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, 1999
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
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(Exact name of registrant as specified in its charter)
Delaware
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(State or other jurisdiction of incorporation or organization)
110 East Broadway, Missoula, Montana
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(Address of principal executive offices)
81-0487794
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(I.R.S. Employer Identification Number)
59802-4511
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(Zip Code)
Registrant's telephone number, including area code: (406) 721-5254
Securities Registered Pursuant to Section 12(b) of the Act:
None
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Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(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
National Market System as of September 8, 1999, was $66.1 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 8, 1999, there were issued and outstanding 4,568,678
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, 1999.
Part III of Form 10-K - Portions of the Proxy Statement for 1999 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 Security Bank ("Western Security" 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 June 30,
1999, the Company had total assets of $1.0 billion, deposits of $645.5 million
and stockholders' equity of $91.1 million (9.05% 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, 34 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,
multi-family, commercial, agriculture and construction real estate loans and non
real estate commercial, agriculture and consumer loans. These loans are
generally originated for its primary market area. 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. 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.
The name of Western Federal Savings Bank was changed to "Western Security Bank"
in February 1998. Unless the context otherwise requires, reference herein to the
Company includes WesterFed, Western Security and its subsidiaries on a
consolidated basis.
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," "significantly," or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company wishes to caution readers not to
place undue reliance on any such forward-looking statements, which speak only as
of the date made, and to advise readers that various factors-including regional
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 and any unforseen business risks related to
Year 2000 computer issues-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.
2
<PAGE>
Market Areas
The Bank conducts operations through its 34 branch offices located in
18 counties located throughout Montana.
Missoula. In Missoula the Bank operates its main office and six branch
offices which accounted for $146.4 million of Missoula County's June 30, 1998
deposits, or a 13.7% 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, the 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 six branches in the cities of Billings and
Laurel, located in Yellowstone County. Total deposits held by those branches
represented $171.9 million of the county's total June 30, 1998 deposits, or a
11.3% market share. Leading non-farm basic industries in Yellowstone County are
trade center activity, transportation, oil and gas, and the Federal government.
In Billings, expansion of trade center activities continues.
Helena. Four Western Security offices are located in Helena and East
Helena, which is located in Lewis and Clark County. The four branches there have
total deposits of $45.2 million, which accounts for 7.2% of the county's total
June 30, 1998 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 $40.9 million in deposits,
which is 4.6% of the county's total June 30, 1998 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 one office located in the city of Bozeman in
Gallatin County. Deposits in the branch are $22.5 million for a 3.7% market
share of the county's June 30, 1998 total deposits. Leading non-farm basic
industries in Gallatin County are Montana State University, selected
manufacturing, and non-resident travel. The county's economy continues to
benefit from growth in non-resident travel.
Hamilton. The Bank has one branch office in Hamilton, located in Ravalli
County, where it holds deposits of $17.5 million of the county's June 30, 1998
deposits for a 5.0% 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 $7.8 million in deposits and a 9.2% market share of the
county's total June 30, 1998 deposits. The local economy is primarily
agricultural in nature.
Lewistown. The Bank has one office in the city of Lewistown, located in
Fergus County. The branch has $29.8 million in deposits for a 16.8% market share
of the county's total June 30, 1998 deposits. The local economy is primarily
agricultural in nature.
Miles City. In Custer County, the Bank has one branch located in Miles
City, which has $14.3 million in deposits for a 6.1% market share of the
county's June 30, 1998 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 $9.0 million in deposits for a 11.2% market share of
the county's June 30, 1998 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 $25.5 million in deposits for a 21.3% market
share of the county's June 30, 1998 total deposits.
3
<PAGE>
Kalispell. The Bank has one branch located in the city of Kalispell, in
Flathead County. The branch has $6.4 million in deposits for a 0.7% market share
of the county's June 30, 1998 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 $18.9 million in deposits for a 8.1% market share of the
county's June 30, 1998 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 $3.6 million in deposits for a 4.4% market share
of the county's June 30, 1998 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 $10.0 million in deposits for a 6.6% market
share of the county's June 30, 1998 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 $16.4 million in deposits for a 15.4% market
share of the county's June 30, 1998 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 $41.8 million in deposits for a 9.3% market
share of the county's June 30, 1998 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 $8.3 million in deposits for a 6.4% market share
of the county's June 30, 1998 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, commercial real estate,
consumer, multi-family, agricultural, agricultural real estate and construction
loans. With the 1997 merger with Security Bank, the Bank acquired a more
expansive lending portfolio, including loans and expertise in commercial
non-real estate and agricultural services. The Bank is also a major originator
and servicer of Federal Housing Administration/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 Security may retain the
servicing rights on some loans. See "Originations, Purchases and Sales of Loans
and Mortgage-Backed Securities." At June 30, 1999, Western Security serviced
loans with principal balances of approximately $223.4 million for others. The
loan servicing fees earned provided a supplement to the Bank's earnings.
4
<PAGE>
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,
--------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------- --------------- ----------------- ------------------ ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------- --------- ------ -------- -------- -------- --------- -------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family(1)........ $285,914 44.52% $318,663 47.56% $348,577 53.85% $280,853 74.69% $247,331 76.94%
Multi-family.................. 41,619 6.48 42,716 6.38 40,237 6.21 19,939 5.30 18,985 5.91
Commercial.................... 75,666 11.78 64,150 9.57 50,049 7.73 18,318 4.87 12,399 3.86
Agricultural.................. 11,421 1.79 11,066 1.65 7,970 1.23 -- -- -- --
Construction.................. 12,542 1.95 17,523 2.62 19,858 3.07 12,977 3.45 10,742 3.34
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans..... 427,162 66.52 454,118 67.78 466,691 72.06 332,087 88.31 289,457 90.05
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Other Loans:
Commercial (non-real estate).. 40,237 6.27 34,384 5.13 28,924 4.47 -- -- -- --
Agricultural (non-real estate) 23,193 3.61 24,036 3.59 18,866 2.91 -- -- -- --
Loans to depositors, secured
by deposits..................... 1,745 0.27 3,194 0.48 4,101 0.63 2,337 0.62 2,138 0.67
Indirect consumer loans....... 66,406 10.34 64,287 9.60 40,708 6.29 2,827 0.75 -- --
Other consumer loans-real
estate secured.................. 39,031 6.08 54,619 8.15 58,551 9.04 30,814 8.19 24,757 7.69
Other consumer loans.......... 44,385 6.91 35,352 5.27 29,772 4.60 8,003 2.13 5,112 1.59
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total other loans........... 214,997 33.48 215,872 32.22 180,922 27.94 43,981 11.69 32,007 9.95
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total gross loans........... 642,159 100.00% 669,990 100.00% 647,613 100.00% 376,068 100.00% 321,464 100.00%
====== ====== ====== ====== ======
Less:
Unearned fees ................ (1,144) (1,453) (1,813) (1,625) (1,344)
Undisbursed loan funds........ (3,611) (5,178) (9,489) (4,245) (4,988)
Purchased discounts........... (954) (1,159) (1,383) -- --
Allowance for losses.......... (5,079) (4,907) (4,651) (2,005) (2,011)
-------- -------- -------- -------- --------
Total loans receivable, net.. $631,371 $657,293 $630,277 $368,193 $313,121
======== ======== ======== ======== ========
<FN>
(1) Includes $10.1 million, $8.6 million, $13.7 million, $7.5 million, and $7.1
million of FHA and VA loans at June 30, 1999, 1998, 1997, 1996, and 1995,
respectively.
</FN>
</TABLE>
5
<PAGE>
The following table illustrates the interest rate sensitivity of the
Bank's loan portfolio at June 30, 1999. 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
(Dollars in Thousands)
----------------------------------------------------------------------------------------------------------------
One-to-Four Family Multi-Family Commercial Agricultural Construction Total Real Estate
------------------ ----------------- ---------------- ----------------- ---------------- -------------------
Weighted Weighted Weighted Weighted Weighted Weighted
Due During Years Average Average Average Average Average Average
Ending June 30, Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
- ------------------- -------- ------- -------- ------- ------- ------- -------- ------- -------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2000 $ 50,445 7.57% $ 7,513 8.29% $13,978 8.65% $ 1,407 8.68% $11,793 8.90% $ 85,136 8.01%
2001 26,409 7.72 4,697 8.92 9,444 8.45 1,990 8.57 187 8.22 42,727 8.06
2002 19,108 7.65 2,658 8.96 9,860 8.60 797 8.99 69 8.37 32,492 8.08
2003 to 2004 30,716 7.58 7,735 8.66 24,697 8.31 2,361 8.14 456 8.37 65,965 8.01
2005 to 2009 69,039 7.42 8,354 8.72 12,831 8.86 3,610 8.59 17 8.50 93,851 7.78
2010 to 2014 35,607 7.32 9,316 9.53 4,140 8.12 723 8.55 20 8.50 49,806 7.82
2015 and Following 54,590 7.27 1,346 8.32 716 9.27 533 9.16 -- -- 57,185 7.34
-------- ---- ------- ---- ------- ---- ------- ---- ------- ---- -------- ----
Total $285,914 7.47% $41,619 8.84% $75,666 8.52% $11,421 8.56% $12,542 8.86% $427,162 7.86%
======== ==== ======= ==== ======= ==== ======= ==== ======= ==== ======== ====
</TABLE>
<TABLE>
<CAPTION>
Non-Real Estate
(Dollars in Thousands)
--------------------------------------------------------------------------- Total Real Estate and
Commercial Agricultural Consumer Total Non-Real Estate Non-Real Estate
------------------ ----------------- ---------------- ------------------- -------------------
Weighted Weighted Weighted Weighted Weighted
Due During Years Average Average Average Average Average
Ending June 30, Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
- ------------------- -------- ------- -------- ------- ------- ------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2000 (1) $ 25,458 8.39% $15,590 8.90% $42,884 9.09% $83,932 8.84% $169,068 8.42%
2001 5,250 8.13 1,902 8.93 28,648 9.09 35,800 8.94 78,527 8.46
2002 4,758 8.14 1,045 9.18 25,134 9.10 30,937 8.95 63,429 8.50
2003 to 2004 3,833 8.08 1,726 8.75 33,726 9.01 39,285 8.91 105,250 8.35
2005 to 2009 629 9.30 2,406 8.51 16,658 9.58 19,693 9.44 113,544 8.07
2010 to 2014 309 10.30 270 8.36 4,444 10.03 5,023 9.96 54,829 8.02
2015 and Following -- -- 254 8.54 73 8.83 327 8.61 57,512 7.35
-------- ---- ------- ---- ------- ---- ------- ---- -------- ----
Total $40,237 8.33% $23,193 8.85% $151,567 9.16% $214,997 8.97% $642,159 8.23%
======== ==== ======= ==== ======= ==== ======= ==== ======== ====
<FN>
(1) Includes demand loans and loans having no stated maturity.
</FN>
</TABLE>
6
<PAGE>
The following table sets forth the dollar amount of all loans at June
30, 1999 that have fixed interest rates, and that are contractually due after
June 30, 2000 and have floating or adjustable interest rates that change after
June 30, 2000.
Floating or
Adjustable
Fixed Rates Rates Total
(In Thousands)
Real Estate:
One- to four-family.... $ 269,892 $ 16,022 $ 285,914
Multi-family........... 30,234 11,385 41,619
Commercial............. 31,298 44,368 75,666
Agricultural........... 3,413 8,009 11,421
Construction........... 11,907 635 12,542
Other loans
Agricultural........... 36,325 3,912 40,237
Commercial ............ 21,551 1,642 23,193
Consumer............... 149,868 1,698 151,567
-------------- ------------ -------------
Total.................. $ 554,488 $ 87,671 $ 642,159
============== ============ =============
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, 1999, based on the above, the Bank's regulatory loans-to-one-borrower limit
was approximately $11.5 million. On the same date, the Bank's largest amount of
loans to one borrower or group of related borrowers was 74 loans totaling
approximately $7.4 million, secured by multi-family residential property and
leased equipment, and these loans were performing in accordance with their
contractual terms at June 30, 1999.
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 Security assesses both the borrower's ability
to repay the loan and the adequacy of the proposed security. Initially, Western
Security's loan underwriters analyze the loan application and the property
involved. Western Security also utilizes the Federal Home Loan Mortgage
Corporation (FHLMC) automated underwriting software "Loan Prospector." 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 Security also obtains information concerning the
income, financial condition, employment and credit history of the applicant.
Western Security's policy is to require title, fire and extended hazard coverage
on its real estate loans.
If the loan terms and borrower meet Western Security's established
underwriting criteria and the loan amount does not exceed FHLMC conforming
limits, the loan may be approved by action of one to three members of the loan
committee depending on individual authority. Applications approved by "Loan
Prospector" do not require further approval. 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 $500,000 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
7
<PAGE>
applications are designed primarily to determine the borrower's ability to repay
and the more significant items on the application are verified through use of
credit reports, financial statements, tax returns and/or verifications of
employment.
The Bank requires evidence of marketable title and lien position as
well as appropriate title insurance (except on certain home equity loans) on all
loans secured by real property and requires fire and extended coverage casualty
insurance in amounts at least equal to the principal amount of the loan or the
value of improvements on the property, depending on the type of loan. The Bank
also requires flood insurance to protect the property securing its interest when
the property is located in a designated flood hazard area.
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, 1999, $285.9 million, or 44.5%, 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
Security are secured by properties located in the Bank's primary market area.
Historically, Western Security originated for retention in its own
portfolio, 30-year fixed-rate loans secured by one- to-four family residential
real estate. However, in order to reduce its exposure to changes in interest
rates, Western Security attempts to originate adjustable rate mortgage loans
("ARMs"), subject to market conditions and consumer preference. As a result of
continued consumer demand for long term fixed-rate loans, particularly during
periods of relatively low interest rates, Western Security 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
may retain the servicing of the conventional loans it originates and sells to
FHLMC. 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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Quantitative and Qualitative
Disclosures About Market Risk" in the Annual Report incorporated by reference
herein as Exhibit 13.
The Bank has offered ARMs 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 Security are subject to
adjustment at stated intervals based on a margin over a specified index and are
subject to lifetime adjustment limits.
Western Security 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 Security 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, 1999, the Bank had $52.9 million of one-to four-family ARM loans.
It is Western Security's present policy generally not to lend more than
97% of the property's appraised value in the case of first mortgage loans
secured by real property. Western Security presently
8
<PAGE>
requires private mortgage insurance in specified amounts on all conventional
residential loans with loan-to-value ratios at origination exceeding 80%. The
terms of the private mortgage insurance have generally provided that Western
Security 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 Security'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 $240,000 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 Security, due to its acquisition of Security Bank, has a mature
portfolio of multi-family and commercial real estate loans. New originations are
handled through the Bank's business division to allow a full line of commercial
products and services as a part of the customer relationship.
Western Security'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 125% 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
Security 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 adverse conditions in the
economy generally to a greater extent than residential loans. In dealing with
these risk factors, Western Security 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% and 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,
1999, $41.6 million, or 6.5% of the Bank's loan portfolio, consisted of
multi-family loans and $75.7 million, or 11.8% of the Bank's loan portfolio,
consisted of commercial real estate loans. In general, under Office of Thrift
Supervision ("OTS") regulations, 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, 1999, $11.4 million, or 1.8% of the
9
<PAGE>
Bank's loan portfolio, consisted of agricultural real estate loans. In general,
OTS regulations total investments in agricultural real estate loans may not
exceed 400% of the Bank's capital.
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, 1999, $40.2 million, or 6.3% of the Bank's loan
portfolio, consisted of commercial non-real estate loans and $23.2 million, or
3.6% of the Bank's loan portfolio, consisted of agricultural non-real estate
loans.
Construction Lending
Historically, construction lending for one- to four-family residences
has always been an important part of Western Security'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 Security 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, 1999,
approximately $12.5 million, or 2.0% 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 Security 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
Security'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.
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 -
Quantitative and Qualitative Disclosures About Market Risk" in the Annual Report
incorporated by reference herein as Exhibit 13.
10
<PAGE>
The Bank currently originates substantially all of its consumer loans
in its primary market areas. At June 30, 1999, the Bank's consumer loans totaled
$151.6 million, or 23.6%, of the Bank's loan portfolio.
Western Security 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 May and June, 1999, Western Security sold its credit card portfolio
and began phasing out its dealer finance lending program. This was done after
management determined that these two programs were not returning desired levels
of profitability and were hindering return on assets and equity. At June 30,
1999, the Bank had $66.4 million of indirect dealer finance loans.
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,
1999 the Bank had $8.4 million outstanding under this program with an additional
$7.3 million in unused lines of credit available to borrowers under this
program.
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 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, 1999, $1.2 million,
or approximately 0.8% of the consumer loan portfolio was 90 days or more
delinquent), there can be no assurance that delinquencies will not increase in
the future.
Originations, Purchases and Sales of Loans and Mortgage-Backed Securities
In addition to originating and purchasing loans for its own loan
portfolio, Western Security 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 Security generally receives in
return FHLMC participation certificates or cash for non-recourse sales to FHLMC.
During fiscal 1999, Western Security sold or securitized $14.9 million of loans,
with servicing retained, to FHLMC and other institutional investors (exclusive
of sales pursuant to loan correspondent agreements discussed below).
Western Security currently has loan correspondent agreements with
mortgage banking firms under which Western Security agrees to originate and sell
primarily conventional, FHA and VA loans to such firms. Under these programs,
Western Security 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 Security retains any loan
origination fees and negotiates the retention of discount points. Under these
programs, the borrower locks in an interest rate, and Western Security
concurrently obtains a purchase commitment from the correspondent that does not
require delivery unless the loan is
11
<PAGE>
closed. Western Security'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 Security can be required to repurchase any
loan which becomes 60 days or more delinquent within four months of the sale.
During fiscal 1999, Western Security sold $90.2 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, 1999, Western Security has rarely had to repurchase a delinquent loan
from a loan correspondent.
Western Security also participates in loan programs financed by the
Montana Board of Housing ("MBOH"). Under these programs, Western Security
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
Security retains servicing rights on all loans sold to the MBOH.
When loans or participations are sold (other than in respect of the
agreements with correspondent institutions described above), Western Security
may retain 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 Security was servicing mortgage loans for others in the amount of $223.4
million at June 30, 1999.
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
Security's sales of loans or participations 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 Security in the event of
default, except in the case of the loan agreements with correspondent
institutions discussed above. Western Security 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.
12
<PAGE>
The following table sets forth the loan and mortgage-backed security
activity for the periods indicated.
Year Ended June 30,
---------------------------------
1999 1998 1997
--------- ---------- ----------
(In Thousands)
Beginning of Period:
Loans, net..................................$657,293 $630,277 $368,193
Mortgage-backed securities, net............. 126,433 149,169 104,947
-------- -------- --------
Total loans and mortgage-backed
securities receivable, net, at
beginning of period...................... 783,726 779,446 473,140
-------- -------- --------
Loan Originations:
Real Estate:
One- to four-family...................... 158,586 149,959 97,732
Multi-family............................. 6,775 5,107 4,101
Commercial and agricultural.............. 32,863 28,649 6,069
Construction............................. 21,787 28,127 13,650
-------- -------- --------
Total real estate loan originations..... 220,011 211,842 121,552
-------- -------- --------
Other Loans:
Commercial................................ 36,959 44,245 11,684
Agricultural.............................. 19,643 19,420 9,024
Consumer.................................. 81,234 91,202 84,569
-------- -------- --------
Total other loan originations......... 137,836 154,867 105,277
-------- -------- --------
Total loan originations..................... 357,847 366,709 226,829
-------- -------- --------
Purchases:
Real estate loans........................... -- 1,055 1,488
Loans purchased in acquisition ............. -- -- 218,281
Mortgage-backed securities.................. 58,499 6,990 6,928
Mortgage-backed securities
purchased in acquisition ................. -- -- 91,467
-------- -------- --------
Total real estate loans and mortgage-
backed securities purchased
and converted........................... 58,499 8,045 318,164
-------- -------- --------
Total real estate loans and mortgage-
backed securities originated,
purchased and converted................. 416,346 374,754 544,993
-------- -------- --------
Principal Repayments and Sales:
Principal Repayments:
Loans....................................... 278,981 244,519 127,723
Mortgage-backed securities.................. 31,764 26,616 23,010
Sales:
Real estate loans available-for-sale........ 105,129 96,520 54,582
Mortgage-backed securities.................. -- 3,193 31,932
-------- -------- --------
Total principal repayments,
sales and conversions............. 415,874 370,848 237,247
-------- -------- --------
Net loan and mortgage-backed securities
activity ................................... 472 3,906 307,746
Changes in allowance for losses, -------- -------- --------
undisbursed loan funds, and unearned
fees and discounts:
Real estate loans........................... 341 291 (2,209)
Mortgage-backed securities.................. (63) 58 689
Change in unrealized loss on mortgage-
backed securities available for sale........ (1,356) 25 80
-------- -------- --------
End of Period:
Loans, net.................................. 631,371 657,293 630,277
Mortgage-backed securities.................. 151,749 126,433 149,169
-------- -------- --------
Total loans and mortgage-backed
securities receivable, net,
at end of period..................$783,120 $783,726 $779,446
======== ======== ========
13
<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 when past
due for over 30-days and a forbearance agreement or resolution may 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, 1999.
<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 94 $4,410 1.54% 25 $1,111 0.39% 22 $ 948 0.33% 141 $6,469 2.26%
Multi-family 1 82 0.20 -- -- -- -- -- -- 1 82 0.20
Commercial 21 777 0.67 3 30 0.03 6 106 0.09 30 913 0.79
Agricultural 6 866 2.50 4 715 2.07 10 1,097 3.17 20 2,678 7.74
Construction 1 180 1.44 1 79 0.63 3 456 3.64 5 715 5.70
Consumer 217 2,440 1.61 72 439 0.29 89 1,217 0.80 378 4,096 2.70
--- ------ --- ------ --- ------ --- -------
Total 340 $8,755 105 $2,374 130 $3,824 575 $14,953
=== ====== === ====== === ====== === =======
</TABLE>
The following table sets forth the Bank's loan delinquencies by type,
by amount and by percentage of type at June 30, 1998.
<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 104 $5,789 1.82% 26 $1,174 0.37% 49 $2,409 0.76% 179 $9,372 2.94%
Multi-family..... 2 267 0.63 --- --- --- 1 89 0.21 3 356 0.83
Commercial ...... 5 173 0.18 4 270 0.27 5 77 0.08 14 520 0.53
Agricultural..... 8 140 0.40 1 416 1.19 --- --- --- 9 556 1.58
Construction..... 10 915 5.22 2 61 0.35 3 362 2.07 15 1,338 7.46
Consumer......... 239 2,658 1.69 102 1,033 0.66 139 1,678 1.07 480 5,369 3.41
--- ------ --- ------ --- ------ --- -------
Total........ 368 $9,942 135 $2,954 197 $4,615 700 $17,511
=== ====== === ====== === ====== === =======
</TABLE>
14
<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 Security internally
classifies its assets on a regular basis. On the basis of management's review of
its assets, at June 30, 1999 on a net basis, the Bank had classified $9.8
million as Substandard, $348,000 as Doubtful and $7,000 as Loss.
The following table sets forth as of June 30, 1999 the Bank's
classified assets by type. No multi-family real estate loans, commercial real
estate or construction loans were classified at June 30, 1999.
(In Thousands)
--------------------------------------
Substandard Doubtful Loss Total
----------- -------- ---- -------
One-to-four family........ $ 1,168 $ -- $-- $ 1,168
Multi-family.............. 829 -- -- 829
Commercial Real Estate.... 279 -- -- 279
Agriculture Real Estate... 1,469 -- -- 1,469
Construction.............. 636 -- -- 636
Commercial ............... 281 -- -- 281
Agriculture .............. 3,925 -- -- 3,925
Consumer.................. 1,204 348 7 1,559
------- ---- --- -------
Total..................... $ 9,791 $348 $ 7 $10,146
======= ==== === =======
Non-Performing Assets. Loans are reviewed periodically and any loan
whose collectibility is doubtful is placed on non-accrual status. All loans
other than one- to four-family 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. Residential,
or one- to four-family, real estate loans are placed on non-accrual status when
either principal or interest is 120 days or more past due.
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 Security as a result of foreclosure or
by deed in lieu of foreclosure is classified as other 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 net realizable value at
the date of foreclosure. Any write-down resulting therefrom is charged to the
allowance for loan losses. Upon disposition, all costs incurred in maintaining
the property are expensed. Costs relating to the development and improvement of
the property, however, are capitalized to the extent of net realizable value.
The Bank considers loans as in-substance foreclosed if the borrower has
little or no equity in the property based upon its current fair value, if
repayment can be expected only to come from operation or sale of the collateral
and if the borrower has effectively abandoned control of the collateral or has
continued to retain control of the collateral but because of the current
financial status of the borrowers, it is doubtful the borrower will be able to
repay in the foreseeable future.
15
<PAGE>
The following table sets forth the amounts and categories of
non-performing assets in the Bank's loan portfolio. For all periods presented,
the Bank did not have any troubled debt restructurings (which involve forgiving
a portion of interest or principal on any loans or making loans at a rate
materially less than market rates). Foreclosed assets include assets acquired in
settlement of loans, and are recorded at the lower of the related loan balance,
less any specific allowance for loss, or fair value at the date of foreclosure.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
Real Estate:
One- to four-family...................$ 521 $1,967 $ 842 $ 21 $ --
Multi-family.......................... -- 89 -- -- --
Commercial............................ -- 35 -- -- 166
Construction.......................... 112 362 -- -- --
Agriculture non-real estate................ 1,098 -- -- -- --
Commercial non-real estate................. 106 32 102 -- --
Consumer................................... 1,212 1,504 573 383 153
------ ------ ------ ------ ------
Total................................. 3,049 3,989 1,517 404 319
------ ------ ------ ------ ------
Accruing loans delinquent 90 days or more:
Real Estate
One- to four-family................... 426 442 231 288 253
Multi-family.......................... -- -- -- -- --
Commercial............................ -- -- -- -- --
Construction.......................... 344 -- -- -- --
Agriculture non-real estate................ -- -- -- -- --
Commercial non-real estate................. -- 10 -- -- --
Consumer................................... 5 174 605 23 1
------ ------ ------ ------ ------
Total................................. 775 626 836 311 254
------ ------ ------ ------ ------
Foreclosed assets:
Real Estate:
One- to four-family................... 238 279 -- -- --
Multi-family.......................... -- -- -- -- --
Commercial............................ -- -- -- -- --
Land.................................. 26 28 -- -- --
Consumer .................................. 106 114 82 -- --
------ ------ ------ ------ ------
Total................................. 370 421 82 -- --
------ ------ ------ ------ ------
Total non-performing assets................ $4,194 $5,036 $2,435 $ 715 $ 573
====== ====== ====== ====== ======
Total as a percentage of total assets...... 0.42% 0.49% 0.25% 0.13% 0.10%
====== ====== ====== ====== ======
Total allowance for loan losses
to non-performing loans
(exclusive of foreclosed)............... 132.85% 106.33% 197.66% 280.42% 350.35%
====== ====== ====== ====== ======
Total allowance for loan losses to total
non-performing assets................... 121.13% 97.44% 191.01% 280.42% 350.35%
====== ====== ====== ====== ======
</TABLE>
For the year ended June 30, 1999, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to approximately $223,000.
At June 30, 1999, Western Security's non-accruing loans were comprised
of twelve one- to four-family loans totaling $521,000, one construction loan
totaling $112,000, ten agriculture non-real estate loans totaling $1.1 million,
six commercial non-real estate loans totaling $106,000 and eighty-seven consumer
loans totaling $1.2 million. Accruing loans delinquent 90 days or more at June
30, 1999, includes ten one- to four-family loans totaling $426,000, two
construction loans totaling $344,000 and two consumer loans totaling $5,000
which were 100% secured by savings accounts. These loans continue to accrue
interest due to management's belief that the borrowers will repay these loans.
At June 30, 1999, there were $238,000 in seven foreclosed real estate
loans and $26,000 in one foreclosed commercial land loans.
16
<PAGE>
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, 1999, there were no other loans identified by the Bank with respect
to which known information about the possible credit problems of the borrowers
or the cash flows of the security properties have caused management to have some
doubts as to the ability of the borrowers to comply with present loan repayment
terms and which may 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.
17
<PAGE>
The following table sets forth an analysis of the Bank's allowance for
loan losses.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------
1999 1998 1997 1996 1995
------ ------ ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period............................ $ 4,907 $4,651 $2,005 $2,011 $2,030
------ ------ ----- ----- -----
Charge-Offs:
Real Estate:
One- to four-family.................................. (177) -- (53) -- (2)
Commercial .......................................... -- -- (43) -- --
Other:
Commercial........................................... (49) (26) (47) -- --
Consumer............................................. (1,002) (611) (110) (11) (26)
------ ------ ----- ----- -----
Total charge-offs......................................... (1,228) (637) (253) (11) (28)
------ ------ ----- ----- -----
Recoveries:
Other:
Commercial........................................... 6 3 -- -- --
Consumer............................................. 94 50 18 5 9
------ ------ ----- ----- -----
Total recoveries.......................................... 100 53 18 5 9
------ ------ ----- ----- -----
Net charge-offs........................................... (1,128) (584) (235) (6) (19)
Provisions charged to operations.......................... 1,300 840 400 -- --
Reserves acquired......................................... -- -- 2,481 -- --
------ ------ ----- ----- -----
Balance at end of period.................................. $ 5,079 $4,907 $4,651 $2,005 $2,011
====== ====== ===== ===== =====
Ratio of net charge-offs during the period to average loans
outstanding during the period........................ 0.18% 0.09% 0.05% 0.00% 0.18%
====== ====== ===== ===== =====
Ratio of net charge-offs during the period to average non-
performing assets during the period ................. 25.21% 11.92% 13.12% 1.39% 2.91%
====== ====== ===== ===== =====
Ratio of allowance for loan losses to loans receivable, net 0.80% 0.74% 0.73% 0.54% 0.64%
====== ====== ===== ===== =====
</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,
----------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------- ----------------- ----------------- ----------------- -----------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four- family. $ 838 18.56% $ 927 47.56% $2,244 53.82% $ 539 74.69% $ 175 76.94%
Multi-family......... 305 6.75 300 6.38 259 6.21 136 5.30 12 5.91
Commercial........... 710 15.72 550 9.57 479 7.73 152 4.87 75 3.86
Agricultural......... 210 4.65 150 1.65 471 1.23 -- -- -- --
Construction......... 156 3.45 250 2.62 128 3.07 164 3.45 5 3.34
Other loans:
Commercial .......... 468 10.36 450 5.13 -- 4.47 -- -- -- --
Agricultural ........ 460 10.19 400 3.59 -- 2.91 -- -- -- --
Consumer............. 1,369 30.32 1,480 23.50 918 20.56 126 11.69 132 9.95
Unallocated............... 563 -- 400 -- 152 -- 888 -- 1,612 --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total............... $5,079 100.00% $4,907 100.00% $4,651 100.00% $2,005 100.00% $2,011 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
19
<PAGE>
Investment Activities
Securities. As part of its asset/liability management strategy, the
Company invests 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, 1999,
the Company 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, 1999, the Bank owned $79.9 million of bank qualified
local government 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, 1999, the Bank's
liquidity ratio (liquid assets as a percentage of net withdrawable savings and
current borrowings) was 20.54% as compared to the OTS requirement of 4.0%.
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 15 of the Notes to Consolidated Financial
Statements in the Annual Report incorporated by reference herein as Exhibit 13.
At June 30, 1999 the Bank had no structured notes.
The following tables set forth the composition of the securities
portfolio at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------
1999 1998 1997
-------------- --------------- --------------
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.... $ -- 0.00% $ 2,994 2.39% $18,804 23.76%
U.S. Government obligations... -- 0.00 100 0.08 297 0.38
Corporate obligations......... 6,985 6.20 11,473 9.15 5,980 7.55
Other investments............. 2,250 2.00 2,280 1.82 2,385 3.01
-------- ------ -------- ------ ------- ------
Total investment securities
held-to-maturity .......... 9,235 8.20 16,847 13.44 27,466 34.70
-------- ------ -------- ------ ------- ------
Investments available-for-sale:
Federal agency obligations..... 79,985 70.99 89,781 71.62 45,969 58.08
Corporate obligations.......... 23,374 20.74 18,720 14.93 5,675 7.17
Other......................... 82 0.07 10 0.01 39 0.05
-------- ------ -------- ------ ------- ------
Total investments
available for sale ........ 103,441 91.80 108,511 86.56 51,683 65.30
-------- ------ -------- ------ ------- ------
Total investment securities.... $112,676 100.00% $125,358 100.00% $79,149 100.00%
======== ====== ======== ====== ======= ======
Average remaining life or term to
repricing of securities 37 mos. 33 mos. 41 mos.
</TABLE>
For information regarding the estimated market value of investment
securities at June 30, 1999, see Notes 1 and 3 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, 1999.
<TABLE>
<CAPTION>
At June 30, 1999
--------------------------------------------------
Less Than 1 to 5 5 to 10 Over 10
1 Year Years Years Years Total Securities
Cost Cost Cost Cost Cost Market Value
------ ------- ----- ------ -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investments held-to-maturity:
U.S. government securities....................... $ -- $ -- $ -- $ -- $ -- $ --
Federal agency obligations....................... -- -- -- -- -- --
Corporate obligations............................ 2,994 3,991 -- -- 6,985 6,995
Other investments................................ 38 -- 567 1,645 2,250 2,260
------- ------- ----- ------ -------- --------
Total investment securities held-to-maturity ... 3,032 3,991 567 1,645 9,235 9,255
------- ------- ----- ------ -------- --------
Investments available-for-sale:
Federal agency obligations....................... 3,608 75,837 -- 1,879 81,324 79,985
Corporate obligations............................ 7,248 15,761 -- 499 23,508 23,374
Other investments................................ 3 -- -- -- 3 82
------- ------- ----- ------ -------- --------
Total investments available for sale............ 10,859 91,598 -- 2,378 104,835 103,441
------- ------- ----- ------ -------- --------
Total securities.................................. $13,891 $95,589 $ 567 $4,023 $114,070 $112,696
======= ======= ===== ====== ======== ========
Average weighted yield............................ 6.02% 5.63% 7.06% 7.00% 5.73%
======= ======= ===== ====== ========
</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 $22,000. At June 30, 1999,
the book value of the CMOs was $65.1 million. The book value of all the Bank's
mortgage-backed securities at June 30, 1999 was $151.7 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Quantitative and Qualitative Disclosures About Market Risk" in the
Annual Report incorporated by reference herein as Exhibit 13. At June 30, 1999,
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, 1999. The Bank also holds $8.0 million
of mortgage-backed securities issued by private institutions.
For information regarding the estimated market values of mortgage
backed securities at June 30, 1999, see Notes 1 and 4 of 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.
At June 30,
---------------------------
1999 1998 1997
------- -------- --------
(In Thousands)
Issuers:
Federal Home Loan Mortgage Corporation....... $ 42,632 $ 51,776 $ 66,070
Federal National Mortgage Association........ 17,047 7,721 12,344
Government National Mortgage Association..... 19,004 15,218 18,850
Collateralized Mortgage
Obligations - federal agency........... 65,102 48,578 45,815
Other........................................ 7,964 3,140 6,090
-------- -------- --------
Total.................................... $151,749 $126,433 $149,169
======== ======== ========
22
<PAGE>
The following table sets forth the contractual maturities, without
giving effect to repricing, of the mortgage-backed securities portfolio, net, at
June 30, 1999.
<TABLE>
<CAPTION>
Market June 30,
1 - 3 3 - 5 5 - 10 10 - 15 Over 15 Value 1999
Years Years Years Years Years Adjustment Total
------- ------ ------- ------- ------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Held-to-Maturity:
Federal Home Loan Mortgage Corporation....$ -- $ 2,657 $23,748 $ -- $ 1,177 $ -- $ 27,582
Federal National Mortgage Corporation..... -- -- 26 -- -- -- 26
Government National Mortgage Association.. -- -- 27 -- 10,777 -- 10,804
Collateralized Mortgage Obligations -
Federal Agency............................ -- 220 6,238 516 36,319 -- 43,293
Other .................................... -- -- -- -- 2,015 -- 2,015
------- ------ ------- ------- ------- -------- --------
Subtotal.............................. -- 2,877 30,039 516 50,288 -- 83,720
------- ------ ------- ------- ------- -------- --------
Available for sale:
Federal Home Loan Mortgage Corporation.... -- 1,648 5,013 1,947 6,608 (171) 15,045
Federal National Mortgage Corporation..... -- 940 -- 11,563 4,939 (421) 17,021
Government National Mortgage Association.. -- -- 4,813 3,241 327 (151) 8,230
Collateralized Mortgage Obligations
Federal Agency ...................... 421 2,550 2,021 1,855 15,597 (634) 21,810
Other .................................... -- -- -- -- 5,923 -- 5,923
------- ------ ------- ------- ------- -------- --------
Subtotal............................. 421 5,138 11,847 18,606 33,394 (1,377) 68,029
------- ------ ------- ------- ------- -------- --------
Total............................ $ 421 $8,015 $41,886 $19,122 $83,682 $(1,377) $151,749
======= ====== ======= ======= ======= ======== ========
</TABLE>
The following schedule sets forth the contractual maturity and
repricing of the Bank's mortgage-backed securities portfolio, net, at June 30,
1999. Those which have adjustable or renegotiable interest rates are shown as
maturing in the period during which the contract is subject to repricing.
<TABLE>
<CAPTION>
After 1 After 2 After 3 After 5 After 10 Market June 30,
1 Year Through Through Through Through Through Over 15 Value 1999
or Less 2 Years 3 Years 5 Years 10 Years 15 Years Years Adjustment Total
------- ------- ------- ------- -------- ------- ------- ---------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-Backed Securities
Held-to-Maturity................ $ -- $ -- $ -- $2,657 $23,802 $ -- $13,969 $ -- $40,428
Mortgage-Backed Securities
Available-for-Sale.............. 13,028 -- -- 942 9,826 16,752 6,414 (743) 46,219
Collateralized Mortgage Obligations
Held-to-Maturity................ 8,487 -- -- 220 817 -- 33,768 -- 43,292
Collateralized Mortgage Obligations
Available-for-Sale.............. -- 421 -- 2,548 2,021 1,856 15,598 (634) 21,810
------- ------- ------ ------- ------- ------- ------- ------- --------
Total........................ $21,515 $ 421 $ -- $ 6,367 $36,466 $18,608 $69,749 $(1,377) $151,749
======= ======= ====== ======= ======= ======= ======= ======= ========
</TABLE>
Cash Surrender Value of Life Insurance Policies. Western Security
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, 1999 the Bank had $6.9 million in cash surrender value of life insurance
policies.
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.
23
<PAGE>
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 bearing demand accounts, money
market accounts and certificates of deposits with varying maturities. Western
Security has not actively sought deposits outside of its primary market area.
Western Security 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
Security 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 Security 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 a rising interest rate
environment while certificates of deposit are preferred by those depositors in a
declining 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.
24
<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,
----------------------------------------------------------------
1999 1998 1997
------------------ ------------------ -------------------
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 (2.70 - 2.75%).. $ 89,975 13.94% $ 94,557 14.86% $ 102,923 16.31%
Money market accounts (2.96 - 4.98%).......... 75,398 11.68 55,464 8.71 49,062 7.78
NOW accounts (1.50%).......................... 77,899 12.07 74,673 11.73 76,582 12.14
Non-Interest bearing demand .................. 35,708 5.53 30,524 4.80 26,050 4.13
---------- ------ --------- ------ ---------- ------
Total non-certificates........................ 278,980 43.22 255,218 40.10 254,617 40.36
---------- ------ --------- ------ ---------- ------
Certificates:
0.00 - 3.99%................................. 3,385 0.52 1,894 0.30 1,276 0.20
4.00 - 5.99%................................. 302,629 46.88 269,590 42.36 288,440 45.72
6.00 - 7.99%................................. 60,545 9.38 109,731 17.24 86,341 13.69
8.00 - and over ............................. 10 -- 8 -- 195 0.03
---------- ------ --------- ------ ---------- ------
Total certificates............................ 366,569 56.78 381,223 59.90 376,252 59.64
---------- ------ --------- ------ ---------- ------
Total deposits................................ $ 645,549 100.00% $ 636,441 100.00% $ 630,869 100.00%
========== ====== ========= ====== ========== ======
</TABLE>
The following table sets forth the rate and maturity information for
the Bank's certificates of deposit as of June 30, 1999.
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:
September 30, 1999..... $3,177 $ 82,438 $ 9,189 $ 3 $ 94,807 25.85%
December 31, 1999...... 135 62,865 11,484 -- 74,484 20.31
March 31, 2000......... -- 47,329 11,494 -- 58,823 16.05
June 30, 2000.......... 32 42,751 2,733 -- 45,516 12.42
September 30, 2000..... -- 10,609 5,078 -- 15,687 4.28
December 31, 2000...... -- 12,335 5,679 -- 18,014 4.91
March 31, 2001......... -- 11,620 6,657 -- 18,277 4.99
June 30, 2001.......... 6 11,909 292 -- 12,207 3.33
September 30, 2001..... -- 5,544 445 7 5,996 1.64
December 31, 2001...... -- 6,413 580 -- 6,993 1.91
March 31, 2002......... 4 2,719 306 -- 3,029 0.83
June 30, 2002.......... -- 1,322 1,189 -- 2,511 0.69
Thereafter............. 31 4,775 5,419 -- 10,225 2.79
------ -------- ------- ------ -------- ------
Total............... $3,385 $302,629 $60,545 $10 $366,569 100.00%
====== ======== ======= ====== ======== ======
Percent of total.... 0.92% 82.56% 16.52% --
====== ======== ======= ======
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, 1999.
<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.... $76,920 $64,976 $ 91,756 $83,061 $316,713
Certificates of deposit of $100,000 or more... 9,138 8,974 10,374 9,225 37,711
Public funds(1)............................... 8,749 534 2,209 653 12,145
------- ------- -------- ------- --------
Total certificates of deposit................. $94,807 $74,484 $104,339 $92,939 $366,569
------- ------- -------- ------- --------
<FN>
- -----------------------
(1) Deposits from governmental and other public entities.
</FN>
</TABLE>
25
<PAGE>
For additional information regarding the composition of the Bank's
deposits, see Note 8 of the Notes to the Consolidated Financial Statements in
the Annual Report incorporated by reference herein as Exhibit 13.
Borrowings. Western Security'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 of the Notes to 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 and other borrowings for the periods
indicated.
Year Ended June 30,
------------------------------
1999 1998 1997
-------- -------- --------
(In Thousands)
Maximum Balance:
FHLB Advances............................... $257,277 $248,133 $190,338
Collateralized Mortgage Obligations......... 511 775 1,117
Other Borrowings and Repurchase Agreements.. 7,416 26,099 8,101
Average Balance:
FHLB Advances............................... 228,174 244,339 145,446
Collateralized Mortgage Obligations......... 376 625 967
Other Borrowings and Repurchase Agreements.. 6,749 12,022 2,731
The following table sets forth certain information as to the Bank's
FHLB advances, CMO's and other borrowings at the dates indicated.
June 30,
------------------------------
1999 1998 1997
-------- -------- --------
(Dollars in Thousands)
FHLB Advances................................. $244,048 $248,133 $190,338
Collateralized Mortgage Obligations........... 242 511 797
Other Borrowings and Repurchase Agreements.... 6,895 6,542 8,101
-------- -------- --------
Total Borrowings............................ $251,185 $255,186 $199,236
======== ======== ========
Weighted Average Interest Rate
of FHLB Advances........................ 5.53% 5.83% 6.14%
======== ======== ========
Weighted Average Interest Rate
of Collateralized Mortgage
Obligations................................... 11.48% 11.48% 11.37%
======== ======== ========
Weighted Average Interest Rate of
Other Borrowings and Repurchase
Agreements................................. 4.34% 5.05% 5.30%
======== ======== ========
26
<PAGE>
Interest Rate Caps and Interest Rate Swaps
As explained under Quantitative and Qualitative Disclosures About
Market Risk Discussion and Analysis of Financial Condition and Results of
Operations and Note 15 of the Notes to Consolidated Financial Statements in the
Annual Report incorporated by reference herein as Exhibit 13, the Bank was party
to three interest rate exchange agreements. These agreements were interest rate
cap agreements covering a total of $15.0 million in notional principal amounts
wherein the 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. 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,
1999 the amount of the unamortized premiums paid related to the interest rate
cap transactions was $23,000.
Subsidiary Activities
General. The Company has no direct subsidiaries other than the Bank.
Western Security has three wholly-owned service corporation subsidiaries:
Service Corp. of Montana, Inc. ("Service Corp."), Western Security Investment
Services, Inc. ("Western Security Investment") and a special-purpose finance
subsidiary, Monte Mac I, Inc. ("Monte Mac"). At June 30, 1999, Western
Security's investment in the three wholly owned service corporations totaled
$2.5 million, or approximately 0.25% 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 Security's service
corporations:
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 Security's
investment in Service Corp. totaled $411,000 at June 30, 1999.
Western Security Investment Services, Inc. Western Security Investment
was acquired in February 1997, in connection with the acquisition of Security
Bancorp. Western Security Investment conducts a securities brokerage business in
Western Security's Missoula and Billings offices and a real estate rental
business. At June 30, 1999, Western Security's investment in Western Security
Investment totaled $579,000.
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 Security to Monte
Mac. The transferred FHLMC certificates had a book value of $1.0 million at June
30, 1999. Western Security's investment in Monte Mac as of June 30, 1999,
included approximately $0.8 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
27
<PAGE>
of Seattle and is subject to certain limited regulation by the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board"). As the
savings and loan holding company of the Bank, the Company is subject to federal
regulation and oversight. The purpose of the regulation of the Company and other
holding companies is to protect subsidiary savings associations. The Bank is a
member of the Savings Association Insurance Fund ("SAIF"), 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 April, 1999 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, 1999, was
approximately $195,000. 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, 1999,
the Bank's lending limit under this restriction was approximately $11.5 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
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premiums and is authorized to conduct examinations of and to require reporting
by FDIC-insured institutions. It also may prohibit any FDIC-insured institution
from engaging in any activity the FDIC determines by regulation or order to pose
a serious risk to the 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. See Note 2 of the Notes to Consolidated
Financial Statements in the Annual Report incorporated by reference herein as
Exhibit 13. 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.
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
non-cumulative perpetual preferred stock and related income. All intangible
assets must be deducted from tangible capital for calculating compliance with
the requirement. At June 30, 1999, the Bank had unamortized purchased mortgage
servicing rights of $602,000 and goodwill and core deposit intangible relating
to the purchase of Security Bancorp of $18.8 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, 1999, the Bank was required to deduct $568,000 of its
investment in Service Corp. of Montana, Inc. and $579,000 of its investment in
Western Security Investment under these rules.
At June 30, 1999, the Bank had tangible capital of $71.3 million, or
7.2% of adjusted total assets, which is approximately $56.5 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, 1999, the Bank
had no such intangible assets.
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At June 30, 1999, the Bank had core capital equal to $71.3 million, or
7.2% of adjusted total assets, which is $31.8 million above the minimum leverage
ratio requirement of 3% as in effect on that date.
The OTS risk-based capital 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, 1999, the Bank had no capital instruments that qualify as supplementary
capital and had $5.1 million of general loss reserves, which was less than 1.25%
of risk-weighted assets, and were included in the $76.4 million of risk-based
capital at June 30, 1999.
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, 1999.
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.
On June 30, 1999, the Bank had total risk-based capital of $76.4
million (including $71.3 million in core capital and $5.1 million in qualifying
supplementary capital) and risk-weighted assets of $622.9 million (including
$66,000 in converted off-balance sheet assets); or total risk-based capital of
12.3% of risk-weighted assets. This amount was $26.6 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.
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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
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.
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 Security may pay dividends in accordance with this general authority.
The OTS regulations permit a savings association to make a capital
distribution without notice to the OTS (unless it is a subsidiary of a holding
company) provided that it has a CAMELS 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. The OTS may
object to a capital distribution if it would constitute an unsafe or unsound
practice.
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 4%.
The Bank's regulatory ratio was 20.5% at June 30, 1999.
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, 1999, the Bank
met the test and has always met the test since its effectiveness.
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Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it re-qualifies as a QTL and thereafter remains
a QTL. If an association does not re-qualify 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 re-qualified 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 re-qualified 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 September, 1998 and received a rating of satisfactory.
Transactions with Affiliates. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on terms
as favorable to the association as transactions with non-affiliates. In
addition, certain of these transactions, such as loans to an affiliate, are
restricted to a percentage of the association's capital. Affiliates of the Bank
include the Company and any company which is under common control with the
Company. In addition, a savings association may not lend to any affiliate
engaged in activities not permissible for a bank holding company or acquire the
securities of most affiliates. The Bank's subsidiaries are not deemed
affiliates; however, the OTS has the discretion to treat subsidiaries of savings
associations as affiliates on a case-by-case basis.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
Holding Company Regulation. The Company is a unitary savings and loan
holding company subject to regulatory oversight by the OTS. As such, the Company
is required to register and file reports with the OTS and is subject to
regulation and examination by the OTS. In addition, the OTS has enforcement
authority over the Company and its non-savings association subsidiaries which
also permits the OTS to restrict or prohibit activities that are determined to
be a serious risk to the subsidiary savings association.
As a unitary savings and loan holding company, the Company generally is
not subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of the Company and any of its
subsidiaries (other than Western Security 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.
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If Western Security 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, 1999, 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, 1999, the Bank had $14.6 million in FHLB stock,
which was in compliance with this requirement. In past years, the Bank has
received substantial dividends on its FHLB stock. Over the past five calendar
years such dividends have averaged 7.57% and were 8.00% and 7.75% for calendar
years 1997 and 1998 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.
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For the fiscal year ended June 30, 1999, dividends paid by the FHLB of
Seattle to the Bank totaled $1.1 million which constitutes a $80,000 increase
over the amount of dividends received in fiscal year 1998. 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 and Montana income tax return using the
accrual method of accounting. For fiscal years beginning before January 1, 1997,
Montana state statute prevented filing of a consolidated Montana income tax
return including the Bank; thus, separate returns were filed by the Company
(including the non-bank subsidiaries) and the Bank. Generally, the Company, the
Bank and its non-bank 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 non-bank 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. These 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 institutions can no longer calculate their deduction for bad debts using
the percentage-of-taxable-income method. Instead, such institutions are required
to compute their deductions based on specific charge-offs during the taxable
year when they otherwise qualify to use the experience method. This legislation
also requires savings institutions to recapture into income over a six-year
period their post-1987 additions to their tax bad debt 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, 1999 the Bank's bad debt reserve for tax purposes was approximately
$2.0 million. (See Note 12 of the Notes to Consolidated Financial Statements in
the Annual Report incorporated by reference as Exhibit 13.)
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).
Dividends-Received Deduction and Other Matters - The Company may
eliminate from its taxable income 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. In the opinion of management, any examination of still open returns
(including returns of subsidiaries and predecessors, or entities merged with and
into the Company or the Bank) would not result in a deficiency which could have
a material adverse effect on the financial condition of the Company, the Bank
and its consolidated subsidiaries.
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Montana Taxation - Under Montana taxation law, savings institutions,
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 1999.
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 16,
Recent Accounting Pronouncements Not Yet Adopted in Notes to Consolidated
Financial Statements in the Annual Report incorporated by reference herein as
Exhibit 13.
Competition
The Bank generally faces strong competition both in originating loans
and in attracting deposits. Competition in originating loans comes primarily
from other savings institutions, commercial banks, mortgage bankers, credit
unions, insurance companies and government agencies who also make loans 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, a customer oriented staff,
advertising and a branch network in twenty Montana cities.
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The Bank estimates its market share of the savings deposits in the
counties where it has branch offices to be as follows:
June 30, 1998
County Deposit Share(1) City
Missoula.................... 13.7% .......................Missoula
Yellowstone................. 11.3 ............Billings and Laurel
Lewis & Clark............... 7.2 .........Helena and East Helena
Cascade..................... 4.6 ....................Great Falls
Gallatin.................... 3.7 ........................Bozeman
Ravalli..................... 5.0 .......................Hamilton
Pondera ................... 9.2 .........................Conrad
Fergus...................... 16.8 ......................Lewistown
Custer...................... 6.1 .....................Miles City
Big Horn ................... 11.2 .........................Hardin
Deer Lodge.................. 21.3 .......................Anaconda
Flathead.................... 0.7 ......................Kalispell
Hill........................ 8.1 ..........................Havre
Phillips.................... 4.4 ..........................Malta
Richland.................... 6.6 .........................Sidney
Sheridan.................... 15.4 .....................Plentywood
Silverbow................... 9.3 ..........................Butte
Valley...................... 6.4 ........................Glasgow
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(1) Based on data supplied by Sheshunoff Information Services as of June 1998,
Western Security held approximately a 6.4% market share of deposits in
Montana. Based on this market share, Western Security ranked 4th out of 183
financial institutions located in Montana. See "Market Areas" for
information regarding the Bank's deposit share in each county in its market
area.
Western Security'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 Security competes for loans principally
through the interest rates and loan fees charged. Western Security'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, 1999
regarding the executive officers of the Company and the Bank who are not also
directors.
Name Age Position(s) Held
- -------------------- --------- ----------------------------------------------
James A. Salisbury 48 Executive Vice President, Treasurer
and Chief Financial Officer
of the Company and the Bank
Charles E. Eiseman 49 Senior Vice President/Western Region
Marcia Johnson 40 Senior Vice President/Central Operations
John Cromwell 60 Senior Vice President/Human Resource Director
36
<PAGE>
The business experience of each executive officer who is not also a
director is set forth below.
James A. Salisbury. Mr. Salisbury became Treasurer and Chief Financial
officer of the Company in September 1993. Mr. Salisbury joined Western Security
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 Western Security Investment
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.
Charles E. Eiseman. Mr. Eiseman has been employed by Western Security
since December 1975 and became Senior Vice President/Retail Lending Manager in
October 1996. Since 1988, Mr. Eiseman's duties have included supervision of all
retail lending activities in all cities where Western Security has loan
origination centers. Mr. Eiseman is a graduate of the University of Montana.
Marcia Johnson. Ms. Johnson has been with Western Security since 1981.
Prior to her appointment as Senior Vice President/Central Operations Manager in
July 1999, she served as Vice President/Western Region Loan Administrator. Ms.
Johnson is a graduate of the University of Montana.
John Cromwell. Mr. Cromwell joined Western Security as Vice President
and Director of Human Resources in December of 1997. Mr. Cromwell has over 25
years experience in bank human resources. He was elected Senior Vice President
in July 1999. He is responsible for compensation, benefits, personnel, training
and the formulation of Personnel Policies and Procedures. Mr. Cromwell is a
graduate of Rocky Mountain College, Billings and is a certified Senior
Professional in Human Resources by the Society for Human Resource Management.
Employees
At June 30, 1999, the Company had a total of 338 full-time employees
and 42 part-time employees. None of the Bank employees are represented by any
collective bargaining group.
37
<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, 1999.
At June 30, 1999, the Bank's premises and equipment had an aggregate net book
value of approximately $28.3 million.
Year
Acquired Owned or Lease Expiration
Location or Leased Leased Date
- --------------------------------------------------------------------------------
Main Office
110 East Broadway 1957 Owned N/A
Missoula, Montana
Full Service Branches
100 East Broadway 1957 Owned N/A(1)
Missoula, Montana
2230 Brooks 1966 Owned N/A
Missoula, Montana
1610 S. Third West 1977 Leased July 1, 1999(2)
Missoula, Montana
2601 Garfield 1979 Owned N/A
Missoula, Montana
321 Fuller 1983 Owned N/A
Helena, Montana
101 Lane Avenue 1983 Owned N/A
East Helena, Montana
601 N. Montana 1983 Leased December 31, 1999
Helena, Montana
3171 N. Montana 1996 Owned N/A
Helena, Montana
501 N. First Street 1980 Owned N/A
Hamilton, Montana
2425 10th Avenue South 1988 Owned N/A
Great Falls, Montana
25 Fifth Street North 1988 Owned N/A
Great Falls, Montana
900 Third Street, NW 1988 Owned N/A
Great Falls, Montana
702 South Main 1988 Owned N/A
Conrad, Montana
2929 Third Avenue North 1991 Owned N/A
Billings, Montana
1101 Main Street 1991 Owned N/A
Miles City, Montana
524 North Cheyenne Avenue 1991 Owned N/A
Hardin, Montana
219 North 26th Street 1967 Owned N/A
Billings, Montana
2675 King Avenue West 1995(3) Owned N/A
Billings, Montana
2401 Grand Avenue 1975 Owned N/A
Billings, Montana
1546 Main Street 1975 Owned N/A
Billings, Montana
38
<PAGE>
Year
Acquired Owned or Lease Expiration
Location or Leased Leased Date
- --------------------------------------------------------------------------------
2845 Old Hardin Road 1997 Owned N/A
Billings, Montana
19 Montana Avenue 1987 Owned N/A
Laurel, Montana
405 Main Street 1979 Owned N/A
Kalispell, Montana
320 West Broadway 1980(4) Leased January 1, 2008
Missoula, Montana
2350 South Reserve 1995 Leased December 30, 1999
Missoula, Montana
221 Second Street NW 1989 Owned N/A
Sidney, Montana
324 Third Avenue 1989 Owned N/A
Havre, Montana
135 South Second Street East 1994 Owned N/A
Malta, Montana
125 Fourth Street South 1989 Leased Monthly(5)
Glasgow, Montana
102 North Main 1989 Owned N/A
Plentywood, Montana
1880 Harrison Avenue 1994 Owned N/A
Butte, Montana
401 West Main 1994 Owned N/A
Lewistown, Montana
307 East Park Street 1994 Leased March 1, 2008
Anaconda, Montana
2901 West Main 1995 Leased April 15, 2031
Bozeman, Montana
Loan Administration
1100 South Avenue 1993 Owned N/A
Missoula, Montana
1105 West Sussex 1998 Owned N/A
Missoula, Montana
- ----------------------
(1) Includes lease for drive-up window which expires in May 2001.
(2) Contract being negotiated - verbal agreement - 1 year extension
(3) Branch opened 12/97
(4) Property sold 12/97 - leased for 10 years.
(5) Lease is on a month-to-month basis.
39
<PAGE>
The Company purchased property in Missoula to build a branch in the
expanding Missoula marketing area. The sale of the branch at 1941 West Main in
Bozeman, Montana was completed this year.
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, 1999, totaled $4.7 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 Security 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 Stockholders
No matter was submitted to a vote of stock holders, through the
solicitation of proxies or otherwise, during the quarter ended June 30, 1999.
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
The section "General Corporate and Stockholders' Information" contained
in the Company's Annual Report (beginning at page 55 thereto) filed at Exhibit
13 hereto is incorporated in its entirety by reference under this Item 5.
Item 6. Selected Financial Data
The section "Selected Consolidated Financial and Other Data" contained
in the Company's Annual Report (beginning at page 5 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 section "Management's Discussion and Analysis of Financial Condition
and Results of Operations" contained in the Company's Annual Report (beginning
at page 6 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 section "Consolidated Financial Statements" contained in the
Company's Annual Report (beginning at page 24 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.
40
<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 Company's definitive Proxy Statement for the Annual
Meeting of Stockholders scheduled to be held on October 26, 1999, 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 Company's definitive Proxy Statement for the Annual Meeting
of Stockholders scheduled to be held on October 26, 1999, 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 Company's definitive
Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on
October 26, 1999, 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 Company's definitive Proxy Statement
for the Annual Meeting of Stockholders scheduled to be held on October 26, 1999,
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.
41
<PAGE>
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, 1999 is incorporated by reference in
this Form 10-K Annual Report as Exhibit 13.
Pages in
Annual
Annual Report Section Report
Independent Auditors' Report............................................ 24
Consolidated Balance Sheets -- June 30, 1998 and 1999................... 25
Consolidated Statements of Income --
Each of the Years in the Three-Year Period Ended
June 30, 1999........................................................... 26
Consolidated Statements of Stockholders' Equity
and Comprehensive Income -- Each of the Years
in the Three-Year Period Ended June 30, 1999............................ 27
Consolidated Statements of Cash Flows -- Each of the
Years in the Three-Year Period Ended
June 30, 1999........................................................... 28
Notes to Consolidated Financial Statements.............................. 29
Supplementary Financial Data............................................ 55
(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.
42
<PAGE>
(a)(3) Exhibits:
Reference to Prior
Filing of Exhibit
Regulation S-K Number Attached
Exhibit Number Document Hereto
- ---------------- ---------------------------------------- ------------------
2 Plan of acquisition, reorganization, arrangement, None
liquidation or succession
3 (i) Articles of Incorporation *
(ii) By-laws
4 Instruments defining the rights of security holders, *
including indentures
9 Voting trust agreement None
10.1 Stock Option and Incentive Plan **
10.2 Employee Stock Ownership Plan *
10.3 Recognition and Retention Plan **
10.4 Salary Continuation Plan *
10.5 Directors Deferred Compensation Plan *
10.6 Benefit Equalization Plan *
10.7 Employment Agreements for Messrs. Grimes, Bardwell **
and Salisbury
10.8 Employment Agreements for Messrs. Brevik, Eiseman **
and Lovell and Ms. Dumontier
10.9 Annual Management Incentive Plan **
10.10 Wage Continuation Agreements for Messrs. Grimes, **
Bardwell and Salisbury
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 None
to vote of security holders
23 Consents of experts and counsel 23
24 Power of Attorney Not required
27 Financial Data Schedule 27
99 Additional exhibits None
- -------------------------
* 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 statement (Registration No. 533-16428)
pursuant to the Securities Act of 1933 of such previously filed documents
are hereby incorporated herein by reference in accordance with "Item 601 of
Regulation S-K."
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed during the three-month period
ended June 30, 1999.
43
<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 24, 1999 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 24, 1999
By: /s/ Dr. Marvin Reynolds
-----------------------------------------------
Dr. Marvin Reynolds, Director
Date: September 24, 1999
By: /s/ Dr. Otto G. Klein, Jr.
-----------------------------------------------
Dr. Otto G. Klein, Jr., Director
Date: September 24, 1999
By: /s/ John E. Roemer
-----------------------------------------------
John E. Roemer, Vice Chairman
Date: September 24, 1999
By: /s/ Laurie C. DeMarois
-----------------------------------------------
Laurie C. DeMarois, Director
Date: September 24, 1999
By: /s/ James A. Salisbury
-----------------------------------------------
James A. Salisbury, Treasurer and Chief
Financial Officer (Principal Financial and
Accounting Officer)
Date: September 24, 1999
By: /s/ Robert F. Burke
-----------------------------------------------
Robert F. Burke, Director
Date: September 24, 1999
By: /s/ David W. Jorgenson
-----------------------------------------------
David W. Jorgenson, Director and Vice
President
Date: September 24, 1999
By: /s/ William Leslie
-----------------------------------------------
William Leslie, Director
Date: September 24, 1999
Exhibit 13
Annual Report to Security Holders
<PAGE>
[COVER]
No company just ends up in an enviable position.
It must put itself there.
WesterFed Financial Corporation. The 1999 Annual Report.
<PAGE>
Financial Highlights
FOR FISCAL YEAR 1999
(Dollars in thousands, except per share amounts)
FOR THE YEAR
Net Income $6,923
Net Interest Income $31,554
PER COMMON SHARE
Net Income $1.37
Book Value $20.08
AT YEAR END
Assets $1,007,349
Loans $631,371
Deposits $645,549
Stockholders' Equity $91,149
Shares Outstanding 4,538,557
FINANCIAL RATIOS
Return on average assets .70%
Return on equity 6.93%
Stockholders' equity
to total assets 9.05%
Net interest margin
for the year 3.46%
Non-performing assets
to total assets .42%
COMPANY FACTS
Deposit Accounts 93,803
Loan Accounts 25,999
[BAR CHART] [BAR CHART]
Assets Net Income Per Common Share - Diluted
Year Ended June 30 (shown in millions) Year Ended June 30 (shown in dollars)
1995 $563.3 1995 $1.01
1996 $563.9 1996 $1.08
1997 $955.6 1997 $.96
1998 $1,022 1998 $1.29
1999 $1,007 1999 $1.37
[PIE CHARTS]
The following pie charts detail how the bank's total gross loan portfolio
continues to become more diversified.
1997 1998 1999
------- ------- -------
Agriculture 4.1% 5.2% 5.4%
Commercial 12.2% 14.7% 18.1%
Consumer 20.6% 23.5% 23.3%
Construction 3.1% 2.6% 2.0%
Residential Mortgage 60.0% 54.0% 51.2%
<PAGE>
To Our Shareholders
OUR POSITION. There is, in the pages of an annual report, the
temptation to enumerate only the concrete - earnings, losses, share prices,
dividends, deposits, loan portfolios, holdings - for these form the foundation
upon which a financial institution is built as well as much of the impetus to
invest in a company. We're pleased to report, these quantifiable measures were
positive in fiscal year 1999, and included record earnings per share for
shareholders and solid increases in consumer and commercial lending.
Yet, they are not the thrust of this letter.
Over the last year, your management team has worked hard to put Western
Security Bank, our sole subsidiary, into a position for future growth.
Certainly, our financial results have helped, but assets much tougher to
quantify - people, image and service - have been at least as critical. We
believe these are ultimately the assets that define potential. More importantly,
they're the assets responsible for realizing it.
[PICTURE OF RALPH K. HOLLIDAY AND LYLE R. GRIMES]
Consider just a few of the changes made at your company in 1999.
o Lyle Grimes retired as President of Western Security Bank and has
been succeeded by Ralph Holliday, formerly of the Key Bank of
Seattle.
o Our consumer image as Western Federal Savings was shed and the
bank focused on building commercial businesses.
[BOX]
"Your management team has worked hard to put
Western Security Bank into an enviable position for
future growth."
o Y2K compliance and the formation of a contingency plan in the
event of outside Y2K problems were established.
o A relationship was begun with Invest Financial, enabling us to
provide financial planning and investment services.
o Our image-building efforts are being handled by a new
communications agency.
The impact of these changes is far from quantifiable, their influence
in share price far from immediate, yet they are vital to the life of your
company and the dividends paid on your stock.
Therefore, this letter is not merely a numerical recitation. It's a
look at how over the last year, our people have moved your company into a
position to exceed the expectations of its officer, its employees, its
customers, the financial markets, and you.
1
<PAGE>
EMPOWERING MANAGERS TO BE EFFICIENT. One of the key indicators of a
bank's success is its efficiency ratio. For fiscal year 1999, the Western
Security Bank ratio was 69%, or 69 cents spent for every dollar of revenue
earned. That's too high, and lowering it is a major goal for the next year.
Toward that end, we've streamlined and re-organized our management team. We've
restructured branches and empowered our managers to make individual decisions.
If we are to succeed, our managers must have the flexibility to act on behalf of
their branches.
[BOX]
"We want our management team to make sound decisions, to
understand the implications of those decisions, and how each
relates specifically to their branch's efficiency."
Along with this new structure comes accountability. Monthly
profitability reports have been made mandatory for each branch. Management
training seminars have begun in earnest and will continue. We want to equip our
management team with the knowledge to make sound decisions, to understand the
implications of those decisions, and how each relates specifically to their
branch's efficiency. Once that level of understanding is achieved, a marked
improvement in efficiency should quickly follow.
THE IMPORTANCE OF SELLING. As we alluded to earlier, consumer and
commercial loan numbers increased compared to the previous year. You'll be
pleased to know that in keeping with our goal of maintaining a more "bank-like"
loan portfolio, commercial and consumer loans grew by 3.2%. In addition,
deposits increased by $9.1 million, with money market and checking account
assets increasing by $28.3 million. These gains clearly helped our fiscal 1999
performance. Still, we do not intend to rest quietly.
As a whole, our loan portfolio shrank, due to a 10.0% decrease in
residential loans. More telling yet, our recently conducted consumer research
indicates the 47% of our retail customers and 52% of our commercial customers
also bank with another bank. And many of these customers don't consider Western
Security to be their main financial institution. Some might call this a problem,
we call it an immense opportunity for growth.
To capitalize, we intend to greatly advance our sales culture by
setting goals and offering incentives to employees and managers. We're also
dedicated to bringing back "relationship banking" by informing customers about
the expertise of our bankers. Lastly, we've unveiled new products to keep
customers relying on the bank. In 1999, these included a Seniors' checking
account with an eligibility age of 50, financial planning and investment
services through Invest Financial, and the promise of on-line banking (due to be
ready in early 2000).
In short, if the average bank customer uses five bank services, we want
all five of them, not just one or two. We'd also like to sell them a couple of
others they may not know they need
[BOX]
"While improving service comes with a price tag, it is
small compared to the costs of insufficient service."
2
<PAGE>
MEASURING, IMPROVING AND DELIVERING QUALITY SERVICE. Because consumers
tend to give their business to intelligent, helpful individuals whom they like,
service might also be called passive selling. Our research shows that Montana
commercial and retail customers rank service issues first when choosing where
they bank.
In the spring of 1999, your management team embarked on a major effort
to cultivate service at every level of the bank, from commercial lending to the
drive-up teller window to the corporate offices. We've begun by measuring our
current level of service through consumer research and mystery shopping. At this
point, the results are not complete, bu we believe they'll shed light on where
our service needs to improve. Once we know our shortcomings, we'll work to
correct them through courtesy training, product seminars, sales seminars and
continuing education across all levels. While improving service comes with a
price tag, it is small compared to the costs of insufficient service. This is
especially true at a time when it's vital for Western Security Bank to maximize
each contact with customers and prospects.
To further help, we'll be unveiling some new tools for our bankers. One
such too, Compass, will be mailed to commercial customers and prospects. Compass
is an economic quarterly newsletter covering Montana and the Northwest. Our goal
is to bring back relationship banking by giving our people the tools and
knowledge they need to create and cement relationships with customers.
IMPROVING EFFICIENCY AND MAXIMIZING FINANCIAL RESULTS. Fiscal year 1999
was a record year for earnings per share. Shareholders received fourth-quarter
earnings of $0.39 per share, annual earnings of $1.37 per share, and dividends
of $0.62 per share. Each of these figures is a record. This financial showing
was spurred by the bank's performance as well as actions taken to enhance
shareholder value, specifically the Dutch Auction repurchase of 1,082,854 shares
in December of 1998, and the overall reduction in common stock outstanding to
4,538,557. Additionally, your company maintained stockholders' equity of 9.05%
to assets, and the Board of Directors announced the intent to repurchase another
5% of WesterFed stock during the next 12 months at prevailing market prices.
[BOX]
"1999 was a good year for earnings per
share. Our intent is to make next year even
better."
While 1999 was a good year for earnings per share, our intent is to make next
year even better. For example, non-interest expenses increased by $467,000 in
fiscal 1999, a number that was reflected in our efficiency rating (though it is
important to note this was due in part to costs associated with Y2K compliance).
To curb this, we've begun, and will continue to take a hard look at the cost of
offering products versus the reward gained from those products. As a result,
auto loans originated through dealers and our Visa card program were terminated
in 1999. Products from which fees can be earned, such as financial planning,
were added. We believe that by stressing service and sales, and through
restructuring, we can begin to improve our efficiency rating, the bank's
profits, and your earnings.
3
<PAGE>
ENHANCING YOUR BANK'S IMAGE. In May of 1999, we hired a new
communications agency with the hope of re-tooling our public image. The first
step was to complete extensive consumer research. This research revealed that
name recognition for Western Security Bank is very high (over 90%). While this
is welcome news and shows our name change efforts have been successful, more
needs to be done.
The research also showed that most consumers (even our customers) had
no real opinion of the bank. Furthermore, commercial and retail consumers could
name only the most basic of banking products offered by Western Security Bank.
We believe strongly that in order to increase shareholder value and achieve your
company's potential, the bank must stand for something in the minds of
consumers. What will that image be? We want consumers to see our people as
helpful, service-oriented individuals with a complete portfolio of products at
their disposal. Once again, the goal is to form a relationship with our
customers, thereby gaining a greater share of their banking business.
[BOX]
"We believe strongly that in order to
increase shareholder value and achieve
your company's potential, the bank must
stand for something in the minds of
consumers."
POSITIONED FOR THE FUTURE. In summary, during 1999, far-reaching,
difficult decisions were made for the betterment of your company. We believe
these decisions have put your bank into a sound financial position, and prepared
it for growth.
[BOX]
"Western Security Bank now has the people,
the products and the tools to become a
strong leader in banking across Montana."
Western Security Bank now has the people, the products, the tools, and
the focus to become a strong leader in Montana, and an example of innovative
banking throughout the Northwest.
Clearly, we are optimistic about our future. And clearly, much work has
yet to be done. But as we move into a new century, and undoubtedly a new era in
banking, Western Security Bank has never been in a better position to meet the
challenges that lie ahead.
/s/ Ralph K. Holliday
-------------------------------------------------
Ralph Holliday
President and Chief Executive Officer
Western Security bank
/s/ Lyle R. Grimes
-------------------------------------------------
Lyle R. Grimes
Chairman, President and Chief Executive Officer
WesterFed Financial Corporation
4
<PAGE>
Selected Consolidated Financial and Other Data
<TABLE>
<S> <C> <C> <C> <C> <C>
(Dollars in thousands, except per share data) 1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
At June 30,
Selected Financial Condition Data:
Total assets $ 1,007,349 $ 1,022,136 $ 955,639 $ 563,931 $ 563,285
Loans receivable, net and loans held for sale 631,371 657,293 630,277 368,193 313,121
Mortgage-backed securities, net 151,749 126,433 149,169 104,947 143,825
Investment securities, FHLB stock and other 139,271 155,351 98,885 64,108 82,375
interest-earning assets
Deposits 645,549 636,441 630,869 350,212 344,155
Borrowed funds and repurchase agreements 251,185 255,186 199,236 125,838 134,704
Stockholders' equity 91,149 109,700 104,259 78,607 75,146
Book value per common share outstanding 20.08 19.64 18.74 17.88 17.09
Tangible book value per common share outstanding 15.93 16.01 14.99 17.88 17.09
Years Ended June 30, 1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
Selected Operations Data:
Total interest income $ 70,798 $ 74,524 $ 51,260 $ 42,544 $ 37,783
Total interest expense 39,244 42,286 28,407 24,737 20,984
--------- ---------- ---------- ---------- ---------
Net interest income 31,554 32,238 22,853 17,807 16,799
Provision for loan losses (1,300) (840) (400) -- --
Non-interest income 9,298 8,381 4,685 3,312 2,670
Non-interest expense (28,226) (27,759) (20,568) (14,004) (12,868)
--------- ---------- ---------- ---------- ---------
Income before income taxes 11,326 12,020 6,570 7,115 6,601
Income taxes (4,403) (4,760) (2,063) (2,556) (2,473)
--------- ---------- ---------- ---------- ---------
Net income $ 6,923 $ 7,260 $ 4,507 $ 4,559 $ 4,128
========= ========== ========== ========== =========
Net income per common share = basic $ 1.43 $ 1.37 $ 1.01 $ 1.08 $ 1.01
========= ========== ========== ========== =========
Net income per common share = diluted $ 1.37 $ 1.29 $ 0.96 $ 1.08 $ 1.01
========= ========== ========== ========== =========
Dividends per share $ 0.62 $ 0.54 $ 0.45 $ 0.36 $ 0.30
========= ========== ========== ========== =========
Dividend payout ratio1 45.25% 41.86% 46.88% 33.33% 29.70%
========= ========== ========== ========== =========
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Return on assets (ratio of net income to average 0.70% 0.72% 0.65% 0.79% 0.76%
total assets)
Return on equity (ratio of net income to average 6.93 6.73 5.15 5.90 5.54
equity)
Interest rate spread, at end of period 3.16 2.99 3.38 2.67 2.38
Net interest margin1 3.46 3.46 3.53 3.23 3.23
Ratio of non-interest expense to average total 2.84 2.74 2.98 2.43 2.47
assets
Non-performing assets to total assets, at end of 0.42 0.49 0.25 0.13 0.10
period
Total allowance for loan losses to total non- 121.13 97.44 191.01 280.42 350.35
performing assets
Stockholders' equity to total assets, at end of 9.05 10.73 10.91 13.94 13.34
period
Ratio of average interest-earning assets to average 104.69 105.74 110.57 113.58 113.51
interest-bearing liabilities
Number of offices 34 34 36 19 18
<FN>
- --------
1 Dividends per share divided by net income per share.
2 Net interest income divided by average interest-earning assets.
</FN>
</TABLE>
5
<PAGE>
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 Security Bank ("Western Security" or the
"Bank"), then known as Western Federal Savings Bank of Montana, from a federal
mutual to a stock savings bank, which was completed on January 6, 1994 (the
"Conversion"). Currently the Company has no business activity other than acting
as the holding company for Western Security. 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 corporate office located in Missoula, 34 branch offices, one loan servicing
office and two loan processing offices. 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, multi-family, commercial, agriculture and construction real estate
loans and non real estate commercial, agriculture and consumer loans in its
primary 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 statements of income include the results of operations of
Security Bancorp commencing March 1, 1997. Under the purchase 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. 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. 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. The name of
Western Federal Savings Bank was changed to Western Security Bank in February
1998.
Changes in Financial Condition, June 30, 1998 to June 30, 1999
Total assets decreased to $1.007 billion at June 30, 1999 as compared to $1.022
billion at June 30, 1998. Loans receivable and loans available- for-sale
decreased $25.9 million and investment securities, Federal Home Loan Bank stock
and all other interest earning assets decreased $16.1 million while
mortgage-backed securities increased $25.3 million. Total deposits increased
$9.1 million and total stockholders' equity decreased $18.6 million to $91.1
million.
Loans receivable and loans available-for-sale decreased $25.9 million to $631.4
million at June 30, 1999 from $657.3 million at June 30, 1998. The $25.9 million
decrease was primarily the result of principal repayments of $279.0 million and
the sale of loans available for sale of $105.1 million that exceeded new loan
originations of $357.9 million. Included in the $357.9 million in new loan
originations were $81.2 million in consumer loan originations and $56.6 million
in commercial and agriculture loan originations. The $81.2 million of consumer
loan originations included $32.9 million of loans originated through the Bank's
indirect auto and recreational dealer lending program that ceased operation in
May 1999. Loans receivable at June 30, 1999 included $71.2 million of commercial
real estate loans, $11.4 million of agriculture real estate loans and non-real
estate commercial and agriculture loans of $40.2 million and $23.2 million
respectively as compared to $61.4 million, $11.1 million, $34.4 million and
$24.0 million respectively at June 30, 1998. One- to four-family residential
loans decreased $34.3 million, or 11.1%, to $275.8 million at June 30, 1999 from
$310.1 million at June 30, 1998. This decrease is a result of the Bank's
business strategy of having more commercial bank-type loans in its loan
portfolio while limiting the Bank's exposure to rising interest rates due to
reducing longer term fixed rate mortgage loans held in portfolio.
6
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
Mortgage-backed securities increased $25.3 million to $151.7 million at June 30,
1999 from $126.4 million at June 30, 1998. The $25.3 million increase was
primarily the result of the purchase of $58.5 million of mortgage-backed
securities that exceeded principal repayments of $31.8 million. The $58.5
million of purchases were comprised of $23.0 million of adjustable rate and
$35.5 million of fixed rate mortgage-backed securities to partially offset the
decline in the balances of real estate loans.
Investment securities, FHLB stock and other interest earning assets decreased
$16.1 million to $139.3 million at June 30, 1999 from $155.4 million at June 30,
1998. The $16.1 million decrease was primarily the result of maturities and
principal payments of $136.0 million , the sale of $22.0 million of investment
securities available-for-sale and decreases in interest-bearing deposits and due
from banks of $4.7 million, partially offset by the purchase of $146.1 million
of investment securities and an increase of $1.3 million in FHLB stock and the
cash surrender value of life insurance policies.
Deposits increased $9.1 million to $645.5 million at June 30, 1999 from $636.4
million at June 30, 1998. Checking and money market accounts increased $8.4
million and $19.9 million respectively while certificates of deposit and savings
accounts decreased $14.6 million and $4.6 million respectively, reflecting a
$23.7 million increase in non-certificate of deposit accounts while certificates
of deposits decreased $14.6 million. This change in deposit mix is a result of
the Bank's business strategy of having a more commercial bank-type deposit mix
while limiting the Bank's exposure to interest rates due to reducing interest
sensitive certificates of deposit. Interest credited to deposit accounts for
fiscal 1999 was $24.3 million.
Borrowed funds and repurchase agreements decreased $4.0 million to $251.2
million, at June 30, 1999 from $255.2 million at June 30, 1998. There were
$319.6 million of additional new borrowings, of which $62.4 million were
advances of four years or more to partially fund new longer term fixed rate
loans added to the portfolio, $247.2 million were less than one year in maturity
and were used to fund short-term cash requirements and $10.0 million were
advances with maturities of one to four years. Net change in repurchase
agreements and principal repayments on borrowed funds were $323.6 million.
Stockholders' equity decreased $18.6 million, or 17.0 %, to $91.1 million at
June 30, 1999 from $109.7 million at June 30, 1998. This decrease was due to the
repurchase of 1,082,854 shares of common stock at $20.00 per share for a total
of $21.9 million. This decrease was partially offset by increases in equity
resulting from net income for the fiscal year of $6.9 million, $549,000 related
to contributions to Employee Stock Ownership Plan and shares earned and issued
under the Recognition and Retention plan, and the issuance of 36,116 new common
shares with a recorded value of $404,000 related to exercised stock options.
Stockholders' equity was also reduced $2.8 million for dividends declared during
the fiscal year and a decrease of $1.7 million related to changes in unrealized
losses associated with securities classified as available-for-sale being
adjusted to market value in accordance with Statement of Financial Accounting
Standards No. 115.
7
<PAGE>
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, 1999
---------------------------------------
Average Interest
Outstanding Earned/ Yield/
Balance1 Paid Rate1
(Dollars in Thousands)
<S> <C> <C> <C>
Interest-Earnings Assets:
Loans receivable2 3 $ 641,001 $ 53,773 8.39%
Mortgage-backed securities 126,339 8,033 6.36
Investments 128,920 8,048 6.24
Other interest-earning assets4 9,090 606 6.67
Cash surrender value of life insurance 6,842 338 4.94
---------- ---------- ----
Total interest-earning assets $ 912,192 $ 70,798 7.76%
========== ========== ====
Interest-Bearing Liabilities:
Certificates of deposit $ 374,155 $ 20,444 5.46%
Savings deposits 90,586 2,264 2.50
Demand and NOW deposits 112,744 876 0.78
Money market accounts 64,481 2,503 3.88
---------- ---------- ----
Total deposits 641,966 26,087 4.06
FHLB advances and other borrowed money 229,389 13,157 5.74
---------- ---------- ----
Total interest-bearing liabilities $ 871,355 $ 39,244 4.50%
========== ========== ====
Net interest income $ 31,554
==========
Net interest rate spread 3.26%
====
Net interest=earning assets $ 40,837
==========
Net interest margin 5 3.46%
====
Average interest=earning assets to average
interest=bearing liabilities 104.69%
==========
- -------------------
<FN>
1 Based on average monthly balances.
2 Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves.
3 Includes loans held for sale.
4 Includes primarily short-term liquid assets.
5 Net interest income divided by average interest-earning assets.
</FN>
</TABLE>
8
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended June 30, 1998 Year Ended June 30, 1997
---------------------------------- --------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance6 Paid Rate1 Balance1 Paid Rate1
------------ ---------- ----------- --------------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-Earnings Assets:
Loans receivable7 8 $ 662,536 $ 56,261 8.49% $ 451,771 $ 37,923 8.39%
Mortgage-backed securities 140,994 9,676 6.86 116,836 8,185 7.01
Investments 113,412 7,580 6.68 61,241 3,884 6.34
Other interest-earning assets9 8,702 675 7.76 13,732 1,045 7.61
Cash surrender value of life
insurance 6,540 332 5.08 4,187 223 5.33
--------- -------- ------ --------- -------- ------
Total interest-earning assets $ 932,184 $ 74,524 7.99% $ 647,767 $ 51,260 7.91%
========= ======== ====== ========= ======== ======
Interest-Bearing Liabilities:
Certificates of deposit $ 380,726 $ 21,824 5.73% $ 264,588 $ 14,986 5.66%
Savings deposits 96,966 2,658 2.74 76,829 2,223 2.89
Demand and NOW deposits 106,392 1,209 1.14 66,203 883 1.33
Money market accounts 52,496 2,112 4.02 31,873 1,146 3.60
--------- -------- ------ --------- -------- ------
Total deposits 636,580 27,803 4.37 439,493 19,238 4.38
FHLB advances and other
borrowed money 244,964 14,483 5.91 146,413 9,169 6.26
--------- -------- ------ --------- -------- ------
Total interest-bearing
liabilities $ 881,544 $ 42,286 4.80% $ 585,906 $ 28,407 4.85%
========= ======== ====== ========= ======== ======
Net interest income $ 32,238 $ 22,853
======== ========
Net interest rate spread 3.19% 3.06%
====== ======
Net interest-earning assets $ 50,640 $ 61,861
========= =========
Net interest margin 10 3.46% 3.53%
====== ======
Average interest-earning assets to
average interest-bearing liabilities 105.74% 110.57%
======== ========
<FN>
- --------
1 Based on average monthly balances.
2 Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves.
3 Includes loans held for sale.
4 Includes primarily short-term liquid assets.
5 Net interest income divided by average interest-earning assets.
</FN>
</TABLE>
9
<PAGE>
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>
1999 vs 1998 1998 vs 1997
--------------------------------------- --------------------------------------
Increase/(Decrease) Due To: Increase/(Decrease) Due To:
--------------------------- ---------------------------
Total Total
Rate/ Increase Rate/ Increase
Volume Rate Volume (Decrease) Volume Rate Volume (Decrease)
--------------------------------------- --------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable $ (1,829) $ (682) $ 23 $ (2,488) $17,692 $ 443 $ 203 $18,338
Mortgage-backed securities (1,006) (712) 75 (1,643) 1,693 (167) (35) 1,491
Investments 2,107 (1,282) (357) 468 3,596 51 49 3,696
Other interest-earning assets (386) 741 (424) (69) (63) (327) 20 (370)
Cash surrender value of life
insurance 15 (9) -- 6 125 (10) (6) 109
-------- ------- ------ -------- ------- ------- ----- -------
Total interest-earning
assets $ (1,099) $(1,944) $ (683) $ (3,726) $23,043 $ (10) $ 231 $23,264
======== ======= ====== ======== ======= ======= ===== =======
Interest-Bearing Liabilities:
Certificates of deposit $ (377) $(1,020) $ 17 $ (1,380) $6,578 $ 180 $ 80 $ 6,838
Savings deposits (175) (235) 16 (394) 583 (117) (31) 435
Demand and NOW deposits 72 (382) (23) (333) 536 (131) (79) 326
Money market accounts 482 (74) (17) 391 742 136 88 966
-------- ------- ------ -------- ------- ------- ----- -------
Total Deposits 2 (1,711) (7) (1,716) 8,439 68 58 8,565
FHLB advances and other
borrowed money (921) (431) 26 (1,326) 6,070 (434) (322) 5,314
-------- ------- ------ -------- ------- ------- ----- -------
Total interest-bearing
liabilities $ (919) $(2,142) $ 19 $ (3,042) $14,509 $ (366) $(264) $13,879
======== ======= ====== ======== ======= ======= ===== =======
Changes to net interest income $ (180) $ 198 $ (702) $ (684) $8,534 $ 356 $ 495 $ 9,385
======== ======= ====== ======== ======= ======= ===== =======
</TABLE>
10
<PAGE>
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.
At June 30,
---------------------
1999 1998 1997
------ ------ ------
Weighted average yield on:
Loans receivable 1 2 8.01% 8.34% 8.49%
Mortgage-backed securities 6.48 6.73 7.27
Investments 6.09 6.32 6.73
Other interest-earning assets 5.46 6.15 5.58
Cash surrender value of life insurance 5.07 5.22 5.11
------ ------ ------
Combined weighted average yield on interest-
earning assets 7.46 7.78 8.08
------ ------ ------
Weighted average rate paid on:
Certificates of deposit 5.21 5.77 5.52
Savings deposits 2.34 2.77 2.80
Demand and NOW deposits 0.65 0.96 1.15
Money market accounts 3.69 4.10 3.94
------ ------ ------
Total deposits 3.83 4.38 4.24
FHLB advances and other borrowed money 5.49 5.81 6.11
Collateralized mortgage obligations 11.48 11.48 11.37
------ ------ ------
Combined weighted average rate paid on interest-
bearing liabilities 4.30 4.79 4.70
------ ------ ------
Interest rate spread 3.16% 2.99% 3.38%
====== ====== ======
- --------
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.
11
<PAGE>
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:
Year Ended June 30,
-----------------------------------------------
Components of net income: 1999 1998 1997
-------------------- ---------------- ---------
(In Thousands)
Amount Change Amount Change Amount
---------- --------- -------- ------- ---------
Interest income $ 70,798 $(3,726) $74,524 $23,264 $ 51,260
Interest expense 39,244 (3,042) 42,286 13,879 28,407
-------- ------- ------- ------- --------
Net interest income 31,554 (684) 32,238 9,385 22,853
Provision for loan losses (1,300) (460) (840) (440) (400)
Non-interest income 9,298 917 8,381 3,696 4,685
Non-interest expense (28,226) (467) (27,759) (7,191) (20,568)
-------- ------- ------- ------- --------
Income before income taxes 11,326 (694) 12,020 5,450 6,570
Income taxes (4,403) (357) (4,760) 2,697 (2,063)
-------- ------- ------- ------- --------
Net income increase (decrease) $ 6,923 $ (337) $ 7,260 $ 2,753 $ 4,507
======== ======= ======= ======= ========
Comparison of Operating Results for the Years Ended June 30, 1999
and June 30, 1998
General. Net income decreased $337,000 to $6.9 million for the fiscal year ended
June 30, 1999 as compared to $7.3 million for the fiscal year ended June 30,
1998. The $337,000 decrease in net income was comprised of a decrease in net
interest income of $684,000, a $467,000 increase in non-interest expense and a
$460,000 increase in provision for loan losses, offset by an increase in
non-interest income of $917,000 and a decrease in income tax expense of
$357,000. The interest rate spread increased to 3.16% at June 30, 1999 from
2.99% at June 30, 1998. 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 "Quantitative and
Qualitative Disclosures About Market Risk."
Interest Income. Interest income decreased $3.7 million to $70.8 million for the
fiscal year ended June 30, 1999 from $74.5 million for the fiscal year ended
June 30, 1998. This decrease resulted from a decrease in the average balance of
interest earning assets of $20.0 million to $912.2 million during fiscal 1999
from $932.2 million during fiscal 1998 and a decrease in the average yield on
interest-earning assets to 7.76% during fiscal 1999 from 7.99% during fiscal
1998.
Interest earned on loans receivable decreased $2.5 million due primarily to a
$21.5 million decrease in the average balance of loans receivable to $641.0
million during fiscal 1999 from $662.5 million during fiscal 1998. In addition,
the average yield on loans decreased to 8.39% during fiscal 1999 from 8.49%
during fiscal 1998. The decrease in the average balance of loans receivable was
the result of the sale $105.0 million of loans available-for-sale and loan
repayments of $279.0 million that exceeded new loan originations of $357.9
million. The decline in interest rates during the fiscal year contributed to the
decline in the yield on the loan portfolio.
Interest earned on mortgage-backed securities decreased $1.6 million due
primarily to a $14.7 million decrease in the average balance of mortgage-backed
securities outstanding to $126.3 million during fiscal 1999 from $141.0 million
during fiscal 1998. The decrease in the average balance of mortgage-backed
securities was primarily the result of a general decline in interest rates
during the fiscal year that resulted in repayments of principal of $31.8 million
and also contributed to the decrease in the average yield on mortgage-backed
securities to 6.36% during fiscal 1999 from 6.86% during fiscal 1998.
12
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
Interest earned on investment securities increased $468,000 due primarily to a
$15.5 million increase in the average balance of investment securities to $128.9
million during the fiscal year 1999 from $113.4 million during fiscal 1998. The
average yield earned on investment securities decreased to 6.24% during fiscal
year 1999 from 6.68% during the same period last year due to a general decline
in interest rates during fiscal 1999.
Interest Expense. Interest expense decreased $3.1 million to $39.2 million in
fiscal 1999 from $42.3 million in fiscal 1998. This decrease resulted from a
decrease in the average balance of interest-bearing liabilities of $10.1 million
to $871.4 million during fiscal 1999 from $881.5 million during fiscal 1998 and
a decrease in the average rate paid on interest-bearing liabilities to 4.50%
during fiscal 1999 from 4.80% during fiscal 1998. Interest expense on deposits
decreased $1.7 million primarily due to a decrease in the rate paid on deposits
to 4.06% during fiscal 1999 from 4.37% during fiscal 1998 . The average balance
of deposits increased $5.4 million to $642.0 million during fiscal 1999 from
$636.6 million during fiscal 1998. Interest expense on FHLB advances and other
borrowed money decreased $1.3 million to $13.2 million in fiscal 1999 from $14.5
million in fiscal 1998. The average rate paid on FHLB advances and other
borrowed money also decreased to 5.74% during fiscal 1999 from 5.91% during
fiscal 1998 and was primarily the result of a general decline in interest rates
during fiscal 1999.
Provision for Loan Losses. The provision for loan losses increased $460,000 to
$1.3 million for fiscal year 1999 from $840,000 for the same period last year.
The increased provision for loan losses is primarily related to the consumer
loan dealer finance program. The provision for loan losses is determined by
management as the amount to be added to the allowance for loan losses after net
charge-offs have been deducted to bring the allowance to a level which is
considered adequate to absorb losses inherent in the loan portfolio in
accordance with generally accepted accounting principles. At June 30, 1999, the
Company had $4.2 million of non-performing assets (representing 0.42% of total
assets) compared to $5.0 million at June 30, 1998 (representing 0.49% of total
assets). At June 30, 1999, the Company had allowance for loan losses to
non-performing assets of 121.13% as compared to 97.44% at June 30, 1998.
Management's evaluation of the adequacy of its loan loss reserves, the quality
and composition of the loan portfolio and economic conditions in Montana
resulted in the $1.3 million 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. For additional
information, see "Loan Quality."
Non-interest Income. Non-interest income increased $917,000 to $9.3 million in
fiscal 1999 from $8.4 million during 1998. The $917,000 increase resulted
primarily from increases in fees and service fees, net gain on sale of loans and
securities available-for-sale and other operating income of $350,000, $96,000
and $471,000 respectively. The low interest rate environment that existed during
fiscal 1999 produced strong mortgage loan refinance activity which resulted in
$3.7 million of loan origination fees and gains on sale of loans
available-for-sale as compared to $3.2 million for the same period last year.
Seasonal fluctuations in loan volume and a decline in loan volume due to
increased interest rates could adversely affect origination fees and gains on
sale of loans available-for- sale. Included in non-interest income for fiscal
1999 is a net gain of $314,000 from the sale of the Bank's credit card program,
the sale of a building, life insurance proceeds and the write down of mortgage
servicing rights that reduced servicing fee income on loans serviced for others.
Non-interest Expense. Non-interest expense increased $467,000 to $28.2 million
in fiscal 1999 from $27.8 million in fiscal 1998. Compensation and employee
benefits and equipment and furnishings expense increased $546,000 and $467,000
respectively while occupancy, marketing and other expense decreased $118,000,
$173,000 and $276,000 respectively. Included in non-interest expense for fiscal
1999 is $834,000 related to year 2000 readiness expenditures, early retirement
incentives for certain executive officers, non-recurring professional fees and
data center conversion costs.
Income Taxes. Income tax expenses decreased $357,000 to $4.4 million for fiscal
1999 from $4.8 million for fiscal 1998. The $357,000 decrease in income tax
expense was primarily the result of the decrease in income before income tax
expense of $694,000 and the non-tax deductibility of $666,000 of goodwill
amortization for fiscal 1999.
13
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
Comparison of Operating Results for the Years Ended June 30, 1998
and June 30, 1997
General. Net income increased $2.8 million to $7.3 million for the fiscal year
ended June 30, 1998 as compared to $4.5 million for the fiscal year ended June
30, 1997. Included in net income for the fiscal year ended June 30, 1997 was 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 $2.8 million increase in net income was comprised of an increase in net
interest income of $9.4 million and a $3.7 million increase in non-interest
income, offset by an increase in non-interest expense of $7.2 million, an
increase in provision for loan losses of $440,000 and an increase in income tax
expense of $2.7 million. Only four months of combined operations resulting from
the Acquisition are included in net income for the fiscal year ended June 30,
1997. The interest rate spread decreased to 2.99% at June 30, 1998 from 3.38% at
June 30, 1997.
Interest Income. Interest income increased $23.2 million to $74.5 million for
the fiscal year ended June 30, 1998 from $51.3 million for the fiscal year ended
June 30, 1997. This increase resulted from an increase in the average balance of
interest earning assets of $284.4 million to $932.2 million during fiscal 1998
from $647.8 million during fiscal 1997 and an increase in the average yield on
interest-earning assets to 7.99% during fiscal 1998 from 7.91% during fiscal
1997.
Interest earned on loans receivable increased $18.3 million due primarily to a
$210.7 million increase in the average balance of loans receivable to $662.5
million during fiscal 1998 from $451.8 million during fiscal 1997. In addition,
the average yield on loans increased to 8.49% during fiscal 1998 from 8.39%
during fiscal 1997. The increase in the average balance of loans receivable and
the increase in yield was primarily the result of having the higher yielding
loans from the Acquisition for the full fiscal year 1998 as compared to only a
portion for fiscal 1997.
Interest earned on mortgage-backed securities increased $1.5 million due
primarily to a $24.2 million increase in the average balance of mortgage-backed
securities outstanding to $141.0 million during fiscal 1998 from $116.8 million
during fiscal 1997. The increase in the average balance of mortgage-backed
securities was the result of having the mortgage-backed securities purchased in
the Acquisition for the full fiscal year 1998 as compared to only a portion for
fiscal 1997.
Interest earned on investment securities increased $3.7 million due primarily to
a $52.2 million increase in the average balance of investment securities to
$113.4 million during the fiscal year 1998 from $61.2 million during fiscal
1997. The increase in the average balance of investment securitiess was
primarily the result of having the securities purchased in the Acquisition for
the full fiscal year 1998 as compared to a portion for fiscal 1997 and the
purchase of securities in excess of maturities and sales.
Interest earned on other interest-earning assets and cash surrender value of
life insurance decreased $261,000 due primarily to a decrease in the average
balance of other interest-earning assets of $2.7 million to $15.2 million during
fiscal 1998 from $17.9 million during fiscal 1997.
Interest Expense. Interest expense increased $13.9 million to $42.3 million in
fiscal 1998 from $28.4 million in fiscal 1997. This increase resulted from an
increase in the average balance of interest-bearing liabilities of $295.6
million to $881.5 million during fiscal 1998 from $585.9 million during fiscal
1997. Interest expense on deposits increased $8.6 million primarily due to an
increase in the average balance of deposits of $197.1 million to $636.6 million
during fiscal 1998 from $439.5 million during fiscal 1997. The average rate paid
on deposits decreased slightly to 4.37% during fiscal 1998 from 4.38% during
fiscal 1997. The increase in the average balance of deposits was the result of
the purchase of $287.0 million of deposits related to the Acquisition in fiscal
1997. Interest expense on FHLB advances and other borrowed money increased $5.3
million to $14.5 million in fiscal 1998 from $9.2 million in fiscal 1997. This
increase was the result of an increase of $98.6 million in the average balance
of FHLB advances and other borrowed money to $245.0 million during fiscal 1998
from $146.4 million during fiscal 1997. The increase in FHLB advances was
primarily to fund the growth in investment securities.
14
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
Provision for Loan Losses. The Company provided $840,000 for loan losses for the
fiscal year ended June 30, 1998. At June 30, 1998, the Company had $5.0 million
of non-performing assets (representing 0.49% of total assets) compared to $2.4
million at June 30, 1997 (representing 0.25% of total assets). At June 30, 1998,
the Company had allowance for loan losses to non-performing assets of 97.44% as
compared to 191.01% at June 30, 1997. 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 $840,000 provision for loan losses.
Non-interest Income. Non-interest income increased $3.7 million to $8.4 million
in fiscal 1998 from $4.7 million during 1997. The $3.7 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 $1.6 million,
$1.5 million, $375,000 and $268,000 respectively. The $1.6 million increase in
loan origination fees was primarily the result of increased loan production and
the subsequent sale of loans to the secondary markets. The lower interest rate
environment in fiscal 1998 as compared to the prior year resulted in substantial
increases in loan refinancing volume and the loan origination volume also was
greater than the prior year due to a full year of loan production as result of
the Acquisition. The $1.5 million increase in service fees was primarily 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 and were earned for the full fiscal 1998 as compared to a
portion of fiscal 1997.
Non-interest Expense. Non-interest expense increased $7.2 million to $27.8
million in fiscal 1998 from $20.6 million in fiscal 1997. The $7.2 million
increase was primarily the result of the Acquisition and the resulting expenses
for the full fiscal year 1998 as compared to a portion of fiscal 1997. In
addition, expenses in excess of $700,000 were incurred in the conversion of data
centers and approximately $3.0 million of new equipment was purchased related to
the data center conversion, resulting in increased depreciation costs. Fiscal
1997 included a one-time $2.3 million special assessment to recapitalize the
SAIF.
Income Taxes. Income tax expenses increased $2.7 million to $4.8 million for
fiscal 1998 from $2.1 million for fiscal 1997. The $2.7 million increase in
income tax expense was primarily the result of an increase in income before
income tax expense of $5.4 million and the non-tax deductibility of $633,000 of
goodwill amortization for fiscal 1998.
Loan Quality
Total non-performing assets decreased $800,000 to $4.2 million at fiscal year
end June 30, 1999 from $5.0 million at fiscal year end June 30, 1998. The
$800,000 decrease was primarily in real estate loans. Non-performing assets as a
percentage of total assets decreased to 0.42% at June 30, 1999 from 0.49% at
June 30, 1998. The 0.42% is substantially less than the national composite for
thrifts of 0.73% at March 31, 1999, which is the latest available information
reported by the Office of Thrift Supervision. In addition to non-performing
loans and foreclosed assets as of June 30, 1999, there were no additional loans
identified by the Company with respect to which information known about the
possible credit problems of the borrowers or the cash flows of the security
properties have caused management to have some concerns as to the ability of the
borrowers to comply with present loan repayment terms and which may result in
the future inclusion of such items in the non-performing asset categories.
Quantitative and Qualitative Disclosures
About Market Risk
As a financial institution, the Company's primary component of market risk is
interest rate volatility. Fluctuations in interest rates will ultimately impact
both the level of income and expense recorded on a large portion of the
Company's assets and liabilities, and the market value of all interest-earning
assets, other than those which possess a short term to maturity. All significant
interest rate risk management procedures are performed at the Company level.
Based upon the Company's nature of operations, the Company is not subject to
foreign currency exchange or commodity price risk. The Company's loan portfolio
is concentrated primarily within the State of Montana and is subject to risks
associated with the local economy. See "Comparison of Operating Results for the
Years Ended June 30, 1999 and June 30, 1998 - Provision for Loan Losses." The
Company does not own any trading assets.
15
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
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 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. The Bank also sold in
fiscal 1999 $105.1 million of primarily 30 year-fixed rate 1-4 family
residential mortgage loans to the secondary market in an attempt to limit the
exposure to rising interest rates.
In addition, depending on the Bank's interest rate risk position, the Bank may
also sell or convert to Federal Home Loan Mortgage Corporation ("FHLMC")
participation certificates ("PC's") newly originated 30-year, fixed-rate
residential loans. The Bank securitizes such loans to limit credit risk and
increase its liquidity. The Bank's policy is to carry FHLMC PC's 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, 1999, the Bank was a party to three interest rate exchange
agreements, two of which were agreements with the FHLB of Seattle covering a
total of $10.0 million in notional principal amounts and one for $5.0 million
with an investment firm. 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 1999, these
swaps and caps had the effect of increasing the Bank's cost of funds. During
fiscal 1999, the increase in the cost of funds attributable to these swaps and
caps was $111,000. The Bank's interest rate caps expire in 1999 and 2000.
At June 30, 1999 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
16
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
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 15 of the Notes to Consolidated Financial Statements.
OTS regulations provide a Net Portfolio Value ("NPV") and an Interest Rate
Sensitivity Measure approach to the quantification of interest rate risk. NPV is
defined as the net present value of an institution's existing assets,
liabilities, and off-balance sheet contracts. An institution's NPV ratio for a
given interest rate scenario is calculated by dividing the net portfolio value
that would result in that scenario by the present value of the institution's
assets in that same scenario and is expressed in percentage terms. The NPV ratio
is analogous to the capital-to-assets ratio used to measure regulatory capital,
but NPV is measured in economic values (or present values) in a particular rate
scenario. Interest Rate Sensitivity Measure is the magnitude of the decline in
an institution's NPV ratio that occurs as a result of an adverse rate shock of
200 basis points. The measure equals the difference between an institution's
pre-shock NPV ratio and its post-shock NPV ratio, and is expressed in basis
points. The Bank's Asset/Liability Management Committee has established the
minimum level of interest rate risk that they are willing to allow under current
interest rates and for a range of hypothetical interest rate scenarios. These
six scenarios are represented by immediate, permanent, parallel movements in the
term structure of interest rates of plus and minus 100, 200, and 300 basis
points from the actual term structure at quarter end.
Presented below, as of June 30, 1999, 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.
Board Actual at June 30, 1999
Change in Market Minimum as Measured by OTS
Interest Rate Permissible
(Basis Points) NPV Rate
- ------------------- --------------- -----------------------------------------
NPV as a % of PV of assets
- ------------------- --------------- -----------------------------------------
Change
NPV Ratio (Basis Points)
- ------------------- --------------- ---------------------- ------------------
+300 6.00 6.51% -271
+200 7.00 7.55% -167
+100 8.00 8.48% -74
-0- 8.50 9.22% -0-
-100 9.00 9.71% +49
-200 9.50 10.05% +84
-300 10.00 10.40% +118
The OTS has established guidelines for determining the level of interest rate
risk for an OTS regulated institution and has developed an interagency uniform
ratings system establishing several levels of interest rate risk: "minimal,
"moderate", "significant," "high'" and "imminent threat." Based on a 200 basis
point increase in interest rates the Bank's post-shock 7.55% NPV ratio,
representing a 167 basis point change from the 9.22% pre-shock NPV ratio,
indicates a risk rating of minimal for the Bank at June 30, 1999.
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 decrease in
interest rates, the Bank would experience a 118 basis point increase in NPV in a
declining rate environment and a 271 basis point 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 271
basis point 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.
17
<PAGE>
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.
18
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
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, 1999, 1998 and 1997.
For the Year Ended June 30,
-------------------------------
1999 1998 1997
(In Thousands)
- -------------------------------------------------------------------------------
Net Income $ 6,923 $ 7,260 $ 4,507
Adjustments to reconcile net income to net
cash provided by operating activities 32,740 23,475 19,598
- -------------------------------------------------------------------------------
Net cash provided by operating activities 39,663 30,735 24,105
Net cash (used) by investing activities 4,606 (51,101) (21,642)
Net cash provided (used)
by financing activities (44,391) 32,275 1,397
- -------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents (122) 11,909 3,860
Cash and cash equivalents at
beginning of period 29,068 17,159 13,299
- -------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 28,946 $ 29,068 $ 17,159
- -------------------------------------------------------------------------------
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, 1999, 1998 and 1997, the Company's loan originations
totaled $357.9 million,$366.7 million and$226.8 million, respectively.
Purchases of mortgage-backed securities totaled $58.5 million, $7.0 million and
$98.4 million for fiscal years ended June 30, 1999, 1998 and 1997, respectively.
Purchases of investment securities totaled $146.1 million, $148.8 million and
$109.7 million for the fiscal years ended June 30, 1999, 1998 and 1997,
respectively. Mortgage-backed securities and investment securities purchased in
fiscal 1997 included $91.4 million and $20.0 million respectively, related to
the Acquisition.
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, 1999, 1998 and 1997, 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
$573.9 million, $474.2 million, and $313.5 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, 1998 and 1997 the net increase in
cash flows from financing activities was $32.3 million and $1.4 million
respectively, and a net decrease of $44.4 million for the fiscal year ended June
30, 1999.
19
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
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 4%. The
Bank's regulatory liquidity ratio was 16.5% at June 30, 1999.
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, 1999, the Bank's regulatory liquid assets totaled $117.0 million.
Liquidity management for the Bank is both a daily and long-term function of the
Company's management strategy. Excess funds are generally invested in short-term
investments such as FHLB certificates of deposit. If the Bank should require
funds beyond its ability to generate them internally, additional sources of
funds are available through the use of FHLB advances. At June 30, 1999, the Bank
had outstanding borrowings of $251.2 million, which included $244.1 million of
FHLB advances, $6.7 million of repurchase agreements and $435,000 of
collateralized mortgage obligations and other borrowed money.
At June 30, 1999, the Bank had outstanding commitments to originate loans of
$22.6 million, of which $4.7 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 less
than one year from June 30, 1999 totaled $273.6 million.
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
Security, which are subject to regulations and the Bank's continued compliance
with all regulatory capital requirements. See Note 2 of the Notes to
Consolidated Financial Statements for information regarding limitations of the
Bank's ability to pay dividends to the Company.
20
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
Year 2000 Readiness Disclosure
General. The Year 2000 ("Y2K") issue confronting the Bank and its suppliers,
customers, customer's suppliers, and competitors centers on the inability of
computer systems to recognize the Year 2000. Many existing computer programs and
systems originally were programmed with six digit dates that provided only two
digits to identify the calendar year in the date field. With the impending new
millennium, these programs and computers will recognize "00" as the year 1900
rather than the year 2000. The Year 2000 issue affects virtually all companies
and organizations.
Financial institution regulators recently have increased their focus upon Y2K
compliance issues and have issued guidance concerning the responsibilities of
senior management and directors. The Federal Financial Institution Examination
Council ("FFIEC") has issued several interagency statements on Y2K Project
Management Awareness. These statements require financial institutions to, among
other things, examine the Y2K implications of their reliance on vendors and with
respect to data exchange and the potential impact of the Y2K issue on their
customers, suppliers, and borrowers. These statements also require each
federally regulated financial institution to survey its exposure, measure its
risk, and prepare a plan to address the Y2K issue. In addition, the federal
banking regulators have issued safety and soundness guidelines to be followed by
insured depository institutions, such as the Bank, to assure resolution of any
Y2K problems. The federal banking agencies have asserted that Y2K testing and
certification is a key safety and soundness issue in conjunction with regulatory
examinations and, thus, that an institution's failure to address appropriately
the Y2K issue could result in supervisory action, including the reduction of the
institution's supervisory rating, the denial of applications for approval of
mergers or acquisitions, or the imposition of civil monetary penalties.
Risk. Like most financial institution service providers, the Bank and its
operations may be significantly affected by the Y2K issue due to its dependence
on technology and date-sensitive data. Computer software and hardware and other
equipment, both within and outside the Bank's direct control and third parties
with whom the Bank electronically or operationally interfaces (including without
limitation its customers and third party vendors), are likely to be affected. If
computer systems are not modified in order to be able to identify the Year 2000,
many computer applications could fail or create erroneous results. As a result,
many calculations which rely on date field information such as interest,
payments, or due dates, and other operating functions, could generate results
which are significantly misstated, and the Bank could experience an inability to
process transactions, prepare statements, or engage in similar normal business
activities. Likewise, under certain circumstances, a failure to adequately
address the Y2K issue could adversely affect the viability of the Bank's
suppliers and creditors and the creditworthiness of its borrowers. Thus, if not
adequately addressed, the Y2K issue could result in a significant adverse impact
on the Bank's operations and, in turn, its financial condition and result of
operations.
State of Readiness. During July 1997, the Bank formulated its plan to address
the Y2K issue. Since that time, the Bank has taken the following steps:
o Established senior management advisory and review responsibilities; o
Completed a Bank-wide assessment of applications and system software;
o Built an internal tracking database for application and vendor
software;
o Developed compliance plans and schedules for all lines of business;
o Initiated vendor compliance verification;
o Began awareness and education activities for employees through
existing internal communication channels;
o Developed a process to respond to customer inquiries as well as help
educate customers on the Y2K issue;
o Converted to new certified Y2K primary data system including: 1)
loans, deposit, and general ledger software; 2) data center service
provider; and 3) PC-based hardware and software throughout the Bank;
o Developed contingency plans for each mission critical system;
o Established a business remediation plan;
o Developed systems verification procedures for after rollover; and
o Assessed the Bank's Y2K cash needs.
21
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
The following paragraphs summarize the phases of the Bank's Y2K plan:
Awareness Phase. The Bank formally established a Y2K plan headed by a senior
manager, and a Y2K committee was assembled for management of the Y2K project.
The Y2K committee created a plan of action that includes milestones, budget
estimates, strategies, and methodologies to track and report the status of the
project. Members of the Y2K committee also received regulatory publications and
attended conferences and information sharing sessions to gain more insight into
the Y2K issue and potential strategies for addressing it.
Assessment Phase. The Bank's strategies were further developed with respect to
how the objectives of the Y2K plan would be achieved, and a Y2K business risk
assessment was made to quantify the extent of the Bank's Y2K exposure. An
assessment of applications and software (which is periodically updated as new
technology is acquired and as systems progress through subsequent phases) was
developed to identify and monitor Y2K readiness for information systems
(hardware, software, utilities, and vendors) as well as environmental systems
(security systems, facilities, etc.). Systems were prioritized based on business
impact and available alternatives. Mission critical systems supplied by vendors
were researched to determine Y2K readiness. Where Y2K-ready versions were not
immediately available, the Bank is monitoring vendor renovation progress. The
Bank identified functional replacements which were either up-gradable or
currently Y2K-ready, and a formal plan developed to repair, upgrade, or replace
all mission critical systems.
Beginning in August 1998, all credits greater than $250,000 were evaluated for
Y2K exposure by the relationship account officer using a questionnaire developed
by the Bank's credit administration staff. Because the Bank's loan portfolio is
primarily real estate based and is diversified with regard to individual
borrowers and types of businesses, and the Bank's primary market area is not
significantly dependent on one employer or industry. As part of the current
credit approval process, all new and renewed loans are evaluated for Y2K risk.
During the course of these evaluations, Bank personnel have met individually
with each of its larger borrowers to discuss and obtain information regarding
each borrower's dependence on information technology and third party vendors and
the nature of steps being taken by the borrowers to address their Y2K risk.
While the Bank will continue to monitor the progress being made by its larger
borrowers in addressing their own Y2K risk, to date the Bank is generally
satisfied with these customers responses to the Bank's inquiries and their
progress in addressing their Y2K risk.
Renovation Phase. The Bank's assessment of applications and system software
revealed that Y2K upgrades were available for all vendor supplied mission
critical systems. All of the Y2K-ready versions have been delivered and placed
into production and have entered the validation process with the exception of
the Bank's utility company. The Bank has not yet received sufficient information
from this vendor to predict the outcome of their Y2K efforts.
Validation Phase. The validation phase is designed to test the ability of
hardware and software to accurately process date sensitive data. The Bank has
conducted validation testing of each mission critical system. During the
validation testing, no significant Y2K problems were identified relating to any
mission critical systems.
Implementation Phase. The Bank's plan calls for putting Y2K-ready systems into
production before having actually completed Y2K validation testing. Y2K-ready
modified or upgraded versions have been installed and placed into production
with respect to all missions critical systems with the exception of the Bank's
utility company.
Bank Resources Invested. The Bank's Y2K committee was assigned the task of
ensuring that all systems across the Bank are identified, analyzed for Y2K
compliance, corrected, if necessary, tested and changes implemented. The Y2K
committee members represent all functional areas of the Bank, including senior
management, accounting, central operations, commercial/agricultural lending,
internal audit, and information systems. The Vice-President-Audit/Compliance is
the Y2K coordinator and heads the Y2K committee. The Bank's Board of Directors
oversees the Y2K plan and provides guidance and resources to, and receives
monthly updates from the Y2K coordinator.
Management currently estimates total costs of the Bank's Year 2000 compliance to
be less than $280,000; $189,000 of which has already been incurred. The Bank
does not believe the cost of addressing the Year 2000 issues will be a material
event or uncertainty that would cause reported financial information not to be
necessarily indicative of future operating results or financial conditions. Nor
does it believe that the costs or the consequences of incomplete or untimely
resolution of its Year 2000 issues represent a known material event or
uncertainty that is reasonably likely to
22
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
affect its future financial results, or cause its reported financial information
not to be necessarily indicative of future financial condition.
There are numerous risks associated with the Year 2000, including the
possibility of a failure of third parties to remediate their own Year 2000
issues. The failure of third parties, which the Bank has financial or
operational relationships with, to remediate their technology systems in a
timely manner could result in a material financial risk to the Bank. While the
Bank exercises no control over third parties, the Bank's Year 2000 plan includes
a survey assessment of critical third party responses and remediation plans and
their potential impact to the Bank.
Contingency Plans. During the assessment phase, the Bank developed back-up or
contingency plans for each of its mission critical systems. These contingency
plans were reviewed for adequacy and employee training was conducted. Validation
of the contingency plans will be substantially completed by September 30, 1999
and reviewed by the Bank's Internal Audit Department. The Bank also developed a
Remediation Plan for the Corporate offices.
System Verification Procedures for After Rollover: Systems verification
procedures are a critical phase of the Bank's project management process to
ensure the integrity of all data. Validation will occur on all core applications
and testing will also be performed on system software. In addition, testing to
validate historical or archive data will be conducted. Systems verification
procedures will be conducted for all core applications on January 2, 2000 (Year
end-December 31st); January 4, 2000 (1st business day-January 3rd); February 1,
2000 (Month-end-January 31st); and March 1, 2000 (Leap year-February 29th).
System verification procedures for all system software will be conducted on
January 1, 2000 (Year end-December 31st).
Cash and Liquidity Plan: Management has established a cash and liquidity plan to
ensure that adequate funds are available for the Bank's Y2K needs and details
both a primary and secondary source of funding for Y2K cash needs in addition to
alternative sources of funds. Y2K cash needs will be reviewed and updated
monthly to account for any changes in the environment related to Y2K. In the
event additional funds are needed to meet Y2K demands, the Bank will obtain
these funds in the most cost effective way.
23
<PAGE>
Independent Auditors' Report
The Board of Directors
WesterFed Financial Corporation:
We have audited the accompanying consolidated balance sheets of WesterFed
Financial Corporation and subsidiaries as of June 30, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended June 30, 1999. 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, 1999 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1999 in conformity with generally accepted accounting
principles.
Billings, Montana
July 23, 1999
24
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
(Dollars in thousands, except share and per share data)
June 30,
1999 1998
Assets
Cash and due from banks............................... $ 25,867 19,440
Interest-bearing bank deposits........................ 3,079 9,628
--------- ---------
Cash and cash equivalents..................... 28,946 29,068
Interest-bearing deposits............................. 1,985 100
Investment securities available-for-sale.............. 103,441 108,511
Investment securities, at amortized
cost (estimated fair value of
$9,255 in 1999 and $16,974 in 1998)............... 9,235 16,847
Mortgage-backed securities available-for-sale......... 68,029 24,135
Mortgage-backed securities, at
amortized cost (estimated fair value of
$85,252 in 1999 and $104,962 in 1998)............. 83,720 102,298
Loans available-for-sale.............................. 3,740 6,922
Loans receivable, net................................. 627,631 650,371
Interest receivable................................... 7,635 7,778
Stock in Federal Home Loan Bank of Seattle, at cost... 14,615 13,560
Premises and equipment, net........................... 28,269 30,089
Core deposit intangible............................... 3,741 4,518
Goodwill.............................................. 15,096 15,762
Cash surrender value of life insurance policies....... 6,916 6,705
Other assets.......................................... 4,350 5,472
--------- ---------
$ 1,007,349 1,022,136
========= =========
- --------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Deposits.............................................. $ 645,549 636,441
Repurchase agreements................................. 6,702 6,233
Borrowed funds........................................ 244,483 248,953
Advances from borrowers for taxes and insurance....... 3,302 4,052
Income taxes - current and deferred................... 1,552 2,289
Accrued interest payable.............................. 6,156 4,480
Accrued expenses and other liabilities................ 8,456 9,988
--------- ---------
Total liabilities............................. 916,200 912,436
--------- ---------
Stockholders' equity:
Preferred stock, $.01 par value,
5,000,000 shares authorized;
none outstanding.............................. - -
Common stock, $.01 par value,
10,000,000 shares authorized;
5,872,807 shares issued, 4,538,557
outstanding in 1999; 5,836,691
shares issued, 5,585,295
outstanding in 1998........................... 56 56
Paid-in capital................................... 69,572 68,923
Common stock acquired by ESOP/RRP................. (2,216) (2,520)
Treasury stock, at cost .......................... (25,319) (3,461)
Accumulated other comprehensive income (loss)..... (1,717) 23
Retained earnings................................. 50,773 46,679
--------- ---------
Total stockholders' equity.................... 91,149 109,700
--------- ---------
Commitments and contingencies
$ 1,007,349 1,022,136
========= =========
Book value per common share outstanding............... $ 20.08 19.64
========== =========
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
25
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Consolidated Statements of Income
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Year Ended June 30,
-------------------------------
1999 1998 1997
-------- -------- --------
Interest income:
Loans receivable.......................... $ 53,773 56,261 37,923
Mortgage-backed securities................ 8,033 9,676 8,185
Investment securities..................... 8,048 7,580 3,884
Interest-bearing deposits................. 606 675 1,045
Other..................................... 338 332 223
-------- -------- --------
Total interest income................. 70,798 74,524 51,260
-------- -------- --------
Interest expense:
NOW and money market demand............... 3,379 3,321 2,029
Savings................................... 2,264 2,658 2,223
Certificates of deposit................... 20,444 21,824 14,986
-------- -------- --------
26,087 27,803 19,238
Borrowed funds and repurchase agreements.. 13,157 14,483 9,169
-------- -------- --------
Total interest expense................ 39,244 42,286 28,407
-------- -------- --------
Net interest income................... 31,554 32,238 22,853
Provision for loan losses..................... 1,300 840 400
-------- -------- --------
Net interest income after
provision for loan losses 30,254 31,398 22,453
-------- -------- --------
Non-interest income:
Loan origination fees on loans sold....... 2,633 2,268 667
Service fees.............................. 4,471 4,486 3,034
Net gain on sale of loans and
securities available-for-sale......... 1,149 1,053 678
Other..................................... 1,045 574 306
-------- -------- --------
Total non-interest income............. 9,298 8,381 4,685
-------- -------- --------
Non-interest expense:
Compensation and employee benefits........ 13,695 13,149 9,342
Net occupancy expense of premises......... 2,035 2,153 1,373
Equipment and furnishings................. 2,313 1,846 1,009
Data processing........................... 1,627 1,644 962
Deposit insurance premium................. 344 358 517
SAIF assessment........................... - - 2,297
Intangibles amortization.................. 1,443 1,391 532
Marketing and advertising................. 616 789 571
Other..................................... 6,153 6,429 3,965
-------- -------- --------
Total non-interest expense............ 28,226 27,759 20,568
-------- -------- --------
Income before income taxes............ 11,326 12,020 6,570
Income taxes.................................. 4,403 4,760 2,063
-------- -------- --------
Net income............................ $ 6,923 7,260 4,507
======== ======== ========
Net income per common share:
Basic..................................... $ 1.43 1.37 1.01
======== ========= ========
Diluted................................... $ 1.37 1.29 .96
======== ========= ========
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
26
<PAGE>
<TABLE>
<CAPTION>
WesterFed Financial Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity and Comprehensive Income
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data) Accumulated
other
compre-
Common Paid-in ESOP/ Treasury hensive Retained
stock capital RRP stock income (loss) earnings Total
-------- -------- ------- -------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996................. $ 46 45,451 (3,558) (3,079) (226) 39,973 78,607
Comprehensive income:
Net income........................... - - - - - 4,507 4,507
Unrealized gain on securities
available-for-sale, net
of reclassification adjustment... - - - - 191 - 191
------
Total comprehensive income..... 4,698
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 $200.... 10 21,052 - - - - 21,062
Issuance of options
allowing holders to
acquire 94,696 shares............ - 873 - - - - 873
Cash dividends declared ($.45 per share). - - - - - (2,166) (2,166)
------- ------- ------ -------- ------- -------- -------
Balance at June 30, 1997................ 56 67,941 (2,936) (3,081) (35) 42,314 104,259
Comprehensive income:
Net income........................... - - - - - 7,260 7,260
Unrealized gain on securities
available-for-sale, net
of reclassification adjustment..... - - - - 58 - 58
-------
Total comprehensive income..... 7,318
Purchase of treasury stock, at
cost - 17,500 shares............... - - - (379) - - (379)
ESOP shares committed to be released..... - 425 227 - - - 652
Amortization of RRP...................... - - 188 - - - 188
Shares forfeited by RRP
participants (75 shares)............ - - 1 (1) - - -
Common stock options exercised
(37,978 shares)..................... - 557 - - - - 557
Cash dividends declared ($.54 per share). - - - - - (2,895) (2,895)
------- ------- ------ -------- ------- -------- -------
Balance at June 30, 1998................. 56 68,923 (2,520) (3,461) 23 46,679 109,700
Comprehensive income:
Net income........................... - - - - - 6,923 6,923
Unrealized loss on securities
available-for-sale, net
of reclassification adjustment..... - - - - (1,740) - (1,740)
-------
Total comprehensive income 5,183
Purchase of 1,082,854 shares of
treasury stock, net of
acquisition costs of $200............ - - - (21,858) - - (21,858)
ESOP shares committed to be released..... - 245 227 - - - 472
Amortization of RRP...................... - - 77 - - - 77
Common stock options exercised
(36,116 shares)..................... - 404 - - - - 404
Cash dividends declared ($.62 per share). - - - - - (2,829) (2,829)
------- ------- ------ -------- ------- -------- -------
Balance at June 30, 1999................. $ 56 69,572 (2,216) (25,319) (1,717) 50,773 91,149
======= ======= ====== ======== ======= ======== =======
<FN>
- -----------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
WesterFed Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows
- -----------------------------------------------------------------------------------------
(Dollars in thousands)
Year Ended June 30,
-------------------------------
1999 1998 1997
---------- -------- -------
<S> <C> <C> <C>
Net cash provided by operating activities............... $ 39,663 30,735 24,105
---------- -------- -------
Cash flows from investing activities:
Net change in interest-bearing deposits............. (1,885) 1,900 1,000
Purchases of:
FHLB stock...................................... - (1,129) -
Investment securities........................... - (5,483) (9,956)
Investment securities available-for-sale........ (146,138) (143,279) (79,804)
Mortgage-backed securities...................... - - (5,950)
Mortgage-backed securities available-for-sale... (58,499) (6,990) (983)
Proceeds from maturities:
Investment securities........................... 7,636 16,316 9,351
Investment securities available-for-sale........ 127,651 70,545 61,289
Proceeds from sales of:
Investment securities available-for-sale........ 21,961 16,065 5,192
Mortgage-backed securities available-for-sale... - 3,222 31,937
Real estate owned............................... 204 - -
Principal payments from:
Investment securities available-for-sale........ 748 437 385
Mortgage-backed securities...................... 18,782 15,661 8,897
Mortgage-backed securities available-for-sale... 12,981 10,955 14,113
Net change in loans receivable...................... 21,557 (24,516) (43,911)
Proceeds from sales of premises and equipment....... 611 1,162 -
Purchases of premises and equipment................. (1,003) (5,682) (2,426)
Purchase of life insurance policies................. - (285) -
Acquisition of Security Bancorp, net of cash and
cash equivalents acquired of $16,013............ - - (10,776)
---------- -------- -------
Net cash provided by (used in)
investing activities................... 4,606 (51,101) (21,642)
---------- -------- -------
Cash flows from financing activities:
Net change in deposits.............................. (15,212) (21,366) (25,093)
Net change in repurchase agreements................. 469 (1,553) 974
Proceeds from borrowings............................ 319,560 344,165 136,090
Payments on borrowings.............................. (324,078) (286,719) (108,606)
Net change in advances from borrowers for taxes
and insurance................................... (750) 299 (295)
Dividends paid to stockholders...................... (2,926) (2,729) (1,867)
Proceeds from exercise of options and stock issuances 404 557 194
Payments to acquire treasury stock.................. (21,858) (379) -
---------- -------- -------
Net cash provided by (used in) financing activities (44,391) 32,275 1,397
---------- -------- -------
Net increase (decrease) in cash and cash equivalents.... (122) 11,909 3,860
Cash and cash equivalents at beginning of year.......... 29,068 17,159 13,299
---------- -------- -------
Cash and cash equivalents at end of year................ $ 28,946 29,068 17,159
========== ======== =======
Supplemental disclosure of cash flow information:
Payments during the period for:
Interest........................................ $ 12,856 13,900 8,942
Income taxes, net............................... 3,933 4,080 3,014
========== ======== =======
<FN>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
28
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statement Presentation
WesterFed Financial Corporation ("WesterFed," and collectively with its
subsidiary, the "Company") serves the financial needs of 20 communities in the
state of Montana through its wholly-owned subsidiary, Western Security Bank (the
"Bank"), a federally chartered savings bank. In addition to traditional
financial institution services, the Company provides insurance, investment and
other related services through Western Security Investment Services, Inc.,
Service Corporation of Montana, Monte Mac I, Inc. and COAD Limited Partnership,
all wholly-owned subsidiaries of the Bank.
The Company's consolidated financial statements have been prepared in conformity
with generally accepted accounting principles. All significant intercompany
balances and transactions have been eliminated in consolidation. 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. A
substantial portion of the Company's loans are secured by collateral 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
Company'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
Company'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 Company's allowance for loan losses. Such agencies may
require the Company to recognize additions to the allowance based on their
judgments about information available to them at the time of their examination.
Fiscal Year
The Company's fiscal year ends on June 30 each year. Reference to a fiscal year
refers to the year in which such fiscal year ends.
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.
At June 30, 1999, the Company was required to have aggregate reserves, exclusive
of cash on hand, with the Federal Reserve Bank of approximately $2,260.
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 and included as a
separate component of stockholders' equity. Upon realization, gains and losses
are 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. All securities are adjusted for amortization of premiums and accretion of
discounts using the level-yield method over the estimated lives of the
securities.
Management determines the appropriate classification of investment and
mortgage-backed securities at the purchase date.
29
<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 are amortized to income
using the level-yield method over the estimated lives of the loans. Loans that
can be contractually prepaid or otherwise settled in such a way that the Company
would not recover substantially all of its recorded investment are measured like
debt securities available-for-sale.
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 Company's
overall asset/liability management strategy.
The cost of loan servicing rights is included in other assets and amortized in
proportion to, and over the period of, estimated net servicing revenues.
The carrying value of loan servicing rights and the amortization thereon is
periodically evaluated in relation to estimated future net servicing revenues.
The Company evaluates the carrying value of the servicing portfolio for
impairment by estimating the future net servicing income of the portfolio based
on management's best estimate of remaining loan lives and contractual interest
rates.
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 Company also provides an allowance for losses on specific loans which are
deemed to be impaired. Groups of small balance homogeneous basis loans
(generally the Company'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 allowance 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 Company's impaired loans are the
same as those non-consumer loans currently reported as non-accrual. The Company
recognizes interest income on impaired loans only to the extent that cash
payments are received.
30
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
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. Other assets include $370 and
$421 of real estate and other personal property acquired through foreclosure at
June 30, 1999 and 1998, respectively.
Cash Surrender Value of Life Insurance
The Company has acquired life insurance policies covering certain key employees
for which the Company is the beneficiary. The Company makes one-time lump-sum
payments as key employees are identified. Earnings on the premiums paid, usually
in the form of 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
Long-lived tangible and intangible assets are 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.
Goodwill
Goodwill reflects the excess of cost over fair value of identifiable net assets
which were acquired during 1997. Goodwill is amortized over 25 years.
Accumulated amortization at June 30, 1999 and 1998 was $1,499 and $833,
respectively.
Core Deposit Intangible
Core deposit intangible represents the intangible value of depositor
relationships resulting from deposit liabilities assumed in a 1997 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,
1999 and 1998 was $1,867 and $1,090, respectively.
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 consolidated Federal and state income tax
returns.
Financial Instruments
The Company periodically 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. Any payments received on Caps are reflected in operations.
Stock Based Compensation
The cost of stock based compensation issued to third parties is measured at the
grant date based on the fair value of the award. For grants to employees,
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.
31
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Comprehensive Income
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income" effective July 1,
1998. SFAS No. 130 requires companies to report comprehensive income which
includes net income, as well as other changes in stockholders' equity that
result from transactions and economic events other than those with stockholders.
The Company's only significant element of comprehensive income is unrealized
gains and losses on available-for-sale securities. SFAS No. 130 requires only
additional disclosures in the consolidated financial statements; it does not
affect the Company's financial position or results of operations. Prior year
financial statements have been reclassified to conform to the requirements of
SFAS No. 130.
Earnings Per Share
Basic earnings per common share is calculated by dividing net income by the
weighted average number of common shares outstanding during the period less
unvested RRP and unallocated ESOP shares. Diluted earnings per common share is
calculated by dividing net income by the weighted average number of common
shares used to compute basic EPS plus the incremental amount of potential common
stock determined by the treasury stock method.
Reclassifications
Certain reclassifications have been made to the 1998 financial statements to
conform with the 1999 presentation.
- --------------------------------------------------------------------------------
(2) REGULATORY MATTERS
WesterFed's ability to pay dividends is dependent upon the dividends it receives
from the Bank, which are subject to regulations and the Bank's continued
compliance with all regulatory capital requirements as specified 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 OTS has amended its capital distribution regulation effective April 1, 1999.
Associations that are subsidiaries of a savings and loan holding company must
file a notice with the OTS at least 30 days before the proposed declaration of a
dividend or approval of the proposed capital distribution by its Board of
Directors. In addition, the savings institution now must obtain prior approval
from the OTS if it fails to meet certain regulatory conditions or if, after
giving effect to the proposed distribution, the institution's capital
distributions in a calendar year would exceed its year-to-date net income plus
retained net income for the preceding two years or the association would not be
at least adequately capitalized.
The Bank may also not declare or pay a cash dividend on, or repurchase any of,
its common stock if the effect thereof would cause the regulatory capital of the
Bank to be reduced below the amount required for a liquidation account, which
was established at the date the Bank completed its conversion from a mutual to a
stock form of savings bank.
Capital standards 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 addition, 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 related to the level of capital of the depository institution: (1)
well-capitalized, (2) adequately capitalized, (3) under-capitalized, (4)
significantly undercapitalized, and (5) critically undercapitalized. The Bank's
total risk-based, Tier 1 and core capital ratios were 12.26%, 11.44% and 7.23%,
respectively, at June 30, 1999. The Bank's total risk-based, Tier 1 and core
capital ratios were 13.81%, 13.03% and 8.27%, respectively, at June 30, 1998.
At June 30, 1999 and 1998, the Bank was categorized as "well-capitalized."
32
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
The Bank's compliance with capital requirements at June 30, 1999 and 1998
follows:
<TABLE>
<CAPTION>
Minimum to Minimum
be adequately to be well
capitalized under capitalized under
prompt corrective prompt corrective
Actual actions provision actions provision
-------------------- -------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
--------- -------- ---------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1999:
Total capital (to risk-weighted
assets).................... $ 76,384 12.26% $ 49,830 8.00% $ 62,287 10.00%
Core (Tier 1) capital (to
risk-weighted assets)...... 71,275 11.44 24,915 4.00 37,372 6.00
Core (Tier 1) capital (to
adjusted assets)........... 71,275 7.23 39,447 4.00 49,309 5.00
Tangible capital (to tangible
assets).................... 71,275 7.23 14,793 1.50 14,793 1.50
======= ====== ======== ======= ======= ======
As of June 30, 1998:
Total capital (to risk-weighted
assets).................... $ 86,975 13.81% $ 50,394 8.00% $ 62,992 10.00%
Core (Tier 1) capital (to
risk-weighted assets)...... 82,084 13.03 25,197 4.00 37,795 6.00
Core (Tier 1) capital (to
adjusted assets)........... 82,084 8.27 39,724 4.00 49,655 5.00
Tangible capital (to tangible
assets).................... 82,084 8.27 14,896 1.50 14,896 1.50
======= ====== ======== ======= ======= ======
</TABLE>
The following is a reconciliation of capital as shown on the consolidated
financial statements and tangible, core and risk-based regulatory capital of the
Bank at June 30, 1999 and 1998:
1999 1998
-------- -------
Capital per consolidated financial statements.......... $ 91,149 109,700
Less:Nonqualifying equity............................. (2,160) (6,263)
Goodwill and other intangibles................... (18,837) (20,280)
Nonqualifying purchased mortgage loan servicing.. (602) (1,062)
Unrealized losses (gains) on certain securities
available-for-sale........................... 1,725 (11)
-------- -------
Tangible and Core capital.............................. 71,275 82,084
Add: general valuation allowance.................... 5,109 4,891
-------- -------
Risk-based capital..................................... $ 76,384 86,975
======== =======
33
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
(3) INVESTMENT SECURITIES
The amortized cost and estimated fair values of investment securities at June
30, 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
1999
-----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ------ ------- -------
<S> <C> <C> <C> <C>
Investment securities held-to-maturity:
Corporate obligations....................... $ 6,985 16 (6) 6,995
Other investments........................... 2,250 10 - 2,260
--------- ------ ------- -------
Total investment securities
held-to-maturity........................ $ 9,235 26 (6) 9,255
========= ====== ======= =======
Investment securities available-for-sale:
Federal agency obligations.................. $ 81,323 2 (1,340) 79,985
Corporate obligations....................... 23,509 32 (167) 23,374
Other....................................... 3 79 - 82
--------- ------ ------- -------
Total investment securities
available-for-sale...................... $ 104,835 113 (1,507) 103,441
========= ====== ======= =======
</TABLE>
<TABLE>
1998
-----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ------ ------- -------
<S> <C> <C> <C> <C>
Investment securities held-to-maturity:
Federal agency obligations.................. $ 2,994 27 - 3,021
U.S. Government obligations................. 100 - - 100
Corporate obligations....................... 11,473 87 - 11,560
Other investments........................... 2,280 13 - 2,293
--------- ------ ------- -------
Total investment securities
held-to-maturity........................ $ 16,847 127 - 16,974
========= ====== ======= =======
Investment securities available-for-sale:
Federal agency obligations.................. $ 89,792 100 (111) 89,781
Corporate obligations....................... 18,658 62 - 18,720
Other....................................... 3 7 - 10
--------- ------ ------- -------
Total investment securities
available-for-sale...................... $ 108,453 169 (111) 108,511
========= ====== ======= =======
</TABLE>
34
<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 issuers 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, 1999, by contractual maturity, are shown below:
Fair
Cost value
Investment securities held-to-maturity
Due in:
Less than one year........................ $ 3,032 3,047
One to five years......................... 3,991 3,986
Five to ten years......................... 567 567
After ten years........................... 1,645 1,655
------- -------
................................... $ 9,235 9,255
======= =======
Investment securities available-for-sale
Due in:
Less than one year........................ $ 10,859 10,894
One to five years......................... 91,598 90,212
Other..................................... 2,378 2,335
------- -------
................................... $ 104,835 103,441
======= =======
Gross proceeds from sales of investment securities available-for-sale for 1999,
1998 and 1997 were $21,961, $16,065 and $5,192, respectively. These sales
resulted in gross gains of $89, $68 and $18 in 1999, 1998 and 1997,
respectively, and gross losses of $0, $0 and $34 in 1999, 1998 and 1997,
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.
- --------------------------------------------------------------------------------
(4) MORTGAGE-BACKED SECURITIES
A summary of mortgage-backed securities at June 30, 1999 and 1998 is as follows:
1999
-------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------- ---------- ---------- ---------
Mortgage-backed securities
held-to-maturity:
Collateralized mortgage
obligations - federal agency....... $ 43,292 1,142 (8) 44,426
FHLMC ........................... 27,587 219 (26) 27,780
GNMA............................... 10,774 21 (6) 10,789
FNMA............................... 26 - (26) -
Other.............................. 2,041 218 (2) 2,257
-------- ----- ----- -------
Total mortgage-backed securities
held-to-maturity................ $ 83,720 1,600 (68) 85,252
======== ===== ===== =======
35
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
1999
-------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------- ---------- ---------- ---------
Mortgage-backed securities
available-for-sale:
Collateralized mortgage
obligations - federal agency.. $22,444 13 (647) 21,810
FHLMC ........................... 15,216 30 (201) 15,045
GNMA............................... 8,381 - (151) 8,230
FNMA............................... 17,442 35 (456) 17,021
Other.............................. 5,923 - - 5,923
------- ----- ------- -------
Total mortgage-backed securities
available-for-sale.............. $69,406 78 (1,455) 68,029
======= ===== ======= =======
1998
--------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ---------
Mortgage-backed securities
held-to-maturity:
Collateralized mortgage
obligations - federal agency.. $44,874 1,666 - 46,540
FHLMC ........................... 39,508 786 - 40,294
GNMA............................... 14,776 194 - 14,970
Other.............................. 3,140 49 (31) 3,158
-------- ----- ------- -------
Total mortgage-backed securities
held-to-maturity..............$102,298 2,695 (31) 104,962
======== ===== ======= =======
Mortgage-backed securities
available-for-sale:
Collateralized mortgage
obligations - federal agency $ 3,711 - (7) 3,704
FHLMC .......................... 12,265 112 (109) 12,268
GNMA.............................. 438 4 - 442
FNMA.............................. 7,742 49 (70) 7,721
-------- ----- ------- -------
Total mortgage-backed securities
available-for-sale........... $ 24,156 165 (186) 24,135
======== ===== ======= =======
Gross proceeds from sales of mortgage-backed securities available-for-sale for
1999, 1998 and 1997 were $0, $3,222 and $31,937, resulting in gross gains of $0,
$40 and $76 and gross losses of $0, $11 and $19, respectively.
Expected maturities of mortgage-backed securities will differ from contractual
maturities because issuers may have the right to prepay obligations with or
without penalties. The contractual weighted average life of mortgage-backed
securities is 16.6 years at June 30, 1999.
Mortgaged backed securities with amortized cost of $31,674 and $34,799 at June
30, 1999 and 1998, respectively, were pledged to secure public deposits and
securities sold under repurchase agreements. The approximate market value of
securities pledged at June 30, 1999 and 1998 was $31,949 and $35,431,
respectively.
Mortgage-backed securities with a recorded value of approximately $1,039 and
$1,474 have been pledged to secure collateralized mortgage obligations at June
30, 1999 and 1998, respectively.
36
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
(5) LOANS RECEIVABLE
A summary of loans receivable at June 30, 1999 and 1998 is summarized as
follows:
1999 1998
- ------------------------------------------------------------------------------
Loans secured by real estate:
1-4 residential units.......................... $ 275,792 310,062
5 or more residential units.................... 41,619 42,716
Construction................................... 12,542 17,523
Commercial..................................... 71,221 61,415
Agriculture.................................... 11,421 11,066
Other nonresidential........................... 4,445 2,735
FHA insured or VA guaranteed................... 10,122 8,601
-------- --------
Total real estate loans ................... 427,162 454,118
Less:
Net deferred loan origination fees............. (1,144) (1,453)
Undisbursed loan funds......................... (3,611) (5,178)
Purchased discounts............................ (954) (1,159)
Allowance for loan losses...................... (2,219) (2,177)
-------- --------
Net real estate loans...................... 419,234 444,151
Other loans:
Commercial (Non real estate)................... 40,237 34,384
Agriculture (Non real estate).................. 23,193 24,036
Loans to depositors, secured by deposits....... 1,745 3,194
Indirect consumer loans........................ 66,406 64,287
Other consumer loans - real estate secured..... 39,031 54,619
Other consumer loans........................... 44,385 35,352
Allowance for loan losses...................... (2,860) (2,730)
-------- --------
Net other loans............................ 212,137 213,142
-------- --------
631,371 657,293
Less loans available-for-sale...................... (3,740) (6,922)
-------- --------
........................................ $ 627,631 650,371
======== ========
A summary of nonperforming loans at June 30, 1999, 1998 and 1997 follows:
1999 1998 1997
-------- ------- ------
Nonaccrual loans...................... $ 3,049 3,989 1,517
Loans 90 days or more delinquent
and still accruing................ 775 626 836
------ ------- ------
Total nonperforming loans......... $ 3,824 4,615 2,353
====== ======= ======
Contractual interest due.............. $ 223 271 71
====== ======= ======
Interest income recognized on nonaccrual loans during the years ended June 30,
1999, 1998 and 1997 was insignificant. At June 30, 1999, there were no
commitments to lend additional funds to borrowers whose loans are classified as
nonperforming.
37
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Included in impaired loans at June 30, 1999 and 1998 are $1,837 and $2,485,
respectively, of loans for which no impairment allowance was deemed necessary.
The average recorded investment in impaired loans for the years ended June 30,
1999, 1998 and 1997 was approximately $2,161, $1,715 and $483, respectively.
An analysis of the allowance for loan losses for each of the years ended June
30, 1999, 1998 and 1997 is as follows:
1999 1998 1997
---- ---- ----
Balance at beginning of year........... $ 4,907 4,651 2,005
Reserves acquired...................... - - 2,481
Provision charged to operations........ 1,300 840 400
Charge-offs............................ (1,228) (637) (253)
Recoveries............................. 100 53 18
------ ------- ------
Balance at end of year................. $ 5,079 4,907 4,651
====== ======= ======
- --------------------------------------------------------------------------------
(6) INTEREST RECEIVABLE
A summary of interest receivable at June 30, 1999 and 1998 is as follows:
1999 1998
---------- ---------
Loans........................................ $ 4,736 5,520
Mortgage-backed securities................... 795 776
Investment securities........................ 2,096 1,475
Interest-bearing deposits.................... 8 7
-------- ------
$ 7,635 7,778
======== ======
- --------------------------------------------------------------------------------
(7) PREMISES AND EQUIPMENT
Premises and equipment at June 30, 1999 and 1998 is summarized as follows:
1999 1998
---------- ----------
Land............................................ $ 5,822 5,593
Office buildings and leasehold improvements..... 26,609 26,887
Furniture, fixtures and equipment............... 10,887 10,789
------- -------
43,318 43,269
Less accumulated depreciation and amortization.. (15,049) (13,180)
------- -------
$28,269 30,089
======= =======
- --------------------------------------------------------------------------------
38
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
(8) DEPOSITS
Deposits at June 30, 1999 and 1998 are summarized as follows:
1999 1998
------------- ---------
Certificates of deposit.................. $ 366,569 381,223
Savings accounts......................... 89,975 94,557
Money market accounts.................... 75,398 55,464
NOW accounts............................. 77,899 74,673
Noninterest-bearing demand............... 35,708 30,524
--------- --------
$ 645,549 636,441
========= ========
Certificates of deposit at June 30, 1999 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%..................... $ 2,872 6 4 23 8 - 2,913
4.00% to 4.99%..................... 123,584 13,290 3,115 180 369 - 140,538
5.00% to 5.99%..................... 78,800 28,909 11,773 1,760 2,013 33 123,288
6.00% to 6.99%..................... 26,263 15,070 1,869 4,575 95 - 47,872
7.00% to 8.99%..................... 2,720 - 7 6 - - 2,733
------- ------- ------- ------- ------- ---- --------
234,239 57,275 16,768 6,544 2,485 33 317,344
Jumbo ($100,000 or more)........... 39,391 6,910 1,761 963 200 - 49,225
------- ------- ------- ------- ------- ---- --------
Total certificates of deposit.. $ 273,630 64,185 18,529 7,507 2,685 33 366,569
======= ======= ======= ======= ======= ==== ========
</TABLE>
- --------------------------------------------------------------------------------
(9) REPURCHASE AGREEMENTS
Repurchase agreements generally mature on the next banking day. The securities
underlying agreements to repurchase are for the same securities originally sold
and are held in a custody account by a third party. For the years ended June 30,
1999 and 1998, securities sold under agreements to repurchase averaged
approximately $6,568 and $8,113, respectively. The maximum outstanding at any
month end during the years ended June 30, 1999 and 1998 was approximately $7,211
and $9,645, respectively.
- --------------------------------------------------------------------------------
(10) BORROWED FUNDS
Advances from the FHLB and other borrowings at June 30, 1999 and 1998 are
summarized as follows:
1999 1998
---------- ---------
Advances from Federal Home Loan Bank of Seattle....... $ 244,048 248,133
Collateralized mortgage obligations................... 242 511
8.5% contract payable................................. 193 309
-------- -------
$ 244,483 248,953
======== =======
39
<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
4.62% to 8.11%. Principal requirements are presented at the earlier of Call or
maturity as follows:
Years ending June 30
2000................................................. $ 144,700
2001................................................. 19,984
2002................................................. 45,658
2003................................................. 9,405
2004................................................. 8,239
Thereafter........................................... 16,062
--------
$ 244,048
========
Advances from the FHLB are secured by pledges of FHLB stock of $14,615 and
$13,560 at June 30, 1999 and 1998, respectively, and a 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.
The Bank has amounts available for borrowing under the FHLB Cash Management
Advance Program up to $49,728. There were no amounts outstanding under the
program as of June 30, 1999.
- --------------------------------------------------------------------------------
(11) COMPREHENSIVE INCOME
A summary of the reclassification amounts and related tax effects for
comprehensive income follows:
Year Ended June 30,
--------------------------
1999 1998 1997
------- ------ -------
Disclosure of reclassification amount:
Unrealized and realized holding gains
(losses) arising during the period,
net of income tax expense (benefit)
of $(1,032), $73 and $133
in 1999, 1998 and 1997, respectively....... $(1,685) 118 216
Lessreclassification adjustment
for gains included in net income,
net of income tax of $34, $37 and
$16 in 1999, 1998 and 1997, respectively... (55) (60) (25)
------- ------ -------
Net unrealized gain (loss) on
available-for-sale investment securities $(1,740) 58 191
======= ====== =======
- --------------------------------------------------------------------------------
(12) INCOME TAXES
Prior to July 1, 1996, if certain conditions were met, the Company 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. The Company has provided a deferred tax
liability on the excess deductions which are payable over six years beginning in
1997.
40
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
A summary of the provision for income taxes for the years ended June 30, 1999,
1998 and 1997 follows:
1999 1998 1997
---- ---- ----
Federal:
Current..................... $ 3,469 3,582 2,095
Deferred.................... 141 315 (408)
------ ------- ------
3,610 3,897 1,687
------ ------- ------
State:
Current..................... 762 753 440
Deferred.................... 31 110 (64)
------ ------- ------
793 863 376
------ ------- ------
$ 4,403 4,760 2,063
====== ======= ======
The effective tax rates for 1999, 1998 and 1997 are 38.8%, 39.6% and 31.4%,
respectively. A reconciliation between income tax expense and the amount
computed by multiplying the applicable statutory federal income tax rate for
1999, 1998 and 1997 is as follows:
1999 1998 1997
---- ---- ----
Computed "expected" Federal tax expense... $ 3,851 4,086 2,234
Earnings on life insurance policies....... (147) (99) (53)
State income taxes, net of
Federal income tax benefit............ 523 567 248
Reversal of deferred taxes - cash
surrender value increases............. - - (397)
Goodwill amortization..................... 226 215 68
Tax credit................................ (75) (77) (74)
Other..................................... 25 68 37
------ ------- ------
$ 4,403 4,760 2,063
====== ======= ======
The tax effects of temporary differences that give rise to deferred tax assets
and liabilities at June 30, 1999 and 1998 are as follows:
1999 1998
Deferred tax assets:
Loans, principally allowance for loan losses......... $ 1,954 1,887
Purchased excess tax bases........................... 1,165 1,283
Loan, principally differences in bases............... 367 446
Deposits, principally difference in bases............ 45 113
Investment securities, principally
differences in bases............................. 639 669
Employee benefits, principally deferred
compensation and accrued vacation................ 1,315 1,043
Market value adjustment of investment
securities and mortgage-backed
securities available-for-sale.................... 1,054 -
Other................................................ - 231
------- ------
Gross deferred income tax assets................. 6,539 5,672
------- ------
41
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
1999 1998
Deferred tax liabilities:
FHLB stock dividends.......................... $ 3,407 3,002
Core deposit intangible....................... 1,438 1,738
Deferred loan fees and origination costs...... 367 315
Life insurance contract income................ 48 43
Loans, due primarily to tax bad debt
reserves in excess of base year
amount.................................... 488 612
Loan servicing premium........................ 125 277
Fixed assets, principally difference
in bases and depreciation................. 1,572 1,475
Market value adjustment of investment
securities and mortgage-backed
securities available-for-sale............. - 14
Other......................................... 376 374
------- ------
Gross deferred income tax liabilities..... 7,821 7,850
------- ------
Net deferred income tax liability......... $ 1,282 2,178
======= ======
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the existence of, or generation of, taxable income in the periods
which those temporary differences are deductible. Management considers the
scheduled reversal of deferred tax liabilities, taxes paid in carryback years,
projected future taxable income, and tax planning strategies in making this
assessment. Based upon the level of historical taxable income and projection for
future taxable income over the periods which the deferred tax assets are
deductible, at June 30, 1999, management believes it is more likely than not
that the Company will realize the benefits of these deductible differences.
- --------------------------------------------------------------------------------
(13) COMMITMENTS AND CONTINGENCIES
The Company leases certain land, premises and equipment from third parties under
operating leases. Total rental expense for the years ended June 30, 1999, 1998
and 1997 was $198, $197 and $114, respectively. The total future minimum rental
commitments required under operating leases that have initial or remaining
noncancelable lease terms in excess of one year at June 30, 1999 are as follows:
Years ended June 30, Amount
2000 $ 194
2001 148
2002 136
2003 136
2004 136
Thereafter 1,416
-------
Total minimum future rental expense $ 2,166
=======
42
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
The Company 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, 1999 are as follows:
Years ended June 30, Amount
2000 $ 808
2001 403
2002 210
2003 103
2004 53
Thereafter -
-------
Total minimum future rental income $ 1,577
=======
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, 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 Company's liquidity, financial condition or results of
operations.
- --------------------------------------------------------------------------------
(14) 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 the Bank 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. Dividends on unallocated ESOP shares are
reflected as compensation expense.
The Company 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 Company recognized expense relating to the
ESOP of $472, $652 and $492 during the years ended June 30, 1999, 1998 and 1997,
respectively.
43
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
The ESOP shares as of June 30, 1999 and 1998 were as follows:
1999 1998
-------- --------
Allocated shares.... 166,774 141,344
Unallocated shares.. 188,159 213,589
-------- --------
Original ESOP
common shares... 354,933 354,933
Shares distributed to
participants...... (24,756) (15,820)
-------- --------
Common shares held
by ESOP........... 330,177 339,113
======== ========
At June 30, 1999, the fair value of the unallocated shares was approximately
$3,082.
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).
At June 30, 1997, the Company had granted all options available (the options)
under the Stock Option Plan. The term of the outstanding options may not exceed
10 years from the date the options are granted. Stock options are generally
granted at an option price of not less than the fair market value at the grant
date. For incentive stock options, a maximum of 10,000 shares per Stock Option
Plan participant are exercisable per year. All stock options awarded were
exercisable at the grant date.
Equity Incentive Plan
In conjunction with the acquisition of Security Bancorp (see Note 24), the
stockholders of the Company approved the Equity Incentive Plan (the "Incentive
Plan"). The Incentive Plan provides for granting various awards to directors,
officers, and employees of WesterFed or any of its 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 Company has granted Incentive Awards in the form of stock options during the
years ended June 30, 1999 and 1997 which allow holders to acquire 50,000 and
57,085 common shares, respectively. 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. There were no awards
granted in the year ended June 30, 1998.
The Board of Directors of the Company periodically grants stock options on a
discretionary basis to employees. During the year ended June 30, 1999,
discretionary options were granted for the option holder to acquire 10,000
shares. There were no such grants in the years ended June 30, 1998 and 1997.
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 $77, $188 and $499 has been recorded for the years ended
June 30, 1999, 1998 and 1997, respectively.
44
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
The following table reflects options for both the Stock Option Plan and
Incentive Plan:
Common
Shares Exercise Price
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, 1998:
Granted........................................ - -
Exercised...................................... (37,978) 3.65 - 12.72
--------
Outstanding, end of year....................... 534,826 $ 3.65 - 21.50
Year ending June 30, 1999:
Granted........................................ 60,000 16.16
Exercised...................................... (36,116) 3.65 - 12.72
--------
Outstanding, end of year....................... 558,710 $ 3.65 - 21.50
========
Information regarding options outstanding and exercisable at June 30, 1999
follows:
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
- ---------------- -------- -------------- ------------ -------- --------------
$ 3.65 - 6.54 13,350 $ 5.94 3.1 13,350 $ 5.94
10.00 - 12.72 413,191 10.26 4.6 413,191 10.26
16.75 - 21.50 132,169 18.53 8.7 56,969 19.30
------- -------
558,710 483,510
======= =======
No compensation cost has been recognized in the consolidated statements of
income for options granted under the plans. Had compensation cost for options
granted been determined based on the estimated fair value of the options issued
at the dates of grant, the Company's net income and income per common share
amounts for the years ended June 30 would have been as follows:
1999 1998 1997
---- ---- ----
Net income, as reported.......... $ 6,923 7,260 4,507
====== ======= ======
Net income, pro forma............ $ 6,842 7,228 4,367
====== ======= ======
Income per common share:
As reported:
Basic ...................... $ 1.43 1.37 1.01
======= ======== =======
Diluted...................... $ 1.37 1.29 .96
======= ======== =======
Pro forma:
Basic ...................... $ 1.42 1.36 .98
======= ======== =======
Diluted...................... $ 1.35 1.29 .93
======= ======== =======
45
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
The fair value of the options granted during the years ended June 30, 1999 and
1997 was estimated using the Black-Scholes model with the following assumptions:
for 1999; dividend yield of 2.6%; expected life of 5 years; volatility of 22%;
and a risk-free interest rate of 5.6%; for 1997; dividend yield of 2.4%;
expected life of 7 years; volatility of 19% and a risk-free interest rate of
6.4%. No options were granted during the year ended June 30, 1998. The average
fair value of options granted during 1999 and 1997 was $8.11 and $6.07,
respectively, Additional awards in future years are anticipated.
Pension Plan
The Company 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 $33, $20 and $48 for the years ended
June 30, 1999, 1998 and 1997, respectively.
Former Security Bank employees were included in a noncontributory multi-employer
trustee defined benefit pension plan. Actuarially determined pension costs were
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. Effective February 1997, the employees of the former Security Bank
were included in the Company's non-contributory multi-employer defined benefit
pension plan.
Deferred Compensation Agreements
The Company has entered into deferred compensation agreements with certain key
employees that provide for predetermined periodic payments over 10 to 15 years
upon retirement or death. The agreements specify a vesting schedule, 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 Company by a third party, the deferred compensation agreements require any
successor corporation to assume the obligations of the agreements.
Amounts expensed under these agreements totaled approximately $154, $346 and $86
for 1999, 1998 and 1997, respectively.
Savings Plan
The Company has adopted an employee savings plan. To be eligible for the plan,
an employee must complete one year of full time employment. Company
contributions match 50% of an employee's contributions, up to a maximum of 3% of
the participating employee's wages. Savings plan expense for 1999, 1998 and 1997
totaled approximately $166, $184 and $103, respectively.
Employment Agreements
The Company has entered into employment contracts with certain senior officers
that provide benefits under certain conditions following a termination without
cause or a change in control of the Company.
- --------------------------------------------------------------------------------
(15) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company 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 Company has in particular classes of financial
instruments.
46
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
The Company'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 Company 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 do not represent exposure to credit loss. The
Company controls the credit risk of those instruments through credit approvals,
limits, and monitoring procedures.
Commitments to Extend Credit
Commitments to extend credit at June 30, 1999 are as follows:
Fixed rate.............................................. $ 4,745
Variable rate........................................... 17,840
-------
........................................................ $ 22,585
=======
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 Company'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
Company evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary, upon extension of credit is
based on management's evaluation of the counterparty. Collateral held varies but
may include personal property, residential real property, and income-producing
commercial properties.
Interest Rate Caps
Interest rate caps entitle the Company 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, 1999:
Notional principal amount Agreement termination Cap
$ 5,000 (1) July 1999 6.5%
5,000 (1) July 1999 7.0%
5,000 (2) July 2000 6.0%
(1) The counterparty to the cap agreement is the FHLB of Seattle.
(2) The counterparty to the cap agreement is Merrill Lynch.
47
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
(16) RECENT ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Management of the Company is currently assessing the effect, if any, on its
financial statements of implementing SFAS No. 133. The Company will be required
to adopt the standard on July 1, 2000.
- --------------------------------------------------------------------------------
(17) RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
The reconciliation of net income to net cash provided by operating activities
for fiscal 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Net income............................................. $ 6,923 7,260 4,507
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of:
Deferred loan origination fees................. (470) (440) (439)
Premiums and discounts on securities,
loans and borrowings........................... (632) (900) (1,138)
RRP deferred compensation.......................... 77 188 499
ESOP shares committed to be released............... 472 652 492
Provision for loan losses.......................... 1,300 840 400
Net (gain) loss on sales of:
Mortgage-backed securities
available-for-sale............................. - (29) (57)
Investment securities available-
for-sale....................................... (89) (68) 16
Loans.......................................... (1,060) (956) (637)
Real estate owned.............................. (13) - -
Premises and equipment......................... (276) (17) -
Depreciation and amortization of
premises and equipment......................... 2,488 2,147 1,208
Goodwill and core deposit amortization............. 1,443 1,391 532
Federal Home Loan Bank stock dividends............. (1,055) (975) (712)
Origination of loans available-for-sale............ (105,129) (96,520) (54,396)
Proceeds from sales of loans
available-for-sale............................. 109,370 94,254 55,300
Decrease (increase) in interest receivable......... 143 (821) (562)
Interest expense credited to deposit accounts...... 24,320 26,938 18,704
Changes in other assets and liabilities............ 1,851 (2,209) 388
--------- ------- -------
Net cash provided by operating activities...... $ 39,663 30,735 24,105
======= ======= =======
</TABLE>
48
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
(18) NON-CASH INVESTING AND FINANCING ACTIVITIES
On June 24, 1999, the Company declared a dividend of approximately $908 which is
recorded in accrued expenses and other liabilities at June 30, 1999.
On June 23, 1998, the Company declared a dividend of approximately $1,005 which
is recorded in accrued expenses and other liabilities at June 30, 1998.
On June 24, 1997, the Company declared a dividend of approximately $839 which is
recorded in accrued expenses and other liabilities at June 30, 1997.
During 1997, the Company issued common stock under the RRP and recorded deferred
compensation of approximately $106. No common stock was issued under the RRP in
fiscal 1999 or 1998.
Real estate owned acquired through foreclosures of loans receivable was
approximately $559 and $546 for 1999 and 1998, respectively. No real estate
owned was acquired in fiscal 1997.
Treasury stock of approximately $1 and $2 was recorded due to forfeitures of
unearned RRP shares for fiscal 1998 and 1997, respectively. There were no
forfeitures in fiscal 1999.
In conjunction with the acquisition of Security Bancorp, the Company issued
common shares valued at $21,062 and stock options with an intrinsic value of
$873.
- --------------------------------------------------------------------------------
(19) 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 cash and 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, 1999 and 1998. 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.
49
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Long-Term Borrowings
The fair value for long-term borrowings was based upon the discounted value of
the cash flows. The discount rates utilized were based on rates currently
available with similar terms and maturities.
The estimated fair values of financial instruments at June 30 are as follows:
<TABLE>
<CAPTION>
1999 1998
--------------------- --------------------
Carrying Fair Carrying Fair
value value value value
---------- --------- ---------- --------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents............. $ 28,946 28,946 29,068 29,068
Interest-bearing deposits............. 1,985 1,985 100 100
Investment securities available-for-sale 103,441 103,441 108,511 108,511
Investment securities................. 9,235 9,255 16,847 16,974
Mortgage-backed securities
available-for-sale................ 68,029 68,029 24,135 24,135
Mortgage-backed securities............ 83,720 85,252 102,298 104,962
Loans available-for-sale.............. 3,740 3,740 6,922 6,922
Loans, net............................ 627,631 624,583 650,371 654,037
Stock in Federal Home Loan Bank of Seattle 14,615 14,615 13,560 13,560
Financial liabilities:
Deposits.............................. 645,549 644,574 636,441 637,529
Repurchase agreements................. 6,702 6,702 6,233 6,233
Borrowed funds........................ 244,483 243,467 248,953 249,792
Off-balance-sheet items:
Interest rate cap agreements: notional
amount of $15,000................. - 9 - 24
======== ======= ======== =======
</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 entire holdings of a particular financial
instrument or category thereof. Since no market exists for a substantial portion
of the financial instruments, fair value estimates were necessarily based on
judgments 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 Company'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.
50
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
(20) MORTGAGE BANKING ACTIVITIES
Mortgage banking revenues for fiscal 1999, 1998 and 1997 are presented below:
1999 1998 1997
---- ---- ----
Origination fees...................... $ 2,633 2,268 667
Servicing fees........................ 412 795 694
Net gains on sales of loans........... 1,060 956 637
------ ------ -----
Total mortgage banking revenues....... $ 4,105 4,019 1,998
====== ====== =====
Mortgage loans serviced for others are not included in the accompanying
consolidated financial statements. The unpaid balances of these loans were
approximately $223,400, $260,300 and $268,600 at June 30, 1999, 1998 and 1997,
respectively.
Mortgage servicing rights are included in other assets and an analysis of
activity is as follows:
1999 1998 1997
---- ---- ----
Balance at beginning of fiscal year....... $ 1,062 1,239 132
Additions................................. 23 37 1,221
Amortization.............................. (213) (214) (114)
Provision for impairment.................. (270) - -
------ ------ -----
Balance at end of fiscal year............. $ 602 1,062 1,239
====== ====== =====
At June 30, 1999, carrying value approximates fair value.
- --------------------------------------------------------------------------------
(21) WESTERFED INFORMATION
The summarized condensed financial information for WesterFed Financial
Corporation as of and for the years ending June 30, 1999 and 1998 are presented
below:
Condensed Balance Sheets 1999 1998
---- ----
Assets:
Cash and cash equivalents............................ $ 116 17
Interest-bearing and due from banks deposits......... 383 402
Investment securities available-for-sale............. 1,099 5,146
Taxes receivable..................................... 5 336
Other assets......................................... 46 47
Investment in subsidiaries........................... 90,426 104,897
------- -------
Total assets.................................. $ 92,075 110,845
======= =======
Liabilities and Stockholders' Equity:
Other liabilities.................................... $ 926 1,145
Stockholders' Equity:
Common stock..................................... 56 56
Additional paid-in capital....................... 69,572 68,923
Common stock acquired by ESOP/RRP................ (2,216) (2,520)
Treasury stock at cost........................... (25,319) (3,461)
Accumulated other comprehensive income (loss).... (1,717) 23
Retained earnings................................ 50,773 46,679
------- -------
Total stockholders' equity.................... 91,149 109,700
------- -------
Total liabilities and stockholders' equity.... $ 92,075 110,845
======= =======
51
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Year ended June 30,
Condensed Statements of Income 1999 1998
---- ----
Dividends from the Bank................................... $ 20,000 5,000
Interest income........................................... 266 233
Non-interest expense...................................... (653) (677)
------- -------
Income before income taxes............................ 19,613 4,556
Income tax benefit........................................ 120 79
------- -------
Income before undistributed
earnings of subsidiaries.............................. 19,733 4,635
Undistributed (distributions in excess of)
earnings of subsidiaries.............................. (12,810) 2,625
------- -------
Net income............................................ $ 6,923 7,260
======= =======
Condensed Statements of Cash Flows
Operating Activities:
Net income............................................ $ 6,923 7,260
Adjustments to reconcile net income
to net cash provided by
operating activities:
Distributions in excess of
(equity in undistributed) earnings
of subsidiaries................................ 12,810 (2,625)
Amortization of premiums on
investment securities
available-for-sale............................. (223) (182)
ESOP shares committed to be released.............. 472 652
Increase in other assets
and liabilities, net........................... 213 (686)
-------- -------
Net cash provided by
operating activities....................... 20,195 4,419
-------- -------
Investing Activities:
Net change in interest-bearing deposits............... 19 561
Purchase of investment securities..................... (37,985) (23,766)
Proceeds from maturities of
investment securities............................ 42,250 21,350
-------- -------
Net cash provided by (used in)
investing activities....................... 4,284 (1,855)
-------- -------
Financing Activities:
Dividends paid to stockholders........................ (2,926) (2,729)
Proceeds from exercise of stock
options and stock issuances...................... 404 557
Purchase of treasury stock............................ (21,858) (379)
-------- -------
Net cash used in financing activities............... (24,380) (2,551)
-------- -------
Increase in cash and cash equivalents..................... 99 13
Cash and cash equivalents at beginning of year............ 17 4
-------- -------
Cash and cash equivalents at end of year............ $ 116 17
======== =======
52
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
(22) CONDENSED QUARTERLY RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Fiscal 1999
---------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income......................... $ 17,468 17,082 17,828 18,420
Interest expense........................ 9,443 9,371 9,865 10,565
------- ------- ------- -------
Net interest income.............. 8,025 7,711 7,963 7,855
Provision for loan losses............... (445) (345) (270) (240)
Noninterest income...................... 2,542 2,052 2,377 2,327
Noninterest expense..................... (7,316) (6,956) (6,985) (6,969)
------- ------- ------- -------
Income before income tax expense. 2,806 2,462 3,085 2,973
Income tax expense...................... (1,050) (878) (1,256) (1,219)
------- ------- ------- -------
Net income....................... $ 1,756 1,584 1,829 1,754
======= ======= ======= =======
Net income per share:
Basic............................... $ .40 .37 .35 .33
======== ======= ======== =======
Diluted............................. $ .39 .35 .33 .31
======== ======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1998
---------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income......................... $ 18,565 18,866 18,764 18,329
Interest expense........................ 10,460 10,843 10,651 10,332
------- ------- ------- -------
Net interest income.............. 8,105 8,023 8,113 7,997
Provision for loan losses............... (210) (210) (256) (164)
Noninterest income...................... 2,300 2,123 1,995 1,963
Noninterest expense..................... (6,910) (7,581) (6,415) (6,853)
------- ------- ------- -------
Income before income tax expense. 3,285 2,355 3,437 2,943
Income tax expense...................... (1,292) (995) (1,339) (1,134)
------- ------- ------- -------
Net income....................... $ 1,993 1,360 2,098 1,809
======= ======= ======= =======
Net income per share:
Basic............................... $ .37 .26 .40 .34
======== ======= ======== =======
Diluted............................. $ .35 .24 .37 .32
======== ======= ======== =======
</TABLE>
53
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
(23) EARNINGS PER SHARE
The following table sets forth the compilation of basic and diluted
earnings per share:
For the year ended 1999 1998 1997
---- ---- ----
Number of shares on which basic earnings
per share is calculated:
Average outstanding shares during the
fiscal year.......................... 4,830,068 5,317,577 4,458,079
Add: Incremental shares under stock
option plans.................... 240,270 296,316 220,259
Incremental shares related to RRPs.. 1,225 13,425 25,901
--------- --------- ---------
Number of shares on which diluted earnings per
share is calculated.......................... 5,071,563 5,627,318 4,704,239
--------- --------- ---------
Net income applicable to common stockholders.... $ 6,923 7,260 4,507
========= ========= =========
Basic earnings per share........................ $ 1.43 1.37 1.01
========= ========= =========
Diluted earnings per share...................... $ 1.37 1.29 .96
========= ========= =========
Stock options to purchase 72,169 and 57,085 shares in 1999 and 1997,
respectively, were outstanding, but were not included in the computation of
diluted earnings per share because the options' exercise price was greater than
the average market price of the common shares and, therefore, the effect would
be antidilutive. No stock options were excluded from the computation of diluted
earnings per share in 1998.
- --------------------------------------------------------------------------------
(24) 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 fiscal 1997 includes the results of
operations of Security Bancorp commencing March 1, 1997. 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 of $48,724. 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.
54
<PAGE>
GENERAL CORPORATE AND STOCKHOLDERS' INFORMATION
<TABLE>
<S> <C>
CORPORATE HEADQUARTERS FORM 10-K
110 E. Broadway This report is available to stockholders of
Missoula, MT 59802 record without charge upon written request to:
(406) 721-5254 Suzanne Loewen
Corporate Secretary
WesterFed Financial Corporation
INDEPENDENT ACCOUNTANTS 110 E. Broadway
KPMG LLP Missoula, MT 59802
Billings, MT
STOCK INFORMATION
GENERAL COUNSEL WesterFed stock is traded in the over-the-counter
Worden, Thane and Haines, P.C. market with quotations through the Nasdaq National
Missoula, MT Market System under the symbol "WSTR."
At June 30, 1999,
there were 1,031
stockholders of
record.
SPECIAL COUNSEL
Silver, Freedman and Taff, LLP At June 30, 1999, there were approximately 2,400
Washington, D.C. beneficial stockholders.
TRANSFER AGENT, REGISTRAR AND
DIVIDEND DISBURSING AGENT
Stockholder inquiries regarding transfer requirements, To request information on dividend
dividends, lost certificates and changes of address reinvestment, please contact:
should be directed to the transfer agent: Investor Relations
Davidson Trust Co. WesterFed Financial Corporation
9 Third Street North, Suite 200 110 E. Broadway
P.O. Box 2309 Missoula, MT 59802
Great Falls, MT 59403-2309 Phone: 406-721-5254
1-800-634-5526
ANNUAL MEETING The annual meeting of stockholders will be held on Tuesday,
October 26, 1999, beginning at 9 a.m. at the Southgate Office, 2601 Garfield,
Missoula, MT
</TABLE>
55
<PAGE>
GENERAL CORPORATE AND STOCKHOLDERS' INFORMATION
Dividends Stock Prices
Quarter Ended
High Low Declared
March 31, 1997 $21.75 17.75 .105
June 30, 1997 $20.75 17.25 .151*
September 30, 1997 $26.75 20.00 .115
December 31, 1997 $27.00 22.25 .12
March 31, 1998 $26.75 24.50 .125
June 30, 1998 $26.63 24.00 .18**
September 30, 1998 $24.875 17.00 .135
December 31, 1998 $20.125 17.188 .14
March 31, 1999 $18.625 16.188 .145
June 30, 1999 $17.25 15.938 .20***
* Declared June 30, 1997, payable August 20 to stockholders of record August
6. Includes a special dividend of $0.041 per share.
** Declared June 23, 1998, payable August 24 to stockholders of record August
10. Includes a special dividend of $0.05 per share.
*** Declared June 24, 1999, payable July 21 to stockholders of record July 7.
Includes a special dividend of $0.05 per share.
MARKET MAKERS
Strike Technologies LLC Keefe, Bruyette & Woods, Incorporated D.A. Davidson &
Co., Incorporated Spear, Leeds & Kellogg Friedman Billings Ramsey & Company
Everen Securities Incorporated Sandler O'Neill & Partners Knight Securities L.P.
WESTERFED OFFICERS
Lyle R. Grimes
Chairman, President and Chief Executive Officer
James A. Salisbury, CPA
Executive Vice President, Treasurer/Chief Financial Officer
Suzanne Loewen
Vice President/Secretary
David W. Jorgenson
Vice President
Ronald F. Halls
Assistant Secretary
WESTERFED DIRECTORS
Lyle R. Grimes
Chairman
John E. Roemer
Vice Chairman
Dr. Marvin Reynolds
Dr. Otto Klein, Jr.
Robert F. Burke
Laurie DeMarois
Davind W. Jorgenson
William Leslie
56
<PAGE>
<TABLE>
<S> <C> <C>
DIRECTORS AND OFFICERS
BOARD OF DIRECTORS
Lyle R. Grimes Laurie C. DeMarois Dr. Otto Klein, Jr.
Chairman, President and Owner, Garden City Floral, Missoula. Opthamologist
Chief Executive Officer Elected 1996. Rocky Mountain Eye &
WesterFed Financial Corp., Missoula. Ear Center, Missoula.
Elected 1983. Elected 1988.
John E. Roemer Robert F. Burke William Leslie
Vice Chairman Financial Planner Chairman, President
Retired American Express, Missoula. Quality Concrete Company, Billings.
Roemer Tire Center, Missoula. Elected 1994. Elected 1997.
Elected 1978.
Ralph K. Holliday David W. Jorgenson Dr. Marvin Reynolds
President & Executive Vice President Dentist, Missoula.
Chief Executive Officer Eastern Region Manager Elected 1969.
Western Security Bank, Missoula. Western Security Bank, Billings.
Elected 1999. Elected 1997 Donovan Worden, Jr.
Director Emeritus
Retired
SENIOR MANAGEMENT
Ralph K. Holliday Charles E. Eiseman Scott Sanders
President, Chief Executive Officer Sr. Vice President Sr. Vice President
Western Region Manager Commercial Real Estate Lending
David W. Jorgenson Marcia Johnson John Cromwell
Executive Vice President Sr. Vice President Sr. Vice President
Eastern Region Manager Central Operations Manager Human Resources
James A. Salisbury, CPA Stan R. Hill Sharon E. Woldstad
Treasurer Sr. Vice President Corporate Secretary
Executive Vice President/ Commercial Lending Sr. Vice President
Chief Financial Officer Data Center Coordinator
Suzanne M. Loewen
Vice President
Audit/Compliance
DEPARTMENT HEADS
Desiree Bagnell, CPA Nancy Rhoads Debi Turner
Controller Vice President Branch Coordinator
Loan Servicing Manager
Ronald F. Halls Gary Hewitt Brenda Ratcliff
Vice President Assistant Vice President Sales Coordinator
Quality Control Manager Property Manager - Security Officer
Laura Lustgraff Glenn Nelson Sue Hay
Vice President Assistant Vice President Assistant Corporate Secretary/
Deposit Support Services Manager Information Services Department Loan Systems Coordinator
</TABLE>
57
<PAGE>
[BACK COVER]
110 East Broadway, Missoula, Montana 59802
Exhibit 21
Subsidiaries of Registrant
<PAGE>
<TABLE>
<CAPTION>
SUBSIDIARIES OF THE REGISTRANT
Percent State of
of Incorporation
Parent Subsidiary Ownership or Organization
- ------------------------------- ------------------------------------------ ---------- ---------------
<S> <C> <C> <C>
WesterFed Financial Corporation Western Security Bank 100% Federal
Western Security Bank Monte Mac I 100% Montana
Western Security Bank Western Security Investment Services, Inc. 100% Montana
Western Security Bank Service Corporation of Montana 100% Montana
</TABLE>
Exhibit 23
Consents of Experts and Counsel
<PAGE>
EXHIBIT 23.1
Independent Accountants' Consent
The Board of Directors
WesterFed Financial Corporation:
We consent to incorporation by reference in the registration statement (No.
33-85350) on Form S-8 of WesterFed Financial Corporation of our report dated
July 23, 1999, relating to the consolidated balance sheets of WesterFed
Financial Corporation and subsidiaries as of June 30, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended June 30, 1999, which report appears in the June 30, 1999 annual
report on Form 10-K of WesterFed Financial Corporation.
KPMG LLP
Billings, Montana
September 24, 1999
<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, 1999 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-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 28,946
<INT-BEARING-DEPOSITS> 1,985
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 171,470
<INVESTMENTS-CARRYING> 92,955
<INVESTMENTS-MARKET> 94,507
<LOANS> 631,371
<ALLOWANCE> 5,079
<TOTAL-ASSETS> 1,007,349
<DEPOSITS> 645,549
<SHORT-TERM> 144,700
<LIABILITIES-OTHER> 19,466
<LONG-TERM> 99,348
<COMMON> 56
0
0
<OTHER-SE> 91,093
<TOTAL-LIABILITIES-AND-EQUITY> 1,007,349
<INTEREST-LOAN> 53,773
<INTEREST-INVEST> 16,687
<INTEREST-OTHER> 338
<INTEREST-TOTAL> 70,798
<INTEREST-DEPOSIT> 26,087
<INTEREST-EXPENSE> 39,244
<INTEREST-INCOME-NET> 31,544
<LOAN-LOSSES> 1,300
<SECURITIES-GAINS> 89
<EXPENSE-OTHER> 6,153
<INCOME-PRETAX> 11,326
<INCOME-PRE-EXTRAORDINARY> 6,923
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,923
<EPS-BASIC> 1.43
<EPS-DILUTED> 1.37
<YIELD-ACTUAL> 0
<LOANS-NON> 3,049
<LOANS-PAST> 775
<LOANS-TROUBLED> 370
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,907
<CHARGE-OFFS> 1,228
<RECOVERIES> 100
<ALLOWANCE-CLOSE> 5,079
<ALLOWANCE-DOMESTIC> 5,079
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 564
</TABLE>
