevant. In our examination, we have assumed and have not
verified (i) the genuineness of all signatures, (ii) the authenticity of all
documents submitted to us as originals, (iii) the conformity with the originals
of all documents supplied to us as copies, and (iv) the accuracy and
completeness of all corporate records and documents and all certificates and
statements of fact, in each case given or made available to us by the Company.
We have relied upon certificates and other written documents from public
officials and government agencies and departments and we have assumed the
accuracy and authenticity of such certificates and documents.
Based upon the foregoing, and having a regard for such legal
considerations as we deem relevant, we are of the opinion that the Common Stock
will be, upon issuance, against payment therefor as contemplated in the Merger
Agreement, legally issued, fully paid and non-assessable.
We consent to the use of this opinion, to the incorporation by
reference of such opinion as an exhibit to the Registration Statement and to the
reference to our firm and our opinion under the heading "Legal Matters" in the
Registration Statement filed by the Company, and all amendments thereto. In
giving this consent, we do not admit that we are within the category of persons
whose consent is required under Section 7 of the Securities Act or the rules and
regulations of the Commission thereunder.
Very truly yours,
/s/ Silver, Freedman & Taff, L.L.P.
SILVER, FREEDMAN & TAFF, L.L.P.
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
THIS AGREEMENT IS SUBJECT TO ARBITRATION
PURSUANT TO THE UNIFORM ARBITRATION ACT
CONTAINED IN CHAPTER 5, TITLE 27 OF THE MONTANA CODE ANNOTATED
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
this 24th day of September, 1996, by and between Western Federal Savings Bank of
Montana, Missoula, Montana (hereinafter referred to as the "Bank"), and David W.
Jorgenson (the "Employee").
WHEREAS, the Bank's parent holding company, WesterFed Financial
Corporation ("WesterFed" or the "Holding Company"), has entered into an
agreement dated September 24, 1996, with Security Bancorp, the parent holding
company of Security Bank, FSB ("Security"), under which Security Bancorp shall
be merged into WesterFed (the "Merger"), and such agreement calls for the
Employee and the Bank to enter into an employment agreement in the form of this
agreement; and
WHEREAS, the Employee is currently serving as President and Chief
Executive Officer of Security and of Security Bancorp and has agreed to serve as
an Executive Vice President of the Bank effective at the effective time of the
Merger; and
WHEREAS, the Employee has agreed that upon the effectiveness of the
Merger, that certain Employment Agreement between himself and Security and
Security Bancorp, dated June 19, 1995 (the "Prior Employment Agreement"), shall
terminate without any obligation thereunder to him on the part of any employer
or successor thereto and that this Agreement shall entirely supersede and
replace the Prior Employment Agreement; and
WHEREAS, the Board of Directors of the Bank (the "Board of Directors")
believes it is in the best interests of the Bank to enter into this Agreement
with the Employee in order to induce the Employee to serve the Bank as an
Executive Vice President following the Merger and to assure continuity of
management after the Merger; and
WHEREAS, although it is contemplated that Security shall merge into the
Bank in connection with the Merger, the Employee has agreed that if Security
does not merge into the Bank, the Bank may assign and transfer to Security all
of the Bank's rights and obligations under this Agreement; and
WHEREAS, the Board of Directors has approved and authorized the
execution of this Agreement with the Employee to take effect as stated in
Section 2 hereof;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein, it is AGREED as follows:
1. Definitions.
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(a) The term "Change in Control" means (1) an acquisition by
any acquiror, directly or indirectly, through one or more subsidiaries or
transactions, or acting in concert with one or more persons or companies, of
more than 25% of the outstanding voting securities of the Holding Company, or
(2) a reorganization, merger, consolidation, sale of all or substantially all of
the assets of the Bank or the Holding Company or a similar transaction in which
the Bank or the Holding Company is not the resulting entity. The term "Change in
Control" shall not include an acquisition of securities by an employee benefit
plan of the Bank or the Holding Company.
(b) The term "Commencement Date" means the date upon which the
Merger is effective.
(c) The term "Date of Termination" means the earlier of (1)
the date upon which the Bank gives notice to the Employee of the termination of
the Employee's employment with the Bank or (2) the date upon which the Employee
ceases to serve as an employee of the Bank.
(d) The term "Involuntarily Termination" means termination of
the employment of Employee without the Employee's express written consent, and
shall include a material diminution of or interference with the Employee's
duties, responsibilities and benefits as an Executive Vice President of the Bank
with respect to commercial lending, including (without limitation) any of the
following actions unless consented to in writing by the Employee: (1) a change
in the principal workplace of the Employee which would reasonably require him to
commute more than 30 miles each way from his principal residence as of the date
of this Agreement; (2) the assignment to the Employee of duties substantially
inconsistent with and in diminution of the position, duties, responsibilities
and status contemplated by Section 3 of this Agreement; and (3) a material
adverse change in the Employee's salary, perquisites, benefits, contingent
benefits or vacation, other than as part of an overall program applied uniformly
and with equitable effect to all members of the senior management of the Bank or
the Holding Company. The term "Involuntary Termination" does not include
Termination for Cause or termination of employment due to retirement, death,
disability or suspension or temporary or permanent prohibition from
participation in the conduct of the Bank's affairs under Section 8 of the
Federal Deposit Insurance Act ("FDIA").
(e) The terms "Termination for Cause" and "Terminated for
Cause" mean termination of the employment of the Employee because of the
Employee's personal dishonesty, incompetence, willful misconduct, breach of a
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule, or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, or material
breach of any provision of this Agreement. The Employee shall not be deemed to
have been Terminated for Cause unless and until there shall have been delivered
to the Employee a copy of a resolution, duly adopted by the affirmative vote of
not less than a majority of the entire membership of the Board of Directors at a
meeting called and held for such purpose (after reasonable notice to the
Employee stating why the Board of Directors would consider Termination for Cause
and an opportunity for the Employee, together with the Employee's counsel, to be
heard before the Board), stating that in the good faith opinion of the Board the
Employee has engaged in conduct described in the preceding sentence and
specifying the particulars thereof in detail.
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2. Term; Termination of Prior Employment Agreement. The term of this
Agreement shall be a period of three years commencing on the Commencement Date,
subject to earlier termination as provided herein. Upon the effectiveness of the
Merger, the Prior Employment Agreement shall terminate with no obligation
thereunder to the Employee on the part of any employer or successor thereto, and
this Agreement shall entirely supersede and replace such Prior Employment
Agreement.
3. Employment. The Employee is employed as an Executive Vice President
of the Bank. As such, the Employee shall render administrative and management
services as are customarily performed by persons situated in similar executive
capacities with respect to commercial lending by the Bank, and shall have such
other powers and duties of such an officer of the Bank as the Board of Directors
may prescribe from time to time.
4. Compensation.
(a) Salary. The Bank agrees to pay the Employee during the
term of this Agreement a salary of $160,200 per year, subject to customary
withholding, and payable in such installments as the Bank customarily utilizes
in paying its executive employees. In the discretion of the Board of Directors,
such salary may be increased from time to time.
(b) Discretionary Bonuses. The Employee shall be entitled to
participate in an equitable manner with all other executive officers of the Bank
in discretionary bonuses as authorized and declared by the Board of Directors to
its executive employees. No other compensation provided for in this Agreement
shall be deemed a substitute for the Employee's right to participate in such
bonuses when and as declared by the Board of Directors.
(c) Expenses. The Employee shall be entitled to receive prompt
reimbursement for all reasonable expenses incurred by the Employee in performing
services under this Agreement in accordance with the policies and procedures
applicable to the executive officers of the Bank, provided that the Employee
accounts for such expenses as required under such policies and procedures.
(d) Company Car. So long as the Employee is employed
hereunder, the Bank shall provide him with the use of a car owned by the Bank,
provided that, in accordance with the policies of the Bank as in effect from
time to time, the Employee shall (i) keep records of personal and business use
of the automobile, and (ii) reimburse the Employer for expenses connected with
the personal use of the automobile by the Employee or his spouse.
5. Participation in Retirement and Employee Benefit Plans. The Employee
shall be entitled to participate in all plans relating to pension, thrift,
profit-sharing, group life insurance, medical and dental coverage, education,
and other retirement or employee benefits or combinations thereof, in which
continuing employees of Security are entitled to participate after the Merger.
6. Vacations; Leave. The Employee shall be entitled to (i) annual paid
vacation in accordance with the policies established by the Bank's Board of
Directors, provided that such vacation shall not be less than four weeks per
year, and (ii) to voluntary leave of absence, with
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or without pay, from time to time at such times and upon such conditions as the
Board of Directors may determine in its discretion.
7. Termination of Employment.
(a) Involuntary Termination. The Board of Directors may
terminate the Employee's employment at any time, but, except in the case of
Termination for Cause, such termination of employment by action of the Board of
Directors shall not prejudice the Employee's right to compensation or other
benefits under this Agreement. In the event of Involuntary Termination of the
employment of the Employee by the Bank other than in connection with or within
12 months after a Change in Control, the Bank shall, through the third
anniversary of the Commencement Date, (i) continue to pay to the Employee his
salary at the rate in effect immediately prior to the Date of Termination, which
salary shall be payable in such manner and at such times as such salary would
have been payable to the Employee under Section 4(a) if the Employee had
continued to be employed by the Bank, and (ii) provide to the Employee health
benefits as maintained by the Bank for the benefit of its executive officers
from time to time during the remaining term of this Agreement or, at the
election of the Board of Directors, substantially the same health benefits as
the Bank maintained for the Employee.
In the event of Involuntary Termination of the employment of
the Employee by the Bank in connection with or within 12 months after a Change
in Control, the Bank shall, during the longer of the period remaining until the
third anniversary of the Commencement Date or the period of 18 months following
the Date of Termination, (i) continue to pay to the Employee his salary at the
rate in effect immediately prior to the Date of Termination, which salary shall
be payable in such manner and at such times as such salary would have been
payable to the Employee under Section 4(a) if the Employee had continued to be
employed by the Bank, and (ii) provide to the Employee health benefits as
maintained by the Bank for the benefit of its executive officers from time to
time during such period or, at the election of the Board of Directors,
substantially the same health benefits as the Bank maintained for the Employee.
(b) Termination for "Good Reason." In the event that the
Employee reasonably believes that the Bank has taken any of the actions
specified in clauses (1), (2) or (3) of Section 1(d) of this Agreement or
otherwise materially breached this Agreement, the Employee shall have the right
to provide to the Board of Directors a written notice asserting the right to
terminate his employment for good reason and specifying (i) the facts and
circumstances supporting the Employee's belief that the Bank has taken any such
action or materially breached this Agreement and the date upon which such
termination of employment for good reason shall become effective, which date
shall be at least 30 days after the date of such notice, and (ii) a period of
not less than ten business days during which the Bank shall have the opportunity
to rescind such actions or cure such breach. In the event that the Bank does not
rescind such actions or cure such breach with such period, the Employee shall
have the right to terminate his employment and to receive from the Bank through
the third anniversary of the Commencement Date the same salary and health
benefits as he would have received in the event of Involuntary Termination as
described in subsection 7(a) of this Agreement.
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(c) Termination for Cause. In the event of Termination for
Cause, the Bank shall pay the Employee the Employee's salary through the Date of
Termination, and the Bank shall have no further obligation to the Employee under
this Agreement.
(d) Voluntary Termination. The Employee's employment may be
voluntarily terminated by the Employee at any time upon 90 days' written notice
to the Bank or such shorter period as may be agreed upon between the Employee
and the Board of Directors of the Bank. In the event of such voluntary
termination, the Bank shall be obligated to continue to pay to the Employee the
Employee's salary and benefits only through the Date of Termination, at the time
such payments are due, and the Bank shall have no further obligation to the
Employee under this Agreement.
(e) Death; Disability. In the event of the death of the
Employee while employed under this Agreement and prior to any termination of
employment, the Employee's estate, or such person as the Employee may have
previously designated in writing, shall be entitled to receive from the Bank the
salary of the Employee through the last day of the calendar month in which the
Employee died. If the Employee becomes disabled as defined in the Bank's then
current disability plan, if any, or if the Employee is otherwise unable due to
disability to serve as an Executive Vice President, the Employee shall be
entitled to receive group and other disability income benefits of the type, if
any, then provided by the Bank for executive officers.
(f) Temporary Suspension or Prohibition. If the Employee is
suspended and/or temporarily prohibited from participating in the conduct of the
Bank's affairs by a notice served under Section 8(e)(3) or (g)(1) of the FDIA,
12 U.S.C. ss. 1818(e)(3) and (g)(1), the Bank's obligations under this Agreement
shall be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Bank may in its
discretion (i) pay the Employee all or part of the compensation withheld while
its obligations under this Agreement were suspended and (ii) reinstate in whole
or in part any of its obligations which were suspended.
(g) Permanent Suspension or Prohibition. If the Employee is
removed and/or permanently prohibited from participating in the conduct of the
Bank's affairs by an order issued under Section 8(e)(4) or (g)(1) of the FDIA,
12 U.S.C. ss. 1818(e)(4) and (g)(1), all obligations of the Bank under this
Agreement shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.
(h) Default of the Bank. If the Bank is in default (as defined
in Section 3(x)(1) of the FDIA), all obligations under this Agreement shall
terminate as of the date of default, but this provision shall not affect any
vested rights of the contracting parties.
(i) Termination by Regulators. All obligations under this
Agreement shall be terminated, except to the extent determined that continuation
of this Agreement is necessary for the continued operation of the Bank: (1) by
the Director of the Office of Thrift Supervision (the "Director") or his or her
designee, at the time the Federal Deposit Insurance Corporation or the
Resolution Trust Corporation enters into an agreement to provide assistance to
or on behalf of the Bank under the authority contained in Section 13(c) of the
FDIA; or (2) by the Director or his or her designee, at the time the Director or
his or her designee approves a supervisory
5
<PAGE>
merger to resolve problems related to operation of the Bank or when the Bank is
determined by the Director to be in an unsafe or unsound condition. Any rights
of the parties that have already vested, however, shall not be affected by any
such action.
(j) Limitations on Payments. Any payments made to the Employee
pursuant to this Agreement, or otherwise, are subject to and conditioned upon
their compliance with 12 U.S.C. 1828(k) and any regulations promulgated
thereunder. Notwithstanding any other provision of this Agreement, if the value
of payments and benefits under this Agreement, together with any other amounts
and the value of benefits received or to be received by the Employee would cause
any amount to be nondeductible by the Bank or the Holding Company for federal
income tax purposes pursuant to Section 280G of the Internal Revenue Code of
1986, as amended, then payments under this Agreement shall be reduced (not less
than zero) to the extent necessary so as to maximize amounts and the value of
benefits to the Employee without causing any amount to become nondeductible by
the Bank or the Holding Company pursuant to or by reason of such Section 280G.
8. Confidential Information; Loyalty; Non-competition
(a) During the term of the Employee's employment hereunder and
thereafter, the Employee shall not, except as may be required to perform his
duties hereunder or as required by law, disclose to others or use, whether
directly or indirectly, any Confidential Information. "Confidential Information"
means information about the Bank and the Bank's clients and customers which is
not available to the general public and was or shall be learned by the Employee
in the course of his employment by the Bank, including without limitation any
data, formulae, information, proprietary knowledge, trade secrets, and credit
reports and analyses owned, developed and used in the course of the business of
the Bank, including client and customer lists and information related thereto;
and all papers, resumes, records and other documents (and all copies thereof)
containing such Confidential Information. The Employee acknowledges that such
Confidential Information is specialized, unique in nature and of great value to
the Bank. The Employee agrees that upon the expiration of the Employee's term of
employment hereunder or in the event the Employee's employment hereunder is
terminated prior thereto for any reason whatsoever, the Employee will promptly
deliver to the Bank all documents (and all copies thereof) containing any
Confidential Information.
(b) The Employee shall devote his full time to the performance
of his employment under this Agreement; provided, however, that the Employee may
serve, without compensation, with charitable, community and industry
organizations and continue to serve, with compensation, as a director of any
business corporation of which he is currently a director to the extent such
directorships do not inhibit the performance of his duties thereunder or
conflict with the business of the Bank. During the term of the Employee's
employment hereunder, the Employee shall not engage in any business or activity
contrary to the business affairs or interests of the Bank.
(c) Upon the expiration of the term of the Employee's
employment hereunder or in the event the Employee's employment hereunder
terminates prior thereto for any reason whatsoever, the Employee shall not, for
a period of three years after the occurrence of such event, for himself, or as
the agent of, on behalf of, or in conjunction with, any person or entity,
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<PAGE>
solicit or attempt to solicit, whether directly or indirectly: (i) any employee
of the Bank to terminate such employee's employment relationship with the Bank;
or (ii) any savings and loan, banking or similar business from any person or
entity that is or was a client, employee, or customer of the Bank and had dealt
with the Employee or any other employee of the Bank under the supervision of the
Employee.
(d) In the event Employee voluntarily terminates his
employment hereunder pursuant to Section 7(d) of this Agreement, or in the event
the Employee's employment hereunder is Terminated for Cause, the Employee shall
not, for a period of one (1) year from the Date of Termination, directly or
indirectly, own, manage, operate or control, or participate in the ownership,
management, operation or control of, or be employed by or connected in any
manner with, any financial institution having an office located within twenty
(20) miles of any office of the Bank as of the Date of Termination.
(e) The provisions of subsections (b) and (d) of this Section
8 shall not prevent the Employee from purchasing, solely for investment, not
more than five percent (5%) of any financial institution's stock or other
securities which are traded on any national or regional securities exchange or
are actively traded in the over-the-counter market and registered under Section
12(g) of the Securities Exchange Act of 1934.
(f) The provisions of this Section 8 shall survive the
termination of the Employee's employment hereunder whether by expiration of the
term thereof or otherwise.
9. No Mitigation. The Employee shall not be required to mitigate the
amount of any salary or other payment or benefit provided for in this Agreement
by seeking other employment or otherwise, nor shall the amount of any payment or
benefit provided for in this Agreement be reduced by any compensation earned by
the Employee as the result of employment by another employer, by retirement
benefits after the Date of Termination or otherwise.
10. Stock and Stock Option Awards.
(a) On the Commencement Date, WesterFed shall grant to the
Employee under the WesterFed Financial Corporation 1993 Stock Option and
Incentive Plan (the "Plan") options to purchase 12,000 shares of Common Stock
(as defined in the Plan) at an Exercise Price (as defined in the Plan) equal to
the Market Value (as defined in the Plan) of a share of the Common Stock on the
date on which the Merger becomes effective. Such award shall vest based upon
Continuous Service (as defined in the Plan) at the rate of 20 percent per year
over the five years following the date of the grant, but vesting shall
accelerate in the event of a change in control or merger, consolidation or
combination of WesterFed into another corporation in the same manner as awards
made under the Plan prior to the Merger to executive officers of WesterFed
accelerate in such events.
(b) Furthermore, if prior to the Merger, the shareholders of
WesterFed are asked to approve an increase in the number of shares of Common
Stock which may be awarded under the Plan, or approve a plan similar to the Plan
under which stock options are to be awarded to executive officers of WesterFed,
and such shareholders vote to approve such an increase or plan, WesterFed shall
on the Commencement Date award to the Employee options to purchase an
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<PAGE>
additional 30,000 shares of the Common Stock at an Exercise Price equal to the
Market Value of the Common Stock on the date of the grant, which award shall
vest based upon Continuous Service at the rate of 20 percent per year over the
five years following the date of the grant, but vesting shall accelerate in the
event of a change in control, or merger, consolidation or combination of
WesterFed into another corporation in same manner as awards made under the Plan
prior to the Merger to executive officers of WesterFed accelerate in such
events; provided that if the shareholders of WesterFed are asked to approve such
an increase or plan and vote not to approve it, then the Employee's rights under
this Section 10(b) shall expire.
(c) On the Commencement Date, WesterFed shall make the same
award to the Employee under the WesterFed Financial Corporation Recognition and
Retention Plan as he would have received if on that date he had been elected and
qualified for the first time as a non-employee director of WesterFed.
11. Attorneys Fees. In the event the Bank exercises its right of
Termination for Cause, but it is determined by a court of competent jurisdiction
or by an arbitrator pursuant to Section 18 that cause did not exist for such
termination, or if in any event it is determined by any such court or arbitrator
that the Bank has failed to make timely payment of any amounts owed to the
Employee under this Agreement, the Employee shall be entitled to reimbursement
for all reasonable costs, including attorneys' fees, incurred in challenging
such termination or collecting such amounts. Such reimbursement shall be in
addition to all rights to which the Employee is otherwise entitled under this
Agreement.
12. Assignments.
(a) In the event that Security does not merge into the Bank,
the Bank shall have the right to assign and transfer all of its rights and
obligations under this Agreement to Security. If the Bank elects to exercise
this right, it shall so notify the Employee in writing.
(b) This Agreement is a personal services contract and the
Employee may not assign or delegate any of his rights or obligations hereunder.
(c) This Agreement and all rights of the Employee hereunder
shall inure to the benefit of and be enforceable by the Employee's personal and
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
13. Notice. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, to the Bank at its home office,
to the attention of the Board of Directors with a copy to the Secretary of the
Bank, or, if to the Employee, to such home or other address as the Employee has
most recently provided in writing to the Bank.
14. Amendments. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein otherwise
provided.
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15. Headings. The headings used in this Agreement are included solely
for convenience and shall not affect, or be used in connection with, the
interpretation of this Agreement.
16. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
17. Governing Law. This Agreement shall be governed by the laws of the
United States to the extent applicable and otherwise by the laws of the State of
Montana.
18. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
Attest: Western Federal Savings Bank
of Montana
/s/ Wendy Lambson /s/ Lyle R. Grimes
- ----------------- -------------------
Secretary Lyle R. Grimes, President
and Chief Executive Officer
Employee
/s/ David W. Jorgenson
-----------------------
David W. Jorgenson
9
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
THIS AGREEMENT IS SUBJECT TO ARBITRATION
PURSUANT TO THE UNIFORM ARBITRATION ACT
CONTAINED IN CHAPTER 5, TITLE 27 OF THE MONTANA CODE ANNOTATED
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
this 24th day of September, 1996, by and between Western Federal Savings Bank of
Montana, Missoula, Montana (hereinafter referred to as the "Bank"), and Elaine
F. Hine (the "Employee").
WHEREAS, the Bank's parent holding company, WesterFed Financial
Corporation ("WesterFed" or the "Holding Company"), has entered into an
agreement dated September 24, 1996, with Security Bancorp, the parent holding
company of Security Bank, FSB ("Security"), under which Security Bancorp shall
be merged into WesterFed (the "Merger"), and such agreement calls for the
Employee and the Bank to enter into an employment agreement in the form of this
agreement; and
WHEREAS, the Employee is currently serving as a Senior Vice President
of Security and has agreed to serve as a Senior Vice President of the Bank
effective at the effective time of the Merger"); and
WHEREAS, the Employee has agreed that upon the effectiveness of the
Merger, that certain Employment Agreement between herself and Security, dated
July 1, 1996 (the "Prior Employment Agreement"), shall terminate without any
obligation to her on the part of any employer or successor thereto and that this
Agreement shall entirely supersede and replace the Prior Employment Agreement;
and
WHEREAS, the Board of Directors of the Bank (the "Board of Directors")
believes it is in the best interests of the Bank to enter into this Agreement
with the Employee in order to induce the Employee to serve the Bank as a Senior
Vice President following the Merger and to assure continuity of management after
the Merger; and
WHEREAS, although it is contemplated that Security shall merge into the
Bank in connection with the Merger, the Employee has agreed that if Security
does not merge into the Bank, the Bank may assign and transfer to Security all
of the Bank's rights and obligations under this Agreement; and
WHEREAS, the Board of Directors has approved and authorized the
execution of this Agreement with the Employee to take effect as stated in
Section 2 hereof;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein, it is AGREED as follows:
1. Definitions.
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(a) The term "Commencement Date" means the date upon which the
Merger is effective.
(b) The term "Date of Termination" means the earlier of (1)
the date upon which the Bank gives notice to the Employee of the termination of
the Employee's employment with the Bank or (2) the date upon which the Employee
ceases to serve as an employee of the Bank.
(c) The term "Involuntarily Termination" means termination of
the employment of Employee without the Employee's express written consent, and
shall include a material diminution of or interference with the Employee's
duties as a Senior Vice President of the Bank, including (without limitation)
any of the following actions unless consented to in writing by the Employee: (1)
the assignment to the Employee of duties substantially inconsistent with and in
diminution of the duties of a Senior Vice President of the Bank; and (2) a
material adverse change in the Employee's salary or benefits, other than as part
of an overall program applied uniformly and with equitable effect to a
substantial number of similarly situated personnel of the Bank. The term
"Involuntary Termination" does not include Termination for Cause or termination
of employment due to retirement, death, disability or suspension or temporary or
permanent prohibition from participation in the conduct of the Bank's affairs
under Section 8 of the Federal Deposit Insurance Act ("FDIA").
(d) The terms "Termination for Cause" and "Terminated for
Cause" mean termination of the employment of the Employee because of the
Employee's personal dishonesty, incompetence, willful misconduct, breach of a
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule, or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, or material
breach of any provision of this Agreement. The Employee shall not be deemed to
have been Terminated for Cause unless and until there shall have been delivered
to the Employee a copy of a resolution, duly adopted by the affirmative vote of
not less than a majority of the entire membership of the Board of Directors at a
meeting called and held for such purpose (after reasonable notice to the
Employee and an opportunity for the Employee, together with the Employee's
counsel, to be heard before the Board), stating that in the good faith opinion
of the Board the Employee has engaged in conduct described in the preceding
sentence and specifying the particulars thereof in detail.
2. Term; Termination of Prior Employment Agreement. The term of this
Agreement shall be a period of two years commencing on the Commencement Date,
subject to earlier termination as provided herein. Beginning on the first
anniversary of the Commencement Date, and on each anniversary thereafter, the
term of this Agreement shall be extended for a period of one year in addition to
the then-remaining term, provided that (1) the Bank has not given notice to the
Employee in writing at least 90 days prior to such anniversary that the term of
this Agreement shall not be extended further; and (2) prior to such anniversary,
the Board of Directors of the Bank explicitly reviews and approves the
extension. Reference herein to the term of this Agreement shall refer to both
such initial term and such extended terms. Upon the effectiveness of the Merger,
the Prior Employment Agreement shall terminate with no obligation thereunder to
the Employee on the part of any employer or successor thereto, and this
Agreement shall entirely supersede and replace such Prior Employment Agreement.
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3. Employment. The Employee is employed as a Senior Vice President of
the Bank. As such, the Employee shall render such administrative and management
services as are assigned to the Employee by the President of the Bank or
prescribed by the Board of Directors from time to time. 4. Compensation.
(a) Salary. The Bank agrees to pay the Employee during the
term of this Agreement a salary of $76,648 per year, subject to customary
withholding, and payable in such installments as the Bank customarily utilizes
in paying its employees generally. In the discretion of the Bank's Board of
Directors, such salary may be increased from time to time.
(b) Discretionary Bonuses. The Employee shall be entitled to
participate in an equitable manner with similarly situated personnel in
discretionary bonuses as authorized and declared by the Board of Directors. No
other compensation provided for in this Agreement shall be deemed a substitute
for the Employee's right to participate in such bonuses when and as declared by
the Board of Directors.
(c) Expenses. The Employee shall be entitled to receive prompt
reimbursement for all reasonable expenses incurred by the Employee in performing
services under this Agreement in accordance with applicable policies and
procedures of the Bank, provided that the Employee accounts for such expenses as
required under such policies and procedures.
(d) Company Car. So long as the Employee is employed hereunder, she
shall be entitled, for business purposes only, to non-exclusive use of a car
owned by the Bank.
5. Participation in Retirement and Employee Benefit Plans. The Employee
shall be entitled to participate in all plans relating to pension, thrift,
profit-sharing, group life insurance, medical and dental coverage, education,
and other retirement or employee benefits or combinations thereof, in which
continuing employees of Security are entitled to participate after the Merger.
6. Vacations; Leave. The Employee shall be entitled (i) to annual paid
vacation in accordance with the policies established by the Bank's Board of
Directors, provided that such vacation shall not be less than four weeks per
year, and (ii) to voluntary leave of absence, with or without pay, from time to
time at such times and upon such conditions as the Board of Directors may
determine in its discretion.
7. Termination of Employment.
(a) Involuntary Termination. The Board of Directors may
terminate the Employee's employment at any time, but, except in the case of
Termination for Cause, such termination of employment by the Board of Directors
shall not prejudice the Employee's right to compensation or other benefits under
this Agreement. In the event of Involuntary Termination of the employment of the
Employee by the Bank, the Bank shall, through the period of the remaining term
of this Agreement, pay to the Employee her salary at the annual rate in effect
immediately prior to the Date of Termination, which salary shall be payable in
such
3
<PAGE>
manner and at such times as such salary would have been payable to the Employee
under Section 4(a) if the Employee had continued to be employed by the Bank.
(b) Termination for "Good Reason." In the event that the
Employee reasonably believes that the Bank has taken any of the actions
specified in clauses (1) or (2) of Section 1(c) of this Agreement or otherwise
materially breached this Agreement, the Employee shall have the right to provide
to the Bank a written notice asserting the right to terminate her employment for
good reason and specifying (i) the facts and circumstances supporting the
Employee's belief that the Bank has taken any such action or materially breached
this Agreement and the date upon which such termination of employment for good
reason is effective, which date shall be at least 30 days after the date of such
notice, and (ii) a period of not less than ten business days during which the
Bank shall have the opportunity to rescind such actions or cure such breach. In
the event that the Bank does not rescind such actions or cure such breach with
such period, the Employee shall have the right to terminate her employment and
the Bank shall pay to the Employee her salary at the annual rate in effect
immediately prior to the Date of Termination, which salary shall be payable in
such manner and at such times as such salary would have been payable to the
Employee under Section 4(a) if the Employee had continued to be employed by the
Bank.
(c) Termination for Cause. In the event of Termination for
Cause, the Bank shall pay the Employee the Employee's salary through the Date of
Termination, and the Bank shall have no further obligation to the Employee under
this Agreement.
(d) Voluntary Termination. The Employee's employment may be
voluntarily terminated by the Employee at any time upon 90 days' written notice
to the Bank or such shorter period as may be agreed upon between the Employee
and the Board of Directors of the Bank. In the event of such voluntary
termination, the Bank shall be obligated to continue to pay to the Employee the
Employee's salary and benefits only through the Date of Termination, at the time
such payments are due, and the Bank shall have no further obligation to the
Employee under this Agreement.
(e) Death; Disability. In the event of the death of the
Employee while employed under this Agreement and prior to any termination of
employment, the Employee's estate, or such person as the Employee may have
previously designated in writing, shall be entitled to receive from the Bank the
salary of the Employee through the last day of the calendar month in which the
Employee died. If the Employee becomes disabled as defined in the Bank's then
current disability plan, if any, or if the Employee is otherwise unable due to
disability to serve as a Senior Vice President of the Bank, the Employee shall
be entitled to receive group and other disability income benefits of the type,
if any, then provided by the Bank for similarly situated personnel.
(f) Temporary Suspension or Prohibition. If the Employee is
suspended and/or temporarily prohibited from participating in the conduct of the
Bank's affairs by a notice served under Section 8(e)(3) or (g)(1) of the FDIA,
12 U.S.C. ss. 1818(e)(3) and (g)(1), the Bank's obligations under this Agreement
shall be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Bank may in its
discretion (i) pay the Employee all or part of the compensation withheld while
its obligations
4
<PAGE>
under this Agreement were suspended and (ii) reinstate in whole or in part any
of its obligations which were suspended.
(g) Permanent Suspension or Prohibition. If the Employee is
removed and/or permanently prohibited from participating in the conduct of the
Bank's affairs by an order issued under Section 8(e)(4) or (g)(1) of the FDIA,
12 U.S.C. ss. 1818(e)(4) and (g)(1), all obligations of the Bank under this
Agreement shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.
(h) Default of the Bank. If the Bank is in default (as defined
in Section 3(x)(1) of the FDIA), all obligations under this Agreement shall
terminate as of the date of default, but this provision shall not affect any
vested rights of the contracting parties.
(i) Termination by Regulators. All obligations under this
Agreement shall be terminated, except to the extent determined that continuation
of this Agreement is necessary for the continued operation of the Bank: (1) by
the Director of the Office of Thrift Supervision (the "Director") or his or her
designee, at the time the Federal Deposit Insurance Corporation or the
Resolution Trust Corporation enters into an agreement to provide assistance to
or on behalf of the Bank under the authority contained in Section 13(c) of the
FDIA; or (2) by the Director or his or her designee, at the time the Director or
his or her designee approves a supervisory merger to resolve problems related to
operation of the Bank or when the Bank is determined by the Director to be in an
unsafe or unsound condition. Any rights of the parties that have already vested,
however, shall not be affected by any such action.
(j) Limitations on Payments. Any payments made to the Employee
pursuant to this Agreement, or otherwise, are subject to and conditioned upon
their compliance with 12 U.S.C. 1828(k) and any regulations promulgated
thereunder. Notwithstanding any other provision of this Agreement, if the value
of payments under this Agreement, together with any other amounts and the value
of benefits received or to be received by the Employee in connection with a
Change in Control would cause any amount to be nondeductible by the Bank or the
Holding Company for federal income tax purposes pursuant to Section 280G of the
Internal Revenue Code of 1986, as amended, then payments under this Agreement
shall be reduced (not less than zero) to the extent necessary so as to maximize
amounts and the value of benefits to the Employee without causing any amount to
become nondeductible by the Bank or the Holding Company pursuant to or by reason
of such Section 280G.
8. No Mitigation. The Employee shall not be required to mitigate the
amount of any salary or other payment or benefit provided for in this Agreement
by seeking other employment or otherwise, nor shall the amount of any payment or
benefit provided for in this Agreement be reduced by any compensation earned by
the Employee as the result of employment by another employer, by retirement
benefits after the Date of Termination or otherwise.
9. Attorneys Fees. In the event the Bank exercises its right of
Termination for Cause, but it is determined by a court of competent jurisdiction
or by an arbitrator pursuant to Section 16 that cause did not exist for such
termination, or if in any event it is determined by any such court or arbitrator
that the Bank has failed to make timely payment of any amounts owed to the
Employee under this Agreement, the Employee shall be entitled to reimbursement
5
<PAGE>
for all reasonable costs, including attorneys' fees, incurred in challenging
such termination or collecting such amounts. Such reimbursement shall be in
addition to all rights to which the Employee is otherwise entitled under this
Agreement.
10. Assignments.
(a) In the event that Security does not merge into the Bank,
the Bank shall have the right to assign and transfer all of its rights and
obligations under this Agreement to Security. If the Bank elects to exercise
this right, it shall so notify the Employee in writing.
(b) This Agreement is a personal services contract and the
Employee may not assign or delegate any of her rights or obligations hereunder.
(c) This Agreement and all rights of the Employee hereunder
shall inure to the benefit of and be enforceable by the Employee's personal and
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
11. Notice. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, to the Bank at its home office,
to the attention of the Board of Directors with a copy to the Secretary of the
Bank, or, if to the Employee, to such home or other address as the Employee has
most recently provided in writing to the Bank.
12. Amendments. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein otherwise
provided.
13. Headings. The headings used in this Agreement are included solely
for convenience and shall not affect, or be used in connection with, the
interpretation of this Agreement.
14. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
15. Governing Law. This Agreement shall be governed by the laws of the
United States to the extent applicable and otherwise by the laws of the State of
Montana.
16. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction.
6
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
Attest: Western Federal Savings Bank
of Montana
/s/ Wendy Lambson /s/ Lyle R. Grimes
- ----------------- -------------------
Secretary Lyle R. Grimes, President and
Chief Executive Officer
Employee
/s/ Elaine F. Hine
-------------------
Elaine F. Hine
7
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
THIS AGREEMENT IS SUBJECT TO ARBITRATION
PURSUANT TO THE UNIFORM ARBITRATION ACT
CONTAINED IN CHAPTER 5, TITLE 27 OF THE MONTANA CODE ANNOTATED
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
this 24th day of September, 1996, by and between Western Federal Savings Bank of
Montana, Missoula, Montana (hereinafter referred to as the "Bank"), and Stanley
R. Hill (the "Employee").
WHEREAS, the Bank's parent holding company, WesterFed Financial
Corporation ("WesterFed" or the "Holding Company"), has entered into an
agreement dated September 24, 1996, with Security Bancorp, the parent holding
company of Security Bank, FSB ("Security"), under which Security Bancorp shall
be merged into WesterFed (the "Merger"), and such agreement calls for the
Employee and the Bank to enter into an employment agreement in the form of this
agreement; and
WHEREAS, the Employee is currently serving as a Senior Vice President
of Security and has agreed to serve as a Senior Vice President and a Commercial
Lending Officer of the Bank effective at the effective time of the Merger; and
WHEREAS, the Employee has agreed that upon the effectiveness of the
Merger, that certain Employment Agreement between himself and Security, dated
February 1, 1996 (the "Prior Employment Agreement"), shall terminate without any
obligation to him on the part of any employer or successor thereto and that this
Agreement shall entirely supersede and replace the Prior Employment Agreement;
and
WHEREAS, the Board of Directors of the Bank (the "Board of Directors")
believes it is in the best interests of the Bank to enter into this Agreement
with the Employee in order to induce the Employee to serve the Bank as a Senior
Vice President and a Commercial Lending Officer of the Bank following the Merger
and to assure continuity of management after the Merger; and
WHEREAS, although it is contemplated that Security shall merge into the
Bank in connection with the Merger, the Employee has agreed that if Security
does not merge into the Bank, the Bank may assign and transfer to Security all
of the Bank's rights and obligations under this Agreement; and
WHEREAS, the Board of Directors has approved and authorized the
execution of this Agreement with the Employee to take effect as stated in
Section 2 hereof;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein, it is AGREED as follows:
1
<PAGE>
1. Definitions.
(a) The term "Change in Control" means (1) an acquisition by
any acquiror, directly or indirectly, through one or more subsidiaries or
transactions, or acting in concert with one or more persons or companies, of
more than 25% of the outstanding voting securities of the Holding Company, or
(2) a reorganization, merger, consolidation, sale of all or substantially all of
the assets of the Bank or the Holding Company or a similar transaction in which
the Bank or the Holding Company is not the resulting entity. The term "Change in
Control" shall not include an acquisition of securities by an employee benefit
plan of the Bank or the Holding Company.
(b) The term "Commencement Date" means the date upon which the
Merger is effective.
(c) The term "Date of Termination" means the earlier of (1)
the date upon which the Bank gives notice to the Employee of the termination of
the Employee's employment with the Bank or (2) the date upon which the Employee
ceases to serve as an employee of the Bank.
(d) The term "Involuntarily Termination" means termination of
the employment of Employee without the Employee's express written consent, and
shall include a material diminution of or interference with the Employee's
duties as a Senior Vice President and a Commercial Lending Officer of the Bank,
including (without limitation) any of the following actions unless consented to
in writing by the Employee: (1) the assignment to the Employee of duties
substantially inconsistent with and in diminution of the duties of a Senior Vice
President and a Commercial Lending Officer of the Bank; and (2) a material
adverse change in the Employee's salary or benefits, other than as part of an
overall program applied uniformly and with equitable effect to a substantial
number of similarly situated personnel of the Bank. The term "Involuntary
Termination" does not include Termination for Cause or termination of employment
due to retirement, death, disability or suspension or temporary or permanent
prohibition from participation in the conduct of the Bank's affairs under
Section 8 of the Federal Deposit Insurance Act ("FDIA").
(e) The terms "Termination for Cause" and "Terminated for
Cause" mean termination of the employment of the Employee because of the
Employee's personal dishonesty, incompetence, willful misconduct, breach of a
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule, or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, or material
breach of any provision of this Agreement. The Employee shall not be deemed to
have been Terminated for Cause unless and until there shall have been delivered
to the Employee a copy of a resolution, duly adopted by the affirmative vote of
not less than a majority of the entire membership of the Board of Directors at a
meeting called and held for such purpose (after reasonable notice to the
Employee and an opportunity for the Employee, together with the Employee's
counsel, to be heard before the Board), stating that in the good faith opinion
of the Board the Employee has engaged in conduct described in the preceding
sentence and specifying the particulars thereof in detail.
2
<PAGE>
2. Term; Termination of Prior Employment Agreement. The term of this
Agreement shall be a period of two years commencing on the Commencement Date,
subject to earlier termination as provided herein. Beginning on the first
anniversary of the Commencement Date, and on each anniversary thereafter, the
term of this Agreement shall be extended for a period of one year in addition to
the then-remaining term, provided that (1) the Bank has not given notice to the
Employee in writing at least 90 days prior to such anniversary that the term of
this Agreement shall not be extended further; and (2) prior to such anniversary,
the Board of Directors of the Bank explicitly reviews and approves the
extension. Reference herein to the term of this Agreement shall refer to both
such initial term and such extended terms. Upon the effectiveness of the Merger,
the Prior Employment Agreement shall terminate with no obligation thereunder to
the Employee on the part of any employer or successor thereto, and this
Agreement shall entirely supersede and replace such Prior Employment Agreement.
3. Employment. The Employee is employed as a Senior Vice President and
a Commercial Lending Officer of the Bank at the Billings, Montana office of the
Bank. As such, the Employee shall perform all duties commonly discharged by a
Senior Vice President and a Commercial Lending Officer of the Bank, pursuant to
guidelines and directions issued by superior officers or the Board of Directors
from time to time, and such other duties of a similar nature as may be assigned
to him by superior officers or the Board of Directors from time to time,
provided that such other duties shall be reasonably related to the duties of a
Senior Vice President and a Commercial Lending Officer of the Bank.
4. Compensation.
(a) Salary. The Bank agrees to pay the Employee during the
term of this Agreement a salary of $71,500 per year, subject to customary
withholding, and payable in such installments as the Bank customarily utilizes
in paying its employees generally. In the discretion of the Bank's Board of
Directors, such salary may be increased from time to time.
(b) Discretionary Bonuses. The Employee shall be entitled to
participate in an equitable manner with similarly situated personnel in
discretionary bonuses as authorized and declared by the Board of Directors. No
other compensation provided for in this Agreement shall be deemed a substitute
for the Employee's right to participate in such bonuses when and as declared by
the Board of Directors.
(c) Expenses. The Employee shall be entitled to receive prompt
reimbursement for all reasonable expenses incurred by the Employee in performing
services under this Agreement in accordance with applicable policies and
procedures of the Bank, provided that the Employee accounts for such expenses as
required under such policies and procedures.
(d) Company Car. So long as the Employee is employed hereunder, he
shall be entitled, for business purposes only, to non-exclusive use of a car
owned by the Bank.
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<PAGE>
5. Participation in Retirement and Employee Benefit Plans. The Employee
shall be entitled to participate in all plans relating to pension, thrift,
profit-sharing, group life insurance, medical and dental coverage, education,
and other retirement or employee benefits or combinations thereof, in which
continuing employees of Security are entitled to participate after the Merger.
6. Vacations; Leave. The Employee shall be entitled to (i) annual paid
vacation in accordance with the policies established by the Bank's Board of
Directors, provided that such vacation shall not be less than four weeks per
year, and (ii) to voluntary leave of absence, with or without pay, from time to
time at such times and upon such conditions as the Board of Directors may
determine in its discretion.
7. Termination of Employment.
(a) Involuntary Termination. The Board of Directors may
terminate the Employee's employment at any time, but, except in the case of
Termination for Cause, such termination of employment by the Board of Directors
shall not prejudice the Employee's right to compensation or other benefits under
this Agreement. In the event of Involuntary Termination of the employment of the
Employee by the Bank other than in connection with or within 12 months after a
Change in Control, the Bank shall, through the period of the remaining term of
this Agreement, pay to the Employee his salary at the annual rate in effect
immediately prior to the Date of Termination, which salary shall be payable in
such manner and at such times as such salary would have been payable to the
Employee under Section 4(a) if the Employee had continued to be employed by the
Bank.
In the event of Involuntary Termination of the employment of the
Employee by the Bank in connection with or within 12 months after a Change in
Control, the Bank shall, during the 24 months following the Date of Termination,
pay to the Employee his salary at the annual rate in effect immediately prior to
the Date of Termination, which salary shall be payable in such manner and at
such times as such salary would have been payable to the Employee under Section
4(a) if the Employee had continued to be employed by the Bank.
(b) Termination for "Good Reason." In the event that the
Employee reasonably believes that the Bank has taken any of the actions
specified in clauses (1) or (2) of Section 1(d) of this Agreement or otherwise
materially breached this Agreement, the Employee shall have the right to provide
to the Bank a written notice asserting the right to terminate his employment for
good reason and specifying (i) the facts and circumstances supporting the
Employee's belief that the Bank has taken any such action or materially breached
this Agreement and the date upon which such termination of employment for good
reason is effective, which date shall be at least 30 days after the date of such
notice, and (ii) a period of not less than ten business days during which the
Bank shall have the opportunity to rescind such actions or cure such breach. In
the event that the Bank does not rescind such actions or cure such breach with
such period, the Employee shall have the right to terminate his employment and
the Bank shall pay to the Employee his salary at the annual rate in effect
immediately prior to the Date of Termination, which salary shall be payable in
such manner and at such times as such salary would have been payable to the
Employee under Section 4(a) if the Employee had continued to be employed by the
Bank.
4
<PAGE>
(c) Termination for Cause. In the event of Termination for
Cause, the Bank shall pay the Employee the Employee's salary through the Date of
Termination, and the Bank shall have no further obligation to the Employee under
this Agreement.
(d) Voluntary Termination. The Employee's employment may be
voluntarily terminated by the Employee at any time upon 90 days' written notice
to the Bank or such shorter period as may be agreed upon between the Employee
and the Board of Directors of the Bank. In the event of such voluntary
termination, the Bank shall be obligated to continue to pay to the Employee the
Employee's salary and benefits only through the Date of Termination, at the time
such payments are due, and the Bank shall have no further obligation to the
Employee under this Agreement.
(e) Death; Disability. In the event of the death of the
Employee while employed under this Agreement and prior to any termination of
employment, the Employee's estate, or such person as the Employee may have
previously designated in writing, shall be entitled to receive from the Bank the
salary of the Employee through the last day of the calendar month in which the
Employee died. If the Employee becomes disabled as defined in the Bank's then
current disability plan, if any, or if the Employee is otherwise unable due to
disability to serve as a Senior Vice President and a Commercial Lending Officer
of the Bank, the Employee shall be entitled to receive group and other
disability income benefits of the type, if any, then provided by the Bank for
similarly situated personnel.
(f) Temporary Suspension or Prohibition. If the Employee is
suspended and/or temporarily prohibited from participating in the conduct of the
Bank's affairs by a notice served under Section 8(e)(3) or (g)(1) of the FDIA,
12 U.S.C. ss. 1818(e)(3) and (g)(1), the Bank's obligations under this Agreement
shall be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Bank may in its
discretion (i) pay the Employee all or part of the compensation withheld while
its obligations under this Agreement were suspended and (ii) reinstate in whole
or in part any of its obligations which were suspended.
(g) Permanent Suspension or Prohibition. If the Employee is
removed and/or permanently prohibited from participating in the conduct of the
Bank's affairs by an order issued under Section 8(e)(4) or (g)(1) of the FDIA,
12 U.S.C. ss. 1818(e)(4) and (g)(1), all obligations of the Bank under this
Agreement shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.
(h) Default of the Bank. If the Bank is in default (as defined
in Section 3(x)(1) of the FDIA), all obligations under this Agreement shall
terminate as of the date of default, but this provision shall not affect any
vested rights of the contracting parties.
(i) Termination by Regulators. All obligations under this
Agreement shall be terminated, except to the extent determined that continuation
of this Agreement is necessary for the continued operation of the Bank: (1) by
the Director of the Office of Thrift Supervision (the "Director") or his or her
designee, at the time the Federal Deposit Insurance Corporation or the
Resolution Trust Corporation enters into an agreement to provide assistance to
or on behalf of the Bank under the authority contained in Section 13(c) of the
FDIA; or (2) by the Director or
5
<PAGE>
his or her designee, at the time the Director or his or her designee approves a
supervisory merger to resolve problems related to operation of the Bank or when
the Bank is determined by the Director to be in an unsafe or unsound condition.
Any rights of the parties that have already vested, however, shall not be
affected by any such action.
(j) Limitations on Payments. Any payments made to the Employee
pursuant to this Agreement, or otherwise, are subject to and conditioned upon
their compliance with 12 U.S.C. 1828(k) and any regulations promulgated
thereunder. Notwithstanding any other provision of this Agreement, if the value
of payments under this Agreement, together with any other amounts and the value
of benefits received or to be received by the Employee would cause any amount to
be nondeductible by the Bank or the Holding Company for federal income tax
purposes pursuant to Section 280G of the Internal Revenue Code of 1986, as
amended, then payments under this Agreement shall be reduced (not less than
zero) to the extent necessary so as to maximize amounts and the value of
benefits to the Employee without causing any amount to become nondeductible by
the Bank or the Holding Company pursuant to or by reason of such Section 280G.
8. No Mitigation. The Employee shall not be required to mitigate the
amount of any salary or other payment or benefit provided for in this Agreement
by seeking other employment or otherwise, nor shall the amount of any payment or
benefit provided for in this Agreement be reduced by any compensation earned by
the Employee as the result of employment by another employer, by retirement
benefits after the Date of Termination or otherwise.
9. Attorneys Fees. In the event the Bank exercises its right of
Termination for Cause, but it is determined by a court of competent jurisdiction
or by an arbitrator pursuant to Section 16 that cause did not exist for such
termination, or if in any event it is determined by any such court or arbitrator
that the Bank has failed to make timely payment of any amounts owed to the
Employee under this Agreement, the Employee shall be entitled to reimbursement
for all reasonable costs, including attorneys' fees, incurred in challenging
such termination or collecting such amounts. Such reimbursement shall be in
addition to all rights to which the Employee is otherwise entitled under this
Agreement.
10. Assignments.
(a) In the event that Security does not merge into the Bank,
the Bank shall have the right to assign and transfer all of its rights and
obligations under this Agreement to Security. If the Bank elects to exercise
this right, it shall so notify the Employee in writing.
(b) This Agreement is a personal services contract and the
Employee may not assign or delegate any of his rights or obligations hereunder.
(c) This Agreement and all rights of the Employee hereunder
shall inure to the benefit of and be enforceable by the Employee's personal and
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
11. Notice. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given
6
<PAGE>
when personally delivered or sent by certified mail, return receipt requested,
postage prepaid, to the Bank at its home office, to the attention of the Board
of Directors with a copy to the Secretary of the Bank, or, if to the Employee,
to such home or other address as the Employee has most recently provided in
writing to the Bank.
12. Amendments. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein otherwise
provided.
13. Headings. The headings used in this Agreement are included solely
for convenience and shall not affect, or be used in connection with, the
interpretation of this Agreement.
14. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
15. Governing Law. This Agreement shall be governed by the laws of the
United States to the extent applicable and otherwise by the laws of the State of
Montana.
16. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
Attest: Western Federal Savings Bank
of Montana
/s/ Wendy Lambson /s/ Lyle R. Grimes
- ------------------ -------------------
Secretary Lyle R. Grimes, President and
Chief Executive Officer
Employee
/s/ Stanley R. Hill
--------------------
Stanley R. Hill
7
EXHIBIT 10.4
EMPLOYMENT AGREEMENT
THIS AGREEMENT IS SUBJECT TO ARBITRATION
PURSUANT TO THE UNIFORM ARBITRATION ACT
CONTAINED IN CHAPTER 5, TITLE 27 OF THE MONTANA CODE ANNOTATED
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
this 24th day of September, 1996, by and between Western Federal Savings Bank of
Montana, Missoula, Montana (hereinafter referred to as the "Bank"), and Scott W.
Sanders (the "Employee").
WHEREAS, the Bank's parent holding company, WesterFed Financial
Corporation ("WesterFed" or the "Holding Company"), has entered into an
agreement dated September 24, 1996, with Security Bancorp, the parent holding
company of Security Bank, FSB ("Security"), under which Security Bancorp shall
be merged into WesterFed (the "Merger"), and such agreement calls for the
Employee and the Bank to enter into an employment agreement in the form of this
agreement; and
WHEREAS, the Employee is currently serving as a Senior Vice President
of Security and has agreed to serve as a Senior Vice President and a Lending
Officer of the Bank effective at the effective time of the Merger; and
WHEREAS, the Employee has agreed that upon the effectiveness of the
Merger, that certain Employment Agreement between himself and Security, dated
February 1, 1996 (the "Prior Employment Agreement"), shall terminate without any
obligation to him on the part of any employer or successor thereto and that this
Agreement shall entirely supersede and replace the Prior Employment Agreement;
and
WHEREAS, the Board of Directors of the Bank (the "Board of Directors")
believes it is in the best interests of the Bank to enter into this Agreement
with the Employee in order to induce the Employee to serve the Bank as a Senior
Vice President and a Lending Officer of the Bank following the Merger and to
assure continuity of management after the Merger; and
WHEREAS, although it is contemplated that Security shall merge into the
Bank in connection with the Merger, the Employee has agreed that if Security
does not merge into the Bank, the Bank may assign and transfer to Security all
of the Bank's rights and obligations under this Agreement; and
WHEREAS, the Board of Directors has approved and authorized the
execution of this Agreement with the Employee to take effect as stated in
Section 2 hereof;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein, it is AGREED as follows:
1. Definitions.
1
<PAGE>
(a) The term "Change in Control" means (1) an acquisition by
any acquiror, directly or indirectly, through one or more subsidiaries or
transactions, or acting in concert with one or more persons or companies, of
more than 25% of the outstanding voting securities of the Holding Company, or
(2) a reorganization, merger, consolidation, sale of all or substantially all of
the assets of the Bank or the Holding Company or a similar transaction in which
the Bank or the Holding Company is not the resulting entity. The term "Change in
Control" shall not include an acquisition of securities by an employee benefit
plan of the Bank or the Holding Company.
(b) The term "Commencement Date" means the date upon which the
Merger is effective.
(c) The term "Date of Termination" means the earlier of (1)
the date upon which the Bank gives notice to the Employee of the termination of
the Employee's employment with the Bank or (2) the date upon which the Employee
ceases to serve as an employee of the Bank.
(d) The term "Involuntarily Termination" means termination of
the employment of Employee without the Employee's express written consent, and
shall include a material diminution of or interference with the Employee's
duties as a Senior Vice President and a Lending Officer of the Bank, including
(without limitation) any of the following actions unless consented to in writing
by the Employee: (1) the assignment to the Employee of duties substantially
inconsistent with and in diminution of the duties of a Senior Vice President and
a Lending Officer of the Bank; and (2) a material adverse change in the
Employee's salary or benefits, other than as part of an overall program applied
uniformly and with equitable effect to a substantial number of similarly
situated personnel of the Bank. The term "Involuntary Termination" does not
include Termination for Cause or termination of employment due to retirement,
death, disability or suspension or temporary or permanent prohibition from
participation in the conduct of the Bank's affairs under Section 8 of the
Federal Deposit Insurance Act ("FDIA").
(e) The terms "Termination for Cause" and "Terminated for
Cause" mean termination of the employment of the Employee because of the
Employee's personal dishonesty, incompetence, willful misconduct, breach of a
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule, or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, or material
breach of any provision of this Agreement. The Employee shall not be deemed to
have been Terminated for Cause unless and until there shall have been delivered
to the Employee a copy of a resolution, duly adopted by the affirmative vote of
not less than a majority of the entire membership of the Board of Directors at a
meeting called and held for such purpose (after reasonable notice to the
Employee and an opportunity for the Employee, together with the Employee's
counsel, to be heard before the Board), stating that in the good faith opinion
of the Board the Employee has engaged in conduct described in the preceding
sentence and specifying the particulars thereof in detail.
2. Term; Termination of Prior Employment Agreement. The term of this
Agreement shall be a period of two years commencing on the Commencement Date,
subject to earlier termination as provided herein. Beginning on the first
anniversary of the Commencement Date,
2
<PAGE>
and on each anniversary thereafter, the term of this Agreement shall be extended
for a period of one year in addition to the then-remaining term, provided that
(1) the Bank has not given notice to the Employee in writing at least 90 days
prior to such anniversary that the term of this Agreement shall not be extended
further; and (2) prior to such anniversary, the Board of Directors of the Bank
explicitly reviews and approves the extension. Reference herein to the term of
this Agreement shall refer to both such initial term and such extended terms.
Upon the effectiveness of the Merger, the Prior Employment Agreement shall
terminate with no obligation thereunder to the Employee on the part of any
employer or successor thereto, and this Agreement shall entirely supersede and
replace such Prior Employment Agreement.
3. Employment. The Employee is employed as a Senior Vice President and
a Lending Officer of the Bank. As such, the Employee shall perform all duties
commonly discharged by a Senior Vice President and a Lending Officer of the
Bank, pursuant to guidelines and directions issued by superior officers or the
Board of Directors from time to time, and such other duties of a similar nature
as may be assigned to him by superior officers or the Board of Directors from
time to time, provided that such other duties shall be reasonably related to the
duties of a Senior Vice President and a Lending Officer of the Bank.
4. Compensation.
(a) Salary. The Bank agrees to pay the Employee during the
term of this Agreement a salary of $71,500 per year, subject to customary
withholding, and payable in such installments as the Bank customarily utilizes
in paying its employees generally. In the discretion of the Bank's Board of
Directors, such salary may be increased from time to time.
(b) Discretionary Bonuses. The Employee shall be entitled to
participate in an equitable manner with similarly situated personnel in
discretionary bonuses as authorized and declared by the Board of Directors. No
other compensation provided for in this Agreement shall be deemed a substitute
for the Employee's right to participate in such bonuses when and as declared by
the Board of Directors.
(c) Expenses. The Employee shall be entitled to receive prompt
reimbursement for all reasonable expenses incurred by the Employee in performing
services under this Agreement in accordance with applicable policies and
procedures of the Bank, provided that the Employee accounts for such expenses as
required under such policies and procedures.
(d) Company Car. So long as the Employee is employed
hereunder, he shall be entitled, for business purposes only, to non-exclusive
use of a car owned by the Bank.
5. Participation in Retirement and Employee Benefit Plans. The Employee
shall be entitled to participate in all plans relating to pension, thrift,
profit-sharing, group life insurance, medical and dental coverage, education,
and other retirement or employee benefits or combinations thereof, in which
continuing employees of Security are entitled to participate after the Merger.
6. Vacations; Leave. The Employee shall be entitled (i) to annual paid
vacation in accordance with the policies established by the Bank's Board of
Directors, provided that such
3
<PAGE>
vacation shall not be less than four weeks per year, and (ii) to voluntary leave
of absence, with or without pay, from time to time at such times and upon such
conditions as the Board of Directors may determine in its discretion.
7. Termination of Employment.
(a) Involuntary Termination. The Board of Directors may
terminate the Employee's employment at any time, but, except in the case of
Termination for Cause, such termination of employment by the Board of Directors
shall not prejudice the Employee's right to compensation or other benefits under
this Agreement. In the event of Involuntary Termination of the employment of the
Employee by the Bank other than in connection with or within 12 months after a
Change in Control, the Bank shall, through the period of the remaining term of
this Agreement, pay to the Employee his salary at the annual rate in effect
immediately prior to the Date of Termination, which salary shall be payable in
such manner and at such times as such salary would have been payable to the
Employee under Section 4(a) if the Employee had continued to be employed by the
Bank.
In the event of Involuntary Termination of the employment of the
Employee by the Bank in connection with or within 12 months after a Change in
Control, the Bank shall, during the 24 months following the Date of Termination,
pay to the Employee his salary at the annual rate in effect immediately prior to
the Date of Termination, which salary shall be payable in such manner and at
such times as such salary would have been payable to the Employee under Section
4(a) if the Employee had continued to be employed by the Bank.
(b) Termination for "Good Reason." In the event that the
Employee reasonably believes that the Bank has taken any of the actions
specified in clauses (1) or (2) of Section 1(d) of this Agreement or otherwise
materially breached this Agreement, the Employee shall have the right to provide
to the Bank a written notice asserting the right to terminate his employment for
good reason and specifying (i) the facts and circumstances supporting the
Employee's belief that the Bank has taken any such action or materially breached
this Agreement and the date upon which such termination of employment for good
reason is effective, which date shall be at least 30 days after the date of such
notice, and (ii) a period of not less than ten business days during which the
Bank shall have the opportunity to rescind such actions or cure such breach. In
the event that the Bank does not rescind such actions or cure such breach with
such period, the Employee shall have the right to terminate his employment and
the Bank shall pay to the Employee his salary at the annual rate in effect
immediately prior to the Date of Termination, which salary shall be payable in
such manner and at such times as such salary would have been payable to the
Employee under Section 4(a) if the Employee had continued to be employed by the
Bank.
(c) Termination for Cause. In the event of Termination for
Cause, the Bank shall pay the Employee the Employee's salary through the Date of
Termination, and the Bank shall have no further obligation to the Employee under
this Agreement.
(d) Voluntary Termination. The Employee's employment may be
voluntarily terminated by the Employee at any time upon 90 days' written notice
to the Bank or such shorter period as may be agreed upon between the Employee
and the Board of Directors of the Bank.
4
<PAGE>
In the event of such voluntary termination, the Bank shall be obligated to
continue to pay to the Employee the Employee's salary and benefits only through
the Date of Termination, at the time such payments are due, and the Bank shall
have no further obligation to the Employee under this Agreement.
(e) Death; Disability. In the event of the death of the
Employee while employed under this Agreement and prior to any termination of
employment, the Employee's estate, or such person as the Employee may have
previously designated in writing, shall be entitled to receive from the Bank the
salary of the Employee through the last day of the calendar month in which the
Employee died. If the Employee becomes disabled as defined in the Bank's then
current disability plan, if any, or if the Employee is otherwise unable due to
disability to serve as a Senior Vice President and a Lending Officer of the
Bank, the Employee shall be entitled to receive group and other disability
income benefits of the type, if any, then provided by the Bank for similarly
situated personnel.
(f) Temporary Suspension or Prohibition. If the Employee is
suspended and/or temporarily prohibited from participating in the conduct of the
Bank's affairs by a notice served under Section 8(e)(3) or (g)(1) of the FDIA,
12 U.S.C. ss. 1818(e)(3) and (g)(1), the Bank's obligations under this Agreement
shall be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Bank may in its
discretion (i) pay the Employee all or part of the compensation withheld while
its obligations under this Agreement were suspended and (ii) reinstate in whole
or in part any of its obligations which were suspended.
(g) Permanent Suspension or Prohibition. If the Employee is
removed and/or permanently prohibited from participating in the conduct of the
Bank's affairs by an order issued under Section 8(e)(4) or (g)(1) of the FDIA,
12 U.S.C. ss. 1818(e)(4) and (g)(1), all obligations of the Bank under this
Agreement shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.
(h) Default of the Bank. If the Bank is in default (as defined
in Section 3(x)(1) of the FDIA), all obligations under this Agreement shall
terminate as of the date of default, but this provision shall not affect any
vested rights of the contracting parties.
(i) Termination by Regulators. All obligations under this
Agreement shall be terminated, except to the extent determined that continuation
of this Agreement is necessary for the continued operation of the Bank: (1) by
the Director of the Office of Thrift Supervision (the "Director") or his or her
designee, at the time the Federal Deposit Insurance Corporation or the
Resolution Trust Corporation enters into an agreement to provide assistance to
or on behalf of the Bank under the authority contained in Section 13(c) of the
FDIA; or (2) by the Director or his or her designee, at the time the Director or
his or her designee approves a supervisory merger to resolve problems related to
operation of the Bank or when the Bank is determined by the Director to be in an
unsafe or unsound condition. Any rights of the parties that have already vested,
however, shall not be affected by any such action.
(j) Limitations on Payments. Any payments made to the Employee
pursuant to this Agreement, or otherwise, are subject to and conditioned upon
their compliance with 12
5
<PAGE>
U.S.C. 1828(k) and any regulations promulgated thereunder. Notwithstanding any
other provision of this Agreement, if the value of payments under this
Agreement, together with any other amounts and the value of benefits received or
to be received by the Employee would cause any amount to be nondeductible by the
Bank or the Holding Company for federal income tax purposes pursuant to Section
280G of the Internal Revenue Code of 1986, as amended, then payments under this
Agreement shall be reduced (not less than zero) to the extent necessary so as to
maximize amounts and the value of benefits to the Employee without causing any
amount to become nondeductible by the Bank or the Holding Company pursuant to or
by reason of such Section 280G.
8. No Mitigation. The Employee shall not be required to mitigate the
amount of any salary or other payment or benefit provided for in this Agreement
by seeking other employment or otherwise, nor shall the amount of any payment or
benefit provided for in this Agreement be reduced by any compensation earned by
the Employee as the result of employment by another employer, by retirement
benefits after the Date of Termination or otherwise.
9. Attorneys Fees. In the event the Bank exercises its right of
Termination for Cause, but it is determined by a court of competent jurisdiction
or by an arbitrator pursuant to Section 16 that cause did not exist for such
termination, or if in any event it is determined by any such court or arbitrator
that the Bank has failed to make timely payment of any amounts owed to the
Employee under this Agreement, the Employee shall be entitled to reimbursement
for all reasonable costs, including attorneys' fees, incurred in challenging
such termination or collecting such amounts. Such reimbursement shall be in
addition to all rights to which the Employee is otherwise entitled under this
Agreement.
10. Assignments.
(a) In the event that Security does not merge into the Bank,
the Bank shall have the right to assign and transfer all of its rights and
obligations under this Agreement to Security. If the Bank elects to exercise
this right, it shall so notify the Employee in writing.
(b) This Agreement is a personal services contract and the
Employee may not assign or delegate any of his rights or obligations hereunder.
(c) This Agreement and all rights of the Employee hereunder
shall inure to the benefit of and be enforceable by the Employee's personal and
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
11. Notice. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, to the Bank at its home office,
to the attention of the Board of Directors with a copy to the Secretary of the
Bank, or, if to the Employee, to such home or other address as the Employee has
most recently provided in writing to the Bank.
12. Amendments. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein otherwise
provided.
6
<PAGE>
13. Headings. The headings used in this Agreement are included solely
for convenience and shall not affect, or be used in connection with, the
interpretation of this Agreement.
14. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
15. Governing Law. This Agreement shall be governed by the laws of the
United States to the extent applicable and otherwise by the laws of the State of
Montana.
16. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
Attest: Western Federal Savings Bank
of Montana
/s/ Wendy Lambson /s/ Lyle R. Grimes
- ------------------ -------------------
Secretary Lyle R. Grimes, President and
Chief Executive Officer
Employee
/s/ Scott W. Sanders
---------------------
Scott W. Sanders
7
EXHIBIT 21.1
SUBSIDIARIES OF WESTERFED FINANCIAL CORPORATION
<TABLE>
<CAPTION>
PERCENT STATE OF
OF INCORPORATION
PARENT SUBSIDIARY OWNERSHIP OR
- ------ ---------- --------- ORGANIZATION
------------
<C> <C> <C> <C>
WESTERFED FINANCIAL CORPORATION WESTERN FEDERAL SAVINGS BANK OF 100% FEDERAL
MONTANA
WESTERN FEDERAL SAVINGS BANK OF MONTE MAC I 100% MONTANA
MONTANA
WESTERN FEDERAL SAVINGS BANK OF SERVICE CORPORATION OF MONTANA 100% MONTANA
MONTANA
WESTERN FEDERAL SAVINGS BANK OF WESTERFED INSURANCE SERVICES, INC. 100% MONTANA
MONTANA
</TABLE>
EXHIBIT 21.2
SUBSIDIARIES OF SECURITY BANCORP
<TABLE>
<CAPTION>
PERCENT STATE OF
OF INCORPORATION
PARENT SUBSIDIARY OWNERSHIP OR
- ------ ---------- --------- ORGANIZATION
------------
<S> <C> <C> <C>
SECURITY BANCORP SECURITY BANK, FSB 100% FEDERAL
SECURITY BANK, FSB S.F.S. INDUSTRIES, INC. 100% MONTANA
</TABLE>
Exhibit 23.1
[KPMG Peat Marwick LLP Letterhead]
The Board of Directors
WesterFed Financial Corporation:
We consent to the use of our report included herein and to the reference to our
firm under the heading 'Experts' in the prospectus. Our report refers to changes
in the methods of accounting for securities and income taxes.
/s/ KPMG Peat Marwick LLP
Billings, Montana
November 14, 1996
<PAGE>
[KPMG Peat Marwick LLP Letterhead]
The Board of Directors
Security Bancorp:
We consent to the use of our report included herein and to the reference to our
firm under the heading 'Experts' in the prospectus. Our report refers to changes
in the methods of accounting for investment and mortgage-backed securities.
/s/ KPMG Peat Marwick LLP
Billings, Montana
November 14, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-Q FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 6,256
<INT-BEARING-DEPOSITS> 11,133
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 82,609
<INVESTMENTS-CARRYING> 72,496
<INVESTMENTS-MARKET> 72,432
<LOANS> 371,228
<ALLOWANCE> 2,001
<TOTAL-ASSETS> 566,109
<DEPOSITS> 342,986
<SHORT-TERM> 34,000
<LIABILITIES-OTHER> 14,483
<LONG-TERM> 96,351
0
0
<COMMON> 46
<OTHER-SE> 78,243
<TOTAL-LIABILITIES-AND-EQUITY> 566,109
<INTEREST-LOAN> 7,710
<INTEREST-INVEST> 2,837
<INTEREST-OTHER> 46
<INTEREST-TOTAL> 10,593
<INTEREST-DEPOSIT> 3,865
<INTEREST-EXPENSE> 5,950
<INTEREST-INCOME-NET> 4,643
<LOAN-LOSSES> 15
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 720
<INCOME-PRETAX> (268)
<INCOME-PRE-EXTRAORDINARY> (179)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (179)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
<YIELD-ACTUAL> 0
<LOANS-NON> 316
<LOANS-PAST> 957
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 199
<ALLOWANCE-OPEN> 2,005
<CHARGE-OFFS> 20
<RECOVERIES> 1
<ALLOWANCE-CLOSE> 2,001
<ALLOWANCE-DOMESTIC> 2,001
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 904
</TABLE>
EXHIBIT 99.1
REVOCABLE PROXY
WesterFed Financial Corporation
Missoula, Montana
SPECIAL MEETING OF STOCKHOLDERS
, 1997
The undersigned hereby appoints Lyle R. Grimes, with full powers of
substitution, to act as proxy for the undersigned, to vote all shares of common
stock of WesterFed Financial Corporation ("WesterFed") which the undersigned is
entitled to vote at the Special Meeting of Stockholders, scheduled to be held at
the office of_______________________ on February _____, 1997 at _________, and
at any and all adjournments thereof, as follows:
VOTE
----
FOR AGAINST
--- -------
1) The approval of the Agreement and
Plan of Merger dated September 24,
1996 between WesterFed Financial and Security
(including the exhibits and
schedules thereto) (the "Merger
Agreement"), and the transactions
contemplated thereby; and [ ] [ ]
2) The ratification of the adoption of the
Equity Investment Plan. [ ] [ ]
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE PROPOSITIONS SET
FORTH ABOVE
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE
SPECIFIED, THIS PROXY WILL BE VOTED FOR THE PROPOSITION STATED. IF ANY OTHER
BUSINESS IS PRESENTED AT THE SPECIAL MEETING, THIS PROXY WILL BE VOTED BY THOSE
NAMED IN THIS PROXY AS DETERMINED BY A MAJORITY OF THE BOARD OF DIRECTORS. AT
THE PRESENT TIME, THE BOARD OF DIRECTORS KNOWS OF NO OTHER BUSINESS TO BE
PRESENTED AT THE SPECIAL MEETING. THIS PROXY CONFERS DISCRETIONARY AUTHORITY ON
THE HOLDERS THEREOF TO VOTE WITH RESPECT TO MATTERS INCIDENT TO THE CONDUCT OF
THE SPECIAL MEETING. HOWEVER, PROXIES INSTRUCTED TO VOTE AGAINST THE PROPOSAL TO
APPROVE THE MERGER AGREEMENT AND THE EQUITY INVESTMENT PLAN WILL NOT BE VOTED
FOR A PROPOSAL TO APPROVE ADJOURNMENT OF THE SPECIAL MEETING IN THE EVENT THAT
THERE ARE NOT SUFFICIENT SHARES PRESENT IN PERSON OR BY PROXY AT THE SPECIAL
MEETING TO APPROVE THE MERGER.
<PAGE>
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
Should the undersigned be present and elect to vote at the Special
Meeting or at any adjournment thereof and after notification to the Secretary of
WesterFed Financial at the Special Meeting of the stockholder's decision to
terminate this proxy, then the power of said attorney and proxy shall be deemed
terminated and of no further force and effect.
The undersigned acknowledges receipt from WesterFed Financial prior to
the execution of this proxy of the Notice of the Special Meeting and the Proxy
Statement/Prospectus dated , 1997.
Dated: _________________________, 1997
--------------------------
SIGNATURE OF STOCKHOLDER
--------------------------
SIGNATURE OF STOCKHOLDER
Please sign exactly as your
name appears herein. When
signing as attorney,
executor, administrator,
trustee or guardian, please
give your full title. If
shares are held jointly,
each holder should sign.
PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY PROMPTLY
IN THE ACCOMPANYING POSTAGE-PREPAID ENVELOPE
EXHIBIT 99.2
REVOCABLE PROXY
Security Bancorp
Billings, Montana
ANNUAL MEETING OF STOCKHOLDERS
_________, 1997
This Proxy Is Being Solicited on Behalf of the Board of Directors of Security
Bancorp
The undersigned, being a stockholder of Security Bancorp ("Security")
hereby appoints the Board of Directors of Security, with full powers of
substitution, to act as proxy for the undersigned, to vote all shares of common
stock of Security which the undersigned is entitled to vote at the Annual
Meeting of Stockholders, scheduled to be held at the office of , on February __,
1997 at .m, and at any and all adjournments thereof, as follows:
VOTE
----
FOR AGAINST ABSTAIN
--- ------- -------
1) The approval of the Agreement and
Plan of Merger dated September 24,
1996 between Westerfed Financial
Corporation and Security Bancorp
(the "Merger Agreement"), and
the transactions contemplated thereby;
2) The election of the following three directors:
A. I vote FOR all nominees listed below (except as marked to the
contrary below) [ ]
B. I WITHHOLD AUTHORITY to vote for all nominees listed below [ ]
[INSTRUCTION: To withhold authority to vote for any individual nominee
strike a line through the nominee's name in the list below.)
ELAINE F. HINE - DAVID W. JORGENSON - WILLIAM M. LESLIE
VOTE
----
FOR AGAINST ABSTAIN
--- ------- -------
3) The ratification of the appointment of
KPMG Peat Marwick, LLP as auditors
for the fiscal year ending June 30, 1997.[ ] [ ] [ ]
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE PROPOSITIONS SET FORTH ABOVE
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE
SPECIFIED, THIS PROXY WILL BE VOTED FOR THE PROPOSITIONS STATED. IF ANY OTHER
BUSINESS IS PRESENTED AT THE ANNUAL MEETING, THIS PROXY WILL BE VOTED BY THOSE
NAMED IN THIS PROXY AS DETERMINED BY A MAJORITY OF THE BOARD OF DIRECTORS. AT
THE PRESENT TIME, THE BOARD OF DIRECTORS KNOWS OF NO OTHER BUSINESS TO BE
PRESENTED AT THE ANNUAL MEETING. THIS PROXY CONFERS DISCRETIONARY AUTHORITY ON
THE HOLDERS THEREOF TO VOTE WITH RESPECT TO MATTERS INCIDENT TO THE CONDUCT OF
THE ANNUAL MEETING. HOWEVER, PROXIES INSTRUCTED TO VOTE AGAINST THE PROPOSAL TO
APPROVE THE MERGER AGREEMENT, THE ELECTION OF THE THREE DIRECTORS AND THE
RATIFICATION OF AUDITORS WILL NOT BE VOTED FOR A PROPOSAL TO APPROVE ADJOURNMENT
OF THE ANNUAL MEETING IN THE EVENT THAT THERE ARE NOT SUFFICIENT SHARES PRESENT
IN PERSON OR BY PROXY AT THE ANNUAL MEETING TO APPROVE THE MERGER.
<PAGE>
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
Should the undersigned be present and elect to vote at the Annual
Meeting or at any adjournment thereof and after notification to the Secretary of
Security at the Annual Meeting of the stockholder's decision to terminate this
proxy, then the power of said attorney and proxies shall be deemed terminated
and of no further force and effect.
The undersigned acknowledges receipt from Security prior to the
execution of this proxy of the Notice of the Annual Meeting and the Joint Proxy
Statement/Prospectus dated , 1997.
Dated: _________________________, 1997
--------------------------
SIGNATURE OF STOCKHOLDER
--------------------------
SIGNATURE OF STOCKHOLDER
Please sign exactly as your
name appears herein. When
signing as attorney,
executor, administrator,
trustee or guardian, please
give your full title. If
shares are held jointly,
each holder should sign.
PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY PROMPTLY
IN THE ACCOMPANYING POSTAGE-PREPAID ENVELOPE
EXHIBIT 99.3
ELECTION FORM FOR USE BY STOCKHOLDERS OF
SECURITY BANCORP, INC.
Gentlemen:
Pursuant to the terms of the Agreement and Plan of Merger (the "Merger
Agreement") between WesterFed Financial Corporation ("WesterFed Financial") and
Security Bancorp, Inc. ("Security"), the undersigned stockholder(s) of Security
elects the following alternative as to the consideration that the undersigned
elects to receive in conversion of his or her shares of Security Common Stock
upon consummation of the merger. This election is subject to the stock component
being 40% to 45% of the aggregate consideration paid by WesterFed Financial to
Security stockholders.
CHECK THE APPROPRIATE BOXE(S) TO INDICATE YOUR ELECTION
[ ] (i) Stock Election--_______ shares of Security Common Stock to be
converted into shares of WesterFed Financial common stock based on the
"Exchange Ratio." The "exchange ratio" is $30.00 divided by the average
closing price of WesterFed Financial common stock for the twenty
trading days commencing thirty days prior to closing. However, if the
average WesterFed Financial stock price is (a) equal to or less than
$13.05, the exchange ratio will be 2.2989, (b) equal to or greater than
$15.95 but not greater than $17.50, the exchange ratio will be 1.8809,
or (c) in excess of $17.50, the exchange ratio will be (absent
extraordinary circumstances) $32.91 divided by the average price.
[ ] (ii) Cash Election-- _____ shares of Security Common Stock to be
converted to an amount equal to $30.00 per share for each share of
Security Common Stock.
[ ] Stock and Cash Election-- a combination of cash and stock as follows:
_____ shares of Security stock for cash; and
_____ shares of Security stock for WesterFed Financial stock.
PLEASE NOTE THAT THE TOTAL NUMBER OF SHARES SPECIFIED ABOVE CANNOT
EXCEED THE TOTAL NUMBER OF SHARES OF SECURITY COMMON STOCK YOU OWN OF RECORD.
The undersigned acknowledges that the deadline for filing this Election
Form with ___________________________ is by 5:00 p.m., Montana Time, on
_______________, 1997, the day of the Annual Meeting of Stockholders of Security
in which Security stockholders will consider and vote upon the Merger Agreement.
Any stockholder who fails to deliver the Election Form to
___________________________ by the deadline will be deemed to have elected the
Cash Election but will be treated differently than other stockholders who have
made a Cash Election by filing this Election Form. In addition, any holder of 1%
or more of the Security Common Stock that shall not have delivered to
_________________________ on or before 5:00 p.m., Montana Time, on
_______________, 1997, in properly executed form, the accompanying certification
regarding certain tax matters, shall be deemed to have made a timely Cash
Election. The undersigned further acknowledges that the election to receive the
indicated category of consideration is subject to the limitations on the
issuance of not more than ______ shares of Common Stock. See the section of the
accompanying Joint Proxy Statement/Prospectus entitled "THE MERGER-- Merger
Consideration" for a description of the situations in which the Exchange Agent
may be required to pay to stockholders consideration
<PAGE>
other than from the elected category of consideration and the priorities
governing such adjustments.
Prior to 5:00 p.m., Montana Time, on _______________, 1997, the
undersigned may, at any time or from time to time, change his or her election by
filing a new Election Form with
- ---------------------------.
Stockholders who have questions regarding the election process, and/or
the tax consequences associated with such election process, should consult, at
their own expense, their own tax, legal and investment advisors.
Date:____________________ , 1997 ________________________
Signature of Stockholder
________________________
Signature of Stockholder
(To be signed by the holder(s) of record
exactly as the names(s) of such holder(s)
appears on the stock certificate. When
signing as an attorney, executor,
administrator, trustee or guardian, please
give full title. All joint owners must
sign.)
--------------------------------
Print Signature of Stockholder(s)
THIS ELECTION FORM IS NOT A FORM OF PROXY. PLEASE RETUN THIS ELECTION FORM ONLY
TO__________________________________________________.
PLEASE RETURN TO _______________________________ USING
THE ENCLOSED, PRE-PAID, PRE-ADDRESSED ENVELOPE.
