<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------- ----------------
COMMISSION FILE NUMBER 0-22772
WESTERFED FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 81-0187794
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
110 East Broadway, Missoula, Montana 59802-4511
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (406) 721-5254
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
--------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days. YES X NO___.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, computed by reference to the closing price of such stock on the
NASDAQ National Market System as of September 15, 1997, was $115.9 million. (The
exclusion from such amount of the market value of the shares owned by any person
shall not be deemed an admission by the registrant that such person is an
affiliate of the registrant.)
As of September 15, 1997, there were issued and outstanding 5,577,129
shares of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and IV of Form 10-K - Portions of the Annual Report to Stockholders for
the fiscal year ended June 30, 1997.
Part III of Form 10-K - Portions of the Proxy Statement for 1997 Annual
Meeting of Stockholders.
<PAGE>
PART I
------
Item 1. Business
General
WesterFed Financial Corporation (the "Company"), a Delaware
corporation, is a unitary savings and loan holding company which was organized
in 1994 at the direction of Western Federal Savings Bank of Montana ("Western
Federal" or the "Bank") for the purpose of owning all of the outstanding stock
of the Bank to be issued in connection with the Bank's conversion from mutual to
stock form (the "Conversion"). The Conversion was completed on January 6, 1994
at which time the Company issued a total of 4,436,657 shares of its common
stock. At June 30, 1997, the Company had total assets of $955.6 million,
deposits of $630.9 million and stockholders' equity of $104.3 million (10.91% of
total assets).
The Company's results of operations are dependent primarily on net
interest income and fee income. Net interest income is the difference between
the interest income earned on its loans, mortgage-backed securities, and
investment portfolio and its cost of funds, consisting of interest paid on its
deposits and borrowed money ("spread"). The Company's results of operations are
also significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities.
The Company serves the financial needs of communities throughout
Montana through its main office located in Missoula, 36 branch offices and one
loan servicing office. The Company attracts deposits from the general public and
uses the deposits, together with borrowings and other funds, to originate loans
secured by mortgages on owner-occupied one- to four-family residences in its
primary market area. To a lesser extent, the Company also originates
multi-family, commercial, agriculture and construction real estate loans and non
real estate commercial, agriculture and consumer loans in its market areas. The
Company also invests in mortgage-backed securities, investment securities and
other short-term liquid assets.
On February 28, 1997, the Company completed its acquisition of Security
Bancorp (the "Acquisition"). The Acquisition was accounted for as a purchase
transaction and accordingly, the consolidated statement of income includes the
results of operations of Security Bancorp commencing March 1, 1997. Under this
method of accounting, assets and liabilities of Security Bancorp are adjusted to
their estimated fair value and combined with the historical recorded book value
of the assets and liabilities of the Company. The actual revaluation of Security
Bancorp's net assets acquired is subject to the completion of studies and
evaluations by management. The Company issued 1,150,175 shares of WesterFed
Common Stock, options to acquire 94,696 common shares and committed to pay
$25,995,480 in cash for all of the outstanding shares of Security Bancorp Common
Stock, for total consideration (based on the $18.49 per share average closing
price of WesterFed Common Stock as reported on the NASDAQ National Market System
for the twenty business days from January 16, 1997 through February 12, 1997) of
$48.7 million. In addition, as of such date, Security Bank, a federally
chartered stock savings bank and wholly owned subsidiary of Security Bancorp,
merged with and into the Bank. At the time of the merger, Security Bancorp had
assets on a consolidated basis of $372.6 million, deposits of $286.5 million and
stockholders equity of $30.8 million. Unless the context otherwise requires,
reference herein to the company includes WesterFed, Western Federal and its
subsidiaries on a consolidated basis. See "Management's Discussion and Analysis
- - Acquisition Completed" in the Annual Report to the Shareholders attached
hereto as Exhibit 13 (the "Annual Report").
Forward-Looking Statements
When used in this Form 10-K or future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "will likely
result," "are expected to," "will continue," "is anticipated," "estimate,"
"project" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. The Company wishes to caution readers not to place undue reliance on
any such forward-looking
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statements, which speak only as of the date made, and to advise readers that
various factors--including regional and national economic conditions,
substantial changes in levels of market interest rates, credit and other risks
of lending and investment activities and competitive and regulatory
factors--could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected.
The Company does not undertake--and specifically disclaims any
obligation--to update any forward-looking statements to reflect occurrence of
anticipated or unanticipated events or circumstances after the date of such
statements.
Market Areas
The Bank conducts operations through its main office in Missoula,
Montana and its 35 branch offices and 2 administrative offices in 18 diverse
counties located throughout the State.
Missoula. In Missoula the Bank operates six branch offices which
accounted for a total of $144.7 million of Missoula county's June 30, 1996
deposits, or a 16.2% market share, the latest date such information is
available. 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 manufacturing), the University of Montana and the U.S. Forest Service.
Billings. The Bank operates seven branches in the cities of Billings
and Laurel, located in Yellowstone county. Total deposits held by those branches
represented $177.9 million of the county's total June 30, 1996 deposits, or a
12.2% 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.
Helena. Four Western Federal offices are in Helena and East Helena,
which is located in Lewis and Clark county. The four branches there have total
deposits of $46.2 million, which accounts for 6.5% of the county's total June
30, 1996 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.
Great Falls. The Bank operates three branches in the city of Great
Falls, located in Cascade county. These branches hold $39.6 million in deposits
which is 4.7% of the county's total June 30, 1996 deposits. In Great Falls, the
leading non-farm basic industries are Malmstrom Air Force Base, and trade center
activity. Agriculture has a major influence on the economy of Great Falls with
the surrounding counties being the state's leading wheat producers.
Bozeman. The Bank has two offices located in the city of Bozeman in
Gallatin county. Deposits in the branches are $19.8 million for a 3.7% market
share of the county's June 30, 1996 total deposits. Leading non-farm basic
industries in Gallatin county are Montana State University, selected
manufacturing, and non-resident travel. The county's economy continues to
benefit from growth in non-resident travel. The Bank anticipates closing one
branch in Bozeman in early 1998 as a result of the consolidation made possible
by the merger of Security Bank.
Hamilton. The Bank has one branch office in Hamilton, located in
Ravalli county, where it holds deposits of $16.3 million of the county's June
30, 1996 deposits for a 5.5% market share. Ravalli county has benefitted
recently from an influx of retirees.
Conrad. One Bank office is located in the city of Conrad in Pondera
county. This branch has $8.1 million in deposits and a 9.1% market share of the
county's total June 30, 1996 deposits. The local economy is primarily
agricultural in nature.
3
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Lewistown. The Bank has two offices in the city of Lewistown, located
in Fergus county. The branches have $29.0 million in deposits for a 17.0% market
share of the county's total June 30, 1996 deposits. The local economy is
primarily agricultural in nature. The Bank anticipates closing one branch in
Lewistown in early 1998 as a result of the consolidation made possible by the
merger of Security Bank.
Miles City. In Custer county, the Bank has one branch located in Miles
City, which has $13.9 million in deposits for a 6.6% market share of the
county's June 30, 1996 total deposits. Ranching is an important segment of the
local economy.
Hardin. The Bank has one branch located in the city of Hardin, in Big
Horn county. The branch has $8.9 million in deposits for a 12.1% market share of
the county's June 30, 1996 total deposits. The local economy is primarily
agricultural in nature.
Anaconda. The Bank has one branch located in the city of Anaconda, in
Deer Lodge county. The branch has $28.1 million in deposits for a 25.6% market
share of the county's June 30, 1996 total deposits. Anaconda continues to
benefit from resotration activities related to environmental superfund sites.
Kalispell. The Bank has one branch located in the city of Kalispell, in
Flathead county. The branch has $6.8 million in deposits for a 0.9% market share
of the county's June 30, 1996 total deposits. Kalispell's economy is supported
by natural resource industries and non-resident travel.
Havre. The Bank has one branch located in the city of Havre, in Hill
county. The branch has $26.1 million in deposits for a 11.3% market share of the
county's June 30, 1996 total deposits. The local economy is primarily
agricultural in nature.
Malta. The Bank has one branch located in the city of Malta, in
Phillips county. The branch has $3.8 million in deposits for a 4.7% market share
of the county's June 30, 1996 total deposits. The local economy is primarily
agricultural in nature.
Sidney. The Bank has one branch located in the city of Sidney, in
Richland county. The branch has $8.7 million in deposits for a 6.0% market share
of the county's June 30, 1996 total deposits. The local economy is primarily
agricultural in nature.
Plentywood. The Bank has one branch located in the city of Plentywood,
in Sheridan county. The branch has $16.8 million in deposits for a 15.4% market
share of the county's June 30, 1996 total deposits. The local economy is
primarily agricultural in nature.
Butte. The Bank has one branch located in the city of Butte, in
Silverbow county. The branch has $40.4 million in deposits for a 9.0% market
share of the county's June 30, 1996 total deposits. Butte is a trade center and
continues to be supported by various mining activities.
Glasgow. The Bank has one branch located in the city of Glasgow, in
Valley county. The branch has $8.2 million in deposits for a 6.2% market share
of the county's June 30, 1996 total deposits. The local economy is primarily
agricultural in nature.
Lending Activities
General. Historically the principal lending activity of the Bank has
been the origination, for portfolio and for sale, of first mortgage loans
secured by owner-occupied one-to-four family residential properties located in
its primary market areas. More recently, in order to increase the yield and
better manage the interest rate sensitivity of its portfolio, and in order to
provide more comprehensive financial services to communities in its market
areas, the Bank now also originates commercial real estate, consumer,
multi-family, and construction loans. With the 1997 merger with Security Bank,
Western Federal acquired a more expansive lending portfolio, including loans and
expertise in commercial non-real estate and agricultural services. The Bank is
also a major
4
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originator and servicer of Federal Housing Adminstration/Veterans Administration
("FHA/VA") loans, which are subsequently purchased by the Montana Board of
Housing ("MBOH").
When fixed-rate conventional mortgage loans with terms over 15 years
are routinely sold into the secondary market, Western Federal generally retains
the servicing rights on these loans, except for those loans sold pursuant to
loan correspondent agreements. See "- Originations, Purchases and Sales of Loans
and Mortgage-Backed Securities." At June 30, 1997, Western Federal serviced
loans with principal balances of approximately $268.6 million for others. The
loan servicing fees earned provided a supplement to the Bank's earnings.
5
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Loan Portfolio Composition. The following table sets forth information
regarding the composition of the Bank's loan portfolio in dollar amounts and in
percentages (before deductions for loans in process, deferred fees and discounts
and allowances for losses) as of the dates indicated.
<TABLE>
<CAPTION>
At June 30,
1997 1996 1995
---------------- ----------------- ----------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family(1).................... $ 348,577 53.82% $280,853 74.69% $247,331 76.94%
Multi-family.............................. 40,237 6.21 19,939 5.30 18,985 5.91
Commercial................................ 50,049 7.73 18,318 4.87 12,399 3.86
Agricultural.............................. 7,970 1.23 --- --- --- ---
Construction.............................. 19,858 3.07 12,977 3.45 10,742 3.34
--------- ------- -------- ------- -------- ------
Total real estate loans................. 466,691 72.06 332,087 88.31 289,457 90.05
--------- ------- -------- ------- -------- ------
Other Loans:
Commercial (non-real estate).............. 28,924 4.47 --- --- --- ---
Agricultural (non-real estate)............ 18,866 2.91 --- --- --- ---
Loans to depositors, secured by deposits.. 4,101 0.63 2,337 0.62 2,138 0.67
Indirect consumer loans................... 40,708 6.29 2,827 0.75 --- ---
Other consumer loans - real estate secured 58,551 9.04 30,814 8.19 24,757 7.69
Other consumer loans...................... 29,772 4.60 8,003 2.13 5,112 1.59
--------- ------- -------- ------- -------- ------
Total other loans....................... 180,922 27.94 43,981 11.69 32,007 9.95
--------- ------- -------- ------- -------- ------
Total gross loans....................... 647,613 100.00% 376,068 100.00% 321,464 100.00%
====== ====== ======
Less:
Unearned fees and discounts............... (1,813) (1,625) (1,344)
Undisbursed loan funds.................... (9,489) (4,245) (4,988)
Purchased discounts....................... (1,383) --- ---
Allowance for losses...................... (4,651) (2,005) (2,011)
--------- -------- --------
Total loans receivable, net............. $ 630,277 $368,193 $313,121
========= ======== ========
</TABLE>
<TABLE>
<CAPTION>
At June 30,
1994 1993
-------------------- -------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family(1).................... $230,700 81.85% $192,950 79.75%
Multi-family.............................. 14,430 5.12 11,801 4.88
Commercial................................ 11,300 4.01 13,215 5.46
Agricultural.............................. --- --- --- ---
Construction.............................. 7,866 2.79 8,764 3.62
-------- ------- -------- -------
Total real estate loans................. 264,296 93.77 226,730 93.71
-------- ------- -------- -------
Other Loans:
Commercial (non-real estate).............. --- --- --- ---
Agricultural (non-real estate)............ --- --- --- ---
Loans to depositors, secured by deposits.. 2,034 0.72 1,839 0.76
Indirect consumer loans................... --- --- --- ---
Other consumer loans - real estate secured 10,150 3.60 7,800 3.22
Other consumer loans...................... 5,387 1.91 5,577 2.31
-------- ------- -------- -------
Total other loans....................... 17,571 6.23 15,216 6.29
-------- ------- -------- -------
Total gross loans....................... 281,867 100.00% 241,946 100.00%
====== ======
Less:
Unearned fees and discounts............... (1,301) (1,017)
Undisbursed loan funds.................... (3,696) (5,723)
Purchased discounts....................... --- ---
Allowance for losses...................... (2,030) (2,058)
------- --------
Total loans receivable, net............. $274,840 $233,148
======== ========
</TABLE>
- ----------
(1) Includes $13.7 million, $7.5 million, $7.1 million, $8.9 million, and $12.5
million of FHA and VA loans at June 30, 1997, 1996, 1995, 1994 and 1993,
respectively.
6
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The following table illustrates the interest rate sensitivity of the
Bank's loan portfolio at June 30, 1997. 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 Construction
-------------------------------------------------------------------------------
Weighted Weighted Weighted
Due During Years Average Average Average
Ending June 30, Amount Rate Amount Rate Amount Rate
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998 (1) $ 1,330 9.04% $ 233 9.71% $ 16,918 7.81%
1999 1,434 8.65% 1,281 8.72% 319 10.00%
2000 722 9.03% 643 9.23% 2,421 10.00%
2001 and 2002 10,014 8.60% 2,767 9.22% --- --
2003 and 2007 33,140 8.21% 6,067 8.84% 200 9.00%
2008 and 2012 146,844 7.62% 19,104 10.03% --- --
2013 and Following 155,093 7.77% 10,142 8.47% --- --
-------------------------------------------------------------------------------
Total $ 348,577 7.78% $ 40,237 9.35% $ 19,858 8.12%
===============================================================================
</TABLE>
<TABLE>
<CAPTION>
Real Estate
--------------------------------------------------------------------------------
Commercial Agriculture Total Real Estate
--------------------------------------------------------------------------------
Weighted Weighted Weighted
Due During Years Average Average Average
Ending June 30, Amount Rate Amount Rate Amount Rate
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998 (1) $ 1,374 9.66% $ 177 9.65% $ 20,032 8.05%
1999 4,060 9.79% 47 8.75% 7,141 9.37%
2000 799 9.32% 90 9.62% 4,675 9.62%
2001 and 2002 3,857 9.26% 491 8.74% 17,129 8.85%
2003 and 2007 10,043 8.96% 1,271 9.11% 50,721 8.46%
2008 and 2012 20,003 9.02% 1,286 8.76% 187,237 8.02%
2013 and Following 9,913 9.29% 4,608 8.54% 179,756 7.92%
--------------------------------------------------------------------------------
Total $ 50,049 9.17% $ 7,970 8.72% $ 466,691 8.10%
================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Non-Real Estate
---------------------------------------------------------------------------------------------------------
Commercial Agriculture Consumer Total Non-Real Estate
---------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted
Due During Years Average Average Average Average
Ending June 30, Amount Rate Amount Rate Amount Rate Amount Rate
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998 (1) $ 7,370 9.30% $ 9,941 9.45% $ 13,538 9.38% $ 30,849 9.38%
1999 6,494 8.81% 706 9.49% 6,688 9.22% 13,888 9.04%
2000 2,211 9.10% 743 10.34% 11,491 9.30% 14,445 9.32%
2001 and 2002 9,403 8.51% 2,950 9.18% 48,864 9.19% 61,217 9.08%
2003 and 2007 2,684 9.57% 3,327 7.75% 21,317 9.62% 27,328 9.39%
2008 and 2012 762 8.79% 699 8.72% 31,179 9.94% 32,640 9.89%
2013 and Following --- -- 500 9.23% 55 8.94% 555 9.20%
---------------------------------------------------------------------------------------------------------
Total $ 28,924 8.93% $ 18,866 9.11% $ 133,132 9.46% $ 180,922 9.34%
=========================================================================================================
Total Real Estate and
Non-Real Estate
----------------------------
Weighted
Average
Amount Rate
----------------------------
<S> <C> <C>
1998 (1) $ 50,881 8.86%
1999 21,029 9.15%
2000 19,120 9.39%
2001 and 2002 78,346 9.03%
2003 and 2007 78,049 8.79%
2008 and 2012 219,877 8.30%
2013 and Folling 180,311 7.92%
----------------------------
$ 647,613 8.44%
============================
</TABLE>
(1) Includes demand loans and loans having no stated maturity.
7
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The following table sets forth the dollar amount of all loans at June
30, 1997 that have fixed interest rates, those that are contractually due after
June 30, 1998 and have floating or adjustable interest rates that change after
June 30, 1998.
<TABLE>
<CAPTION>
Floating or
Adjustable
Fixed Rates Rates Total
------------- -------------- ---------
(In Thousands)
Real Estate:
<S> <C> <C> <C>
One- to four-family.................................... $248,686 $ 21,302 $269,988
Multi-family........................................... 31,517 2,583 34,100
Commercial............................................. 26,192 10,309 36,501
Agricultural........................................... 1,152 4,575 5,727
Construction........................................... 81,682 200 81,882
Other loans
Agricultural........................................... 7,005 318 7,323
Commercial ............................................ 11,147 254 11,401
Consumer............................................... 38,348 481 38,829
-------- -------- --------
Total.................................................. $445,729 $ 40,022 $485,751
======== ======== ========
</TABLE>
Under federal law, the aggregate amount of loans that the Bank is
permitted to make to any one borrower is generally limited to 15% of unimpaired
capital and surplus (25% if the security for such loan has a "readily
ascertainable" value or 30% for certain residential development loans). At June
30, 1997, based on the above, the Bank's regulatory loans-to-one-borrower limit
was $12.7 million. On the same date, the Bank's largest amount of loans to one
borrower was approximately $6.5 million and are currently performing in
accordance with their contractual terms.
Residential real estate loans are originated by employees who are
compensated on a salary or commission basis. In the case of commissioned loan
officers, processing and loan underwriting are handled by other personnel. In
the loan approval process, Western Federal assesses both the borrower's ability
to repay the loan and the adequacy of the proposed security. Initially, Western
Federal's loan underwriters analyze the loan application and the property
involved. As part of the loan application process, qualified outside appraisers
inspect and appraise the security property. All appraisals are subsequently
reviewed by staff underwriters. Western Federal also obtains information
concerning the income, financial condition, employment and credit history of the
applicant. Western Federal's policy is to require title, fire and extended
hazard coverage on its real estate loans.
If the loan terms and borrower meet Western Federal's established
underwriting criteria and the loan amount does not exceed $100,000, the loan may
be approved by action of two members of the loan committee. Real estate loans
that exceed $100,000 must be approved by three loan committee members, one of
which must be a loan policy committee member or one of five selected senior loan
committee members. Business division loan officers have individual approval
limits based upon their experience and expertise. 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 seven senior officers
of the Bank. In addition, the Bank employs one- to four-family residential
underwriters who have no origination duties and can approve residential loans up
to Freddie Mac limits. Loan policy members have individual authority up to
$250,000 within this specialty area.
All of the Bank's lending is subject to its written underwriting
standards and loan origination procedures. Decisions on loan applications are
made on the basis of detailed applications and property valuations (consistent
with the Bank's written appraisal policy) by qualified appraisers. The loan
applications are designed primarily to determine the borrower's ability to repay
and the more significant items on the
8
<PAGE>
application are verified through use of credit reports, financial statements,
tax returns and/or verifications of employment.
The Bank requires evidence of marketable title and lien position as
well as appropriate title insurance (except on certain home equity loans) on all
loans secured by real property and requires fire and extended coverage casualty
insurance in amounts at least equal to the principal amount of the loan or the
value of improvements on the property, depending on the type of loan. The Bank
may also require flood insurance to protect the property securing its interest.
One- to Four-Family Residential Real Estate Lending
The cornerstone of the Bank's lending program has long been the
origination of long-term permanent loans secured by mortgages on owner-occupied
one- to four-family residences. At June 30, 1997, $348.6 million, or 53.8%, of
the Bank's loan portfolio consisted of permanent loans on one- to four-family
residences. Substantially all of the residential loans originated by Western
Federal are secured by properties located in the Bank's primary market areas.
Historically, Western Federal originated for retention in its own
portfolio, 30-year fixed-rate loans secured by one- to-four family residential
real estate. In order to reduce its exposure to changes in interest rates,
Western Federal originates adjustable rate mortgage loans ("ARMs"), subject to
market conditions and consumer preference. As a result of continued consumer
demand, particularly during periods of relatively low interest rates, for long
term fixed-rate loans, Western Federal has continued to originate loans for sale
in the secondary market in amounts and at rates which are monitored for
compliance with the Bank's asset/liability management policy.
The Bank's loans are underwritten and documented to permit their sale,
consistent with the Bank's asset/liability management objectives. Since under
the Bank's current policy, it may sell or securitize all of the newly originated
fixed-rate loans with terms of more than 15 years, the Bank's fixed-rate loans
are originated with terms which conform to secondary market standards (i.e.,
FHLMC standards). Such loans may be held for sale until they are sold or
securitized. Most of the Bank's newly originated fixed-rate residential loans
have contractual terms to maturity of 15 to 30 years. The Bank's decision to
hold or sell these loans is based on its asset/liability management policy and
goals and the market conditions for mortgages at any period in time. The Bank
typically retains the servicing of the conventional loans it originates and
sells to FHLMC. During fiscal 1997, the Bank sold $26.0 million of loans with
servicing retained. See "- Originations, Purchases and Sales of Loans and
Mortgage-Backed Securities" for information regarding fees received by the Bank
in connection with loans serviced for others. At June 30, 1997, the Bank had
$167.2 million of fixed-rate one- to four-family residential loans with
remaining terms of 15 years or less and $83.0 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 incorporated by reference
herein as Exhibit 13.
The Bank has offered ARM loans at rates, terms and points determined in
accordance with market and competitive factors. The programs currently offered
generally meet the standards and requirements of the secondary market for
residential loans. The Bank's current one- to four-family residential ARMs are
fully amortizing loans with contractual maturities of up to 30 years. The
interest rates on the ARMs originated by Western Federal are subject to
adjustment at stated intervals based on a margin over a specified index and are
subject to lifetime adjustment limits.
Western Federal presently offers several ARM products. The primary
offering 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.
This loan adjusts annually subject to a limitation on the annual increase to 2%
and overall life of loan limitation of 6%. Western Federal also offers various
other ARM products for portfolio or on a correspondent basis which are available
for 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, 1997, the Bank had $95.6 million of one-to four-family ARM loans.
It is Western Federal's present policy generally not to lend more than
97% of the appraised value in the case of first mortgage loans secured by real
property. Western Federal presently requires private mortgage
9
<PAGE>
insurance in specified amounts on all conventional residential loans with
loan-to-value ratios at origination exceeding 80%. The terms of the private
mortgage insurance have generally provided that Western Federal would receive a
payment equal to 17% to 30%, depending on the initial loan-to-value ratio, of
the outstanding principal amount of the loan if there has been a default, plus
costs of foreclosure.
Substantially all of Western Federal's present real estate loans
(excluding mortgage-backed securities) are secured by properties located in
Montana. In view of the prevailing level of real estate values in the Bank's
market areas, the Bank rarely originates loans in excess of $214,600 (the
Federal Home Loan Mortgage Corporation ("FHLMC") one-family maximum).
The Bank's residential mortgage loans customarily include due-on-sale
clauses giving the Bank the right to declare the loan immediately due and
payable in the event that, among other things, the borrower sells or otherwise
disposes of the property subject to the mortgage and the loan is not repaid. The
Bank has enforced due-on-sale clauses in its mortgage contracts for the purpose
of increasing its loan portfolio yield. ARM loans may be assumed provided home
buyers meet the Bank's underwriting standards and the applicable fees are paid.
Multi-Family and Commercial Real Estate Lending
Western Federal, due to its acquisition of Security Bank, has a mature
portfolio of multi-family and commercial real estate loans. New originations are
handled through a Business Division to allow a full line of commercial products
and services as a part of the customer relationship.
Western Federal's lending guidelines generally require, in the case of
loans secured by multi-family or commercial income-producing property, that the
property securing such loans generate gross cash flow of 120% or more of all
operating expenses, including debt service but excluding depreciation, and have
a loan-to-value ratio of no more than 75%. Higher debt coverage ratios or lower
loan-to-value ratios may apply depending on property type and market.
The multi-family loans are generally secured by income producing
properties and may be made for the purchase or refinance of multi-family
residential properties. The commercial real estate loans originated by Western
Federal are primarily secured by office buildings, small shopping centers,
motels, warehouses, and other income-producing properties. Commercial real
estate lending entails significant additional risks as compared with residential
property lending. Commercial real estate loans typically involve large loan
balances to single borrowers or groups of related borrowers. The payment
experience on such loans is typically dependent on the successful operation of
the real estate project and as such may be subject to a greater extent than
residential loans to adverse conditions in the economy generally. In dealing
with these risk factors, Western Federal generally limits itself to a real
estate market and/or borrowers with which it has knowledge and experience. The
Bank also makes loans issued under the SBA's 504(B) program. Under this program,
the borrower's down payment may be as little as 10%. Under this program, the
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%, the Bank's loan to value ratio does not
exceed 50%. At June 30, 1997, $40.2 million, or 6.2% of the Bank's loan
portfolio, consisted of multi-family loans and $50.0 million, or 7.7% of the
Bank's loan portfolio, consisted of commercial real estate loans. In general,
total investments in commercial real estate loans may not exceed 400% of the
Bank's capital.
Agricultural Real Estate Lending
The majority of the Bank's agricultural real estate loans are secured
by first liens on farm and ranch land located within the State of Montana. The
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. At June
30, 1997, $8.0 million, or 1.2% of the Bank's loan portfolio, consisted of
agricultural real estate loans. In general, total investments in agricultural
real estate loans may not exceed 400% of the Bank's capital.
10
<PAGE>
Commercial and Agricultural Non-Real Estate Lending
The 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. In general, the Bank's total investment in such loans is limited
such that at any one time it generally may not exceed 20% of assets, as defined
in OTS regulations. At June 30, 1997, $28.9 million, or 4.5% of the Bank's loan
portfolio, consisted of commercial non-real estate loans and $18.9 million, or
2.9% of the Bank's loan portfolio, consisted of agricultural non-real estate
loans.
Consumer Lending and Unused Lines of Credit
Management believes that offering consumer loan products helps expand
the Bank's customer base and creates stronger ties to its existing customer
base. In addition, because consumer loans generally have shorter terms to
maturity and/or adjustable rates and carry higher rates of interest than do
residential mortgage loans, they can be valuable asset/liability management
tools. See "Management's Discussion and Analysis of Financial Condition -
Interest Rate Risk Management" in the Annual Report incorporated by reference
herein as Exhibit 13.
The Bank currently originates substantially all of its consumer loans
in its market areas. At June 30, 1997, the Bank's consumer loans totaled $129.0
million, or 19.9%, of the Bank's loan portfolio.
Western Federal offers a variety of real estate secured consumer loans
for various purposes with terms up to fifteen years. The majority of lending is
for home improvement, personal vehicles, equity loans and other personal
purposes.
In addition, Western Federal offers an in-house credit card program
with the credit card receivables owned by Western Federal. The credit cards are
provided as an additional service to Western Federal customers. At June 30,
1997, Western Federal had $2.2 million of credit card receivables outstanding.
In addition, on such date, Western Federal had $9.4 million in unused lines of
credit available to cardholders under this program.
The Bank also offers 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,
1997 the Bank had $8.3 million outstanding under this program with an additional
$4.2 million in unused lines of credit available to borrowers under this
program.
Early in 1996, Western Federal engaged the services of a
manager/consultant to initiate a Dealer Finance Program to conduct indirect
lending activities for automobiles, trucks, and recreational vehicles and boats.
The manager/consultant hired and trained personnel in order to start operations
by May 1, 1996. As of June 30, 1997, receivables for Dealer Finance totaled
$40.7 million. Western Federal, consistent with its consumer loan policies,
considers Dealer Finance an additional opportunity to expand the installment
portfolio offering better yields. New accounts are cross-sold to extend
relationships and expand customer base.
Consumer loan terms vary according to the type of collateral, term of
the loan, and credit-worthiness of the borrower. Unsecured loans are offered to
borrowers for a variety of purposes and personal needs. These are generally
fully amortizing with loan terms of 48 months or less. Underwriting for all
unsecured lending is substantially the same.
The Bank's secured lending for vehicles, household goods, mobile homes,
and real estate secured utilizes established loan-to-value ratios and restricted
terms to match the age and condition of the security. The underwriting standards
employed by the Bank for consumer loans include a determination of the
applicant's payment history on other debts and an assessment of the borrower's
ability to meet payments on the proposed loan along with his existing
obligations. In addition to the credit-worthiness of the applicant, the
underwriting process also includes a comparison of the value of the security, if
any, in relation to the proposed loan amount.
Consumer loans may entail greater risk than residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciable assets such as automobiles. In such cases, any repossessed
collateral for defaulted consumer loans may not provide adequate sources of
repayment for the outstanding loan balances as a result of the greater
likelihood of damage, loss or depreciation. In
11
<PAGE>
addition, consumer loan collections are dependent on the borrower's continuing
financial stability, and thus are more likely to be affected by adverse personal
circumstances. Furthermore, the application of various Federal and state laws,
including Federal and state bankruptcy and insolvency laws, may limit the amount
which can be recovered on such loans. Although the level of delinquencies in the
Bank's consumer loan portfolio has generally been low (at June 30, 1997, $1.2
million, or approximately 0.93% of the consumer loan portfolio was 90 days or
more delinquent), there can be no assurance that delinquencies will not increase
in the future.
Construction Lending
Historically, construction lending for one- to four-family residences
has always been an important part of Western Federal's commitment to the
communities it serves. Loans to individuals are either 12-month fixed-rate loans
or long-term variable rate construction/permanent loans which provide for a
six-month construction period before converting to a fully amortizing 29
1/2-year or less adjustable-rate loan. Occasionally, Western Federal originates
construction loans to builders for the speculative construction of one- to
four-family homes. Such loans are generally 12-month, fixed-rate loans and are
generally limited to one to five properties per builder. The Bank occasionally
makes acquisition and development loans to credit worthy borrowers for
residential projects within the Bank's market area. At June 30, 1997,
approximately $19.9 million, or 3.1% of the Bank's loan portfolio, consisted of
construction loans.
Most of the Bank's construction loans have been originated with
fixed-rates of interest. One- to four-family construction loans are generally
made in amounts of up to a maximum loan-to-value ratio of 90%. Prior to making a
commitment to fund a construction loan, the Bank requires an appraisal of the
property. Western Federal obtains personal guarantees for substantially all of
its construction loans. The Bank generally requires that both borrowers and
guarantors provide personal financial statements. Virtually all of Western
Federal's construction loans have been located in its primary market areas.
The Bank's construction loan agreements generally provide that loan
proceeds are disbursed in increments as construction progresses. The Bank
periodically reviews the progress of the underlying construction project.
Construction lending generally affords the Bank an opportunity to
receive interest at rates higher than those obtainable from residential lending
and to receive origination and other loan fees. In addition, such loans are
generally made for relatively short terms. Nevertheless, construction lending to
persons other than owner occupants is generally considered to involve a higher
level of credit risk than one- to four-family residential lending due to the
concentration of principal in a limited number of loans and borrowers and the
effects of general economic conditions on construction projects, real estate
developers and managers. In addition, the nature of these loans is such that
they are more difficult to evaluate and monitor. The Bank's risk of loss on a
construction loan is dependent largely upon the accuracy of the initial estimate
of the property's value upon completion of the project and the estimated cost
(including interest) of the project. If the estimate of value proves to be
inaccurate, the Bank may be confronted, at or prior to the maturity of the loan,
with a project with a value which is insufficient to assure full repayment.
Because defaults in repayment may not occur during the construction period it
may be difficult to identify problem loans at an early stage.
Originations, Purchases and Sales of Loans and Mortgage-Backed Securities
In addition to originating and purchasing loans for its own loan
portfolio, Western Federal from time to time participates in secondary mortgage
market activities by selling whole loans and participations in loans to FHLMC
and various institutional purchasers. Western Federal generally receives in
return FHLMC participation certificates or cash for non-recourse sales to the
FHLMC. During fiscal 1997, Western Federal sold or securitized $26.0 million of
loans, with servicing retained, to the FHLMC and other institutional investors
(exclusive of sales pursuant to loan correspondent agreements discussed below).
Western Federal currently has loan correspondent agreements with
mortgage banking firms under which Western Federal agrees to originate and sell
primarily conventional, FHA and VA loans to such firms. Under these programs,
Western Federal processes loan applications and originates loans in accordance
with the buyers' underwriting policies. The loans, together with all servicing
rights, are then sold to such firms and Western Federal retains any loan
origination fees and negotiates the retention of discount points. Under these
programs, the borrower locks in an interest rate, and Western Federal
concurrently obtains a purchase commitment from
12
<PAGE>
the correspondent that does not require delivery unless the loan is closed.
Western Federal's risk is generally limited to its failure to comply with the
agreement with the correspondent institution or loan underwriting and
documentation requirements of such institution, which could result in rejection
of the loan by the purchaser after closing. However, under some of the
correspondent agreements, Western Federal can be required to repurchase any loan
which becomes 60 days or more delinquent within four months of the sale. During
fiscal 1997, Western Federal sold $28.6 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, 1997, Western Federal has never had to repurchase a delinquent loan
from a loan correspondent.
Western Federal also participates in loan programs financed by the
Montana Board of Housing ("MBOH"). Under these programs, Western Federal
originates loans according to standards, underwriting, and qualifications
prescribed by the MBOH which are then purchased by the MBOH with funds generated
by tax-exempt revenue bonds. Loans are generally priced at a discount to market
interest rates for the benefit of low- to moderate-income borrowers. Western
Federal retains servicing rights on all loans sold to the MBOH.
Typically, when loans or participations are sold (other than in respect
of the agreements with correspondent institutions described above), Western
Federal retains responsibility for collecting and remitting loan payments,
inspecting the properties, making certain insurance and tax payments on behalf
of borrowers and otherwise servicing the loans, and receives a fee for
performing this service. Sales of whole loans, participation interests and
mortgage-backed securities generate income (or loss) at the time of sale,
produce future servicing income and provide funds for additional lending and
other purposes. Western Federal was servicing mortgage loans for others in the
amount of $268.6 million at June 30, 1997.
Prior to the issuance of Statement of Financial Accounting Standards
("SFAS") No. 125, see Note 1 of the Notes to Consolidated Financial Statements
in the Annual Report incorporated by reference herein as Exhibit 13, the
contractual right to service mortgage loans that had been originated and sold
had an economic value that was not recognized in the Bank's financial
statements. SFAS No. 125 provides that 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. The value results from the future income
stream of the servicing fees, the availability of the cash balances associated
with escrow funds collected monthly for real estate taxes and insurance, the
availability of the cash from monthly principal and interest payments from the
collection date to the remittance date, and the ability of the Bank to
cross-sell other products and services. The actual value of a servicing
portfolio is dependent upon such factors as the age, maturity, and prepayment
rate of the loans in the portfolio, the average dollar balance of the loans, the
location of the collateral property, the average amount of escrow funds held,
the interest rates and delinquency experience on the loans, the types of loans
and other factors.
The marketability of loans, loan participations and mortgage-backed
securities depends on the purchasers' investment limitations, general market and
competitive conditions, mortgage loan demand, and other factors. Western
Federal's sales of loans or participation are generally "without recourse"
(i.e., without remedy against the seller by the purchaser if the borrower
defaulted on payment under the loan) against Western Federal in the event of
default, except in the case of the loan agreements with correspondent
institutions discussed above. Western Federal does have contingent liability on
sold loans under warranty of conforming origination to FHLMC.
Gains or losses on the sale of mortgage loans and loan participations
are recognized and a premium or discount is recorded at the time of sale in an
amount reflecting the difference between the contractual interest rate of the
loans sold and the current market rate of interest. Any deferred premium or
discount is amortized using an interest method.
13
<PAGE>
The following table sets forth the loan origination and mortgage-backed
security origination, purchase, and sale activity for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------
1997 1996 1995
---------- --------- ----------
(In Thousands)
<S> <C> <C> <C>
Beginning of Period:
Loans, net............................................................ $ 368,193 $ 313,121 $ 274,840
Mortgage-backed securities, net....................................... 104,947 143,825 145,025
========== ========= ==========
Total loans and mortgage-backed securities receivable, net, at
beginning of period................................................ $ 473,140 $ 456,946 $ 419,865
---------- --------- ----------
Loan Originations:
Real Estate:
One- to four-family................................................ $ 97,732 $ 111,355 $ 93,604
Multi-family....................................................... 4,101 1,215 ---
Commercial......................................................... 6,032 3,318 ---
Agricultural....................................................... 37 --- ---
Construction....................................................... 13,650 17,775 7,973
---------- --------- ----------
Total real estate loan originations............................. 121,552 133,663 101,577
---------- --------- ----------
Other Loans:
Commercial.......................................................... 11,684 --- ---
Agricultural........................................................ 9,024 --- ---
Consumer............................................................ 84,569 31,884 28,178
---------- --------- ----------
Total other loan originations................................... 105,277 31,884 28,178
---------- --------- ----------
Total loan originations............................................... 226,829 165,547 129,755
---------- --------- ----------
Purchases and Conversions:
Real estate loans..................................................... 1,488 7,022 2,127
Loans purchased in acquisition ....................................... 218,281 --- ---
Mortgage-backed securities............................................ 6,928 21,881 21,705
Mortgage-backed securities purchased in acquisition .................. 91,467 --- ---
Mortgage loans converted to mortgage-backed securities................ --- --- 3,885
---------- --------- ----------
Total real estate loans and mortgage-backed securities purchased
and converted............................................... 318,164 28,903 27,717
---------- --------- ----------
Total real estate loans and mortgage-backed securities originated,
purchased and converted..................................... 544,993 194,450 157,472
---------- --------- ----------
Principal Repayments and Sales:
Principal Repayments:
Loans................................................................. 127,723 87,041 54,862
Mortgage-backed securities............................................ 23,010 29,631 17,257
Sales:
Real estate loans..................................................... 54,582 31,186 33,463
Mortgage-backed securities............................................ 31,932 30,723 10,031
Real estate loans converted to mortgage-backed securities................ --- --- 3,885
---------- --------- ----------
Total principal repayments, sales and conversions............... 237,247 178,581 119,498
---------- --------- ----------
Net loan and mortgage-backed securities activity......................... 307,746 15,869 37,974
---------- --------- ----------
Changes in allowance for losses, undisbursed loan funds, and unearned
fees and discounts:
Real estate loans..................................................... (2,209) 730 (1,391)
Mortgage-backed securities............................................ 689 498 (279)
Change in unrealized loss on securities available for sale............... 80 (903) 777
---------- --------- ----------
End of Period:
Loans, net............................................................ 630,277 368,193 313,121
Mortgage-backed securities............................................ 149,169 104,947 143,825
---------- --------- ----------
Total loans and mortgage-backed securities receivable, net,
at end of period............................................ $ 779,446 $ 473,140 $ 456,946
========== ========= ==========
</TABLE>
14
<PAGE>
Non-Accruing Loans and Delinquencies
Delinquency Procedures. When a borrower fails to make a required
payment on a loan, the Bank attempts to cause the delinquency to be cured by
contacting the borrower. In the case of real estate loans, a late notice is sent
15 days after the due date. If the delinquency is not cured by the thirtieth
day, a second notice is mailed and, if appropriate, the borrower is contacted by
telephone. Additional written and verbal contacts are made with the borrower
between 60 and 90 days after the due date.
In the event a real estate loan payment is past due for 90 days or
more, the Bank performs an in-depth review of the loan's status, the condition
of the property and circumstances of the borrower. Based upon the results of the
review, the Bank may negotiate and accept a repayment program with the Borrower,
accept a voluntary deed in lieu of foreclosure or, when deemed necessary,
initiate foreclosure proceedings. If foreclosed on, real property is sold at a
public sale and the Bank may bid on the property to protect its interest. A
decision as to whether and when to initiate foreclosure proceedings is made by
the Credit Supervisor with the consent of the Loan Servicing Manager and at
least one Loan Policy Committee member and is based on such factors as the
amount of the outstanding loan in relation to the original indebtedness, the
extent of delinquency and the borrower's ability and willingness to cooperate in
curing the delinquencies.
Consumer loans are charged off if they remain delinquent for 120 days.
The Bank's procedures for repossession and sale of consumer collateral are
subject to various requirements under Montana consumer protection laws.
Delinquencies on commercial properties are vigorously pursued at the
30-day stage and a forbearance agreement or resolution must be negotiated to
prevent further legal action.
The following table sets forth the Bank's loan delinquencies by type,
by amount and by percentage of type at June 30, 1997.
<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>
One- to four-family 136 $2,748 0.79% 55 $1,087 0.31% 62 $1,073 0.31% 253 $4,908 1.41%
Multi-family..... --- --- --- 1 88 0.22 --- --- --- 1 88 0.22
Commercial Real
Estate........ 3 286 0.57 2 155 0.31 --- --- --- 5 441 0.88
Commercial Non-
Real Estate.... 9 110 1.38 --- --- --- 2 102 1.28 11 212 2.66
Agricultural Non-
Real Estate.... 4 329 1.74 --- --- --- --- --- --- 4 329 1.74
Construction..... 2 126 0.63 2 137 0.69 --- --- --- 4 263 1.32
Consumer......... 123 1,064 0.80 82 1,018 0.76 127 1,178 0.88 332 3,260 2.45
---- ------ ---- ------ ---- ------ ---- ------
Total........ 277 $4,663 142 $2,485 191 $2,353 610 $9,501
==== ====== ==== ====== ==== ====== ==== ======
The following table sets forth the Bank's loan delinquencies by type,
by amount and by percentage of type at June 30, 1996.
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)
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>
15
<PAGE>
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 Federal internally
classifies its assets on a regular basis. On the basis of management's review of
its assets, at June 30, 1997 on a net basis, the Bank had classified $1.8
million as Substandard, $26,000 as Doubtful and $28,000 as Loss.
The following table sets forth as of June 30, 1997 the Bank's
classified assets by type. No multi-family real estate loans, commercial real
estate or construction loans were classified at June 30, 1997.
<TABLE>
<CAPTION>
One- to
Four-Family Commercial
Real Estate Non-Real Estate Consumer Total
------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Substandard............ $ 860 $ 169 $ 762 $ 1,791
Doubtful............... --- 15 11 26
Loss................... --- --- 28 28
-------- -------- -------- ---------
Total............. $ 860 $ 184 $ 801 $ 1,845
======== ======== ======== =========
</TABLE>
Non-Performing Assets. Loans are reviewed periodically and any loan
whose collectibility is doubtful is placed on non-accrual status. Real estate
loans are placed on non-accrual status when either principal or interest is 90
days or more past due, unless, in the judgment of management, collectibility is
considered highly probable and collection efforts are in progress, in which case
interest would continue to accrue.
An allowance is established for uncollectible interest on loans that
are contractually 90 days or more past due. The allowance is established by a
charge to interest income equal to all interest previously accrued, and income
is subsequently recognized only to the extent cash payments are received until
the loans are brought less than 90 days past due with respect to both principal
and interest and when, in the judgment of management, the loans are estimated to
be fully collectible as to both principal and interest.
Real estate acquired by Western Federal as a result of foreclosure or
by deed in lieu of foreclosure is classified as real estate owned until it is
sold. When property is acquired, it is recorded at the lower of the related loan
balance, less any specific allowance for loss, or fair value at the date of
foreclosure. Any write-down resulting therefrom is charged to the allowance for
loan losses. Upon disposition, all costs incurred in maintaining the property
are expensed. Costs relating to the development and improvement of the property,
however, are capitalized to the extent of net realizable value.
The Bank considers loans as in-substance foreclosed if the borrower has
little or no equity in the property based upon its current fair value, if
repayment can be expected only to come from operation or sale of the collateral
and if the borrower has effectively abandoned control of the collateral or has
continued to retain control of the collateral but because of the current
financial status of the borrowers, it is doubtful the borrower will be able to
repay in the foreseeable future.
16
<PAGE>
The following table sets forth the amounts and categories of
non-performing assets in the Bank's loan portfolio. For all periods presented,
the Bank did not have any troubled debt restructurings (which involve forgiving
a portion of interest or principal on any loans or making loans at a rate
materially less than market rates). Foreclosed assets include assets acquired in
settlement of loans, and are recorded at the lower of the related loan balance,
less any specific allowance for loss, or fair value at the date of foreclosure.
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------
1997 1996 1995 1994 1993
---------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
Real Estate:
One- to four-family......................... $ 842 $ 21 $ --- $ 119 $ 253
Multi-family................................ --- --- --- --- ---
Commercial.................................. --- --- 166 207 43
Construction................................ --- --- --- --- ---
Commercial non-real estate....................... 102 --- --- --- ---
Consumer......................................... 573 383 153 9 109
---- ---- ------ ------ ------
Total....................................... 1,517 404 319 335 405
------ ---- ------ ------ ------
Accruing loans delinquent 90 days or more:
Real Estate
One- to four-family......................... 231 288 253 425 367
Multi-family................................ --- --- --- --- ---
Commercial.................................. --- --- --- --- ---
Construction................................ --- --- --- --- ---
Commercial non-real estate....................... --- --- --- --- ---
Consumer......................................... 605 23 1 5 11
----- ----- ------ ------ ------
Total....................................... 836 311 254 430 378
----- ----- ------ ------ ------
Foreclosed assets:
Real Estate:
One- to four-family......................... --- --- --- 85 64
Multi-family................................ --- --- --- --- ---
Commercial.................................. --- --- --- --- ---
Construction ............................... --- --- --- --- ---
Consumer ........................................ 82 --- --- --- ---
----- ------ ------ ------ ------
Total....................................... 82 --- --- 85 64
----- ------ ------ ------ ------
Total non-performing assets...................... $2,435 $715 $ 573 $ 850 $ 847
====== ==== ====== ====== ======
Total as a percentage of total assets............ 0.25% 0.13% 0.10% 0.16% 0.21%
==== ==== ==== ==== ====
Total allowance for loan losses to non-performing
loans (exclusive of foreclosed)............... 197.66% 280.42% 350.35% 265.36% 262.84%
====== ====== ====== ====== ======
Total allowance for loan losses to total
non-performing assets......................... 191.01% 280.42% 350.35% 238.82% 242.98%
====== ====== ====== ====== ======
</TABLE>
For the year ended June 30, 1997, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to approximately $71,000.
At June 30, 1997, Western Federal's non-accruing loans were comprised
of 24 one- to four-family loans totaling $842,000, 2 commercial non-real estate
loans totaling $102,000 and 68 consumer loans totaling $573,000. Accruing loans
delinquent 90 days or more at June 30, 1997, included 40 loans totaling $231,000
secured by one- to four-family real estate and 59 consumer loans totaling
$605,000, of which 49 loans representing $527,000 were on loans 100% secured by
savings accounts. These loans continue to accrue interest due to management's
belief that the borrowers will repay these loans.
There were no foreclosed real estate loans at June 30, 1997.
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, 1997, there were no other loans identified by the Bank with respect
to the majority of which known information about the possible credit problems of
the borrowers or the cash flows of the security properties have caused
management to have some doubts as to the ability of
17
<PAGE>
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.
Management has considered the Bank's non-performing assets and other
loans "of concern" assets in establishing its allowance for loan losses.
Loan Loss Reserve Analysis. The allowance for estimated loan losses is
established through a provision for losses on loans based on management's
evaluation of the risk inherent in its loan portfolio and changes in the nature
and volume of its loan activity. Such evaluation, which includes a review of all
loans of which full collectibility may not be reasonably assured, considers the
estimated net realizable value of the underlying collateral, economic
conditions, historical loan loss experience and other factors that warrant
recognition in providing for an adequate allowance for loan losses. In
determining the general reserves under these policies historical charge-offs and
recoveries, changes in the mix and levels of the various types of loans, net
realizable values, the current loan portfolio and current economic conditions
are considered. The Bank also requires additional reserves for all delinquent
loans and other loans of concern.
While management believes that it uses the best information available
to determine the allowance for loan losses, unforeseen market conditions could
result in adjustments to the allowance for loan losses, and net earnings could
be significantly affected, if circumstances differ substantially from the
assumptions used in making the final determination.
The following table sets forth an analysis of the Bank's allowance for
loan losses.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period............................ $2,005 $2,011 $2,030 $2,058 $2,096
------ ------ ------ ------ ------
Charge-Offs:
Real Estate:
One- to four-family.................................. (53) --- (2) (15) (6)
Commercial .......................................... (43) --- --- --- ---
Other:
Commercial........................................... (47)
Consumer............................................. (110) (11) (26) (22) (48)
------- ------- -------- ------- -------
Total charge-offs......................................... (253) (11) (28) (37) (54)
------ ------- -------- ------- --------
Recoveries:
Other:
Consumer............................................. 18 5 9 9 16
----- ------ ------ ------ ------
Total recoveries.......................................... 18 5 9 9 16
----- ------ ------ ------ ------
Net charge-offs........................................... (235) (6) (19) (28) (38)
Provisions charged to operations.......................... 400 --- --- --- ---
Reserves acquired......................................... 2,481 --- --- --- ---
------ ------ ------ ------ ------
Balance at end of period.................................. $4,651 $2,005 $2,011 $2,030 $2,058
====== ====== ====== ====== ======
Ratio of net charge-offs during the period to average loans
outstanding during the period........................ 0.05% ---% 0.01% 0.01% 0.02%
===== ====== ==== ==== ====
Ratio of net charge-offs during the period to average non-
performing assets during the period ................. 1.31% 1.39% 2.91% 3.27% 4.73%
==== ==== ==== ==== ====
</TABLE>
18
<PAGE>
The following table sets forth the distribution of the Bank's allowance
for loan losses at the dates indicated is summarized as follows:
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------------------
1997 1996 1995
---------------------------------------------------------------------------
Percent Percent Percent
of Loans of Loans of Loans
in Each in Each in Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four- family.......... $ 829 53.82% $ 539 74.69% $ 175 76.94%
Multi-family.................. 312 6.21 136 5.30 12 5.91
Commercial.................... 420 7.73 152 4.87 75 3.86
Agricultural.................. 139 1.23 --- --- --- ---
Construction.................. 323 3.07 164 3.45 5 3.34
Other loans:
Commercial ................... 455 4.47 --- --- --- ---
Agricultural ................. 371 2.91 --- --- --- ---
Consumer...................... 1,263 20.56 126 11.69 132 9.95
Unallocated........................ 539 --- 888 --- 1,612 ---
------ ------ ------ ------ ------ ------
Total........................ $4,651 100.00% $2,005 100.00% $2,011 100.00%
====== ====== ====== ====== ====== ======
At June 30,
-------------------------------------------------
1994 1993
-------------------------------------------------
Percent Percent
of Loans of Loans
in Each in Each
Category Category
to Total to Total
Amount Loans Amount Loans
-------------------------------------------------
(Dollars in Thousands)
Real Estate:
One- to four- family.......... $ 175 81.85% $ 175 79.75%
Multi-family.................. 10 5.12 10 4.88
Commercial.................... 65 4.01 75 5.46
Agricultural.................. --- --- --- ---
Construction.................. --- 2.79 --- 3.62
Other loans:
Commercial ................... --- --- --- ---
Agricultural ................. --- --- --- ---
Consumer...................... 150 6.23 163 6.29
Unallocated........................ 1,630 --- 1,635 ---
------ ------ ------ ------
Total........................ $2,030 100.00% $2,058 100.00%
====== ====== ====== ======
</TABLE>
19
<PAGE>
Investment Activities
Securities. As part of its asset/liability management strategy, the
Company and the Bank invest in U.S. and local government and agency securities,
high quality short- and medium-term securities, primarily investment grade
corporate obligations and mutual funds and interest-bearing deposits. At June
30, 1997, the Company and the Bank did not own any securities of a single issuer
which exceeded 10% of the Company's stockholders' equity, other than U.S.
government or federal agency obligations. At June 30, 1997, the Bank owned $2.4
million of bank qualified local goverment agency securities.
The Bank is required by federal regulations to maintain a minimum
amount of liquid assets that may be invested in specified securities and is also
permitted to make certain other securities investments. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
- -Liquidity and Capital Resources" in the Annual Report incorporated by reference
herein as Exhibit 13. Cash flow projections are regularly reviewed and updated
to assure that adequate liquidity is provided. As of June 30, 1997, the Bank's
liquidity ratio (liquid assets as a percentage of net withdrawable savings and
current borrowings) was 9.4% as compared to the OTS requirement of 5.0%.
The Bank will, in order to reduce interest rate risk, purchase
financial instruments that lock in a spread between interest-earning assets and
interest-bearing liabilities. While these types of financial instruments limit
risk, they also reduce the Bank's ability to maximize profits during periods of
favorable interest trends. See Note 14 of the Notes to Consolidated Financial
Statements in the Annual Report incorporated by reference herein as Exhibit 13.
At June 30, 1997 the Bank had three structured notes totaling $4.7 million
wherein their interest rate is based upon a fraction of the increase or decrease
in a specified index. These securities have variable interest rates and were
purchased to enable the Bank to increase its interest income when interest rates
increase. The market value of these securities at June 30, 1997 was $4.6 million
and mature in 1998.
On July 1, 1994, the Company and the Bank adopted SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." Accordingly,
investment securities not categorized as either held to maturity or trading
account securities are classified as securities available for sale. See Note 1
of the Notes to Consolidated Financial Statements in the Annual Report
incorporated by reference herein as Exhibit 13.
The following tables set forth the composition of the securities
portfolio at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------
1997 1996 1995
-------------------- -------------------- -------------------
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.......................... 18,804 23.76% 4,010 8.91% $ 6,518 10.45%
U.S. Government obligations......................... 297 0.38 --- --- --- ---
Corporate obligations............................... 5,980 7.55 5,333 11.86 6,272 10.06
Other investments................................... 2,385 3.01 4 0.01 4 0.01
------ ------ ------ ------ ------- ------
Total investment securities held-to-maturity ...... 27,466 34.70 9,347 20.78 12,794 20.52
------- ------ ------ ------ ------- ------
Investments available-for-sale:
Federal agency obligations........................... 45,969 58.08 32,630 72.54 47,557 76.25
Corporate obligations................................ 5,675 7.17 2,980 6.62 2,020 3.23
Other................................................ 39 0.05 27 0.06 --- ---
------- ------ ------- ----- ------- ------
Total investments available for sale............... 51,683 65.30 35,637 79.22 49,577 79.48
------- ----- ------- ----- ------- ------
Total investment securities.......................... $79,149 100.00% $44,984 100.00% $62,371 100.00%
======= ====== ======= ====== ======= ======
Average remaining life or term to repricing of
securities.......................................... 41 mos. 27 mos. 42 mos.
</TABLE>
For information regarding the estimated market value of the securities
at June 30, 1997, see Note 4 of the Notes to Consolidated Financial Statements
in the Annual Report incorporated by reference herein as Exhibit 13.
20
<PAGE>
The following table sets forth the composition and maturities of the
investment securities portfolio as of June 30, 1997.
<TABLE>
<CAPTION>
At June 30, 1997
-------------------------------------------------------------------------------
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....................... $ 198 $ 99 $ --- $ --- $ 297 $ 298
Federal agency obligations....................... --- 18,804 --- --- 18,804 18,988
Corporate obligations............................ --- 5,980 --- --- 5,980 6,046
Other investments................................ --- 106 235 2,044 2,385 2,396
-------- ------- ------ ------ ------- ------
Total investment securities held-to-maturity ... 198 24,989 235 2,044 27,466 27,728
------- ------ ------ ------- ------ ------
Investments available-for-sale:
Federal agency obligations....................... 12,215 32,258 --- 1,594 46,067 45,969
Corporate obligations............................ 3,925 1,697 --- --- 5,622 5,675
Other investments................................ 3 --- --- --- 3 39
-------- -------- ------- -------- --------- --------
Total investments available for sale............ 16,143 33,955 --- 1,594 51,692 51,683
------ ------ ------- ------ ------ ------
Total securities.................................. $16,341 $58,944 $ 235 $3,638 $79,158 $79,411
======= ======= ====== ====== ======= =======
Average weighted yield............................ 5.80% 6.74% 6.75% 7.69% 6.59%
==== ==== ==== ==== ====
</TABLE>
21
<PAGE>
Mortgage-Backed Securities. The Bank purchases mortgage-backed
securities to supplement residential loan production. The type of securities
purchased is based upon the Bank's asset/liability management strategy and
balance sheet objectives. For instance, most of the mortgage-backed investments
purchased by the Bank over the last several years have had adjustable interest
rates or short or intermediate effective terms to maturity. In addition, the
Bank has purchased investment grade, fixed-rate and variable-rate Collateralized
Mortgage Obligations ("CMOs") having estimated average lives from one to twenty
years. CMOs are securities derived by reallocating cash flows from
mortgage-backed securities or from pools of mortgage loans held by a trust. The
CMOs acquired by the Bank are not interest-only or principal-only or residual
interests except for one interest-only CMO totaling $25,000. At June 30, 1997,
the book value of the CMOs was $45.8 million. The book value of all the Bank's
mortgage-backed securities at June 30, 1997 was $149.2 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Interest Rate Risk Management" in the Annual Report incorporated by
reference herein as Exhibit 13. At June 30, 1997, the Bank did not own
mortgage-backed securities of a single issuer which exceeded 10% of the
Company's stockholders' equity, other than U.S. government agency obligations.
The Bank's mortgage-backed securities are classified as either
held-to-maturity or available-for-sale. Those mortgage-backed securities
classified as held-to-maturity are carried at amortized cost in the Bank's
financial statements. While those mortgage-backed securities classified as
available-for-sale are carried at fair value.
Substantially all of the Bank's mortgage-backed securities are backed
by federal agencies or have received the highest rating by a nationally
recognized rating agency as of June 30, 1997. The Bank also holds $6 million of
mortgage-backed securities issued by private institutions.
On July 1, 1995, the Company and Bank adopted SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." Accordingly,
mortgage-backed securities not categorized as either held to maturity or trading
account securities are classified as securities available for sale. See Note 1
of the Notes to Consolidated Financial Statements in the Annual Report
incorporated by reference herein as Exhibit 13.
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,
---------------------------------------
1997 1996 1995
---------------------------------------
(In
Thousands)
<S> <C> <C> <C>
Issuers:
Federal Home Loan Mortgage Corporation.................... $ 66,070 $77,105 $106,747
Federal National Mortgage Association..................... 12,344 16,674 17,880
Government National Mortgage Association.................. 18,850 2,067 2,873
Collateralized Mortgage Obligations - federal agency...... 45,815 9,101 16,217
Collateralized Mortgage Obligations - private issuer...... --- --- 108
Other..................................................... 6,090 --- ---
---------- ------------- -------------
Total................................................. $149,169 $104,947 $143,825
======== ======== ========
</TABLE>
22
<PAGE>
The following table sets forth the contractual maturities, without
giving effect to repricing, of the mortgage-backed securities portfolio, net, at
June 30, 1997.
<TABLE>
<CAPTION>
Market June 30,
1 - 3 3 - 5 5 - 10 10 - 15 Over 15 Value 1997
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..... $ --- $ 2,968 $ 8,546 $34,964 $3,152 $ --- $ 49,630
Federal National Mortgage Corporation...... --- --- --- --- --- --- ---
Government National Mortgage Association... --- --- 43 18,248 --- --- 18,291
Collateralized Mortgage Obligations -
Federal Agency............................. --- --- 519 8,512 36,784 --- 45,815
Other ..................................... --- --- --- 4,045 --- --- 4,045
------ ------ ------- ---------------- ------ --------
--- 2,968 9,108 65,769 39,936 --- 117,781
------ ----- ------ ------ ------- ------ -------
Available for sale:
Federal Home Loan Mortgage Corporation..... --- --- --- --- 16,496 (56) 16,440
Federal National Mortgage Corporation...... --- --- --- --- 12,372 (28) 12,344
Government National Mortgage Association... --- --- 1 --- 561 (3) 559
Other ..................................... --- --- --- --- 2,004 41 2,045
------ ------ ------- --------- ------- ----- -------
--- --- 1 --- 31,433 (46) 31,388
------ ------ ------ --------- ------ ------ -------
Total............................. $ --- $ 2,968 $ 9,109 $65,769 $71,369 $ (46) $ 149,169
======= ====== ===== ======= ====== ====== =======
</TABLE>
23
<PAGE>
The following schedule sets forth the contractual maturity and
repricing of the Bank's mortgage-backed securities portfolio, net, at June 30,
1997. Those which have adjustable or renegotiable interest rates are shown as
maturing in the period during which the contract is subject to repricing.
<TABLE>
<CAPTION>
After 1 After 2 After 3
1 Year Through Through Through
or Less 2 Years 3 Years 5 Years
------------------------------------ -------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Mortgage-Backed Securities
Held-to-Maturity...................... $ 25,446 $ --- $ --- $2,968
Mortgage-Backed Securities Available-
for-Sale.............................. 31,433 --- --- ---
Collateralized Mortgage Obligations... 10,383 --- --- ---
-------- --------- --------- --------
Total............................ $67,262 $ --- $ --- $2,968
======= ========= ========= ======
(Continued)
After 5 After 10 Market
Through Through Over 15 Value
10 Years 15 Years Years Adjustment Total
----------------------- -------------------------- ---------
(In Thousands)
Mortgage-Backed Securities
Held-to-Maturity...................... $8,589 $34,963 $ --- $ --- $ 71,966
Mortgage-Backed Securities Available-
for-Sale.............................. 1 --- --- (46) 31,388
Collateralized Mortgage Obligations... 519 1,427 33,486 --- 45,815
-------- ------- ------- ------- --------
Total............................ $9,109 $36,390 $33,486 $ (46) $149,169
====== ======= ======= ====== ========
</TABLE>
24
<PAGE>
Cash Surrender Value of Life Insurance Policies. Western Federal
currently maintains Key Person Insurance coverage on certain of its executive
officers. The purpose of this insurance purchase was twofold: (1) Key Person
Insurance coverage for the Bank on those job positions and (2) funding of death
and salary continuation plan benefits for certain of those employees. At June
30, 1997 the Bank had $6.1 million in cash surrender value of life insurance
policies, of which $2.7 million was a result of the Acquisition.
Sources of Funds
General. Deposit accounts have traditionally been the principal source
of the Bank's funds for use in lending and for other general business purposes.
In addition to deposits, the Bank derives funds from loan repayments and cash
flows generated from operations. Scheduled loan payments are a relatively stable
source of funds, while deposit inflows and outflows and the related cost of such
funds have varied. Other potential sources of funds available to the Bank
include borrowings from the Federal Home Loan Bank ("FHLB") of Seattle and other
borrowings.
Deposits. The Bank attracts both short-term and long-term deposits by
offering a wide assortment of accounts and rates. The Bank offers regular
savings accounts, NOW accounts, non-interest bearning demand accounts, money
market accounts and certificates of deposits with varying maturities. Western
Federal has not actively sought deposits outside of its primary market area.
Western Federal does not have any brokered deposits at this time but may
consider the use of such funds in the future to fund loan growth. The Bank also
accepts deposits of $100,000 or more from municipalities and individuals within
its market area.
The flow of deposits is influenced by general economic conditions,
changes in money market and prevailing interest rates and competition. The
variety of accounts offered by the Bank has allowed it to be competitive in
obtaining funds and to respond to changes in consumer demand. However, the Bank
has become more susceptible to short term fluctuations in deposit flows, as
customers have become more interest rate conscious. In setting rates, Western
Federal regularly evaluates (i) its internal cost of funds, (ii) the rates
offered by competing institutions, (iii) its investment and lending
opportunities, (iv) its liquidity position and (v) its asset/liability position.
In order to decrease the volatility of its deposits, Western Federal imposes
penalties on early withdrawal on its certificates of deposit.
Based on its experience, the Bank believes that the majority of its
regular savings, NOW, non-interest bearing demand accounts, and money market
accounts are relatively stable sources of deposits. The Bank believes that a
portion of regular savings 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. The Bank's ability to attract and maintain
certificates of deposit, and the rates paid thereon, has been and will continue
to be significantly affected by market rates.
The following table sets forth the savings flows at the Bank during the
periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------
1997 1996 1995
----------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Opening balance....................... $ 350,212 $344,155 $349,121
Purchased deposits.................... 287,046 --- ---
Deposits.............................. 1,701,486 805,427 788,328
Withdrawals........................... (1,723,664) (815,161) (807,009)
---------- -------- --------
Balance before interest credited...... 615,080 334,421 330,440
Interest credited..................... 15,789 15,791 13,715
-------- -------- --------
Ending balance........................ $630,869 $350,212 $344,155
======== ======== ========
Net increase (decrease)............... $280,657 $ 6,057 $ (4,966)
======== ======== ========
Percent increase (decrease)........... 80.14% 1.76% (1.42)%
===== ==== ====
</TABLE>
25
<PAGE>
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs offered by the Bank for the periods
indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------------
1997 1996 1995
----------------------------------------------- ----------------
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 and savings accounts (2.75 - 3.00%).. $102,923 16.31% $ 64,889 18.53% $ 65,607 19.06%
Money market accounts (2.96 - 4.98%).......... 49,062 7.78 24,018 6.86 25,923 7.53
NOW accounts (1.50 - 2.25%)................... 76,582 12.14 49,848 14.23 45,926 13.35
Non-Interest bearing demand .................. 26,050 4.13 --- --- --- ---
-------- ------ -------- ------ -------- ------
Total non-certificates........................ 254,617 40.36 138,755 39.62 137,456 39.94
-------- ------ -------- ------ -------- ------
Certificates:
0.00 - 3.99%.................................$ 1,276 0.20% $ 1,731 0.49% $ 7,043 2.05%
4.00 - 5.99%................................. 288,440 45.72 159,275 45.48 131,238 38.13
6.00 - 7.99%................................. 86,341 13.69 50,447 14.41 68,381 19.87
8.00 - and over ............................. 195 0.03 4 -.-- 37 0.01
-------- ------ -------- ------ -------- ------
Total certificates............................ 376,252 59.64 211,457 60.38 206,699 60.06
-------- ------- -------- ------ -------- ------
Total deposits................................ $630,869 100.00% $350,212 100.00% $344,155 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
The following table sets forth the rate and maturity information for
the Bank's certificates of deposit as of June 30, 1997.
<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)
Certificate accounts maturing in
quarter ending:
<S> <C> <C> <C> <C> <C> <C>
September 30, 1997................ $ 867 $ 91,489 $ 15,005 $ 92 $107,453 28.56%
December 31, 1997................. 360 61,596 11,081 103 73,140 19.44
March 31, 1998.................... 25 41,263 8,382 --- 49,670 13.20
June 30, 1998..................... 4 36,142 8,342 --- 44,488 11.82
September 30, 1998................ --- 15,188 4,896 --- 20,084 5.34
December 31, 1998................. --- 15,911 3,365 --- 19,276 5.12
March 31, 1999.................... --- 10,852 8,232 --- 19,084 5.07
June 30, 1999..................... 21 5,324 9,684 --- 15,029 3.99
September 30, 1999................ --- 2,311 2,550 --- 4,861 1.29
December 31, 1999................. --- 1,677 3,346 --- 5,023 1.34
March 31, 2000.................... --- 1,457 4,068 --- 5,525 1.47
June 30, 2000..................... --- 634 2,476 --- 3,110 0.83
Thereafter........................ --- 4,597 4,912 --- 9,509 2.53
------- -------- ------- ---- -------- ------
Total.......................... $1,277 $288,441 $86,339 $195 $376,252 100.00%
====== ======== ======= ==== ======== ======
Percent of total............... 0.34% 76.66% 22.95% 0.05% 100.00%
==== ===== ===== ==== ======
</TABLE>
The following table sets forth the amount of the Bank's certificates of
deposit and other deposits by time remaining until maturity as of June 30, 1997.
<TABLE>
<CAPTION>
Maturity
---------------------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over 12
or Less Months Months Months Total
---------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000.... $ 93,351 $67,687 $86,842 $ 92,644 $340,524
Certificates of deposit of $100,000 or more... 9,583 4,902 6,627 7,789 28,901
Public funds(1)............................... 4,519 551 689 1,068 6,827
-------- -------- --------- -------- ---------
Total certificates of deposit................. $107,453 $73,140 $94,158 $101,501 $376,252
======== ======= ======= ======== ========
</TABLE>
- -----------------------
(1) Deposits from governmental and other public entities.
26
<PAGE>
For additional information regarding the composition of the Bank's
deposits, see Note 9 of the Notes to the Consolidated Financial Statements in
the Annual Report incorporated by reference herein as Exhibit 13.
Borrowings. Western Federal's other available sources of funds include advances
from the FHLB of Seattle and other borrowings. As a member of the FHLB of
Seattle, the Bank is required to own capital stock in the FHLB of Seattle and is
authorized to apply for advances from the FHLB of Seattle. Each FHLB credit
program has its own interest rate, which may be fixed or variable, and range of
maturities. The FHLB of Seattle may prescribe the acceptable uses for these
advances, as well as limitations on the size of the advances and repayment
provisions.
The Bank borrows funds from the FHLB of Seattle under its various fixed
rate, variable rate, and amortizing advance lending programs, with terms
requiring monthly interest payments. Principal payments are due monthly under
the amortizing advance program and upon maturity for all other advance programs.
The Bank is generally required to pay a commitment fee upon application and is
normally subject to a prepayment fee if the advance is prepaid by the Bank. See
Note 10 the Notes of Consolidated Financial Statements in the Annual Report
incorporated by reference herein as Exhibit 13.
The following table sets forth the maximum month-end balance and
average balance of FHLB advances, CMO's and other borrowings for the periods
indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------
1997 1996 1995
-----------------------------------------
(In Thousands)
<S> <C> <C> <C>
Maximum Balance:
FHLB Advances................................................... $190,338 $145,388 $133,119
Collateralized Mortgage Obligations............................. 1,117 1,584 2,244
Other Borrowings and Repurchase Agreements...................... 8,101 --- ---
Average Balance:
FHLB Advances................................................... 145,446 134,211 112,343
Collateralized Mortgage Obligations............................. 967 1,380 1,877
Other Borrowings and Repurchase Agreements...................... 2,731 --- ---
</TABLE>
The following table sets forth certain information as to
the Bank's FHLB advances and CMO's at the dates indicated.
<TABLE>
June 30,
-----------------------------------------
1997 1996 1995
-----------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB Advances.........................................................$190,338 $124,663 $133,119
Collateralized Mortgage Obligations................................... 797 1,175 1,585
Other Borrowings and Repurchase Agreements............................ 8,101 --- ---
-------- -------- --------
Total Borrowings....................................................$199,236 $125,838 $134,704
======== ======== ========
Weighted Average Interest Rate of FHLB Advances....................... 6.14% 6.26% 6.28%
==== ==== =====
Weighted Average Interest Rate of Collateralized Mortgage Obligations. 11.37% 11.27% 11.22%
===== ===== =====
Weighted Average Interest Rate of Other Borrowings and Repurchase
Agreements......................................................... 5.30% ---% ---%
===== === ===
</TABLE>
Interest Rate Caps and Interest Rate Swaps
As explained under Interest Rate Risk Management in Management's
Discussion and Analysis of Financial Condition and Results of Operations and
Note 14 of the Notes to Consolidated Financial Statements in the Annual Report
incorporated by reference herein as Exhibit 13, the Bank was party to two
interest rate exchange agreements. These two agreements were interest rate cap
agreements covering a total of $10.0 million in notional principal amounts
wherein the interest rate caps entitle the Bank to receive various interest
payments
27
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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. Because the Bank receives various interest payments if the
three-month LIBOR exceeds the agreed upon interest rate, the Bank is generally
at risk to the extent of the unamortized premium paid if the three-month LIBOR
does not exceed the agreed upon interest rate. At June 30, 1997 the amount of
the unamortized premiums paid related to the interest rate cap transactions was
$181,000.
Subsidiary Activities
General. The Company has no direct subsidiaries other than the Bank.
Western Federal has four wholly owned service corporation subsidiaries:
WesterFed Insurance Services, Inc. ("WesterFed Insurance"), Service Corp. of
Montana, Inc. ("Service Corp."), SFS Industries Inc. ("SFS") and a
special-purpose finance subsidiary, Monte Mac I, Inc. ("Monte Mac"). At June 30,
1997, Western Federal's investment in the four wholly owned service corporations
totaled $3.1 million, or approximately 0.32% of unconsolidated assets, at such
date.
Federal associations generally may invest up to 2% of their assets in
service corporations, plus an additional 1% of assets for community purposes. In
addition, federal associations may invest up to 50% of their total capital in
conforming loans to their service corporations in which they own more than 10%
of the capital stock. Federal associations are also permitted to invest an
unlimited amount in operating subsidiaries engaged solely in activities which a
federal association may engage in directly.
The following is a description of Western Federal's service
corporations:
Westerfed Insurance Services, Inc. Westerfed Insurance, which was
incorporated in 1981, is an insurance agency currently engaged in the sale of
tax deferred annuities and depositor group health insurance programs, although
it may offer a wider range of insurance services in the future. This subsidiary
was acquired by Western Federal in connection with its acquisition of Home
Federal in 1983. Western Federal's investment in WesterFed Insurance was
$157,000 at June 30, 1997. This subsidiary had an after-tax profit of $3,000 for
the fiscal year ended June 30, 1997.
Service Corp. of Montana, Inc. Service Corp. was acquired December
1988, in connection with the acquisition of Great Falls Federal. This service
corporation owns and operates a 30-unit apartment complex in Lewistown, Montana
and a single family residence in Hamilton, Montana. Western Federal's investment
in Service Corp. totaled $392,000 at June 30, 1997.
SFS Industries Inc. SFS was acquired in February 1997, in connection
with the acquisition of Security Bancorp. SFS conducts a securities brokerage
business under the name of Security Financial Services in Western Federal's
Billings Office and a real estate rental business. At June 30, 1997, Western
Federal's investment in SFS totaled $903,000.
Monte Mac I, Inc. Monte Mac was formed in 1985 for the purpose of
participating in a collateralized mortgage obligation conduit program. Monte Mac
had participated in three series of CMO issuances. The CMOs are collateralized
by FHLMC participation certificates transferred by Western Federal to Monte Mac.
The transferred FHLMC certificates had a book value of $1.9 million at June 30,
1997. Western Federal's investment in Monte Mac as of June 30, 1997, included
approximately $1.1 million in FHLMC certificates in excess of collateralized
mortgage obligations. The payments received on the FHLMC certificates are used
to pay down the CMOs. If the CMOs are paid as originally projected, the
remaining investment in Monte Mac is expected to be minimal.
Regulation
General. The Bank is a federally chartered Bank, the deposits of which
are federally insured and backed by the full faith and credit of the United
States Government. Accordingly, the Bank is subject to broad federal regulation
and oversight extending to all of its operations. The Bank is a member of the
FHLB of Seattle and is subject to certain limited regulation by the Board of
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<PAGE>
Governors of the Federal Reserve System (the "Federal Reserve Board"). As the
savings and loan holding company of the Bank, the Company is subject to federal
regulation and oversight. The purpose of the regulation of the Company and other
holding companies is to protect subsidiary savings associations. The Bank is a
member of the Savings Association Insurance Fund ("SAIF"), which together with
the Bank Insurance Fund (the "BIF") are the two deposit insurance funds
administered by the FDIC, and the deposits of the Bank are insured by the
Federal Deposit Insurance Corporation (the "FDIC"). As a result, the FDIC has
certain regulatory and examination authority over the Bank.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Savings Associations. The OTS has extensive
authority over the operations of savings associations. As part of this
authority, the Bank is required to file periodic reports with the OTS and is
subject to periodic examinations by the OTS and the FDIC. The last regular OTS
and FDIC examinations of the Bank were September 1995 and March 1990,
respectively. Under agency scheduling guidelines, it is likely that another
examination will be initiated in the near future. When these examinations are
conducted by the OTS and the FDIC, the examiners may require the Bank to provide
for higher general or specific loan loss reserves.
All savings associations are subject to a semi-annual assessment, based
upon the savings association's total assets, to fund the operations of the OTS.
The Bank's OTS assessment for the fiscal year ended June 30, 1997, was
approximately $517,000. Savings associations (unlike the Bank) that are
classified as "troubled" (i.e., having a supervisory rating of "4" or "5" or
subject to a conservatorship) are required to pay higher premiums.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Bank and the Company.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of the
Bank is prescribed by federal laws, and it is prohibited from engaging in any
activities not permitted by such laws. For instance, no savings association may
invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal associations in loans secured by
non-residential real property may not exceed 400% of total capital, except with
approval of the OTS. Federal savings associations are also generally authorized
to branch nationwide. The Bank is in compliance with the noted restrictions.
The Bank's permissible lending limit for loans to one borrower is equal
to the greater of $500,000 or 15% of unimpaired capital and surplus (except for
loans fully secured by certain readily marketable collateral, in which case this
limit is increased to 25% of unimpaired capital and surplus). At June 30, 1997,
the Bank's lending limit under this restriction was $8.3 million. The Bank is in
compliance with the loans-to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, internal controls and audit systems, asset
quality, earnings standards, internal controls and audit systems, interest rate
risk exposure and compensation and other employee benefits. Any institution
which fails to comply with these standards must submit a compliance plan. A
failure to submit a plan or to comply with an approved plan will subject the
institution to further enforcement action.
Insurance of Accounts and Regulation by the FDIC. The deposits of the
Bank are presently insured by the SAIF. 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
29
<PAGE>
to pose a serious risk to the SAIF or the BIF. 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.
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.
For the first six months of 1995, the assessment schedule for BIF
members and SAIF members ranged from .23% to .31% of deposits. As is the case
with the SAIF, the FDIC is authorized to adjust the insurance premium rates for
banks that are insured by the BIF of the FDIC in order to maintain the reserve
ratio of the BIF at 1.25% of BIF-insured deposits. As a result of the BIF
reaching its statutory reserve ratio, the FDIC revised the premium schedule for
BIF insured institutions to provide a range of 0.04% to 0.31% of deposits. The
revisions became effective in the third quarter of 1995. In addition, the BIF
rates were further revised, effective January 1996, to provide a range of 0% to
.27%. The SAIF rates, however, were not adjusted. At the time the FDIC revised
the BIF premium schedule, it noted that, absent legislative action (as discussed
below), the SAIF would not attain its designated reserve ratio until the year
2002. As a result, SAIF insured members would continue to be generally be
subject to higher deposit insurance premiums than BIF insured institutions
until, all things being equal, the SAIF attained its required reserve ratio.
In order to eliminate this disparity and any competitive disadvantage
between BIF and SAIF member institutions with respect to deposit insurance
premiums, legislation was enacted in September 1996 that provides for a one-time
assessment to be imposed on all deposits assessed at the SAIF rates, as of March
31, 1995, in order to recapitalize the SAIF. It also provides for the merger of
the BIF and the SAIF on January 1, 1999 if no savings associations then exist.
The special assessment rate was established at .657% of deposits by the FDIC and
the resulting assessment of $2.3 million was paid in November, 1996. This
special assessment significantly increased noninterest expense and adversely
affected the Bank's results of operations for the year ended June 30, 1997. As a
result of the special assessment, the Bank's deposit insurance premiums were
reduced to $402,000 based upon its current risk classification and the new
assessment schedule for SAIF insured institutions. These premiums are subject to
change in future periods.
Prior to the enactment of the legislation, a portion of the SAIF
assessment imposed on savings associations was used to repay obligations issued
by a federally chartered corporation to provide financing ("FICO") for resolving
the thrift crisis in the 1980s. Although the FDIC has proposed that the SAIF
assessment be equalized with the BIF assessment schedule, effective October 1,
1996, SAIF-insured institutions will continue to be subject to a FICO assessment
as a result of this continuing obligation. Although the legislation also now
requires assessments to be made on BIF-assessable deposits for this purpose,
effective January 1, 1997, that assessment was limited to 20% of the rate
imposed on SAIF assessable deposits until the earlier of December 31, 1999 or
when no savings association continues to exist, thereby imposing a greater
burden on SAIF member institutions such as the Bank. The FICO assessment for the
SAIF insured institutions will be $0.0648 per $100 deposits while BIF insured
institutions will pay $0.013 per $100 deposits until the year 2000 when the
assessment will be imposed at the same rate on all FDIC insured institutions.
30
<PAGE>
Regulatory Capital Requirements. Federally insured savings
associations, such as the Bank, are required to maintain a minimum level of
regulatory capital. The OTS has established capital standards, including a
tangible capital requirement, a leverage ratio (or core capital) requirement and
a risk-based capital requirement applicable to such savings associations. These
capital requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity, adjusted to eliminate unrealized gains and
losses on certain available-for-sale securities and retained income, and certain
noncumulative perpetual preferred stock and related income. At June 30, 1997 the
Bank added back to capital $42,000 for losses on available-for-sale securities.
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, 1997, the Bank had
intangible assets of $142,000 of unamortized purchased mortgage servicing
rights, $14,000 of which was required to be deducted from tangible capital and
goodwill and core deposit intangible relating to the purchase of Security
Bancorp of $20.8 million, all 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 tangible capital. In
determining compliance with the capital requirements, all subsidiaries engaged
solely in activities permissible for national banks or engaged in certain other
activities solely as agent for its customers are "includable" subsidiaries that
are consolidated for capital purposes in proportion to the Bank's level of
ownership, including the assets of includable subsidiaries in which the
association has a minority interest that is not consolidated for purposes of
generally accepted accounting principles ("GAAP"). For excludable subsidiaries
the debt and equity investments in such subsidiaries are deducted from assets
and capital. At June 30, 1997, the Bank was required to deduct $550,000 of its
investment in Service Corp. of Montana, Inc. and $903,000 of its investment in
SFS Industries under these rules.
At June 30, 1997, the Bank had tangible capital of $79.8 million, or
8.5% of adjusted total assets, which is approximately $65.8 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, 1997, the Bank
had no such intangible assets.
At June 30, 1997, the Bank had core capital equal to $79.8 million, or
8.5% of adjusted total assets, which is $51.7 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, 1997, the Bank had no
capital instruments that qualify as supplementary capital and had $4.6 million
of general loss reserves, which was less than 1.25% of risk-weighted assets, and
were included in the $84.4 million of risk-based capital at June 30, 1997.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. The Bank had no such
exclusions from capital and assets at June 30, 1997.
31
<PAGE>
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 the 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 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, 1997 OTS
interest rate risk information, the Bank would be required to make a deduction
from total capital in the amount of $2.8 million in calculating its risk-based
capital requirement had such rule been in effect on June 30, 1997. Based on the
Bank's excess risk-based capital of $38.0 million at June 30, 1997,
notwithstanding this $2.8 million deduction from capital, the Bank would
continue to exceed it's risk-based capital requirement.
On June 30, 1997, the Bank had total risk-based capital of $84.4
million (including $79.8 million in core capital and $4.6 million in qualifying
supplementary capital) and risk-weighted assets of $582.0 million (including
$12,000 in converted off-balance sheet assets); or total risk-based capital of
14.5% of risk-weighted assets. This amount was $38.0 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 savings 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
subject to other general enforcement actions by the OTS and the FDIC including
the appointment of a conservator or a receiver.
The OTS is also generally authorized to reclassify an association into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on the
Bank may have a substantial adverse effect on the Bank's operations and
profitability. Holding Company shareholders do not have preemptive rights, and
therefore, if the Holding Company is directed by the OTS or the FDIC to issue
32
<PAGE>
additional shares of Common Stock, such issuance may result in the dilution in
the percentage of ownership of the Holding Company.
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 mergers 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. See "The Conversion--Effects of
Conversion to Stock Form on Depositors and Borrowers of the Bank" and "--
Restrictions on Repurchase of Stock."
Generally, savings associations, such as the Bank, that before and
after the proposed distribution meet their capital requirements, may make
capital distributions during any calendar year equal to the greater of 100% of
net income for the year-to-date plus 50% of the amount by which the lesser of
the association's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of their net income for the most recent four quarter
period. However, an association deemed to be in need of more than normal
supervision by the OTS may have its dividend authority restricted by the OTS.
Western Federal may pay dividends in accordance with this general authority.
Savings associations proposing to make any capital distribution need
only submit written notice to the OTS 30 days prior to such distribution.
Savings associations that do not, or would not meet their current minimum
capital requirements following a proposed capital distribution, however, must
obtain OTS approval prior to making such distribution. The OTS may object to the
distribution during that 30-day period notice based on safety and soundness
concerns. See "- Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings association may make a
capital distribution without notice to the OTS (unless it is a subsidiary of a
holding company) 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 the Bank, are required
to maintain an average daily balance of liquid assets equal to a certain
percentage of the sum of its average daily balance of net withdrawable deposit
accounts and borrowings payable in one year or less. For a discussion of what
the Bank includes in liquid assets, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations Liquidity and Capital Resources."
This liquid asset ratio requirement may vary from time to time (between 4% and
10%) depending upon economic conditions and savings flows of all savings
associations. At the present time, the minimum liquid asset ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain time
deposits, certain bankers acceptances and short-term United States Treasury
obligations) currently must constitute at least 1% of the association's average
daily balance of net withdrawable deposit accounts and current borrowings.
Penalties may be imposed upon associations for violations of either liquid asset
ratio requirement. At June 30, 1997, the Bank was in compliance with both
requirements, with an overall liquid asset ratio of 9.4% and a short-term liquid
assets ratio of 4.0%.
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
33
<PAGE>
and accounting for loans and securities (i.e., whether held for investment, sale
or trading) with appropriate documentation. The Bank is in compliance with these
amended rules. OTS accounting regulations, which may be made more stringent than
GAAP, require that transactions be reported in a manner that best reflects their
underlying economic substance and inherent risk and that financial reports must
incorporate any other accounting regulations or orders prescribed by the OTS.
Qualified Thrift Lender Test. All savings associations, including the
Bank, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (as defined by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. As an alternative, the savings association
may maintain 60% of its assets in those assets specified in Section 7701(a)(19)
of the Internal Revenue Code. Under either test, such assets primarily consist
of residential housing related loans and investments. At June 30, 1997, the Bank
met the test and has always met the test since its effectiveness.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If an association has not yet requalified and or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all the restrictions on bank holding
companies. See "- Company Regulation."
Community Reinvestment Act. Under the Community Reinvestment Act
("CRA"), every FDIC insured institution has a continuing and affirmative
obligation consistent with safe and sound banking practices to help meet the
credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with the examination of the Bank, to assess the
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications, such as a
merger or the establishment of a branch, by the Bank. An unsatisfactory rating
may be used as the basis for the denial of an application by the OTS.
The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, the Bank may be required to devote additional funds for
investment and lending in its local community. The Bank was examined for CRA
compliance in October 1995 and received a rating of outstanding.
Transactions with Affiliates. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on terms
as favorable to the association as transactions with non-affiliates. In
addition, certain of these transactions, such as loans to an affiliate, are
restricted to a percentage of the association's capital. Affiliates of the Bank
include the Company and any company which is under common control with the
Company. In addition, a savings association may not lend to any affiliate
engaged in activities not permissible for a bank holding company or acquire the
securities of most affiliates. The Bank's subsidiaries are not deemed
affiliates; however, the OTS has the discretion to treat subsidiaries of savings
associations as affiliates on a case-by-case basis.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
34
<PAGE>
Holding Company Regulation. The Company is a unitary savings and loan
holding company subject to regulatory oversight by the OTS. As such, the Company
is required to register and file reports with the OTS and is subject to
regulation and examination by the OTS. In addition, the OTS has enforcement
authority over the Company and its non-savings association subsidiaries which
also permits the OTS to restrict or prohibit activities that are determined to
be a serious risk to the subsidiary savings association.
As a unitary savings and loan holding company, the Company generally is
not subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of the Company and any of its
subsidiaries (other than Western Federal or any other SAIF-insured savings
association) would become subject to such restrictions unless such other
associations each qualify as a QTL and were acquired in a supervisory
acquisition.
If Western Federal fails the QTL test, the Company must obtain the
approval of the OTS prior to continuing after such failure, directly or through
its other subsidiaries, any business activity other than those approved for
multiple savings and loan holding companies or their subsidiaries. In addition,
within one year of such failure the Company must register as, and will become
subject to, the restrictions applicable to bank holding companies. The
activities authorized for a bank holding company are more limited than are the
activities authorized for a unitary or multiple savings and loan holding
company. See " - Qualified Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control
of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.
Federal Securities Law. The Company is registered with the Securities
and Exchange Commission ("SEC") under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). The Company is subject to the information, proxy
solicitation, insider trading restrictions and other requirements of the SEC
under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest-bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). At June 30, 1997, the Bank was in compliance with these
reserve requirements. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve Board may be used to satisfy liquidity
requirements that may be imposed by the OTS. See " - Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Seattle, which is one of 12 regional FHLBs, that administers the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the board of directors of the FHLB, which are
subject to the oversight of the Federal Housing Finance Board. All advances from
the FHLB are required to be fully secured by sufficient collateral as determined
by the FHLB. In addition, all long-term advances are required to provide funds
for residential home financing.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Seattle. At June 30, 1997, the Bank had $11.5 million in FHLB stock,
which was in compliance with this requirement.
35
<PAGE>
In past years, the Bank has received substantial dividends on its FHLB stock.
Over the past five calendar years such dividends have averaged 9.00% and were
6.52% and 7.74% for calendar years 1995 and 1996 respectively.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Bank's FHLB stock may result in a corresponding
reduction in the Bank's capital.
For the fiscal year ended June 30, 1997, dividends paid by the FHLB of
Seattle to the Bank totaled $712,000, which constitutes a $191,000 increase over
the amount of dividends received in fiscal year 1996. There can be no assurance
that such dividends will continue in the future.
Federal and State Taxation. The Company, the Bank, and its non-bank
subsidiaries file a consolidated federal income tax return using the accrual
method of accounting. For fiscal years beginning before January 1, 1997, Montana
state statute prevents filing of a consolidated Montana income tax return; thus,
separate returns are filed by the Company (including the non-bank subsidiaries)
and the Bank. Generally with some exceptions, including the Bank's reserve for
bad debts discussed below, the Company, the Bank and its subsidiaries are
subject to federal income taxes in the same manner as other corporations.
The following discussion of tax matters is intended solely as a summary
and does not purport to be a comprehensive description of all the tax rules
applicable to the Company, the Bank, or its subsidiaries.
For taxable years beginning prior to January 1, 1996, savings
institutions, such as the Bank, which met certain definitional tests primarily
relating to their assets and the nature of their business ("qualifying
thrifts"), were permitted to establish a reserve for bad debts and to make
annual additions thereto, which additions may, within specified formula limits,
have been deducted in arriving at their taxable income. The Bank's deduction
with respect to "qualifying loans," which are generally loans secured by certain
interests in real property, including various types of mortgage-backed
securities, may have been computed using an amount based on the Bank's actual
loss experience or a percentage equal to 8% of the Bank's taxable income,
computed with certain modifications and reduced by the amount of any permitted
additions to the non-qualifying reserve. The Bank's deduction with respect to
non-qualifying loans was computed under the experience method, which essentially
allows a deduction based on the Bank's actual loss experience over a period of
several years. Each year the Bank selected the most favorable method to
calculate the deduction attributable to an addition to the tax bad debt reserve.
Federal legislation repealed the reserve method of accounting for bad
debt reserves for tax years beginning after December 31, 1995. As a result,
savings associations can no longer calculate their deduction for bad debts using
the percentage-of-taxable-income method. Instead, savings associations are
required to compute their deduction based on specific charge-offs during the
taxable year. This legislation also requires savings associations to recapture
into income over a six-year period their post-1987 additions to their bad debt
tax reserves, thereby generating additional current tax liability. The Bank's
post-1987 reserves that will be recaptured into income ratably over a six-year
period is $3.2 million. At June 30, 1997 the Bank's bad debt reserve for tax
purposes was approximately $13.8 million.
Under prior law, if the Bank failed to satisfy the qualifying thrift
definitional tests in any taxable year, it would be unable to make additions to
its bad debt reserve. Instead, the bank would be required to deduct bad debts as
they occur and would additionally be required to recapture its bad debt reserve
deductions ratably over a multi-year period. Among other things, the qualifying
thrift definitional tests required the Bank to hold at least 60% of its assets
as "qualifying assets." Qualifying assets generally include cash, obligations of
the United States of any agency or instrumentality thereof, certain obligations
of a state or political subdivision thereof, loans secured by interests in
improved residential real property or by savings accounts, student loans and
property used by the Bank in the conduct of its banking business. Under current
law, a savings association will not be required to recapture its pre-1988 bad
debt reserves if it ceases to meet the qualifying thrift definitional tests.
36
<PAGE>
Corporate Alternative Minimum Tax - Federal tax law imposes a tax on
alternative minimum taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI
can be offset by net operating loss carry-overs. AMTI is increased by an amount
equal to 75% of the amount by which the Bank's adjusted current earnings exceed
its AMTI (determined without regard to this preference and prior to reduction
for net operating losses). Under prior law, the excess of the tax bad debt
reserve deduction using the percentage of taxable income method over the
deduction that would have been allowable under the experience method was treated
as a preference item for purposes of computing the AMTI. For taxable years
beginning after December 31, 1986, and before January 1, 1996, an environmental
tax of 0.12% of the excess of AMTI (with certain modifications) over $2.0
million was imposed on corporations, including the Company, whether or not an
alternative minimum tax is paid.
Dividends-Received Deduction and Other Matters - The Company may
exclude from its income 100% of dividends received from the Bank as a member of
the same affiliated group of corporations. The corporate dividends-received
deduction is generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Bank will not file a consolidated
tax return, except that if the Company or the Bank owns more than 20% of the
stock of a corporation distributing a dividend, then 80% of any dividends
received may be deducted.
The Company and its consolidated subsidiaries have been audited by the
IRS with respect to consolidated federal income tax returns through June 30,
1989. With respect to years examined by the IRS, either all deficiencies have
been satisfied or sufficient reserves have been established to satisfy asserted
deficiencies. In the opinion of management, any examination of still open
returns (including returns of subsidiaries and predecessors or, or entities
merged with and into, the Bank) would not result in a deficiency which could
have a material adverse effect on the financial condition of the Bank and its
consolidated subsidiaries.
Montana Taxation - Under Montana taxation law, savings associations,
such as the Bank, are subject to corporation license tax, which incorporates or
is substantially similar to applicable provisions of the Federal Internal
Revenue Code. The corporation license tax is imposed on federal taxable income,
subject to certain adjustments at a rate of 6.75% for fiscal year 1997. Under
Montana law, a savings association is not allowed to make a deduction from gross
income for a reserve for bad debts in the computation of the Montana corporate
license tax or file a consolidated corporate license tax return with affiliated
companies.
Delaware Taxation - As a Delaware holding company, the Company is
exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. The Company is also
subject to an annual franchise tax imposed by the State of Delaware.
Impact of New Accounting Standards
See Note 1, Summary of Significant Accounting Policies and Note 15,
Recent Accounting Pronouncements Not Yet Adopted in Notes to Consolidated
Financial Statements in the Annual Report incorporated by reference herein as
Exhibit 13.
Competition
Savings institutions generally face strong competition both in
originating real estate loans and in attracting deposits. Competition in
originating loans comes primarily from other savings institutions, commercial
banks, and mortgage bankers who also make loans secured by real estate located
in the Bank's primary market areas. The Bank competes for loans principally on
the basis of the interest rates and loan fees it charges, the types of loans it
originates and the quality of services it provides to borrowers.
The Bank faces substantial competition in attracting deposits from
other savings institutions, commercial banks, securities firms, money market and
mutual funds, credit unions and other investment vehicles. The ability of the
Bank to attract and retain deposits depends on its ability to provide an
investment opportunity that satisfies the requirements of investors as to rate
of return, liquidity, risk, convenient locations and other factors. The Bank
competes for these deposits by offering a variety of deposit accounts at
competitive rates, convenient business hours and a customer oriented staff.
37
<PAGE>
The Bank estimates its market share of the savings deposits in the
counties where it has branch offices to be as follows:
<TABLE>
<CAPTION>
June 30, 1996
County Deposit Share(1) City
- ---------------------------------------- ---------------- ----------------------
<S> <C> <C>
Missoula................................ 16.2% Missoula
Yellowstone............................. 12.2 Billings and Laurel
Lewis & Clark........................... 6.5 Helena and East Helena
Cascade................................. 4.7 Great Falls
Gallatin................................ 3.7 Bozeman
Ravalli................................. 5.5 Hamilton
Pondera ............................... 9.1 Conrad
Fergus.................................. 17.0 Lewistown
Custer.................................. 6.6 Miles City
Big Horn ............................... 12.1 Hardin
Deer Lodge.............................. 25.6 Anaconda
Flathead................................ 0.9 Kalispell
Hill.................................... 11.3 Havre
Phillips................................ 4.7 Malta
Richland................................ 6.0 Sidney
Sheridan................................ 15.4 Plentywood
Silverbow............................... 9.0 Butte
Valley.................................. 6.2 Glasgow
</TABLE>
- -----------------
(1) Based on data supplied by Ferguson & Company Branch Source as of June
1996, Western Federal held approximately a 6.9% market share of
deposits in Montana. Based on this market share, Western Federal ranked
4th out of 179 financial institutions located in Montana. See "- Market
Areas" for information regarding the Bank's deposit share in each
county in its market area.
Western Federal's competition for residential real estate loans is
principally from mortgage bankers, other savings institutions, commercial banks
and other institutional lenders. Competition for commercial real estate loans is
primarily from commercial banks in Missoula and other savings institutions in
Missoula, Helena, Billings, Great Falls, and Bozeman. Competition for consumer
loans is from commercial banks, credit unions, other savings institutions and
consumer finance companies. Western Federal competes for loans principally
through the interest rates and loan fees charged. Western Federal's competition
for loans varies from time to time depending upon numerous factors, including
the general availability of lending funds and credit, economic conditions,
current interest rate levels, volatility in the mortgage markets and other
factors which are not readily predictable.
Executive Officers of the Company
The following table sets forth certain information at June 30, 1997
regarding the executive officers of the Company and the Bank who are not also
directors.
<TABLE>
<CAPTION>
Name Age Position(s) Held
- ------------------- --- ---------------------------------------------------------------------------
<S> <C> <C>
Douglas G. Bardwell 55 Executive Vice President and Secretary of the Company and
Executive Vice President and Chief Operating Officer of the Bank
James A. Salisbury 46 Treasurer and Chief Financial Officer of the Company and the Bank
Jack E. Lovell 60 Senior Vice President and Credit Administrator of the Bank
Dale W. Brevik 45 Senior Vice President and Marketing Director/Investor Relations of the Bank
Charles E. Eiseman 47 Senior Vice President/Montana Lending Manager of the Bank
</TABLE>
38
<PAGE>
The business experience of each executive officer who is not also a
director is set forth below.
Douglas G. Bardwell. Mr. Bardwell became Executive Vice President and
Secretary of the Company in September 1993. Mr. Bardwell joined the Bank in
August 1973. He was appointed Chief Operating Officer in 1983 and Executive Vice
President in 1989. He also serves on the Board of Directors of WesterFed
Insurance Services, Inc., Monte Mac I, and Service Corporation of Montana. Mr.
Bardwell is responsible for the supervision of the Bank's savings and operations
departments. Mr. Bardwell is a graduate of the University of Montana.
James A. Salisbury. Mr. Salisbury became Treasurer and Chief Financial
officer of the Company in September 1993. Mr. Salisbury joined Western Federal
as Treasurer and Chief Financial Officer in 1983. Prior to such time, he was
employed as the Chief Financial Officer for Home Federal from 1980 to 1983. From
1978 to 1980, he was in private practice as a certified public accountant.Mr.
Salisbury is responsible for the formulation and implementation of the policies
and objectives of the Bank's finance, accounting and audit function. He also
serves as Treasurer and Chief Financial Officer of Westerfed Insurance Services
Inc., Monte Mac I and Service Corporation of Montana. Mr. Salisbury is a
graduate of the University of Montana and is a certified public accountant.
Jack E. Lovell. Mr. Lovell has been employed by Western Federal since
September 1975 and was promoted to Senior Vice President/Credit Administrator in
October, 1996. He has been Credit Administrator since 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.
Dale W. Brevik. Mr. Brevik has been with Western Federal since May 1979
and became Senior Vice President/Marketing Director/Investor Relations Manager
in October, 1996. He has served as Marketing Director since 1983. In addition to
his duties as Marketing Director, Mr. Brevik is the Investor Relations Manager
and coordinates new product development and oversees Western Federal's insurance
programs. Mr. Brevik is a graduate of the University of Montana.
Charles E. Eiseman. Mr. Eiseman has been employed by Western Federal
since December 1975 and became Senior Vice President/Montana Lending Manager in
October, 1996. Since 1988, Mr. Eiseman's duties have included supervision of all
loan origination activities in all cities where Western Federal has loan
origination centers. Mr. Eiseman is a graduate of the University of Montana.
Employees
At June 30, 1997, the Company had a total of 325 full-time employees
and 88 part-time employees. None of the Bank employees are represented by any
collective bargaining group. Management considers its employee relations to be
excellent.
39
<PAGE>
Item 2. Properties
The following table sets forth information concerning the main office
and each branch office and loan production office of the Bank at June 30, 1997.
At June 30, 1997, the Bank's premises and equipment had an aggregate net book
value of approximately $24.8 million.
<TABLE>
<CAPTION>
Year Owned or Lease Expiration Net Book
Location Acquired Leased Date Value
- ------------------------- -------- -------- ---------------- ----------------
(In Thousands)
<S> <C> <C> <C> <C>
Main Office
- -----------
110 East Broadway 1957 Owned N/A $ 19
Missoula, Montana
Full Service Branches
- ---------------------
100 East Broadway 1957 Owned N/A(1) 649
Missoula, Montana
2230 Brooks 1966 Owned N/A 378
Missoula, Montana
1610 S. Third West 1977 Leased (2) 0
Missoula, Montana
2601 Garfield 1979 Owned N/A 1,175
Missoula, Montana
321 Fuller 1983 Owned N/A 457
Helena, Montana
101 Lane Avenue 1983 Owned N/A 73
East Helena, Montana
601 N. Montana 1983 Leased December 1997 8
Helena, Montana
3171 N. Montana 1996 Owned N/A 356
Helena, Montana
1941 West Main at 20th 1983 Owned N/A 353
Bozeman, Montana
501 N. First Street 1980 Owned N/A 1,679
Hamilton, Montana
2425 10th Avenue South 1988 Owned N/A 458
Great Falls, Montana
25 Fifth Street North 1988 Owned N/A 916
Great Falls, Montana
900 Third Street, N.W. 1988 Owned N/A 171
Great Falls, Montana
424 West Main Street 1988 Owned N/A 182
Lewistown, Montana
702 South Main 1988 Owned N/A 193
Conrad, Montana
2929 Third Avenue North 1991 Owned N/A 2,254
Billings, Montana
300 - 24th Street West 1991 Leased December 1997 1
Billings, Montana
1101 Main Street 1991 Owned N/A 65
Miles City, Montana
524 North Cheyenne Avenue 1991 Owned N/A 97
Hardin, Montana
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
Year Owned or Lease Expiration Net Book
Location Acquired Leased Date Value
--------------------------------- -------- -------- ---------------- --------------
(In Thousands)
<S> <C> <C> <C> <C>
219 North 26th Street 1967 Owned N/A 1,841
Billings, Montana
219 North 26th Street (Corporate) 1967 Owned N/A 0
Billings, Montana
2401 Grand Avenue 1975 Owned N/A 2,806
Billings, Montana
1546 Main Street 1975 Owned N/A 513
Billings, Montana
2845 Old Hardin Road 1997 Owned N/A 968
Billings, Montana
19 Montana Avenue 1987 Owned N/A 508
Laurel, Montana
405 Main Street 1979 Owned N/A 397
Kalispell, Montana
320 West Broadway 1980 Owned N/A 960
Missoula, Montana
2350 South Reserve 1995 Leased December 1999 127
Missoula, Montana
221 Second Street NW 1989 Owned N/A 390
Sidney, Montana
324 Third Avenue 1989 Owned N/A 1,401
Havre, Montana
135 South Second Street East 1994 Owned N/A 131
Malta, Montana
125 Fourth Street South 1989 Leased Monthly 0
Glasgow, Montana
102 North Main 1989 Owned N/A 353
Plentywood, Montana
1880 Harrison Avenue 1994 Owned N/A 1,175
Butte, Montana
401 West Main 1994 Owned N/A 717
Lewistown, Montana
307 East Park Street 1994 Leased March, 1998 16
Anaconda, Montana
2901 West Main 1996 Owned N/A 874
Bozeman, Montana
Mortgage Loan Administration
- ----------------------------
1100 South Avenue 1993 Owned N/A 1,122
Missoula, Montana
Construction in Progress 495
Land for future branch expansion 536
-----------
Total $ 24,814
===========
</TABLE>
- ----------------------
(1) Includes lease for drive-up window which expires in May 2001.
(2) Lease is on a month-to-month basis.
41
<PAGE>
The Company replaced the existing branch in Hamilton with a new facility and
completed construction of a new branch in Helena during fiscal 1997. In
addition, land has been purchased in Helena and Billings for potential branch
facilities in the future.
The Bank's accounting and record-keeping activities are maintained on an
on-line basis with an independent service bureau. The net book value of the
Bank's computer and other equipment (including furniture, fixtures and
automobiles) at June 30, 1997, totaled $3.2 million. In addition, subsidiaries
of the Bank hold properties and equipment with a net book value of $1.3 million.
See "Business - Subsidiary Activities."
Item 3. Legal Proceedings
From time to time, the Company and Western Federal are involved as plaintiff
or defendant in various legal proceedings arising in the normal course of its
business. While the ultimate outcome of these various legal proceedings cannot
be predicted with certainty, it is the opinion of management that the resolution
of these legal actions should not have a material effect on the Company's
consolidated financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended June 30, 1997.
PART II
Item 5. Market for the Registrant's Common Stock and Related Security
Holder Matters
The caption "General Corporate and Stockholders' Information" contained in
excerpts from the Company's Annual Report (beginning at page 60 thereto) filed
at Exhibit 13 hereto is incorporated in its entirety by reference under this
Item 5.
Item 6. Selected Financial Data
The caption "Selected Consolidated Financial and Other Data" contained in
excerpts from the Company's Annual Report (beginning at page 8 thereto) filed at
Exhibit 13 hereto is incorporated in its entirety by reference under this Item
6.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contained in excerpts from the Company's Annual Report
(beginning at page 9 thereto) filed at Exhibit 13 hereto is incorporated in its
entirety by reference under this Item 7.
Item 8. Financial Statements and Supplementary Data
The caption "Consolidated Financial Statements" contained in excerpts from the
Company's Annual Report (beginning at page 26 thereto) filed at Exhibit 13
hereto is incorporated in its entirety by reference under this Item 8.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
There has been no Current Report on Form 8-K filed within 24 months prior to
the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
42
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Information concerning Directors of the Registrant is incorporated herein by
reference from the Corporation's definitive Proxy Statement for the Annual
Meeting of Stockholders scheduled to be held on October 28, 1997, except for
information contained under the heading "Compensation Committee Report on
Executive Compensation" and "Stockholder Return Performance Presentation", a
copy of which will be filed not later than 120 days after the close of the
fiscal year. See "Business - Executive Officers of the Company" in Part I of the
Form 10-K for information regarding executive officers.
Item 11. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the Corporation's definitive Proxy Statement for the Annual
Meeting of Stockholders scheduled to be held on October 28, 1997, except for
information contained under the heading "Compensation Committee Report on
Executive Compensation" and "Stockholder Return Performance Presentation", a
copy of which will be filed not later than 120 days after the close of the
fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the Corporation's definitive
Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on
October 28, 1997, except for information contained under the heading
"Compensation Committee Report on Executive Compensation" and "Stockholder
Return Performance Presentation", a copy of which will be filed not later than
120 days after the close of the fiscal year.
Item 13. Certain Relationships and Related Transactions
Information concerning certain relationships and transactions is incorporated
herein by reference from the Corporation's definitive Proxy Statement for the
Annual Meeting of Stockholders scheduled to be held on October 28, 1997, except
for information contained under the heading "Compensation Committee Report on
Executive Compensation" and "Stockholder Return Performance Presentation", a
copy of which will be filed not later than 120 days after the close of the
fiscal year.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements:
The following information appearing in the Registrant's Annual Report to
Stockholders for the year ended June 30, 1997, is incorporated by reference in
this Form 10-K Annual Report as Exhibit 13.
<TABLE>
<CAPTION>
Pages in
Annual
Annual Report Section Report
- --------------------- --------
<S> <C>
Consolidated Financial Information.......................................................... 25
Independent Auditors' Report................................................................ 26
Consolidated Balance Sheets -- June 30, 1996 and 1997....................................... 27
Consolidated Statements of Income -- Each of the Years in the Three-Year Period Ended
June 30, 1997............................................................................... 28
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
Pages in
Annual
Annual Report Section Report
- --------------------- --------
<S> <C>
Consolidated Statements of Stockholders' Equity -- Each of the Years in the Three-Year
Period Ended June 30, 1997................................................................................ 29
Consolidated Statements of Cash Flows -- Each of the Years in the Three-Year Period Ended
June 30, 1997............................................................................................. 30
Notes to Consolidated Financial Statements................................................................ 31
Supplementary Financial Data.............................................................................. 55
</TABLE>
(a)(2) Financial Statement Schedules:
All financial statement schedules have been omitted as the information
is not required under the related instructions or is inapplicable.
44
<PAGE>
(a)(3) Exhibits:
<TABLE>
<CAPTION>
Reference to Prior
Filing of Exhibit
Regulation S-K Number Attached
Exhibit Number Document Hereto
-------------- --------------------------------------------------------------------------- -----------------
<S> <C> <C>
2 Plan of acquisition, reorganization, arrangement, liquidation or succession None
3 (i) Articles of Incorporation *
(ii) By-laws
4 Instruments defining the rights of security holders, including indentures *
9 Voting trust agreement None
10.1 Stock Option and Incentive Plan **
10.2 Employee Stock Ownership Plan *
10.3 Recognition and Retention Plan **
10.4 Salary Continuation Plan *
10.5 Directors Deferred Compensation Plan *
10.6 Benefit Equalization Plan *
10.7 Employment Agreements for Messrs. Grimes, Bardwell and Salisbury **
10.8 Employment Agreements for Messrs. Brevik, Eiseman and Lovell and Ms. **
Dumontier
10.9 Annual Management Incentive Plan **
10.10 Wage Continuation Agreements for Messrs. Grimes, Bardwell and Salisbury **
10.11 Equity Incentive Plan ***
10.12 Employment Agreement for David W. Jorgenson, Elaine F. Hine, Stanley R. ***
Hill and Scott W. Sanders
11 Statement re: computation of per share earnings None
12 Statement re: computation of ratios Not required
13 Annual Report to Security Holders 13
16 Letter re: change in certifying accountant None
18 Letter re: change in accounting principles None
19 Report furnished to security holders None
21 Subsidiaries of Registrant 21
22 Published report regarding matters submitted to vote of security
holders None
23 Consent of experts and counsel 23
24 Power of Attorney Not required
27 Financial Data Schedule 27
28 Information from reports furnished to State insurance regulatory
authorities None
99 Additional exhibits None
</TABLE>
- -------------------------
* Filed on September 21, 1993, as exhibits to the Registrant's Form S-1
registration statement (Registration No. 33-69168) pursuant to the
Securities Act of 1933. All of such previously filed documents are hereby
incorporated herein by reference in accordance with Item 601 of Regulation
S-K.
** Filed on September 27, 1995, as the exhibits listed above to the
Registrant's Annual Report on Form 10-K for the year ended June 30, 1995
pursuant to the Securities Exchange Act of 1934 (File No. 0-22772). All of
such previously filed documents are hereby incorporated herein by reference
in accordance with Item 601 of Regulation S-K.
*** Filed on November 19, 1996, as the exhibits listed above to the
Registrant's Form S-4 registration statements (Registration No.
533-16428) pursuant to the Securities Act of 1933 all of such
previously filed documents are hereby incorporated herein by reference.
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed during the three-month period
ended June 30, 1997.
45
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WESTERFED FINANCIAL CORPORATION
Date: September 29, 1997 By: /s/ Lyle R. Grimes
------------------
Lyle R. Grimes
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ Lyle R. Grimes
----------------------------------------
Lyle R. Grimes, Chairman of the Board,
President, Chief Executive Officer and
Director (Principal Executive and
Operating Officer)
Date: September 29, 1997
By: /s/ Dr. Marvin Reynolds
-----------------------------
Dr. Marvin Reynolds, Director
Date: September 29, 1997
By: /s/ Dr. Otto G. Klein, Jr.
--------------------------------
Dr. Otto G. Klein, Jr., Director
Date: September 29, 1997
By: /s/ John E. Roemer
-----------------------------
John E. Roemer, Vice Chairman
Date: September 29, 1997
By: /s/ Laurie C. DeMarois
----------------------------
Laurie C. DeMarois, Director
Date: September 29, 1997
By: /s/ James A. Salisbury
------------------------------------------
James A. Salisbury, Treasurer and Chief
Financial Officer (Principal Financial and
Accounting Officer)
Date: September 29, 1997
By: /s/ Robert F. Burke
-------------------------
Robert F. Burke, Director
Date: September 29, 1997
By: /s/ David W. Jorgenson
-------------------------------------
David W. Jorgenson, Director and Vice
President
Date: September 29, 1997
By: /s/ William Leslie
------------------------
William Leslie, Director
Date: September 29, 1997
<PAGE>
Exhibit 13
Annual Report to Security Holders
<PAGE>
President's Letter
Confidence in Montana's strength and our own-- is our foundation for building a
larger organization that enhances profitability to our shareholders. We remain
Montanans serving Montanans, even as we substantially expand our customer base
with new locations and expertise.
This year, we nearly doubled the number of branch offices and gained a presence
in nine more Montana communities through the February 28, 1997, acquisition of
Security Bancorp, the holding company for Security Bank, FSB. Security Bank was
a stock savings bank based in Billings and operating entirely in Montana.
The merger of Security Bank with Western Federal Savings Bank, our only
subsidiary, furthered our business strategy of adding commercial banking to our
operations. Security Bank's lending operations in Billings, Bozeman, Butte,
Anaconda and Lewistown brought significant long-term experience in commercial
and agricultural lending.
We finished fiscal year 1997 with assets approaching one billion dollars.
Strong financial
performance
Record earnings were achieved for the fourth quarter ended June 30, 1997,
primarily due to growth in our loan portfolio and the merger with Security Bank.
Fourth-quarter earnings were $2.1 million, or $0.38 per share, compared to $1.2
million, or $0.29 per share, for the same period last year-- a 31% increase on a
per-share basis.
Earnings for the year ended June 30, 1997, were affected by a one-time,
after-tax charge to earnings of $1.4 million, or $0.30 per share based on 4.7
million outstanding shares, for a special FDIC assessment. The assessment was
levied on all thrifts to recapitalize the Savings Association Insurance Fund
(SAIF). Year-end earnings after the assessment were $4.5 million, or $0.90 per
share. While the special assessment significantly reduced the Bank's earnings in
fiscal year 1997, SAIF premiums have now been reduced and will result in lower
deposit insurance costs.
Regular cash dividends to our stockholders continued to increase every quarter,
as they have since we became a public company. We paid a regular cash dividend
of $0.11 per share for the quarter ended June 30, 1997, which was a 4.8%
increase over the prior quarter's regular cash dividend of $0.105 per share. We
also paid a special
3
<PAGE>
cash dividend of $0.041 per share reflecting a 10% addition to the $0.41 per
share dividends declared during the fiscal year. With the special dividend, we
paid a total of $0.151 in dividends per share for the quarter ended June 30,
1997. Stockholders' equity increased to $104.3 million, or 10.9% of assets, and
tangible stockholders' equity was 8.9% of tangible assets at June 30, 1997.
The Dividend Reinvestment and Stock Purchase Plan we introduced in September
1996 has been successful. It enables stockholders to apply dividends paid on
their WesterFed common stock toward the purchase of additional shares or to make
quarterly cash purchases of more shares. More than 35% of our eligible
shareholders currently participate in the program.
As a result of the acquisition of Security Bancorp and loan growth, total assets
increased to $955.6 million at June 30, 1997, compared to $563.9 million at June
30, 1996. Total loans increased to $630.3 million, compared to $368.2 million in
the prior fiscal year. Total deposits increased to $630.9 million, compared to
$350.2 million in the prior fiscal year. Non-performing assets were 0.25% of
total assets at fiscal year end, up from 0.13% of assets, due primarily to the
acquisition.
Diversified
customer base
Our focus continues to be on growing our business in both deposits and loans.
Both segments have increased during the fiscal year.
As a result of the acquisition of Security Bancorp, total deposits increased to
$630.9 million at June 30, 1997, compared to $350.2 million at June 30, 1996.
Products introduced under our Western Style Checking line last year continued to
perform well. Collectively, the two banks opened 5,102 new checking accounts,
giving us many new opportunities to become the primary resource for customers'
other financial needs.
Our acquisition of Security Bank also added substantial commercial and
agricultural loans to our operations. As of June 30, 1997, their
well-established portfolio provided us with $26.8 million of agricultural loans
and $28.9 million of non-real estate commercial loans. We had no agricultural
nor non-real estate commercial loans prior to the acquisition.
Consumer loans increased by $89.1 million. This includes Security Bank's
consumer loan portfolio of $28.1 million and a first-year growth of $31.2
million in loans originated through our Dealer Finance Program. The Dealer
Finance Program allows customers to get a vehicle loan from us while at the
dealership.
Loan originations were a record $226.8 million. Total loans increased to $630.3
million at June 30, 1997, as compared to $368.2 million at June 30, 1996.
The composition of our loan business has changed substantially over the past
five years. While our mortgage loan portfolio continues to grow, both consumer
and commercial loan activity is increasing at a very fast pace, and
4
<PAGE>
we intend to focus on these areas to provide both near-term and future lending
growth for the bank.
Adding to
community strength
The Montana Board of Housing (MBOH) honored Western Federal Savings Bank's
commitment to the community this year. Governor Marc Racicot presented us with
the Montana Affordable Housing Award in recognition of our mortgage loan
program. Our program originated more low-and moderate-income loans through the
MBOH than any other metropolitan bank.
Last September, we also received an Award for Excellence in Community Lending
from the Federal Home Loan Bank (FHLB) of Seattle. Western Federal was singled
out in the nine- state region for our support of lower-income Montanans who are
mentally ill or disabled.
Strategically strong and growing
Montana's population is strong and growing, exceeding the national average
growth rate in recent years. We are established solidly as the largest, publicly
owned and traded financial institution headquartered in the state.
With our expansion, we are in a strategic position to compete for and win an
5
<PAGE>
ever-growing share of the flourishing Montana market. The population growth in
Billings, for example, warranted construction this year of a new facility in
Lockwood. Another is under construction on King Avenue.
Montanans enjoy doing business with a Montana-based company, keeping their money
in-state and supporting their local economies. New residents respond to the idea
of a community-based bank, since the "smaller-town" lifestyle is a considerable
portion of Montana's attractiveness. However, in order to gain and keep these
customers, we must offer the same conveniences and products as offered by banks
headquartered out-of-state.
This year's merger with Security Bank and our successful follow-through on the
comprehensive, long-term operations plan developed in 1996 are allowing us to
develop more products and services that are competitive with out-of-state
banking corporations.
We now have over 400 employees serving our customers across Montana. To aid in
developing a sense of teamwork and a focus on sales and service, we initiated an
employee training program.
In preparation, all of our offices and their competitors were "mystery shopped"
and assessed on strengths and weaknesses. Products, buildings, furnishings and
signage were compared, as well as service and employee knowledge.
Since March, we have held 46 formal training sessions across the
state. We have carefully mingled employees from Western and Security in
different cities so they could get to know each other and develop a sense of
teamwork.
A system-wide conversion to commercial banking data center software and banking
hardware is scheduled to be completed in February 1998. This will allow us to
take advantage of the benefits resulting from the consolidation of the two
separate systems. These changes and other technological improvements will enable
us to offer full-service commercial and retail banking products.
We will maintain our community identification even as we invest in efficiencies
for the future. Our products, technologies and location conveniences will
solidify our continued growth and profitability, increasing the value of
WesterFed stock.
We thank our customers and stockholders for allowing us to be a strong financial
partner in Montana's present and future.
Lyle R. Grimes
President, Chairman,
Chief Executive Officer
-6-
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Selected Consolidated Financial and Other Data
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in thousands, except share and per share amounts)
At June 30, 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets $ 955,639 $ 563,931 $ 563,285 $ 515,675 $ 404,117
Loans receivable, net and loans held for sale 630,277 368,193 313,121 274,840 233,148
Mortgage-backed securities, net 149,169 104,947 143,825 145,025 87,534
Investment securities, FHLB stock and other
interest-earning assets 98,885 64,108 82,375 74,168 62,941
Deposits 630,869 350,212 344,155 349,121 351,447
Borrowed funds and repurchase agreements 199,236 125,838 134,704 85,087 15,541
Stockholders' equity 104,259 78,607 75,146 74,168 29,024
Book value per common share 18.74 17.88 17.09 16.03 NA
Tangible book value per common share 14.91 17.88 17.09 16.03 NA
- ----------------------------------------------------------------------------------------------------------------
Year Ended June 30, 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
Selected Operations Data:
Total interest income $ 51,260 $ 42,544 $ 37,783 $ 31,933 $ 30,365
Total interest expense 28,407 24,737 20,984 16,391 16,931
- ----------------------------------------------------------------------------------------------------------------
Net interest income 22,853 17,807 16,799 15,542 13,434
Provision for loan losses (400) --- --- --- ---
Non-interest income 4,685 3,312 2,670 2,999 4,260
Non-interest expense (20,568) (14,004) (12,868) (11,426) (10,220)
- ----------------------------------------------------------------------------------------------------------------
Income before income taxes
and cumulative effect of change in accounting
for income taxes 6,570 7,115 6,601 7,115 7,474
Income taxes (2,063) (2,556) (2,473) (2,681) (2,952)
- ----------------------------------------------------------------------------------------------------------------
Income before cumulative effect
of change in accounting for income taxes 4,507 4,559 4,128 4,434 4,522
Cumulative effect of change in accounting for
income taxes --- --- --- 795 ---
- ----------------------------------------------------------------------------------------------------------------
Net income $ 4,507 $ 4,559 $ 4,128 $ 5,229 $ 4,522
================================================================================================================
Net income per share:
Income before cumulative effect of change in
accounting for income taxes $ 0.96 $ 1.07 $ 0.96 $ 1.01 NA
Cumulative effect of change in accounting for
income taxes --- --- --- 0.18 ---
- ----------------------------------------------------------------------------------------------------------------
Net income per share $ 0.96 $ 1.07 $ 0.96 $ 1.19 NA
================================================================================================================
Dividends per share $ 0.45 $ 0.36 $ 0.30 $ 0.05 NA
================================================================================================================
Dividend payout ratio(1) 46.88% 33.64% 31.25% 4.20% NA
================================================================================================================
Selected Financial Ratios and Other Data:
Return on assets (ratio of net income to average
total assets) 0.65% 0.79% 0.76% 1.14% 1.14%
Return on equity (ratio of net income to average
equity) 5.15 5.90 5.54 10.07 16.90
Interest rate spread, at end of period 3.38 2.67 2.38 2.80 3.49
Net interest margin(2) 3.53 3.23 3.23 3.54 3.60
Ratio of non-interest expense to average total
assets 2.98 2.43 2.47 2.60 2.69
Non-performing assets to total assets, at end
of period 0.25 0.13 0.10 0.16 0.21
Total allowance for loan losses to total
non-performing assets 191.01 280.42 350.35 238.82 242.98
Stockholders' equity to total assets, at end
of period 10.91 13.94 13.34 14.38 7.18
Ratio of average interest-earning assets to
average interest-bearing liabilities 110.56 113.58 113.51 110.16 104.04
Number of offices 36 19 18 18 18
================================================================================================================
</TABLE>
- --------
(1) Dividends paid per share divided by net income per share.
(2) Net interest income divided by average interest-earning assets.
8
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
GENERAL
WesterFed Financial Corporation ("WesterFed" or the "Company") was formed as
part of the conversion of Western Federal Savings Bank of Montana ("Western
Federal" or the "Bank") from a federal mutual to a stock savings bank, which was
completed on January 6, 1994 (the "Conversion"). Currently the Company has no
other business activity other than acting as the holding company for Western
Federal. As a result, the following discussion relates primarily to the
activities of the Bank.
The Company's results of operations are dependent primarily on net interest
income and fee income. Net interest income is the difference between the
interest income earned on its loans, mortgage-backed securities, and investment
portfolio and its cost of funds, consisting of interest paid on its deposits and
borrowed money ("spread"). The Company's results of operations are also
significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities.
The Company serves the financial needs of communities throughout Montana through
its main office located in Missoula, 36 branch offices and one loan servicing
office. The Company attracts deposits from the general public and uses the
deposits, together with borrowings and other funds, to originate loans secured
by mortgages on owner-occupied one- to four-family residences in its primary
market area. To a lesser extent, the Company also originates multi-family,
commercial, agriculture and construction real estate loans and non real estate
commercial, agriculture and consumer loans in its market areas. The Company also
invests in mortgage-backed securities, investment securities and other
short-term liquid assets.
On February 28, 1997, the Company completed its acquisition of Security Bancorp
(the "Acquisition"), accounted for as a purchase transaction and accordingly,
the consolidated statement of income include the results of operations of
Security Bancorp commencing March 1, 1997. Under this method of accounting,
assets and liabilities of Security Bancorp are adjusted to their estimated fair
value and combined with the historical recorded book value of the assets and
liabilities of the Company. The actual revaluation of Security Bancorp's net
assets acquired is subject to the completion of studies and evaluations by
management. The Company issued 1,150,175 shares of WesterFed Common Stock and
paid $25,995,480 in cash for all of the outstanding shares of Security Bancorp
Common Stock, for total consideration (based on the $18.49 per share average
closing price of WesterFed Common Stock as reported on the NASDAQ National
Market System for the twenty business days from January 16, 1997 through
February 12, 1997) of $48.7 million. In addition, as of such date, Security
Bank, a federally chartered stock savings bank and wholly owned subsidiary of
Security Bancorp, merged with and into the Bank.
Changes in Financial Condition, June 30, 1996 to June 30, 1997
Total assets increased $391.7 million to $955.6 million at June 30, 1997 from
$563.9 million at June 30, 1996. This increase in assets was primarily the
result of the purchase of $392.4 million of assets from the Acquisition. Loans
receivable and loans available- for- sale increased $262.1 million,
mortgage-backed securities increased $44.2 million investment securities,
Federal Home Loan Bank (FHLB) stock and all other interest earning assets
increased $34.8 million and other assets increased $50.6 million.
Loans receivable increased $262.1 million to $630.3 million at June 30, 1997
from $368.2 million at June 30, 1996. The $262.1 million increase was primarily
the result of the purchase of $218.3 million of loans as a result of the
Acquisition, $226.8 million in new loan originations and $1.5 million in
purchases of loans, which were partially offset by principal repayments of
$127.9 million and the sale of whole loans of $54.4 million. Included in the
$226.8 million in new loan originations were $84.6 million in consumer loan and
$20.7 million in commercial and agriculture non-real estate loan originations.
The consumer loan portfolio increased $89.1 million, or 202.5%, to $133.1
million at June 30, 1997 from $44.0 million at June 30, 1996, which includes
first year growth of $31.2 million in loans originated through the Bank's new
indirect auto and recreational dealer lending program and $28.1 million as a
result of the Acquisition. The $226.8 million in new loan originations
represents an increase of $165.5 million from fiscal 1996. Included in loans
receivable at June 30, 1997 were $8.0 million of agriculture real estate loans
and non-real estate commercial and
9
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
agriculture loans of $28.9 million and $18.9 million respectively. At June 30,
1996 the Bank did not have this type of loan and the increase was attributable
to the Acquisition and managements decision to originate and hold these types of
loans. See Note 6 of the Notes to Consolidated Financial Statements.
Mortgage-backed securities increased $44.3 million to $149.2 million at June 30,
1997 from $104.9 million at June 30, 1996. The $44.3 million increase was
primarily the result of $91.4 million of mortgage-backed securities acquired in
the Acquisition, partially offset by principal repayments of $23.0 million and
the sale of mortgage-backed securities available-for-sale of $31.9 million. The
$31.9 million of mortgage-backed securities that were sold consisted of $25.2
million in adjustable rate and $6.7 million in fixed rate mortgage-backed
securities while the $98.4 million in purchases consisted of $45.7 million of
fixed rate and $52.7 million of adjustable rate mortgage-backed securities. The
mortgage-backed securities that were sold were primarily securities purchased as
a result of the Acquisition and were sold to restructure the composition of the
mortgage-backed securities portfolio consistent with the Company's asset
liability objectives and to provide funds for loan growth.
Investment securities, FHLB stock and other interest earning assets increased
$34.8 million to $98.9 million at June 30, 1997 from $64.1 million at June 30,
1996. The $34.8 million increase was primarily the result of the purchase of
$109.7 million of investment securities and increases of $6.9 million in FHLB
stock and the cash surrender value of life insurance policies. These increases
were partially offset by maturities and principal payments of $71.0 million, a
net reduction in interest bearing deposits due from banks of $5.3 million, a net
decrease in interest bearing deposits of $1.0 million and the sale of $5.2
million of investment securities. Investment securities purchased during the
fiscal year included $20.0 million of securities as a result of the Acquisition.
Other assets increased $50.6 million to $77.3 million at June 30, 1997 from
$26.7 million at June 30, 1996. The $50.6 million increase was primarily the
accounts result of the Acquisition. Premises and equipment, goodwill and other
intangibles, and other assets purchased were $14.8 million, $22.3 million and
$9.6 million, respectively
Deposits increased $280.7 million to $630.9 million at June 30, 1997 from $350.2
million at June 30, 1996. Interest credited was $18.7 million and deposits
acquired as a result of the Acquisition were $287.0 million while withdrawals
exceeded deposits by $25.0 million. Checking accounts increased $52.8 million,
money market accounts increased $25.1 million, passbook accounts increased $38.0
million and certificates of deposit increased $164.8 million of which $56.9
million, $19.9 million, $43.6 million and $166.6 million respectively, were
acquired in the Acquisition.
Borrowed funds and repurchase agreements increased $73.4 million to $199.2
million, at June 30, 1997 from $125.8 million at June 30, 1996. There were $44.9
million of new borrowings and repurchase agreements as a result of the
Acquisition and $136.1 million of additional new borrowings, of which $13.3
million were fixed rate advances of five years or more to partially fund new
thirty year fixed rate FHLB mortgages added to the portfolio, while $97.8
million were less than one year in maturity and used to fund short-term cash
requirements and $25.0 million were fixed rate advances with maturities of one
to four years. Net change in repurchase agreements and principal repayments on
borrowed funds were $107.6 million.
Stockholders' equity increased $25.7 million, or 32.7%, to $104.3 million at
June 30, 1997 from $78.6 million at June 30, 1996. This increase was primarily
due to $22.0 million related to the issuance of stock in connection with the
Acquisition and $4.5 million of net income offset by $2.2 million for dividends
declared during the fiscal year. Stockholders' equity increased $191,000 related
to the change in unrealized loss associated with investment securities
classified as available-for-sale being adjusted to market value in accordance
with Statement of Financial Accounting Standards No. 115.
10
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
Results of Operations
Net Interest Income Analysis. The following table presents for the periods
indicated the total dollar amount of interest income from average
interest-earning assets and the resultant yields, as well as the interest
expense on average interest-bearing liabilities, expressed both in dollars and
rates. No tax equivalent adjustments were made. Non-accruing loans have been
included in the table as loans carrying a zero yield.
<TABLE>
<CAPTION>
Year Ended June 30, 1997
-----------------------------------------------------------
Average Interest
Outstanding Earned/ Yield/
Balance(1) Paid Rate
- ------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Interest-Earnings Assets:
<S> <C> <C> <C> <C>
Loans receivable(2) (3) $ 451,771 $ 37,923 8.39%
Mortgage-backed securities 116,836 8,185 7.01
Investments 61,241 3,884 6.34
Other interest-earning assets(4) 13,732 1,045 7.61
Cash surrender value of life insurance 4,187 223 5.33
- ------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 647,767 $ 51,260 7.91%
============================================================================================================
Interest-Bearing Liabilities:
Certificates of deposit $ 264,548 $ 14,986 5.66%
Passbook deposits 76,829 2,223 2.89
Demand and NOW deposits 66,203 883 1.33
Money market accounts 31,873 1,146 3.60
- -----------------------------------------------------------------------------------------------------------
Total deposits 439,453 19,238 4.38
FHLB advances and other borrowed money 145,446 9,011 6.20
Collateralized mortgage obligations 967 158 16.33
- ------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 585,866 $ 28,407 4.85%
============================================================================================================
Net interest income $ 22,853
============================================================================================================
Net interest rate spread 3.06%
============================================================================================================
Net interest-earning assets $ 61,901
============================================================================================================
Net interest margin (5) 3.53%
============================================================================================================
Average interest-earning assets to average
interest-bearing liabilities 110.56%
============================================================================================================
</TABLE>
- --------
1 Based on average monthly balances.
2 Calculated net of deferred loan fees, loan discounts, loans in process
and loss reserves.
3 Includes loans held for sale.
4 Includes primarily short-term liquid assets.
5 Net interest income divided by average interest-earning assets.
11
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended June 30, 1996 Year Ended June 30, 1995
- -------------------------------------------------------------------------------------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance(1) Paid Rate Balance(1) Paid Rate
---------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-Earnings Assets:
Loans receivable(2)(3) $ 347,084 $ 28,640 8.25% $ 292,881 $ 23,191 7.92%
Mortgage-backed securities 132,629 9,167 6.91 137,359 9,227 6.72
Investments 59,004 3,769 6.39 60,095 3,762 6.26
Other interest-earning assets(4) 9,533 787 8.26 27,501 1,423 5.17
Cash surrender value of life insurance 3,059 181 5.92 2,882 180 6.25
- -------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 551,309 $ 42,544 7.72% $ 520,718 $ 37,783 7.26%
===================================================================================================================
Interest-Bearing Liabilities:
Certificates of deposit $ 212,458 $ 12,405 5.84% $ 197,794 $ 10,035 5.07%
Passbook deposits 64,881 1,940 2.99 71,151 2,110 2.97
Demand and NOW deposits 47,664 889 1.87 46,330 955 2.06
Money market accounts 24,786 851 3.43 29,247 958 3.28
- -------------------------------------------------------------------------------------------------------------------
Total deposits 349,789 16,085 4.60 344,522 14,058 4.08
FHLB advances and other borrowed money 134,211 8,442 6.29 112,343 6,632 5.90
Collateralized mortgage obligations 1,380 210 15.22 1,877 294 15.66
- -------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities $ 485,380 $ 24,737 5.10% $ 458,742 $ 20,984 4.57%
===================================================================================================================
Net interest income $ 17,807 $ 16,799
===================================================================================================================
Net interest rate spread 2.62% 2.69%
===================================================================================================================
Net interest-earning assets $ 65,929 $ 61,976
===================================================================================================================
Net interest margin(5) 3.23% 3.23%
===================================================================================================================
Average interest-earning assets to average 113.58% 113.51%
interest-bearing liabilities
===================================================================================================================
</TABLE>
- --------
1 Based on average monthly balances.
2 Calculated net of deferred loan fees, loan discounts, loans in process
and loss reserves.
3 Includes loans held for sale.
4 Includes primarily short-term liquid assets.
5 Net interest income divided by average interest-earning assets.
12
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
Rate/Volume Analysis
The following table presents the dollar amount of changes in interest income and
interest expense for components of interest-earning assets and interest-bearing
liabilities. It distinguishes between the increase related to higher outstanding
balances and that due to the volatility of interest rates. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (i) changes in volume (i.e., changes in
volume multiplied by old rate), (ii) changes in rate (i.e., changes in rate
multiplied by old volume), (iii) changes in rate-volume (changes in rate
multiplied by the change in volume), and (iv) the net change.
<TABLE>
<CAPTION>
1997 vs. 1996 1996 vs. 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)
Interest-Earning Assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable $8,639 $ 493 $ 151 $ 9,283 $4,292 $ 978 $ 179 $ 5,449
Mortgage-backed securities (1,092) 124 (14) (982) (318) 268 (10) (60)
Investments (423) 607 (69) 115 (68) 77 (2) 7
Other interest-earning assets 1,078 (346) (474) 258 (930) 848 (554) (636)
Cash surrender value of life insurance 67 (18) (7) 42 11 (9) (1) 1
- ----------------------------------------------------------------------------------------- -------------------------------------
Total interest-earning assets $8,269 $ 860 $ (413) $ 8,716 $2,987 $ 2,162 $ (388) $ 4,761
========================================================================================= ======================================
Interest-Bearing Liabilities:
Certificates of deposit $2,530 $ 37 $ 14 $ 2,581 $ 744 $ 1,515 $ 111 $ 2,370
Passbook deposits 636 (269) (84) 283 (186) 17 (1) (170)
Demand and NOW deposits 346 (253) (99) (6) 27 (91) (2) (66)
Money market accounts 243 40 12 295 (146) 46 (7) (107)
- ----------------------------------------------------------------------------------------- --------------------------------------
Total Deposits $3,755 $ (445) $ (157) $ 3,153 $ 439 $ 1,487 $ 101 $ 2,027
FHLB advances and other borrowed money 707 (128) (10) 569 1,291 435 84 1,810
Collateralized mortgage obligations (63) 15 (4) (52) (78) (8) 2 (84)
- ----------------------------------------------------------------------------------------- --------------------------------------
Total interest-bearing liabilities $4,399 $ (558) $ (171) $ 3,670 $1,652 $ 1,914 $ 187 $ 3,753
========================================================================================= ======================================
Changes to net interest income $3,870 $1,418 $ (242) $ 5,046 $1,335 $ 248 $ (575) $ 1,008
========================================================================================= ======================================
</TABLE>
13
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
The following table sets forth the weighted average yields on the Company's
interest-earning assets, the weighted average interest rates on interest-bearing
liabilities and the interest rate spread between the weighted average yields and
rates for the Company at the dates indicated. Non-accruing loans have been
included in the table as loans carrying a zero yield.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average yield on:
Loans receivable (1)(2) 8.49% 8.12% 8.00%
Mortgage-backed securities 7.27 7.06 7.08
Investments 6.73 6.25 6.29
Other interest-earning assets 5.58 5.31 5.76
Cash surrender value of life insurance 5.11 6.50 6.15
- --------------------------------------------------------------------------------------------------------------
Combined weighted average yield on interest-
earning assets 8.08 7.68 7.48
- --------------------------------------------------------------------------------------------------------------
Weighted average rate paid on:
Certificates of deposit 5.52 5.82 5.88
Passbook deposits 2.80 3.00 3.03
Demand and NOW deposits 1.15 1.66 1.98
Money market accounts 3.94 3.46 3.46
- --------------------------------------------------------------------------------------------------------------
Total deposits 4.24 4.54 4.62
FHLB advances and other borrowed money 6.11 6.26 6.28
Collateralized mortgage obligations 11.37 11.27 11.22
- --------------------------------------------------------------------------------------------------------------
Combined weighted average rate paid on interest-
bearing liabilities 4.70 5.01 5.10
- --------------------------------------------------------------------------------------------------------------
Interest rate spread 3.38% 2.67% 2.38%
==============================================================================================================
</TABLE>
- --------
(1) Calculated net of deferred loan fees, loan discounts and loans in
process.
(2) Does not include interest on loans 90 days or more delinquent.
14
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
The following table summarizes the major components of the Company's net income
for the last three fiscal years and the changes which occurred between the
periods shown:
<TABLE>
<CAPTION>
Year Ended June 30,
Components of net income: 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
(In Thousands)
Amount Change Amount Change Amount
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 51,260 $ 8,716 $ 42,544 $ 4,761 $ 37,783
Interest expense 28,407 3,670 24,737 3,753 20,984
- ----------------------------------------------------------------------------------------------------------------
Net interest income 22,853 5,046 17,807 1,008 16,799
Provision for loan losses (400) (400) --- --- ---
Non-interest income 4,685 1,373 3,312 642 2,670
Non-interest expense (20,568) (6,564) (14,004) (1,136) (12,868)
- ----------------------------------------------------------------------------------------------------------------
Income before income taxes 6,570 (545) 7,115 514 6,601
Income taxes (2,063) (493) (2,556) (83) (2,473)
- ----------------------------------------------------------------------------------------------------------------
Net income increase (decrease) $ 4,507 $ (52) $ 4,559 $ 431 $ 4,128
================================================================================================================
</TABLE>
Comparison of Operating Results for the Years Ended June 30, 1997
and June 30, 1996
General. Net income remained relatively stable at $4.5 million for the fiscal
year ended June 30, 1997 as compared to $4.6 million for the fiscal year ended
June 30, 1996. The decrease was the result of a one-time after-tax charge to
earnings of $1.4 million, levied on all thrift institutions, to recapitalize the
Savings Association Insurance Fund ("SAIF"). The $52,000 decrease in net income
was comprised of an increase in net interest income of $5.0 million, a $1.4
million increase in non-interest income and a decrease in income tax expense of
$493,000, offset by an increase in non-interest expense of $6.6 million and an
increase in provision for loan losses of $400,000. Only four months of combined
operations resulting from the Acquisition are included in net income for the
fiscal year just ended. The interest rate spread increased to 3.38% at June 30,
1997 from 2.67% at June 30, 1996. While the Company has adopted interest rate
risk policies in an effort to protect net interest income from significant
increases in short term interest rates, the Company's net income could still be
adversely affected by a narrowing of its net interest rate spread. See "Interest
Rate Risk Management."
Interest Income. Interest income increased $8.8 million to $51.3 million for the
fiscal year ended June 30, 1997 from $42.5 million for the fiscal year ended
June 30, 1996. This increase resulted from an increase in the average balance of
interest earning assets of $96.5 million to $647.8 million during fiscal 1997
from $551.3 million during fiscal 1996 and an increase in the average yield on
interest-earning assets to 7.91% during fiscal 1997 from 7.72% during fiscal
1996.
Interest earned on loans receivable increased $9.3 million due primarily to a
$104.7 million increase in the average balance of loans receivable to $451.8
million during fiscal 1997 from $347.1 million during fiscal 1996. In addition,
the average yield on loans increased to 8.39% during fiscal 1997 from 8.25%
during fiscal 1996. 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 as well as the purchase of $218.3 million
of loans as a result of the Acquisition. The increase in yield was the result of
new loans being originated at rates higher than the average rate of those loans
being repaid as a result of an increase in originations of non-real estate loans
that have higher interest rates than real estate loans.
15
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
Interest earned on mortgage-backed securities decreased $1.0 million due
primarily to a $15.8 million decrease in the average balance of mortgage-backed
securities outstanding to $116.8 million during fiscal 1997 from $132.6 million
during fiscal 1996. The decrease in the average balance of mortgage-backed
securities was the result of management's decision during the fiscal year to use
a portion of the mortgage-backed securities portfolio to partially fund the
growth in loans receivable in an attempt to earn yields greater than those
available on mortgage-backed securities.
Interest earned on investment securities increased $115,000 due primarily to a
$2.2 million increase in the average balance of investment securities to $61.2
million during the fiscal year 1997 from $59.0 million during fiscal 1996.
Interest earned on other interest-earning assets and cash surrender value of
life insurance increased $300,000 due primarily to an increase in the average
balance of other interest-earning assets of $4.2 million to $13.7 million during
fiscal 1997 from $9.5 million during fiscal 1996.
Interest Expense. Interest expense increased $3.7 million to $28.4 million in
fiscal 1997 from $24.7 million in fiscal 1996. This increase resulted from an
increase in the average balance of interest-bearing liabilities of $100.5
million to $585.9 million during fiscal 1997 from $485.4 million during fiscal
1996. Interest expense on deposits increased $3.2 million primarily due to an
increase in the average balance of deposits of $89.7 million to $439.5 million
during fiscal 1997 from $349.8 million during fiscal 1996. The average rate paid
on deposits decreased to 4.38% during fiscal 1997 from 4.60% during fiscal 1996.
The increase in the average balance of deposits was the result of the purchase
of $287.0 million of deposits related to the Acquisition. Interest expense on
FHLB advances and other borrowed money increased $517,000 to $9.2 million in
fiscal 1997 from $8.7 million in fiscal 1996. This increase was the result of an
increase of $11.2 million in the average balance of FHLB advances and other
borrowed money to $145.4 million during fiscal 1997 from $134.2 million during
fiscal 1996.
Provision for Loan Losses. The provision for loan losses is determined by
management as the amount to be added to the allowance for loan losses after net
charge-offs have been deducted to bring the allowance to a level which is
considered adequate to absorb losses inherent in the loan portfolio in
accordance with generally accepted accounting principles. The Company provided
$400,000 for loan losses for the fiscal year ended June 30, 1997. At June 30,
1997, the Company had $2.4 million of non-performing assets (representing 0.25%
of total assets) compared to $715,000 at June 30, 1996 (representing 0.13% of
total assets). At June 30, 1997, the Company had allowance for loan losses to
non-performing assets of 191.0% as compared to 280.4% at June 30, 1996.
Management's evaluation of the adequacy of its loan loss reserves, the quality
of the loan portfolio and economic conditions in Montana resulted in the
$400,000 provision for loan losses. Future additions to the Company's allowance
for loan losses and any change in the related ratio of the allowance for loan
losses to non-performing loans are dependent upon the performance and
composition of the Company's loan portfolio, the economy, inflation, changes in
real estate values and interest rates and the view of the regulatory authorities
toward adequate reserve levels.
Non-interest Income. Non-interest income increased $1.4 million to $4.7 million
in fiscal 1997 from $3.3 million during 1996. The $1.4 million increase resulted
from increases in loan origination fees, service fees, net gain on sale of loans
and securities available-for-sale and other operating income of $319,000,
$914,000, $101,000 and $39,000 respectively. The $914,000 increase in service
fees was the result of increases in checking fees and ATM fees from the
promotion of checking accounts and the increased fee income received on
transaction accounts purchased in the Acquisition.
Non-interest Expense. Non-interest expense increased $6.6 million to $20.6
million in fiscal 1997 from $14.0 million in fiscal 1996. The $6.6 million
increase in expenses was partially the result of a $2.3 million one-time special
assessment to recapitalize the SAIF and the increased costs associated with the
Acquisition, including $532,000 for the amortization of Acquisition related
intangibles. The Bank incurred significant expenses during the fiscal year 1997
related to extensive training of all Bank employees in sales skills in an effort
to improve the Bank's ability to meet the increasing competition in the
financial services market.
16
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
Income Taxes. Income tax expenses decreased $493,000 to $2.1 million for fiscal
1997 from $2.6 million for fiscal 1996. The $493,000 decrease in income tax
expense was primarily the result of a decrease in income before income tax
expense of $545,000, the non-tax deductibility of $200,000 of goodwill
amortization for fiscal 1997 and the reversal of deferred income taxes related
to the cash surrender value of insurance policies which resulted in an
additional reduction in income tax expense of $489,000.
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
$642,000, offset by an increase in non-interest expense of $1.1 million and an
increase in income tax expense of $83,000. The interest rate spread increased to
2.67% at June 30, 1996 from 2.38% at June 30, 1995.
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 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 $635,000 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
17
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
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.
Provision for Loan Losses. The Company made no additional provision for loan
losses for the fiscal years ended June 30, 1996 and June 30, 1995. At June 30,
1996, the Company had $715,000 of non-performing assets (representing 0.13% of
total assets) compared to $573,000 at June 30, 1995 (representing 0.10% of total
assets). At June 30, 1996, the Company had allowance for loan losses to
non-performing assets of 280.4% as compared to 350.4% at June 30, 1995.
Management's evaluation of the adequacy of its loan loss reserves, the quality
of the loan portfolio and economic conditions in Montana resulted in no
additional provision for loan losses.
Non-interest Income. Non -interest income increased $642,000 to $3.3 million in
fiscal 1996 from $2.7 million in fiscal 1995. The $642,000 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 $52,000, 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 $1.1 million to $14.0
million in fiscal 1996 from $12.9 million in fiscal 1995. The $1.1 million
increase in non-interest expense was primarily the result of increases in net
occupancy expense of premises of $68,000, marketing and advertising of $103,000
and other operating expenses of $787,000. The increase in net occupancy expense
of premises was primarily the result of adding one new branch facility in the
Helena market area and the completion of a new office building in Hamilton which
replaced the existing facility. The increase in marketing and advertising was
related to the increased promotion of loan and deposit products. The increase in
other operating expenses were primarily associated with the increased costs of
the new checking and ATM programs, costs incurred for the engagement of a
consulting firm to assist in developing a long-term operations plan and the
related subsequent restructuring and centralization of operations and a $126,000
write-off of the older, existing branch facility in Hamilton.
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 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.
18
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
LOAN QUALITY
The following table sets forth the amounts and categories of non-performing
assets in the Company's loan portfolio. For all periods presented, the Company
did not have any troubled debt restructuring which involved forgiving a portion
of interest or principal on any loans or making loans at a rate materially less
than market rates. Foreclosed assets include assets acquired in settlement of
loans, and are recorded at the lower of the related loan balance, less any
specific allowance for loss, or fair value at the date of foreclosure.
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------------------
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
Real Estate:
One- to four-family $ 842 $ 21 $ --- $ 119 $ 253
Multi-family --- --- --- --- ---
Commercial --- --- 166 207 43
Construction --- --- --- --- ---
Commercial - non-real estate 102 --- --- --- ---
Consumer 573 383 153 9 109
- -------------------------------------------------------------------------------------------------------------------
Total 1,517 404 319 335 405
- -------------------------------------------------------------------------------------------------------------------
Accruing loans delinquent 90 days or more:
Real Estate:
One- to four-family 231 288 253 425 367
Multi-family --- --- --- --- ---
Commercial --- --- --- --- ---
Construction --- --- --- --- ---
Commercial - non-real estate --- --- --- --- ---
Consumer 605 23 1 5 11
- -------------------------------------------------------------------------------------------------------------------
Total 836 311 254 430 378
- -------------------------------------------------------------------------------------------------------------------
Foreclosed assets:
Real Estate:
One- to four-family --- --- --- 85 64
Multi-family --- --- --- --- ---
Commercial --- --- --- --- ---
Construction --- --- --- --- ---
Consumer 82 --- --- --- ---
- -------------------------------------------------------------------------------------------------------------------
Total 82 --- --- 85 64
- -------------------------------------------------------------------------------------------------------------------
Total non-performing assets $ 2,435 $ 715 $ 573 $ 850 $ 847
===================================================================================================================
</TABLE>
Total non-performing assets increased $1.7 million to $2.4 million at fiscal
year end June 30, 1997 from $715,000 at fiscal year end June 30, 1996. The $1.7
million of non-performing assets at June 30, 1997 includes $527,000 of
non-accruing consumer loans 100% secured by loans on savings accounts. For the
fifth year in a row, the Company has had minimal foreclosed assets with no
foreclosed real estate assets for the past three fiscal year-ends 1997, 1996 and
1995. In addition to the non-performing loans and foreclosed assets set forth in
the preceding table, as of June 30, 1997, there were no additional loans
identified by the Company with respect to which information known about the
possible credit
19
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
problems of the borrowers or the cash flows of the security properties have
caused management to have some concerns as to the ability of the borrowers to
comply with present loan repayment terms and which may result in the future
inclusion of such items in the non-performing asset categories.
INTEREST RATE RISK MANAGEMENT
In an attempt to manage its exposure to changes in interest rates, management
closely monitors the Bank's interest rate risk position. The Bank has an
Asset/Liability Management Committee consisting of certain members of senior
management and two non-employee members of the Board of Directors (the "Board").
This committee meets to review the Bank's interest rate risk position and makes
recommendations for adjusting such position to the Board. In addition, the Board
reviews on a quarterly basis the Bank's interest rate risk position, including
simulations of the effect on the Bank's capital of various interest rate
scenarios.
The Bank has an Investment Committee consisting of certain members of the senior
management which meets at least monthly to review the Bank's interest rate risk
position using the Office of Thrift Supervision ("OTS") and the Bank's internal
model simulating the effect on the Bank's capital in various interest rate
scenarios. The Investment Committee makes recommendations for adjusting such
position to the Bank's Asset/Liability Management Committee. The Asset/Liability
Management Committee reviews the Bank's investments, mortgage-backed securities,
loan portfolio, loan production, borrowed funds and deposit structure. The
Committees develop investment strategies and oversee the timing and
implementation of transactions to assure attainment of Board objectives in the
most effective manner.
In managing its asset/liability mix, the Bank, depending on the relationship
between long- and short-term interest rates, market conditions and consumer
preference, may place somewhat greater emphasis on maximizing its net interest
margin than on more closely matching the interest rate sensitivity of its assets
and liabilities in an effort to improve its net interest income Management
believes that the increased net interest income resulting from a mismatch in the
maturity of its asset and liability portfolios can, during periods of declining
or stable interest rates, provide high enough returns to justify the increased
exposure to negative effects which can result from sudden and unexpected
increases in interest rates.
To the extent consistent with its interest rate spread objectives, the Bank
attempts to reduce its interest rate risk and has taken a number of steps to
more closely match the maturities of its assets and liabilities. To accomplish
this objective the Bank has recently focused its lending efforts on the
origination of non-residential loans for its portfolio and increased its
marketing effort to increase the Bank's balance of non-interest bearing demand
accounts. The non-residential loans being originated for portfolio generally
mature or change interest rates within five to seven years as compared to the
origination of fixed rate fifteen and thirty year residential mortgages.
In addition, depending on the Bank's interest rate risk position, the Bank also
sells or converts to Federal Home Loan Mortgage Corporation ("FHLMC")
participation certificates ("PCS") newly originated 30-year, fixed-rate
residential loans. The Bank securitizes such loans to limit credit risk and
increase it's liquidity. The Bank's policy is to carry FHLMC PCS created in this
manner in its "available-for-sale" portfolio until a rising interest rate
scenario or the need for liquidity dictates their sale.
Additionally, since the mid-1980's, the Bank has used interest rate exchange
(i.e., "swap" and "cap") agreements to assist in synthetically extending the
life of interest-bearing liabilities. Under the Bank's current investment
policy, the Bank may engage in swap and cap agreements with the Federal Home
Loan Bank ("FHLB") of Seattle or certain investment firms approved in the Bank's
investment policy.
At June 30, 1997, the Bank was a party to two interest rate exchange agreements,
both of which were agreements with the FHLB of Seattle covering a total of $10.0
million in notional principal amounts. Historically, the swaps and caps have
been used to reduce the Bank's cost of funds during periods of high interest
rates; however, in the interest rate environment experienced during most of
fiscal 1997, these swaps and caps had the effect of increasing the Bank's cost
of funds. During fiscal 1997, the increase in the cost of funds attributable to
these swaps and caps was $249,000. The Bank's interest rate caps expire in 1999.
20
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
At June 30, 1997 the 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 the Bank's income in the future if interest rates do not rise
significantly. See Note 14 of the Notes to Consolidated Financial Statements.
OTS regulations provide a Net Portfolio Value ("NPV") approach to the
quantification of interest rate risk. In essence, this approach calculates the
difference between the present value of expected cash flows from assets and the
present value of expected cash flows from liabilities, as well as cash flows
from off balance sheet contracts. Under OTS regulations, an institution's
"normal" level of interest rate risk in the event of this assumed change in
interest rates is a decrease in the institution's NPV in an amount not exceeding
2% of the present value of its assets. The OTS has adopted, but temporarily
postponed implementation until further notice, a final rule requiring every
thrift institution with greater than "normal" interest rate exposure to take a
deduction from their total capital available to determine if they meet their
risk-based capital requirement. The amount of that deduction is one-half of the
difference between (a) the institution's actual calculated exposure to the 200
basis point interest rate increase or decrease (whichever results in the greater
proforma decrease in NPV) and (b) its "normal" level of exposure which is 2% of
the present value of its assets. At June 30, 1997, the latest date such
information was available from the OTS, 2.0% of the present value of the Bank's
assets was approximately $19.3 million, which was less than the $25.0 million
decrease in NPV resulting from a 200 basis point change in interest rates as
calculated by the OTS. As a result, the Bank would be required to make a
deduction from total capital in the amount of approximately $2.8 million in
calculating its risk-based capital requirement had such rule been in effect on
June 30, 1997. Based on the Bank's excess risk-based capital of $38.0 million at
June 30, 1997, notwithstanding this $2.8 million deduction from capital, the
Bank would continue to exceed its risk-based capital requirement. See Liquidity
and Capital Resources.
The Bank's Asset/Liability Management Committee dictates acceptable limits on
the amount of change in NPV given certain changes in interest rates. Presented
below as of June 30, 1997, the latest date such information is available, is an
OTS analysis of the Bank's interest rate risk as measured by changes in NPV for
instantaneous and sustained parallel shifts in the yield curve, in 100 basis
point increments, up and down 300 basis points and compared to Board policy
limits. Assumptions used in calculating the amounts in this table are OTS
assumptions.
Change in Actual at June 30, 1997
Interest Rate Board Limit as Measured by OTS
(Basis Points) % Change
-----------------------------------------
$ Change % Change
- ------------------------------------------------------------------------------
(Dollars in Thousands)
+300 -35.0% (38,844) -33.0%
+200 -25.0 (24,964) -22.0%
+100 -12.0 (11,772) -10.0%
0 0.0 0 0.0
-100 -12.0 8,717 8.0%
-200 -25.0 12,579 11.0%
-300 -35.0 15,735 14.0%
Management has structured its assets and liabilities to attempt to control its
exposure to interest rate risk. In the event of a 300 basis point change in
interest rates, the Bank would experience a 14.0% increase in NPV in a declining
rate environment and a 33.0% decrease in a rising rate environment. During
periods of rising rates, the value of monetary assets and monetary liabilities
declines. Conversely, during periods of falling rates, the value of monetary
assets and liabilities increases. However, the amount of change in value of
specific assets and liabilities due to changes in rates is not the same in a
rising rate environment as in a falling rate environment (i.e., the amount of
value increase under a specific rate decline may not equal the amount of value
decrease under an identical upward rate movement). The 33.0% decrease in NPV as
a result of a 300 basis point increase in interest rates indicates that the Bank
is susceptible to a reduction in net interest income in a rising interest rate
environment due to interest-bearing liabilities potentially repricing more
rapidly than interest-earning assets.
21
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
In evaluating the Bank's exposure to interest rate risk, certain shortcomings
inherent in the method of analysis presented in the foregoing table must be
considered. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Further, in the event of a change in interest rates, prepayments and
early withdrawal levels would likely deviate significantly from those assumed in
calculating the table. Finally, the ability of many borrowers to service their
debt may decrease in the event of an interest rate increase. As a result, the
actual effect of changing interest rates may differ from that presented in the
foregoing table.
Liquidity and Capital Resources
The Company's primary sources of funds are new deposits and the payment of
principal and interest on loans, mortgage-backed securities and maturing
investments. While maturities and scheduled amortization of loans and
mortgage-backed securities are a predictable source of funds, deposit flows and
mortgage prepayments are greatly influenced by market interest rates, economic
conditions and competition. In a period of declining interest rates, it is
anticipated that mortgage prepayments would increase. As a result, these
proceeds from mortgage prepayments would be invested in lower yielding loans or
other investments which have the effect of reducing interest income. In a period
of rising interest rates, it is anticipated that mortgage prepayments would
decrease and the proceeds from such prepayments would be invested in higher
yielding loans or investments which would have the effect of increasing interest
income.
The Company's liquidity, represented by cash and cash equivalents, is a result
of its operations, investing and financing activities. These activities are
summarized below for the fiscal years ended June 30, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
For the Year Ended June 30,
---------------------------------------
1997 1996 1995
(In Thousands)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income $ 4,507 $ 4,559 $ 4,128
Adjustments to reconcile net income to net
cash provided by operating activities 19,598 14,998 24,430
- -------------------------------------------------------------------------------------------------
Net cash provided by operating activities 24,105 19,557 28,558
Net cash (used) by investing activities (21,642) (2,018) (57,312)
Net cash provided (used) by financing activities 1,397 (19,614) 27,182
- -------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 3,860 (2,075) (1,572)
Cash and cash equivalents at beginning of period 13,299 15,374 16,946
- -------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 17,159 $ 13,299 $ 15,374
=================================================================================================
</TABLE>
The primary investing activities of the Company are the origination of loans and
the purchase of investment and mortgage-backed securities. During the fiscal
years ended June 30, 1997, 1996 and 1995, the Company's loan originations
totaled $226.8 million, $165.5 million and $129.8 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
and agricultural real estate loans and other commercial, agricultural and
consumer loans.
Purchases of mortgage-backed securities totaled $98.4 million, $22.2 million and
$21.5 million for fiscal years ended June 30, 1997, 1996 and 1995, respectively.
Purchases of investment securities totaled $109.7 million, $35.9 million and
$32.6 million for the fiscal years ended June 30, 1997, 1996 and 1995,
respectively. Mortgage-backed securities and investment securities purchased in
fiscal 1997 included $91.4 million and $20.0 million respectively, related to
the Acquisition.
22
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
During fiscal 1997 a net $10.8 million of cash ($26.8 million paid in cash
consideration and direct Acquisition costs less $16.0 million in cash and cash
equivalents purchased) was used to acquire Security Bancorp.
During the fiscal years ended June 30, 1997, 1996 and 1995 these investing
activities were funded primarily by principal repayments on loans and
mortgage-backed securities and investment securities and the maturity of
investment securities and the sale of loans, mortgage-backed securities and
investments totaling $313.5 million, $232.3 million, and $137.8 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, 1997 and 1995 the net increase in
cash flows from financing activities was $1.4 million and $27.2 million
respectively, and a net decrease of $19.6 million for the fiscal year ended June
30, 1996
The Bank is required to maintain minimum levels of liquid assets as defined by
OTS regulations. This requirement, which may be waived at the direction of the
OTS depending upon economic conditions and deposit flows, is based upon a
percentage of deposits and short-term borrowings. The required ratio is 5%. The
Bank's regulatory liquidity ratio was 9.4% at June 30, 1997.
The Bank's most liquid assets are cash and cash in banks and highly liquid,
short-term investments. The levels of these assets are dependent on the Bank's
operating, financing, lending, and investing activities during any given period.
At June 30, 1997, the Bank's regulatory liquid assets totaled $67.6 million.
Liquidity management for the Bank is both a daily and long term function of the
Company's management strategy. Excess funds are generally invested in short-term
investments such as FHLB certificates of deposit. If the Bank should require
funds beyond its ability to generate them internally, additional sources of
funds are available through the use of FHLB of Seattle advances. At June 30,
1997, the Bank had outstanding borrowings of $199.2 million, which include
$190.3 million of FHLB advances, $797,000 of collateralized mortgage obligations
issued by the Bank's finance subsidiary, and $8.1 million of repurchase
agreements and other borrowed money.
At June 30, 1997, the Bank had outstanding commitments to originate loans of
$26.2 million, of which $17.4 million was at fixed interest rates. These loans
are to be secured by properties located in the Bank's primary market areas. The
Bank anticipates that it will have sufficient funds available to meet its
current loan commitments. Certificates of deposit scheduled to mature in one
year or less from June 30, 1997 totaled $274.8 million.
23
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
At June 30, 1997, the Bank exceeded all of its capital requirements on a fully
phased-in basis. The following table sets forth Western Federal's compliance
with its capital requirements at June 30, 1997.
<TABLE>
<CAPTION>
At June 30, 1997
---------------------------------
Amount(1) Percent
- -------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C>
Tangible Capital:
Capital level(2) $ 79,768 8.54%
Requirement 14,016 1.50
- -------------------------------------------------------------------------------------------
Excess $ 65,752 7.04%
===========================================================================================
Core Capital:
Capital level(2)(3) $ 79,768 8.54%
Requirement 28,033 3.00
- -------------------------------------------------------------------------------------------
Excess $ 51,735 5.54%
===========================================================================================
Fully Phased-In Risk-Based Capital:
Capital level(2)(4) $ 84,393 14.54%
Requirement 46,424 8.00
- -------------------------------------------------------------------------------------------
Excess $ 37,969 6.54%
===========================================================================================
</TABLE>
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto presented herein have
been prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the changes in the relative purchasing
power of money over time due to inflation. The impact of inflation is reflected
in the increased cost of the Company's operations. Unlike most industrial
companies, nearly all the assets and liabilities of the Company are monetary in
nature. As a result, interest rates have a greater impact on the Company's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the price
of goods and services.
Dividends
The Board of Directors intends to continue the payment of quarterly cash
dividends, dependent on the results of operations and financial condition of the
Bank, tax considerations, industry standards, economic conditions, general
business practices and other factors. The Company's ability to pay dividends is
dependent on the dividend payments it receives from its subsidiary, Western
Federal, which are subject to regulations and the Bank's continued compliance
with all regulatory capital requirements. See Notes 2 and 3 of the Notes to
Consolidated Financial Statements for information regarding limitations of the
Bank's ability to pay dividends to the Company.
- ---------------------------
1 Tangible and core capital levels are shown as a percentage of adjusted total
assets; risk-based capital levels are shown as a percentage of risk-weighted
assets.
2 The Bank's investment in excludable subsidiaries is excluded for purposes of
calculating regulatory capital.
3 In April 1991, the OTS proposed a core capital requirement for savings
associations comparable to the requirement for national banks that became
effective December 31, 1990. The proposal calls for an OTS core capital
requirement of at least 3% of total adjusted assets for thrifts that receive
the highest supervisory rating for safety and soundness, with a 4% to 5% core
capital requirement for all other thrifts.
4 Includes $4.6 million of general valuation allowances.
24
<PAGE>
Independent Auditors' Report
- --------------------------------------------------------------------------------
KPMG Peat Marwick LLP
The Board of Directors and Stockholders
WesterFed Financial Corporation:
We have audited the accompanying consolidated balance sheets of WesterFed
Financial Corporation and subsidiaries as of June 30, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1997 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."
KPMG Peat Marwick LLP
Billings, Montana
July 25, 1997
26
<PAGE>
WesterFed Financial Corporation and Subsidiaries
<TABLE>
<CAPTION>
Consolidated Balance Sheets
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
June 30,
------------------------------
1997 1996
------------------------------
<S> <C> <C>
Assets
Cash and due from banks......................................................... $ 16,999 7,829
Interest-bearing due from banks................................................. 160 5,470
----------- -----------
Cash and cash equivalents.............................................. 17,159 13,299
Interest-bearing deposits....................................................... 2,000 3,000
Investment securities available-for-sale........................................ 51,683 35,637
Investment securities, at amortized cost (estimated market value of
$27,728 in 1997 and $9,399 in 1996)........................................ 27,466 9,347
Stock in Federal Home Loan Bank of Seattle, at cost............................. 11,456 7,471
Mortgage-backed securities available-for-sale................................... 31,388 44,909
Mortgage-backed securities, at amortized cost (estimated market value of
$119,193 in 1997 and $59,278 in 1996)...................................... 117,781 60,038
Loans available-for-sale........................................................ 3,700 3,967
Loans receivable, net........................................................... 626,577 364,226
Interest receivable............................................................. 6,957 3,695
Premises and equipment, net..................................................... 29,291 13,758
Core deposit intangible......................................................... 5,276 -
Goodwill ....................................................................... 15,562 -
Cash surrender value of life insurance policies................................. 6,120 3,183
Other assets.................................................................... 3,223 1,401
----------- -----------
$ 955,639 563,931
=========== ===========
- -------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Deposits ....................................................................... $ 630,869 350,212
Repurchase agreements........................................................... 7,786 -
Borrowed funds.................................................................. 191,450 125,838
Advances from borrowers for taxes and insurance................................. 3,753 3,255
Income taxes current and deferred............................................... 3,504 1,961
Accrued interest payable........................................................ 3,593 1,219
Accrued expenses and other liabilities.......................................... 10,425 2,839
----------- -----------
Total liabilities...................................................... 851,380 485,324
----------- -----------
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized;
none outstanding....................................................... - -
Common stock, $.01 par value, 10,000,000 shares authorized;
5,798,713 shares issued, 5,564,904 outstanding in 1997; 4,628,818
shares issued, 4,395,204 outstanding in 1996........................... 56 46
Paid-in capital............................................................ 67,941 45,451
Common stock acquired by ESOP/RRP.......................................... (2,936) (3,558)
Treasury stock, at cost ................................................... (3,081) (3,079)
Net unrealized loss on securities available-for-sale....................... (35) (226)
Retained earnings.......................................................... 42,314 39,973
----------- -----------
Total stockholders' equity............................................. 104,259 78,607
----------- -----------
Commitments and contingencies
$ 955,639 563,931
=========== ===========
Book value per common share................................................ $ 18.74 17.88
=========== ==========
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
WesterFed Financial Corporation and Subsidiaries
<TABLE>
<CAPTION>
Consolidated Statements of Income
- --------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Year Ended June 30,
-----------------------------------------
1997 1996 1995
-----------------------------------------
<S> <C> <C> <C>
Interest income:
Loans receivable.................................................. $ 37,923 28,640 23,191
Mortgage-backed securities available-for-sale..................... 2,844 4,214 3,482
Mortgage-backed securities........................................ 5,341 4,953 5,745
Investment securities available-for-sale.......................... 3,185 2,891 3,502
Investment securities............................................. 699 878 260
Interest-bearing deposits......................................... 1,045 787 1,423
Other............................................................. 223 181 180
---------- ---------- ----------
Total interest income......................................... 51,260 42,544 37,783
---------- ---------- ----------
Interest expense:
NOW and money market demand....................................... 2,029 1,740 1,913
Savings ......................................................... 2,223 1,940 2,110
Certificates of deposit........................................... 14,737 12,074 9,653
Cost of Swaps and Caps............................................ 249 331 382
---------- ---------- ----------
19,238 16,085 14,058
Advances from FHLB - Seattle and other borrowed funds............. 9,169 8,652 6,926
---------- ---------- ----------
Total interest expense........................................ 28,407 24,737 20,984
---------- ---------- ----------
Net interest income........................................... 22,853 17,807 16,799
Provision for loan losses.............................................. 400 - -
---------- ---------- ----------
Net interest income after provision for loan losses........... 22,453 17,807 16,799
---------- ---------- ----------
Non-interest income:
Loan origination fees............................................. 667 348 414
Service fees...................................................... 3,034 2,120 1,762
Net gain on sale of loans and securities available-for-sale....... 678 577 279
Other............................................................. 306 267 215
---------- ---------- ----------
Total non-interest income..................................... 4,685 3,312 2,670
---------- ---------- ----------
Non-interest expenses:
Compensation and employee benefits................................ 9,342 7,523 7,446
Net occupancy expense of premises................................. 1,373 880 812
Equipment and furnishings expense................................. 1,009 643 553
Data processing expense........................................... 962 632 621
Federal insurance premium......................................... 517 806 806
SAIF assessment................................................... 2,297 - -
Intangibles amortization.......................................... 532 - -
Marketing and advertising......................................... 571 559 456
Other............................................................. 3,965 2,961 2,174
---------- ---------- ----------
Total non-interest expense.................................... 20,568 14,004 12,868
---------- ---------- ----------
Income before income taxes.................................... 6,570 7,115 6,601
Income taxes ......................................................... 2,063 2,556 2,473
---------- ---------- ----------
Net income.................................................... $ 4,507 4,559 4,128
========== ========== ==========
Net income per common share............................................ $ .96 1.07 .96
========== ========== ==========
Weighted average common shares outstanding for earnings per share...... 4,711,551 4,259,109 4,313,615
=========== ========== ==========
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
WesterFed Financial Corporation and Subsidiaries
<TABLE>
<CAPTION>
Consolidated Statements of Stockholders' Equity
- ----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except share data) Net
unrealized
gain (loss)
on securities
Common Paid-in ESOP/ Treasury available- Retained
stock capital RRP stock for-sale earnings Total
----- ------- --- ----- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
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) - - - -
ESOP shares committed to be released........ - 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
ESOP shares committed to be released........ - 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
Net income.................................. - - - - - 4,507 4,507
ESOP shares committed to be released........ - 265 227 - - - 492
Amortization of RRP......................... - - 499 - - - 499
Shares forfeited by RRP participants - 195 shares - - 2 (2) - - -
Common stock acquired by RRP (5,418 shares). - 106 (106) - - - -
Common stock options exercised (13,768 shares) - 184 - - - - 184
Common stock issued (534 shares)............ - 10 - - - - 10
Security Bancorp acquisition:
Issuance of 1,150,175 shares, net of issuance
costs of $200...................... 10 21,052 - - - - 21,062
Issuance of options allowing holders to
acquire 94,696 shares.............. - 873 - - - - 873
Net change in unrealized loss on securities
available-for-sale, net of income taxes
of $112................................ - - - - 191 - 191
Cash dividends declared ($.45 per share).... - - - - - (2,166) (2,166)
---- ------- ------ ------- -------- -------- ---------
Balance at June 30, 1997.................... $ 56 67,941 (2,936) (3,081) (35) 42,314 104,259
==== ======= ====== ======= ======== ======== =========
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
WesterFed Financial Corporation and Subsidiaries
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
- ----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Year Ended June 30,
------------------------------------------
1997 1996 1995
------------------------------------------
<S> <C> <C> <C>
Net cash provided by operating activities............................ $ 24,105 19,557 28,558
---------- ---------- ---------
Cash flows from investing activities:
Net change in interest-bearing deposits......................... 1,000 (898) 216
Purchases of:
FHLB stock.................................................. - (200) (622)
Investment securities....................................... (9,956) (4,594) (12,772)
Investment securities available-for-sale.................... (79,804) (31,325) (19,828)
Mortgage-backed securities.................................. (5,950) (990) (9,905)
Mortgage-backed securities available-for-sale............... (983) (21,274) (11,596)
Proceeds from maturities:
Investment securities....................................... 9,351 8,100 17,000
Investment securities available-for-sale.................... 61,289 40,536 -
Proceeds from sales of:
Investment securities available-for-sale.................... 5,192 3,840 4,470
Mortgage-backed securities available-for-sale............... 31,937 30,862 10,114
Principal payments from:
Investment securities available-for-sale.................... 385 1,102 695
Mortgage-backed securities.................................. 8,897 8,896 7,764
Mortgage-backed securities available-for-sale............... 14,113 20,721 9,477
Net change in loans receivable.................................. (43,911) (53,541) (50,823)
Proceeds from sales of real estate owned........................ - - 480
Purchases of premises and equipment............................. (2,426) (3,253) (1,982)
Acquisition of Security Bancorp, net of cash and cash
equivalents acquired of $16,013............................. (10,776) - -
---------- ---------- ---------
Net cash used in investing activities.................. (21,642) (2,018) (57,312)
---------- ---------- ---------
Cash flows from financing activities:
Net change in deposits.......................................... (25,093) (9,667) (18,599)
Net change in repurchase agreements............................. 974 - -
Proceeds from borrowings........................................ 136,090 77,720 115,800
Payments on borrowings.......................................... (108,606) (86,658) (66,290)
Net change in advances from borrowers for taxes
and insurance............................................... (295) (54) 298
Dividends paid to stockholders.................................. (1,867) (955) (970)
Proceeds from exercise of options and stock issuances........... 194 - -
Payments to acquire treasury stock.............................. - - (3,057)
---------- ---------- ---------
Net cash provided by (used in) financing activities.... 1,397 (19,614) 27,182
---------- ---------- ---------
Net increase (decrease) in cash and cash equivalents................. 3,860 (2,075) (1,572)
Cash and cash equivalents at beginning of year....................... 13,299 15,374 16,946
---------- ---------- ---------
Cash and cash equivalents at end of year............................. $ 17,159 13,299 15,374
========== ========== =========
Supplemental disclosure of cash flow information:
Payments during the period for:
Interest.................................................... $ 8,942 8,938 6,948
Income taxes, net........................................... 3,014 2,441 1,964
========== ========== =========
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
(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. In
connection with the determination of the allowance 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. 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 is susceptible to changes in market conditions.
Management believes the allowance for loan losses 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 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 allowance for loan losses. Such agencies may
require the Bank to recognize additions to the allowance 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 SFS Industries, 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 daily
interest demand deposits, non-interest-bearing deposits with banks and
interest-bearing deposits having original maturities of three months or less.
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.
Trading account securities are adjusted to market value through earnings. There
were no trading account securities during the years ended June 30, 1997 or 1996.
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.
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."
31
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Stock in Federal Home Loan Bank
Member institutions of the Federal Home Loan Bank (FHLB) System are required to
hold common stock of its district FHLB according to predetermined formulas. FHLB
provides a source of borrowed funds for its member institutions which are
secured by this FHLB stock.
Loans Receivable, Net
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.
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 estimated 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.
Prior to January 1, 1997, the cost of loan servicing rights acquired is included
in other assets and amortized in proportion to, and over the period of,
estimated net servicing revenues. When participating interests in loans sold had
an average contractual interest rate, adjusted for normal servicing costs, which
differed from the agreed yield to the purchaser, gains or losses were recognized
equal to the present value of such differential over the estimated remaining
life of such loans. The resulting excess servicing fees receivable is currently
amortized over the estimated life of the serviced loans using an interest
method.
The cost of loan servicing rights, 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.
In June 1996, the Financial Accounting Standards Board (FASB) issued SFAS No.
125, "Accounting of Transfers and Servicing of Financial Assets and
Extinguishments 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. The Bank adopted the
provisions of SFAS No. 125 on January 1, 1997, and adoption did not have a
material effect on the financial position or results of operations of the Bank.
Amount of capitalized loan servicing rights are included in Other Assets. See
Note 19.
32
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
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.
The Bank also provides a reserve for losses on specific loans which are deemed
to be impaired. 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 estimated current value by anticipated
selling costs. The Bank's impaired loans are the same as 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, 1997 and 1996.
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.
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 ranging from 5 to 40 years.
Long-Lived Assets
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. 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.
Goodwill
Goodwill reflects the excess of cost over fair value of net assets which were
acquired during 1997. Note 22 more fully describes the purchase transaction.
Goodwill is amortized over 25 years which approximates the periods estimated to
be benefited from the assets acquired and liabilities assumed. Accumulated
amortization at June 30, 1997 was $200.
33
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Core Deposit Intangible
Core deposit intangible represents the intangible value of depositor
relationships resulting from deposit liabilities assumed in the Security Bancorp
acquisition and is amortized using an accelerated method based on an estimated
runoff of the related deposits, not exceeding 10 years. Accumulated amortization
at June 30, 1997 was $332.
Collateralized Mortgage Obligations
Bonds issued are recorded at par value net of discounts. Discounts are accreted
to interest expense using the level-yield method over the estimated life of the
bonds.
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.
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.
Stock Based Compensation
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 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. The Bank adopted the provisions of
SFAS No. 123 on July 1, 1996. Management retained the intrinsic value method of
accounting for stock based compensation granted to employees.
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. Unallocated ESOP shares are excluded from the weighted average
common shares outstanding calculation, while allocated common 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 do not differ for primary and fully diluted earnings per share.
(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 after deducting stock offering expense
of $1,309. WesterFed used $21,529 to purchase 100 percent of the common stock of
WFSB.
34
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
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 1.5%
of adjusted total assets, a minimum 3.0% core capital ratio and an 8.0%
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 3.0% 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 3.0%, 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.
WFSB is in compliance with capital requirements at June 30, 1997 and 1996 as
follows:
<TABLE>
<CAPTION>
1997
--------------------------------------------------
Regulatory Capital
Percent(a) Amount Requirements Excess
---------- ------ ------------ ------
<S> <C> <C> <C> <C>
Tangible capital............................................ 8.5% $ 79,768 14,016 65,752
Core capital................................................ 8.5 79,768 28,033 51,735
Risk-based capital.......................................... 14.5 84,393 46,424 37,969
====== ========= ======== =========
1996
--------------------------------------------------
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
====== ========= ======== =========
</TABLE>
(a) Based upon a percentage of adjusted tangible assets for tangible and core
capital and risk-adjusted assets for risk-based capital.
35
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
The following is a reconciliation of capital as shown on the consolidated
financial statements and tangible, core and risk-based regulatory capital of
WFSB at June 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997
-----------------------------------------
Risk-
Tangible Core Based
Capital Capital Capital
------- ------- -------
<S> <C> <C> <C>
Capital per consolidated financial statements........................ $ 104,259 104,259 104,259
Less: Nonqualifying equity...................................... (3,597) (3,597) (3,597)
Goodwill and other intangibles............................ (20,838) (20,838) (20,838)
Nonqualifying purchased mortgage loan servicing........... (14) (14) (14)
Unrealized losses on certain securities
available-for-sale....................................... (42) (42) (42)
Add: General loan valuation allowances......................... - - 4,625
---------- --------- ---------
Regulatory capital................................................... $ 79,768 79,768 84,393
========== ========= =========
1996
------------------------------------------
Risk-
Tangible Core Based
Capital Capital Capital
------- ------- -------
Capital per consolidated financial statements........................ $ 78,607 78,607 78,607
Less: Nonqualifying equity...................................... (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" institution 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
14.5%, 13.8% and 8.5% at June 30, 1997. The Bank's total risk-based, Tier 1 and
core capital ratios were 21.2%, 20.6% and 11.3% at June 30, 1996.
- --------------------------------------------------------------------------------
36
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
(4) INVESTMENT SECURITIES
The amortized cost and estimated market values of investment securities at
June 30, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1997
--------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Investments held-to-maturity:
Federal agency obligations........................... $ 18,804 184 - 18,988
U.S. Government obligations.......................... 297 1 - 298
Corporate obligations................................ 5,980 66 - 6,046
Other investments.................................... 2,385 13 (2) 2,396
--------- ------ ------- ---------
Total investment securities held-to-maturity.... $ 27,466 264 (2) 27,728
========= ====== ======= =========
Investments available-for-sale:
Federal agency obligations........................... $ 46,067 113 (211) 45,969
Corporate obligations................................ 5,622 54 (1) 5,675
Other ............................................ 3 36 - 39
--------- ------ ------- ---------
Total investment securities available-for-sale.. $ 51,692 203 (212) 51,683
========= ====== ======= =========
1996
---------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---- ----- ------ -----
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>
37
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
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, 1997, by contractual maturity, are shown below:
<TABLE>
<CAPTION>
Fair
Cost Value
---- -----
Investment held-to-maturity
Due in:
<S> <C> <C>
Less than one year......................................................... $ 198 199
One to five years.......................................................... 24,989 25,243
Five to ten years.......................................................... 235 234
After ten years............................................................ 2,044 2,052
--------- ---------
.................................................................. $ 27,466 27,728
========= =========
Investments available-for-sale
Due in:
Less than one year......................................................... $ 16,140 16,075
One to five years.......................................................... 33,955 34,041
After five years........................................................... 1,594 1,528
Other .................................................................. 3 39
--------- ---------
.................................................................. $ 51,692 51,683
========= =========
</TABLE>
Gross proceeds from sales of investment securities available-for-sale for 1997,
1996 and 1995 were $5,192, $3,840 and $4,470, respectively. These sales resulted
in gross gains of $18 and $23 in 1997 and 1996, respectively, and gross losses
of $34, $27 and $30 in 1997, 1996 and 1995, respectively.
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, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997
---------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Mortgage-backed securities held-to-maturity:
FHLMC ............................................. $ 49,630 354 (200) 49,784
GNMA ................................................. 18,291 223 - 18,514
Collateralized mortgage obligations - federal agency.. 45,815 842 (86) 46,571
Other................................................. 4,045 279 - 4,324
--------- ------- ------ ---------
Total mortgage-backed securities
held-to-maturity............................. $ 117,781 1,698 (286) 119,193
========= ======= ====== =========
</TABLE>
38
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1997
---------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Mortgage-backed securities available-for-sale:
FHLMC ............................................. $ 16,496 106 (162) 16,440
GNMA ................................................. 562 - (3) 559
FNMA ................................................. 12,372 73 (101) 12,344
Other................................................. 2,004 41 - 2,045
--------- ------- ------ ---------
Total mortgage-backed securities
available-for-sale........................... $ 31,434 220 (266) 31,388
========= ======= ====== =========
1996
---------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---------- ---------- ---------- ---------
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
========= ======= ======= =========
</TABLE>
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Gross proceeds from sales of mortgage-backed securities available-for-sale for
1997 and 1996 were $31,937 and $30,862, resulting in gross gains of $76 and $673
and gross losses of $19 and $279, respectively.
Gross proceeds from sales of mortgage-backed securities for 1995 were $10,114.
These sales resulted in gross gains of $258, and gross losses of $118 for 1995.
Mortgage-backed securities with a recorded value of approximately $1,920 and
$2,295 have been pledged to secure collateralized mortgage obligations at June
30, 1997 and 1996, 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. The contractual weighted average life of mortgage-backed
securities is 19.5 years.
On November 15, 1995, the 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 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 at the date of reclassification.
Mortgaged backed securities with amortized cost of $11,289 at June 30, 1997 were
pledged to secure securities sold under repurchase agreements. The approximate
market value of securities pledged at June 30, 1997 was $11,475.
- --------------------------------------------------------------------------------
39
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
(6) LOANS RECEIVABLE
A summary of loans receivable at June 30, 1997 and 1996 is summarized as
follows:
<TABLE>
<CAPTION>
1997 1996
------------- ---------
Loans secured by real estate:
<S> <C> <C>
1-4 residential units................................................... $ 334,894 273,389
5 or more residential units............................................. 40,237 19,939
Construction............................................................ 19,858 12,977
Commercial.............................................................. 49,348 17,769
Agriculture............................................................. 7,970 -
Other nonresidential.................................................... 701 549
FHA insured or VA guaranteed............................................ 13,683 7,464
---------- ----------
Total real estate loans ............................................ 466,691 332,087
Less:
Net deferred loan origination fees...................................... (1,813) (1,625)
Undisbursed loan funds.................................................. (9,489) (4,245)
Purchased discounts..................................................... (1,383) -
Allowance for loan losses............................................... (2,631) (1,879)
---------- ----------
Net real estate loans............................................... 451,375 324,338
Other loans:
Commercial (Non real estate)............................................ 28,924 -
Agriculture (Non real estate)........................................... 18,866 -
Loans to depositors, secured by deposits................................ 4,101 2,337
Indirect consumer loans................................................. 40,708 2,827
Other consumer loans - real estate secured.............................. 58,551 30,814
Other consumer loans.................................................... 29,772 8,003
Allowance for loan losses............................................... (2,020) (126)
----------- ----------
Net other loans..................................................... 178,902 43,855
---------- ----------
630,277 368,193
Less loans available-for-sale................................................ (3,700) (3,967)
---------- ----------
$ 626,577 364,226
========== ==========
</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 loans at June 30, 1997 and 1996 follows:
<TABLE>
<CAPTION>
1997 1996
------- -----
<S> <C> <C>
Nonaccrual loans................................................................ $ 1,517 404
Loans 90 days or more delinquent and still accruing............................. 836 311
------- -----
Total nonperforming loans.................................................. $ 2,353 715
======= =====
</TABLE>
40
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
If interest income on nonaccrual loans had been accrued in accordance with their
original terms, approximately $71, $22 and $33 of interest income would have
been recorded in 1997, 1996 and 1995, respectively. Interest income recognized
on nonaccrual loans during the years ended June 30, 1997, 1996, and 1995 was
insignificant. At June 30, 1997, there were no commitments to lend additional
funds to borrowers whose loans are classified as nonperforming.
An analysis of the allowance for loan losses for each of the years ended June
30, 1997, 1996, and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year...................................... $ 2,005 2,011 2,030
Reserves acquired................................................. 2,481 - -
Provision charged to operations................................... 400 - -
Charge-offs....................................................... (253) (11) (28)
Recoveries........................................................ 18 5 9
-------- -------- -------
Balance at end of year............................................ $ 4,651 2,005 2,011
======== ======== =======
</TABLE>
- --------------------------------------------------------------------------------
(7) INTEREST RECEIVABLE
A summary of interest receivable at June 30, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Loans (net of allowance for uncollected interest of $82 and $22 at
June 30, 1997 and 1996, respectively)........................................ $ 4,768 2,322
Mortgage-backed securities........................................................ 1,004 805
Investment securities............................................................. 1,148 500
Interest-bearing deposits......................................................... 37 68
-------- -------
$ 6,957 3,695
======== =======
</TABLE>
- --------------------------------------------------------------------------------
(8) PREMISES AND EQUIPMENT
Premises and equipment at June 30, 1997 and 1996 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land............................................................................. $ 6,007 3,861
Office buildings and leasehold improvements...................................... 28,013 15,698
Furniture, fixtures and equipment................................................ 7,509 5,356
--------- --------
41,529 24,915
Less accumulated depreciation and amortization................................... (12,238) (11,157)
--------- --------
$ 29,291 13,758
========= ========
</TABLE>
- --------------------------------------------------------------------------------
41
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
(9) DEPOSITS
Deposits at June 30, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
Weighted Weighted
average average
1997 yield 1996 yield
---- ----- ---- -----
<S> <C> <C> <C> <C>
Certificates of deposit............................... $ 376,252 5.53% 211,457 5.82%
Passbook and savings accounts......................... 102,923 2.80 64,889 3.00
Money market accounts................................. 49,062 3.94 24,018 3.46
NOW accounts.......................................... 76,582 1.55 49,848 1.66
Noninterest-bearing demand............................ 26,050 - - -
---------- ----------
$ 630,869 4.24 $ 350,212 4.54
========== ==========
</TABLE>
Certificates of deposit at June 30, 1997 mature as follows:
<TABLE>
<CAPTION>
Less One to Two to Three Four to
than two three to four five- There-
one year years years years years after Total
-------- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
2.00% to 3.99%............................ $ 941 21 - - - - 962
4.00% to 4.99%............................ 8,580 782 56 - - - 9,418
5.00% to 5.99%............................ 200,201 43,795 5,687 2,670 1,871 70 254,294
6.00% to 6.99%............................ 21,457 16,303 8,056 2,458 1,750 1 50,025
7.00% to 8.99%............................ 17,314 6,463 2,407 - - - 26,184
-------- ------- ------- ------- -------- ---- ---------
248,493 67,364 16,206 5,128 3,621 71 340,883
Jumbo..................................... 26,258 6,109 2,313 259 430 - 35,369
-------- ------- ------- ------- -------- ---- ---------
Total certificates of deposit........ $ 274,751 73,473 18,519 5,387 4,051 71 376,252
======== ======= ======= ======= ======== ==== =========
</TABLE>
- --------------------------------------------------------------------------------
(10) BORROWED FUNDS
Advances from the FHLB and other borrowings at June 30, 1997 and 1996 are
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Advances from Federal Home Loan Bank of Seattle............................ $ 190,338 124,663
Collateralized mortgage obligations........................................ 797 1,175
8.5% contract payable...................................................... 315 -
---------- --------
$ 191,450 125,838
========== ========
</TABLE>
42
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Advances from Federal Home Loan Bank of Seattle bear interest at rates from
4.93% to 8.20% and mature as follows:
<TABLE>
<CAPTION>
Years ending June 30
--------------------
<S> <C>
1998.................................................... 57,886
1999.................................................... 35,668
2000.................................................... 5,000
2001.................................................... 16,027
2002.................................................... 51,658
Thereafter.............................................. 24,099
----------
$ 190,338
==========
</TABLE>
Advances from the FHLB are secured by pledges of FHLB stock of $11,456 and
$7,471 at June 30, 1997 and 1996, respectively, and a blanket assignment (the
blanket assignment) of the Bank's unpledged, qualifying mortgage loans,
mortgage-backed securities and investment securities.
The contract payable requires monthly payments of principal and interest of $3,
maturing in November 2016. The contract payable is secured by real estate.
- --------------------------------------------------------------------------------
(11) INCOME TAXES
Prior to July 1, 1996, if certain conditions were met, the Bank was allowed a
special bad debt deduction in determining income for tax purposes. The deduction
was based on either a specified experience formula or a percentage of taxable
income before such deduction (most recently 8%). Under new legislation enacted
in August 1996, the special bad debt deduction was eliminated effective for tax
years beginning after December 31, 1995.
Retained earnings at June 30, 1997 includes approximately $13,817 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. This amount
is treated as a permanent difference and 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
were provisions to recapture bad debt deductions taken in excess of $13,817 (the
base year reserves). The Bank has provided a deferred tax liability of
approximately $902 on the excess deductions which will be payable over six years
beginning in 1997. At June 30, 1997, management does not foresee any events
under which the base year amount of $13,817 would become taxable.
A summary of the provision for income taxes for the years ended June 30, 1997,
1996 and 1995 follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
Federal:
<S> <C> <C> <C>
Current...................................................... $ 2,095 1,894 1,567
Deferred..................................................... (408) 254 466
-------- -------- -------
1,687 2,148 2,033
-------- -------- -------
State:
Current...................................................... 440 377 362
Deferred..................................................... (64) 31 78
-------- -------- -------
376 408 440
-------- -------- -------
$ 2,063 2,556 2,473
======== ======== =======
</TABLE>
43
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
The effective tax rates for 1997, 1996 and 1995 are 31.4%, 35.9% and 37.5%,
respectively.
In the fourth quarter of 1997, the Bank entered into split-dollar life insurance
agreements with certain key officers which resulted in the reversal of
previously provided deferred income taxes related to the increase in cash
surrender values.
A reconciliation between the income tax expense and the amount computed by
multiplying the applicable statutory federal income tax rate for 1997, 1996 and
1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax expense................................... $ 2,234 2,419 2,244
Accumulated earnings on life insurance policies................... (53) (50) (44)
State income taxes, net of Federal income tax benefit............. 248 270 291
Reversal of deferred taxes - cash surrender value increases....... (397) - -
Goodwill amortization............................................. 68 - -
Tax credit........................................................ (74) - -
Other............................................................. 37 (83) (18)
-------- -------- -------
$ 2,063 2,556 2,473
======== ======== =======
</TABLE>
The tax effects of temporary differences that give rise to deferred tax assets
and liabilities at June 30, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
Deferred tax assets:
<S> <C> <C>
Loans, principally allowance for loan losses................................... $ 1,789 771
Purchased excess tax bases..................................................... 1,400 -
Loan servicing premium......................................................... 326 -
Deposits, principally difference in bases...................................... 182 -
Investment securities, principally differences in bases........................ 781 -
Employee benefits, principally deferred compensation and accrued vacation...... 1,199 468
Market value adjustment of investment securities and mortgage backed
securities available-for-sale.............................................. 20 132
Other.......................................................................... 135 -
-------- --------
Gross deferred income tax assets........................................... 5,832 1,371
-------- --------
Deferred tax liabilities:
FHLB stock dividends........................................................... 2,626 1,631
Core deposit intangible........................................................ 2,029 -
Deferred loan fees and origination costs....................................... 348 575
Life insurance contract income................................................. 470 489
Loans, due primarily to tax bad debt reserves in excess of base year
amount..................................................................... 902 415
Loans, principally difference in bases......................................... 525 -
Fixed assets, principally difference in bases and depreciation................. 2,296 191
Other.......................................................................... - 199
-------- --------
Gross deferred income tax liabilities...................................... 9,196 3,500
-------- --------
Net deferred income tax liability.......................................... $ 3,364 2,129
======== ========
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the existence of, or generation of, taxable income in the periods
which
44
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
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, 1997 and 1996, 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 leases certain land, premises and equipment from third parties under
operating leases. The total future minimum rental commitments required under
operating leases that have initial or remaining noncancellable lease terms in
excess of one year at June 30, 1997 are as follows:
Years ended June 30, Amount
-------------------- -----------
1998 $ 145
1999 65
2000 50
2001 48
2002 36
Thereafter 1,273
---------
Total minimum future rental expense $ 1,617
=========
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 subsequent to June 30, 1997 are as follows:
Years ended June 30, Amount
-------------------- -----------
1998 $ 569
1999 466
2000 394
2001 329
2002 172
Thereafter 75
---------
Total minimum future rental income $ 2,005
=========
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). Prior to September 1, 1996 the Bank paid premiums of
approximately 0.23% of deposits. On September 30, 1996, the Deposit Insurance
Funds Act of 1996 was signed, which authorized the FDIC to impose a special
assessment on certain deposits held by thrift institutions. This special
assessment, which was based on $.657 per one hundred dollars of outstanding
deposits at March 31, 1995, was intended to recapitalize the SAIF. The
assessment of $2,297 and a related tax benefit of approximately $900 were
recorded by the Bank on September 30, 1996. The assessment was paid in November
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 liquidity, financial condition or results of
operations.
45
<PAGE>
The Bank is constructing a new branch facility in Billings, Montana and also
anticipates a significant capital expenditure related to information technology.
The total cost of these projects is anticipated to be approximately $4,200 at
June 30, 1997.
- --------------------------------------------------------------------------------
(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 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, 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. Dividends on common shares
held by the ESOP are paid to the ESOP and, together with Bank contributions, are
used by the ESOP to repay principal and interest on the outstanding note. 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. The Bank recognized expense relating to the
ESOP of $492, $446 and $396 during 1997, 1996 and 1995 respectively.
The ESOP shares as of June 30, 1997 and 1996 were as follows:
1997 1996
---- ----
Allocated shares......... 114,842 87,193
Unallocated shares....... 240,091 267,740
---------- ----------
Original ESOP
common shares....... 354,933 354,933
Shares distributed to
participants.......... (10,847) (2,567)
---------- ----------
Common shares held
by ESOP............... 344,086 352,366
========== ==========
At June 30, 1997, the fair value of the unallocated shares was approximately
$4,922.
Recognition and Retention Plan (RRP)
Under the RRP, common stock has been granted to certain officers, directors and
employees. Deferred compensation is recorded at the date of the stock award
based on the fair value of the shares granted. 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 classified 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 $499, $473 and $473 has been recorded for 1997, 1996 and
1995, 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 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).
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
The Bank has granted incentive stock options and nonqualified stock options (the
options). The term of the options may not exceed 10 years from the date the
options are granted. Incentive stock options granted to stockholders with more
than 10% of the total combined voting power of all classes of stock of the
Company shall be granted at an option price of not less than 110% of the fair
market value at the grant date, and the term of the option may not exceed 5
years from the date of grant. For incentive stock options, a maximum of 10,000
shares per Stock Option Plan participant are exercisable per year. All incentive
and nonqualified stock options awarded are exercisable at the grant date.
Equity Incentive Plan
In conjunction with the acquisition of Security Bancorp (see Note 22), the
stockholders of the Bank approved the Equity Incentive Plan (the "Incentive
Plan"). The Incentive Plan provides for granting various awards to directors,
officers, and employees of the Bank or any of its parent or subsidiary
corporations of various awards up to 250,000 shares of Common Stock. The
Incentive Plan provides for awards in the form of stock options, stock
appreciation rights, other securities and property and restricted stock
(collectively, Incentive Awards).
The Bank has granted Incentive Awards during the year ended June 30, 1997 which
allow holders to acquire 42,000 common shares. The term of the options may not
exceed 15 years from the date the options are granted. 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.
During any calendar year, no participant may be granted Incentive Awards under
the Incentive Plan with respect to more than 50,000 shares.
The following table reflects options for both the Stock Option Plan and
Incentive Plan:
<TABLE>
<CAPTION>
Common
Shares Exercise Price
------ --------------
<S> <C> <C> <C>
Year ending June 30, 1997:
Options outstanding, beginning of year......................................... 419,707 $ 10.00 - 12.13
Granted in conjunction with acquisition of Security Bancorp.................... 36,668 3.65 - 6.54
Granted in conjunction with acquisition of Security Bancorp.................... 58,028 10.67 - 12.72
Granted........................................................................ 72,169 16.75 - 21.50
Exercised...................................................................... (13,768) 10.00 - 14.12
----------
Outstanding, end of year....................................................... 572,804 $ 3.65 - 21.50
========== ==============
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
========== ==============
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
========== ==============
</TABLE>
47
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Information regarding options outstanding and exercisable at June 30, 1997
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------- ---------------------------------
Weighted
Range of Weighted average Weighted
exercise Common average remain Common average
price shares exercise price life in yrs. shares exercise price
----- ------ -------------- ------------ ------ --------------
<S> <C> <C> <C> <C> <C> <C>
$ 3.65 - 6.54 36,668 $ 5.36 4.7 36,668 $ 5.36
10.00 - 12.72 463,967 10.28 6.6 453,032 10.26
16.75 - 21.50 72,169 20.51 9.6 30,169 19.13
----------- -----------
572,804 519,869
=========== ===========
</TABLE>
The Bank applies Accounting Principles Board Opinion 25 and related
interpretations in accounting for stock option benefit plans. Accordingly, no
compensation cost has been recognized in the Bank's consolidated statement of
operations for options granted under the plan. Had compensation cost for the
options granted under the Bank's plan been determined based on the fair value at
the grant dates for awards under the plan consistent with the method of SFAS No.
123, the Bank's net income and income per common share amounts would have been
as follows:
1997
----
Net income, as reported............. $ 4,507
========
Net income, pro forma............... $ 4,367
========
Income per common share as reported. $ .96
========
Income per share, pro forma......... $ .93
========
The fair value of the options granted during the year ended June 30, 1997 was
estimated using the Black-Scholes model with the following assumptions for 1997:
dividend yield of 2.4%; expected life of 10 years; volatility of 19% and a
risk-free interest rate of 6.4%. No options were granted during the year ended
June 30, 1996. The effects of applying SFAS No. 123 in this pro-forma disclosure
may not be indicative of future results as the pro forma disclosures do not
apply to awards prior to July 1, 1995. Additional awards in future years are
anticipated.
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 $48, $321 and $286 for the years ended
June 30, 1997, 1996 and 1995, respectively.
Former Security Bank employees are included in a noncontributory multi-employer
trustee defined benefit pension plan. Actuarially determined pension costs are
funded as required by the plan trustee. Contributions to the plan and
administrative charges amounted to approximately $38 during the year ended June
30, 1997.
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 $74, $144 and $142 for 1997, 1996 and 1995, respectively.
Former key employees of Security Bank are covered by deferred compensation
agreements that provide for predetermined periodic payments over 15 years upon
retirement or death. The agreements specify a vesting
48
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
schedule where by 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 $12 for the year ended June 30, 1997.
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 1997,
1996 and 1995 totaled approximately $77, $86 and $85, respectively.
Former employees of Security Bank are covered under a separate 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 year ended June 30,
1997 was approximately $26.
Employment Agreements
The Bank has entered into employment contracts with twelve senior officers that
provide benefits under certain conditions following a termination without cause
or a change in control of the Bank.
- --------------------------------------------------------------------------------
(14) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers and to
reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit and interest rate cap
agreements. 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.
<PAGE>
Commitments to Extend Credit
Commitments to extend credit at June 30, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Fixed rate.......................................................................... $ 17,375 18,654
Variable rate....................................................................... 8,780 1,888
--------- ---------
$ 26,155 20,542
========= =========
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have terms which specify commitment periods of 45 days at interest
rates which approximate current market rates, adjusted for management's
assessment of the creditworthiness of the customer. In some cases, customers may
be required to pay a fee for the Bank's commitment to lend. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
49
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
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, 1997:
<TABLE>
<CAPTION>
Notional principal amount Agreement termination Cap
------------------------- --------------------- ---
<S> <C> <C>
$ 5,000 July 1999 6.5%
5,000 July 1999 7.0%
</TABLE>
The counterparty to the cap agreements is the FHLB of Seattle.
- --------------------------------------------------------------------------------
(15) RECENT ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
SFAS No. 128, "Earnings Per Share," was issued in February 1997 and will replace
the presentation of primary earnings per share ("EPS") with a presentation of
basic and diluted EPS on the face of the income statement for all entities with
complex capital structure. SFAS No. 128 also requires a reconciliation of the
numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the equity.
SFAS No. 128 will be effective for the Company December 31, 1997 and earlier
application is not permitted. Once effective, SFAS No. 128 requires restatement
of all prior period EPS data. Pro forma basic and diluted net income per share
as determined under SFAS No. 128 does not differ from the amounts as currently
reported herein.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
The statement establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in a full set
of general-purpose financial statements. SFAS No. 130 requires that all items
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. This statement does not
require a specific format for that financial statement but requires that an
entity display an amount representing comprehensive income for the periods in
the financial statement.
SFAS No. 130 requires that an entity (a) classify items of other comprehensive
income by their nature in a financial statement and (b) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement of financial
position.
This statement is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Bank intends to adopt the provisions of
SFAS No. 130 in fiscal year 1999.
- --------------------------------------------------------------------------------
50
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
(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 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net income................................................................... $ 4,507 4,559 4,128
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of:
Deferred loan origination fees...................................... (439) (445) (447)
Premiums and discounts on securities, loans and borrowings.......... (1,138) (63) 482
RRP deferred compensation............................................... 499 473 473
ESOP shares committed to be released.................................... 492 446 396
Provision for:
Loan losses......................................................... 400 - -
Losses on real estate owned......................................... - - 3
Net (gain) loss on sales of:
Mortgage-backed securities available-for-sale....................... (57) (394) (139)
Investment securities available-for-sale............................ 16 4 30
Loans............................................................... (637) (187) (170)
Premises and equipment.............................................. - 127 5
Depreciation and amortization of premises and equipment................. 1,208 740 685
Goodwill and core deposit amortization.................................. 532 - -
Federal Home Loan Bank stock dividends.................................. (712) (521) (363)
Origination of loans available-for-sale................................. (54,396) (31,185) (24,896)
Proceeds from sales of loans available-for-sale......................... 55,300 30,365 33,851
Decrease (increase) in interest receivable.............................. (562) 180 (637)
Interest expense credited to deposit accounts........................... 18,704 15,724 13,633
Changes in other assets and liabilities................................. 388 (266) 1,524
-------- --------- ---------
Net cash provided by operating activities.................. $ 24,105 19,557 28,558
======== ========= =========
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
(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 (net of discount of $26)
for 1995. There were no securitizations of loans in 1997 or 1996.
On June 24, 1997, the Bank declared a dividend of approximately $840 which is
recorded in accrued expenses and other liabilities at June 30, 1997.
On June 28, 1996, the Bank declared a dividend of approximately $541 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 which is
recorded in accrued expenses and other liabilities at June 30, 1995.
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 1997 and 1995, the Bank issued common stock under the RRP and recorded
deferred compensation of approximately $106 and $29, respectively. No common
stock was issued under the RRP in 1996.
51
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Real estate owned acquired through foreclosures of loans receivable was
approximately $397 for 1995. No real estate owned was acquired in 1997 or 1996.
Treasury stock of approximately $2, $13 and $8 was recorded due to forfeitures
of unearned RRP shares for the years ended June 30, 1997, 1996 and 1995,
respectively.
In conjunction with the acquisition of Security Bancorp, the Bank issued common
shares valued at $21,062 and options with an intrinsic value of $873.
Loans made to finance sales of real estate owned totaled approximately $37 for
1995. No such loans were made during 1997 or 1996
- --------------------------------------------------------------------------------
(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 and Interest-Bearing Deposits
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.
Stock in Federal Home Loan Bank of Seattle
For FHLB stock, the carrying amount was considered to be a reasonable estimate
of fair value.
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.
Deposits
The fair value of demand deposits, savings deposits and money market accounts
were the amounts payable on demand at June 30, 1997 and 1996. 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.
52
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
The estimated fair values of the Bank's financial instruments at June 30 are as
follows:
<TABLE>
<CAPTION>
1997 1996
------------------------- --------------------------
Book Fair Book Fair
value value value value
----- ----- ----- -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents..................... $ 16,999 16,999 7,829 7,829
Interest-bearing due from banks............... 160 160 5,470 5,470
Interest-bearing deposits..................... 2,000 2,000 3,000 3,000
Investment securities......................... 27,466 27,728 9,347 9,399
Investment securities available-for-sale...... 51,683 51,683 35,637 35,637
Stock in Federal Home Loan Bank of Seattle.... 11,456 11,456 7,471 7,471
Mortgage-backed securities.................... 117,781 119,193 60,038 59,278
Mortgage-backed securities available-for-sale. 31,388 31,388 44,909 44,909
Loans, net.................................... 626,577 628,058 364,226 373,150
Loans available-for-sale...................... 3,700 3,700 3,967 3,967
Financial liabilities:
Deposits...................................... 630,869 630,171 350,212 351,461
Repurchase agreements......................... 7,786 7,786 - -
Borrowed funds................................ 191,450 190,115 125,838 126,127
Off-balance-sheet items:
Interest rate cap agreements: notional
amounts of $10,000 and $35,000............ - 58 - 138
========== ========= ========== =========
</TABLE>
Limitations
The foregoing fair value estimates are made at a specific point in time, based
on pertinent market data and relevant information on the financial instrument.
These estimates do not include any premium or discount that could result from an
offer to sell, at one time, the Bank's entire holdings of a particular financial
instrument or category thereof. Since no market exists for a substantial portion
of the Bank's financial instruments, fair value estimates were necessarily based
on judgements with respect to future expected loss experience, current economic
conditions, risk assessments of various financial instruments involving a myriad
of individual borrowers, and other factors. Given the innately subjective nature
of these estimates, the uncertainties surrounding them and the matters of
significant judgment that must be applied, these fair value estimations cannot
be calculated with precision. Modifications in such assumptions could
meaningfully alter these estimates.
Since these fair value approximations were made solely for on- and off-balance
sheet financial instruments, no attempt was made to estimate the value of
anticipated future business and the value of nonfinancial statement assets and
liabilities. Other important elements which are not deemed to be financial
assets or liabilities include the value of the Bank's retail branch delivery
system, its existing core deposit base, premises and equipment and goodwill.
Further, certain tax implications related to the realization of the unrealized
gains and losses could have a substantial impact on these fair value estimates
and have not been incorporated into any of the estimates.
- --------------------------------------------------------------------------------
53
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
(19) MORTGAGE BANKING ACTIVITIES
Mortgage banking revenues for each of the years in the three-year period ended
June 30, 1997 is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Origination fees................................................. $ 667 348 414
Servicing fees................................................... 694 626 626
Net gains on sales of loans...................................... 637 187 169
-------- ------- ------
Total mortgage banking revenues.................................. $ 1,998 1,161 1,209
======== ======= ======
</TABLE>
Mortgage loans serviced for others are not included in the accompanying
consolidated financial statements. The unpaid balances of these loans were
approximately $268,646, $183,267 and $190,443 at June 30, 1997, 1996 and 1995,
respectively.
Mortgage servicing rights were approximately $1,239 and $132 at June 30, 1997
and 1996, respectively, and are recorded in other assets. Included in the $1,239
for 1997 is $847 of unamortized servicing rights related to the acquisition of
Security Bancorp. Amortization of the mortgage servicing rights was
approximately $70, $54 and $55 for the years ended June 30, 1997, 1996 and 1995,
respectively.
- --------------------------------------------------------------------------------
(20) WESTERFED INFORMATION
The summarized condensed financial information for WesterFed Financial
Corporation as of and for the years ending June 30, 1997 and 1996 are presented
below:
<TABLE>
<CAPTION>
Condensed Balance Sheets 1997 1996
---- ----
Assets:
<S> <C> <C>
Cash and cash equivalents.................................................... $ 4 14
Interest-bearing and due from banks deposits................................. 963 774
Investment securities available-for-sale..................................... 2,541 12,853
Mortgage-backed securities available-for-sale................................ - 3,084
Other assets................................................................. 134 128
Investment in subsidiaries................................................... 102,033 62,300
--------- --------
Total assets........................................................ $ 105,675 79,153
========= ========
Liabilities and Stockholders' Equity:
Other liabilities............................................................ $ 1,416 546
Stockholders' Equity:
Common stock............................................................. 56 46
Additional paid-in capital............................................... 67,941 45,451
Common stock acquired by ESOP/RRP........................................ (2,936) (3,558)
Treasury stock at cost................................................... (3,081) (3,079)
Net unrealized loss on securities available-for-sale..................... (35) (226)
Retained earnings........................................................ 42,314 39,973
--------- --------
Total stockholders' equity.......................................... 104,259 78,607
--------- --------
Total liabilities and stockholders' equity.......................... $ 105,675 79,153
========= ========
</TABLE>
54
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended June 30,
Condensed Statements of Income 1997 1996
---- ----
<S> <C> <C>
Dividends from WFSB............................................................... $ 14,000 1,199
Interest income................................................................... 735 898
Non-interest expense.............................................................. (428) (348)
-------- -------
Income before income taxes................................................... 14,307 1,749
Income taxes .................................................................... (140) (167)
-------- -------
Income before undistributed earnings of subsidiaries......................... 14,167 1,582
Undistributed (distributions in excess of) earnings of subsidiaries............... (9,660) 2,977
-------- -------
Net income................................................................... $ 4,507 4,559
======== =======
Condensed Statements of Cash Flows
Operating Activities:
Net income................................................................... $ 4,507 4,559
Adjustments to reconcile net income to net cash provided by operating activities:
Distributions in excess of (equity in undistributed) earnings
of subsidiaries..................................................... 9,660 (2,977)
Amortization of premiums on investments and mortgage-backed
securities available-for-sale....................................... (298) (225)
ESOP shares committed to be released..................................... 492 446
Net loss on sale of mortgage-backed securities........................... 6 -
Increase in other assets and liabilities, net............................ 561 (250)
-------- -------
Net cash provided by operating activities....................... 14,928 1,553
-------- -------
Investing Activities:
Net change in interest-bearing deposits..................................... (189) 3,006
Purchase of investment and mortgage-backed securities....................... (20,142) (21,782)
Principal payments and sales proceeds of mortgage-backed securities......... 3,059 1,334
Proceeds from maturities of investment securities........................... 30,784 16,846
Acquisition of Security Bancorp, including direct acquisition costs
of $794 ............................................................... (26,789) -
Other....................................................................... 12 -
-------- -------
Net cash used in investing activities.......................... (13,265) (596)
-------- -------
Financing Activities:
Dividends paid to stockholders.............................................. (1,867) (955)
Proceeds from exercise of stock options and stock issuances................. 194 -
-------- -------
Net cash used in financing activities.......................... (1,673) (955)
-------- -------
Increase (decrease) in cash and cash equivalents................................. (10) 2
Cash and cash equivalents at beginning of year................................... 14 12
-------- -------
Cash and cash equivalents at end of year....................... $ 4 14
======== =======
</TABLE>
55
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
Non-Cash Investing and Financing Activities
At June 30, 1997 and 1996, WesterFed recognized WFSB's change in unrealized loss
on securities available-for-sale, net of taxes, of $182 and $(559).
At June 30, 1997, WesterFed reflects an unrealized loss of $9 on securities
available-for-sale, net of taxes. At June 30, 1996, the fair value of WesterFed
securities available-for-sale approximated their recorded cost.
Amortization of the RRP deferred compensation of approximately $499 and $473
recorded at WFSB was recognized by WesterFed through the investment in
subsidiaries account at June 30, 1997 and 1996, respectively.
Also see non-cash activity in Note 17.
- --------------------------------------------------------------------------------
(21) CONDENSED QUARTERLY RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
1997
--------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income................................. $ 17,454 12,585 10,628 10,593
Interest expense................................ 9,623 6,929 5,905 5,950
--------- --------- --------- ---------
Net interest income.................... 7,831 5,656 4,723 4,643
Provision for loan losses....................... (297) (61) (27) (15)
Noninterest income.............................. 1,927 1,020 903 835
Noninterest expense............................. (6,780) (4,606) (3,451) (5,731)
--------- --------- --------- ---------
Income (loss) before income tax
expense............................ 2,681 2,009 2,148 (268)
Income tax (expense) benefit.................... (542) (814) (796) 89
--------- --------- --------- ---------
Net income (loss)...................... $ 2,139 1,195 1,352 (179)
========= ========= ========= =========
Earnings (loss) per share.............. $ .38 .25 .31 (.04)
======== ========= ========= =========
1996
---------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
------- ------- ------- -------
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
Noninterest income.............................. 760 775 688 1,089
Noninterest expense............................. (3,703) (3,458) (3,244) (3,599)
--------- --------- --------- ---------
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
======== ========= ========= =========
</TABLE>
- --------------------------------------------------------------------------------
56
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
(22) ACQUISITION
On February 28, 1997, WesterFed completed the acquisition of Security Bancorp,
accounted for as a purchase transaction and, accordingly, the consolidated
statement of income for 1997 includes the results of operations of Security
Bancorp commencing March 1, 1997. Under this method of accounting, assets and
liabilities of Security Bancorp are adjusted to their estimated fair value and
combined with the historical recorded book values of the assets and liabilities
of the Bank. The actual revaluation of Security Bancorp's net assets acquired is
subject to the completion of studies and evaluations by management. WesterFed
issued 1,150,175 shares of common stock, options to acquire 94,696 common shares
and committed to pay $25,995 in cash for all of the outstanding shares of
Security Bancorp common stock, for total consideration (based on the $18.49 per
share average price of WesterFed common stock on the NASDAQ National Market
System for the twenty business days ended February 12, 1997) of $48,724.
Pursuant to a Merger Agreement, Security Bancorp stockholders were given the
opportunity to elect to receive either cash, WesterFed common stock or a
combination of both in exchange for Security Bancorp common stock. As a result,
stockholders who elected to receive cash or did not make an election, received
$30 for each share of Security Bancorp common stock. Stockholders who elected to
receive stock, or a combination of cash and stock, exchanged approximately
46.42% of the outstanding Security Bancorp common stock in exchange for
WesterFed common stock (based on a ratio of 1.78 shares of WesterFed common
stock for each share of Security Bancorp common stock) and the remainder in
cash. Stockholders who were due a fractional share, received cash in lieu of the
fractional share, paid on the basis of $30 per share. In addition, as of such
date, Security Bank, a federally chartered stock savings bank and wholly-owned
subsidiary of Security Bancorp, merged with and into WFSB.
The premiums paid over the historical carrying value of net assets of Security
Bancorp at the date of purchase were as follows:
Cash consideration paid to Security Bancorp shareholders... $ 25,995
Issuance of common shares, net............................. 21,062
Intrinsic value of options converted....................... 873
Direct acquisition costs................................... 794
---------
Total consideration paid............................... 48,724
Historical net assets acquired............................. (28,761)
---------
Premium paid over historical carrying value................ $ 19,963
=========
The increase (decrease) in net asset values of Security Bancorp as a result of
estimated fair value adjustments are as follows:
Intangible assets:
Goodwill............................................... $ 15,762
Core deposit intangible................................ 5,608
Mortgage servicing rights.............................. 891
---------
Total intangible assets........................... 22,261
---------
Investment securities...................................... (3,162)
Loans...................................................... (1,433)
Premises and equipment..................................... 5,284
Deposits................................................... (528)
Deferred income taxes...................................... (2,459)
---------
Total fair value adjustments...................... $ 19,963
=========
57
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
The premium paid and estimated fair value adjustments have been "pushed down" to
WFSB. The preliminary allocation of purchase price is subject to change as fair
value estimates are finalized.
The estimated fair values of Security Bancorp net assets at the acquisition date
are summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
Cash and due from banks...................................................... $ 16,013
Securities available-for-sale................................................ 33,340
Securities held-to-maturity.................................................. 78,095
Loans........................................................................ 218,281
Premises and equipment....................................................... 14,770
Goodwill..................................................................... 15,762
Core deposit intangible...................................................... 5,608
Mortgage servicing rights.................................................... 891
Other assets................................................................. 9,609
----------
392,369
----------
Deposits..................................................................... $ 287,046
Borrowed funds............................................................... 38,067
Repurchase agreements........................................................ 6,812
Other liabilities............................................................ 11,720
----------
343,645
----------
Fair value of net assets acquired........................................ $ 48,724
==========
</TABLE>
The information below presents on a pro forma basis, amounts as if Security
Bancorp had been acquired as of the beginning of each year presented.
<TABLE>
<CAPTION>
Year ended June 30,
1997 1996
---- ----
<S> <C> <C>
Interest income................................................................... $ 68,854 66,861
Interest expense.................................................................. 38,152 39,470
--------- ---------
Net interest income.......................................................... 30,702 27,391
Provision for loan losses......................................................... 1,774 120
--------- ---------
Net interest income after provision for loan losses.......................... 28,928 27,271
Investment security transactions.................................................. 991 1,552
Noninterest income................................................................ 6,593 6,218
Noninterest expense............................................................... (31,693) (26,191)
--------- ---------
Income before income taxes................................................... 4,819 8,850
Income taxes .................................................................... (2,360) (3,370)
--------- ---------
Pro forma net income......................................................... $ 2,459 5,480
========= =========
Pro forma net income per common share............................................. $ .52 1.16
========= =========
</TABLE>
Included in the pro forma information above is net amortization of approximately
$1,171 before taxes related to acquisition-related premiums, discounts and
intangible assets for the years ended June 30, 1997 and 1996.
58
<PAGE>
General Corporate and Stockholder's Information
CORPORATE HEADQUARTERS
110 East Broadway
Missoula, MT 59802
(406) 721-5254
INDEPENDENT ACCOUNTANTS
KPMG Peat Marwick LLP
Billings, MT
GENERAL COUNSEL
Worden, Thane and Haines, P.C.
Missoula, MT
SPECIAL COUNSEL
Silver, Freedman and Taff, LLP
Washington, D.C.
TRANSFER AGENT, REGISTRAR AND
DIVIDEND DISBURSING AGENT
Stockholder inquiries regarding
transfer requirements, dividends, lost certificates, and changes of address
should be directed to the transfer agent:
Trust Corp
8 Third Street North, Suite 301
P.O. Box 2309
Great Falls, MT 59403-2309
1-800-634-5526
ANNUAL MEETING
The annual meeting of stockholders will be held on Tuesday, October 28, 1997,
beginning at 9 a.m. at the Southgate Office, 2601 Garfield, Missoula, MT
<PAGE>
FORM 10-K
This report is available to stockholders of
record without charge upon written request to:
Douglas G. Bardwell
Corporate Secretary
WesterFed Financial Corporation
110 East Broadway
Missoula, MT 59802
STOCK INFORMATION
WesterFed stock is traded in the over-the-counter market with quotations through
the Nasdaq National Market System under the symbol WSTR.
At June 30, 1997, there were 1,291 stockholders of record.
At June 30, 1997, there were approximately 3,100 beneficial stockholders.
To request information on dividend
reinvestment, please contact:
Dale Brevik
Investor Relations
WesterFed Financial Corporation
110 East Broadway
Missoula, MT 59802
Phone: 406-543-1315
60
<PAGE>
Stock Prices Dividends
Quarter Ended High Low Declared
- -----------------------------------------------------
March 31, 1994 $ 14.25 10.00* .05
June 30, 1994 $ 14.50 12.25 .0512
September 30, 1994 $ 14.63 13.25 .055
December 31, 1994 $ 14.00 11.38 .06
March 31, 1995 $ 13.63 12.38 .065
June 30, 1995 $ 15.38 12.44 .07
September 30, 1995 $ 17.13 15.00 .075
December 31, 1995 $ 17.13 15.50 .080
March 31, 1996 $ 16.75 14.75 .085
June 30, 1996 $ 14.88 14.00 .123**
September 30, 1996 $ 16.13 13.88 .095
December 31, 1996 $ 18.75 15.63 .10
March 31, 1997 $ 21.75 17.75 .105
June 30, 1997 $ 20.75 17.25 .151***
*Initial public offering price.
**Declared June 26, 1996, payable August 20 to stockholders of record August 6.
Includes a special dividend of $0.033 per share.
***Declared June 30, 1997, payable August 20 to stockholders of record August 6.
Includes a special dividend of $0.041 per share.
<PAGE>
MARKET MAKERS
Friedman Billings Ramsey & Company
Sandler ONeill & Partners
Piper Jaffray Companies Incorporated
Everen Securities Incorporated
Mayer & Schweitzer Incorporated
D.A. Davidson & Company, Incorporated
Ragen McKenzie Incorporated
Troster Singer Corporation
WESTERFED OFFICERS
Lyle R. Grimes
President, Chairman and Chief Executive Officer
James A. Salisbury
Treasurer/Chief Financial Officer
Douglas G. Bardwell
Executive Vice President/Secretary
David W. Jorgenson
Vice President
WESTERFED DIRECTORS
Lyle R. Grimes
Chairman
John E. Roemer
Vice Chairman
Dr. Marvin Reynolds
Dr. Otto Klein, Jr.
Robert F. Burke
Laurie DeMarois
David W. Jorgenson
William Leslie
61
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Percent State of
of Incorporation
Parent Subsidiary Ownership or Organization
------ ---------- --------- ---------------
<S> <C> <S> <S>
WesterFed Financial Corporation Western Federal Savings Bank of Montana 100% Federal
Western Federal Savings Bank of Montana Monte Mac I 100% Montana
Western Federal Savings Bank of Montana S.F.S. Industries, Inc. 100% Montana
Western Federal Savings Bank of Montana Service Corporation of Montana 100% Montana
Western Federal Savings Bank of Montana WesterFed Insurance Services, Inc. 100% Montana
</TABLE>
<PAGE>
KPMG Peat Marwick LLP
1000 First Interstate Center
401 N. 31st Street
P.O. Box 7108
Billings, MT 59103
The Board of Directors
WesterFed Financial Corporation:
We consent to the incorporation by reference in the registration statement on
Form S-8 (No 33-85350) of WesterFed Financial Corporation of our report dated
July 25, 1997, relating to the consolidated balance sheets of WesterFed
Financial Corporation and subsidiaries as of June 30, 1997 and 1996, 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, 1997, which report
appears in the June 30, 1997 annual report on Form 10-K of WesterFed Financial
Corporation. Our report refers to a change to the method of accounting for
securities.
KPMG Peat Marwick LLP
Billings, Montana
September 29, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 16,999
<INT-BEARING-DEPOSITS> 2,160
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 83,071
<INVESTMENTS-CARRYING> 156,703
<INVESTMENTS-MARKET> 158,377
<LOANS> 630,277
<ALLOWANCE> 4,651
<TOTAL-ASSETS> 955,639
<DEPOSITS> 630,869
<SHORT-TERM> 57,886
<LIABILITIES-OTHER> 21,275
<LONG-TERM> 132,452
0
0
<COMMON> 56
<OTHER-SE> 104,203
<TOTAL-LIABILITIES-AND-EQUITY> 955,639
<INTEREST-LOAN> 37,923
<INTEREST-INVEST> 13,114
<INTEREST-OTHER> 223
<INTEREST-TOTAL> 51,260
<INTEREST-DEPOSIT> 19,238
<INTEREST-EXPENSE> 28,407
<INTEREST-INCOME-NET> 22,853
<LOAN-LOSSES> 400
<SECURITIES-GAINS> 47
<EXPENSE-OTHER> 3,965
<INCOME-PRETAX> 6,570
<INCOME-PRE-EXTRAORDINARY> 4,507
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,507
<EPS-PRIMARY> 0.96
<EPS-DILUTED> 0.96
<YIELD-ACTUAL> 0
<LOANS-NON> 1,517
<LOANS-PAST> 836
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,005
<CHARGE-OFFS> 253
<RECOVERIES> 18
<ALLOWANCE-CLOSE> 4,651
<ALLOWANCE-DOMESTIC> 4,651
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 539
</TABLE>
