UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from July 1, 1999 to December 31, 1999.
COMMISSION FILE NUMBER 0-22772
WESTERFED FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 81-0487794
- ------------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
110 EAST BROADWAY, MISSOULA, MONTANA 59802-4511
- ---------------------------------------- ----------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (406) 721-5254
Securities Registered Pursuant to Section 12(b) of the Act:
None
--------------------
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
----------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days. YES [X] NO [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, computed by reference to the closing price of such stock on the
National Market System as of March 13, 2000, was $48.1 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 March 13, 2000 there were issued and outstanding 4,094,404 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 year ended December 31, 1999.
Part III of Form 10-K - Portions of the Proxy Statement
for 2000 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 December 31,
1999, the Company had total assets of $1.001 billion, deposits of $658.4 million
and stockholders' equity of $89.5 million (8.94% 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.
On November 18, 1999, the Company announced it had reached an agreement
with Stockman Bank of Montana to sell six branches with deposits of $57.0
million. The branches are located in Glasgow, Hardin, Malta, Miles City,
Plentywood and Sidney. The geographic location of those branches made it
increasingly difficult to provide the level of service those customers are
entitled to today and in the future. The sale, which is subject to federal
regulatory approval, is expected to be complete in April 2000.
On February 15, 2000, the Company announced the closing of two branches in
the Missoula, Montana market and its intention to consolidate the facilities
into existing facilities or a new facility that is currently under construction.
The branch at 2230 Brooks Street will be consolidated into the Western Security
branch six blocks away at 2601 Garfield near Southgate Mall. The branch at 1610
South Third West will be closed and customer accounts will be consolidated at
either the 2601 Garfield branch, or the new facility at 3045 North Reserve
Street, which is expected to be completed June 1, 2000. Both the Garfield and
Reserve Street facilities are within three miles from the 1610 South Third West
branch that is closing. The 2230 Brooks Street facility is scheduled to close
May 12, 2000 and the 1610 South Third West branch June 15, 2000.
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
2
<PAGE>
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 could affect the Company's financial
performance and could cause the Company's actual results for future periods to
differ materially from those anticipated or projected. The Company does not
undertake--and specifically disclaims any obligation--to update any
forward-looking statements to reflect occurrence of anticipated or unanticipated
events or circumstances after the date of such statements.
MARKET AREAS
The Bank conducts operations through its 34 branch offices located in 18
counties located throughout Montana. Based on data supplied by Sheshunoff
Information Services as of June 30, 1999, the latest date such information is
available, Western Security held approximately a 6.3% market share of deposits
in Montana. Based on this market share, Western Security ranked 4th among the
financial institutions located in Montana.
MISSOULA. In Missoula the Bank operates its main office and six branch
offices which accounted for $149.6 million of Missoula County's June 30, 1999
deposits, or a 13.6% market share. 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, Smurfit-Stone Container Corp. (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 $175.3 million of the county's total June 30, 1999 deposits, or a
11.2% 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 $46.4 million, which accounts for 7.2% of the county's total
June 30, 1999 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 $42.7 million in deposits, which
is 4.7% of the county's total June 30, 1999 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 $25.3 million for a 3.9% market share of the
county's June 30, 1999 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 $17.0 million of the county's June 30, 1999
deposits for a 4.6% market share. Ravalli County has benefitted recently from an
influx of retirees.
CONRAD. One Bank office is located in the city of Conrad in Pondera County.
This branch has $8.3 million in deposits and a 10.1% market share of the
county's total June 30, 1999 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 16.0% market share
of the county's total June 30, 1999 deposits. The local economy is primarily
agricultural in nature.
3
<PAGE>
ANACONDA. The Bank has one branch located in the city of Anaconda, in Deer
Lodge County. The branch has $25.4 million in deposits for a 20.4% market share
of the county's June 30, 1999 total deposits.
KALISPELL. The Bank has one branch located in the city of Kalispell, in
Flathead County. The branch has $7.0 million in deposits for a 0.7% market share
of the county's June 30, 1999 total deposits. Kalispell's economy is supported
by natural resource industries and non-resident travel.
BUTTE. The Bank has one branch located in the city of Butte, in Silverbow
County. The branch has $43.7 million in deposits for a 9.8% market share of the
county's June 30, 1999 total deposits. Butte is a trade center and continues to
be supported by various mining activities.
HAVRE. The Bank has one branch located in the city of Havre, in Hill
County. The branch has $17.6 million in deposits for a 7.5% market share of the
county's June 30, 1999 total deposits. The local economy is primarily
agricultural in nature.
The following branches are expected to be sold the second quarter of 2000:
MALTA. The Bank has one branch located in the city of Malta, in Phillips
County. The branch has $3.7 million in deposits for a 4.1% market share of the
county's June 30, 1999 total 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 $15.0 million in deposits for a 6.7% market share of the
county's June 30, 1999 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 $7.1 million in deposits for a 9.1% market share of the
county's June 30, 1999 total deposits. The local economy is primarily
agricultural in nature.
SIDNEY. The Bank has one branch located in the city of Sidney, in Richland
County. The branch has $8.0 million in deposits for a 5.4% market share of the
county's June 30, 1999 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 $15.4 million in deposits for a 14.1% market
share of the county's June 30, 1999 total deposits. The local economy is
primarily agricultural in nature.
GLASGOW. The Bank has one branch located in the city of Glasgow, in Valley
County. The branch has $8.6 million in deposits for a 6.8% market share of
the county's June 30, 1999 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 December 31, 1999, Western Security serviced
loans with principal balances of approximately $219.8 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>
June 30,
December 31, --------------------------------------------------------------
1999 1999 1998 1997(2)
------------------- --------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent
--------- -------- --------- ------- ------- ------ -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family(1)............... $266,351 42.06% $285,914 44.52% $318,663 47.56% $348,577 53.82
Multi-family......................... 35,563 5.62 41,619 6.48 42,716 6.38 40,237 6.21
Commercial........................... 87,181 13.77 75,666 11.78 64,150 9.57 50,049 7.73
Agricultural......................... 11,625 1.84 11,421 1.79 11,066 1.65 7,970 1.23
Construction......................... 18,775 2.97 12,542 1.95 17,523 2.62 19,858 3.07
-------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans..... 419,495 66.26 427,162 66.52 454,118 67.78 466,691 72.06
-------- ------ -------- ------ -------- ------ -------- ------
Other Loans:
Commercial (non-real estate)......... 45,361 7.16 40,237 6.27 34,384 5.13 28,924 4.47
Agricultural (non-real estate)....... 22,825 3.61 23,193 3.61 24,036 3.59 18,866 2.91
Loans to depositors, secured by
deposits............................ 1,387 0.22 1,745 0.27 3,194 0.48 4,101 0.63
Indirect consumer loans.............. 54,418 8.59 66,406 10.34 64,287 9.60 40,708 6.29
Other consumer loans-real estate
secured............................. 36,153 5.71 39,031 6.08 54,619 8.15 58,551 9.04
Other consumer loans................. 53,510 8.45 44,385 6.91 35,352 5.27 29,772 4.60
-------- ------ -------- ------ -------- ------ -------- ------
Total other loans........... 213,654 33.74 214,997 33.48 215,872 32.22 180,922 27.94
-------- ------ -------- ------ -------- ------ -------- ------
Total gross loans........... 633,149 100.00% 642,159 100.00% 669,990 100.00% 647,613 100.00
====== ====== ====== ======
Less:
Unearned fees ....................... (1,145) (1,144) (1,453) (1,813)
Undisbursed loan funds............... (5,240) (3,611) (5,178) (9,489)
Purchased discounts.................. (852) (954) (1,159) (1,383)
Allowance for losses................. (5,161) (5,079) (4,907) (4,651)
-------- -------- -------- --------
Total loans receivable, net. $620,751 $631,371 $657,293 $630,277
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
June 30,
----------------------------------------
1996 1995
----------------------------------------
Amount Percent Amount Percent
--------- ------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family(1)............... $280,853 74.69 $247,331 76.94%
Multi-family......................... 19,939 5.30 18,985 5.91
Commercial........................... 18,318 4.87 12,399 3.86
Agricultural......................... --- --- --- ---
Construction......................... 12,977 3.45 10,742 3.34
-------- ------ -------- ------
Total real estate loans..... 332,087 88.31 289,457 90.05
-------- ------ -------- ------
Other Loans:
Commercial (non-real estate)......... --- --- --- ---
Agricultural (non-real estate)....... --- --- --- ---
Loans to depositors, secured by
deposits............................ 2,337 0.62 2,138 0.67
Indirect consumer loans.............. 2,827 0.75 --- ---
Other consumer loans-real estate
secured............................. 30,814 8.19 24,757 7.69
Other consumer loans................. 8,003 2.13 5,112 1.59
-------- ------ -------- ------
Total other loans........... 43,981 11.69 32,007 9.95
-------- ------ -------- ------
Total gross loans........... 376,068 100.00% 321,464 100.00%
====== ======
Less:
Unearned fees ....................... (1,625) (1,344)
Undisbursed loan funds............... (4,245) (4,988)
Purchased discounts.................. --- ---
Allowance for losses................. (2,005) (2,011)
-------- --------
Total loans receivable, net. $368,193 $313,121
======== ========
- -------------------------
<FN>
(1) Includes $6.8 million, $10.1 million, $8.6 million, $13.7 million, $7.5
million, and $7.1 million of FHA and VA loans at December 31, 1999 and
June 30, 1999, 1998, 1997, 1996, and 1995, respectively.
(2) Includes assets and liabilities from the Security Bancorp acquisition.
</FN>
</TABLE>
5
<PAGE>
The following table illustrates the interest rate sensitivity of the Bank's
loan portfolio at December 31, 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. Weighted average rates
exclude deferred loan fees, discounts and loans in process.
<TABLE>
<CAPTION>
Real Estate
(Dollars in Thousands)
---------------------------------------------------------------------------------------
One-to Four-Family Multi-Family Commercial Agricultural
---------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted
Due During Years Average Average Average Average
Ending December 31, Amount Rate Amount Rate Amount Rate Amount Rate
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2000 $ 49,581 7.67% $ 4,161 8.69 $ 19,402 8.97% $ 1,147 8.84
2001 21,242 7.62 2,695 8.98 12,474 8.36 1,809 8.38
2002 19,411 7.76 2,782 8.89 6,760 8.67 973 8.57
2003 to 2004 29,997 7.54 9,404 8.51 31,924 8.31 3,126 8.41
2005 to 2009 63,050 7.41 6,101 8.96 14,239 8.59 3,495 8.59
2010 to 2014 32,794 7.34 9,119 9.53 1,748 9.08 656 8.47
2015 and Following 50,276 7.30 1,301 8.30 634 9.22 419 9.19
---------------------------------------------------------------------------------------
Total $266,351 7.48% $35,563 8.93 $ 87,181 8.56 $ 11,625 8.55
=======================================================================================
</TABLE>
Real Estate
(Dollars in Thousands)
-------------------------------------------------
Construction Total Real Estate
-------------------------------------------------
Weighted Weighted
Due During Years Average Average
Ending December 31, Amount Rate Amount Rate
- ----------------------------------------------------------------------------
2000 $ 16,120 8.59% $ 90,411 8.17%
2001 836 8.52 39,056 8.00
2002 560 8.55 30,486 8.11
2003 to 2004 748 8.49 75,199 8.03
2005 to 2009 439 8.87 87,324 7.76
2010 to 2014 72 9.55 44,389 7.88
2015 and Following --- -- 52,630 7.36
-------------------------------------------------
Total $ 18,775 8.60% $ 419,495 7.91
=================================================
<TABLE>
<CAPTION>
Non-Real Estate
--------------------------------------------------------------------------------------
Commercial Agricultural Consumer Total Non-Real Estate
--------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted
Due During Years Average Average Average Average
Ending December 31, Amount Rate Amount Rate Amount Rate Amount Rate
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2000(1) $27,126 8.86% $14,380 9.44% $ 43,426 9.15 $ 84,932 9.11%
2001 7,279 8.06 1,932 8.86 27,487 9.01 36,698 8.81
2002 5,079 7.91 1,343 9.04 23,421 9.01 29,843 8.83
2003 to 2004 5,003 7.92 1,799 8.52 31,356 8.84 38,158 8.70
2005 to 2009 601 9.34 2,644 8.40 15,402 9.50 18,647 9.34
2010 to 2014 273 10.30 418 8.43 4,292 9.90 4,983 9.80
2015 and Following --- --- 309 8.72 84 9.23 393 8.83
--------------------------------------------------------------------------------------
Total $45,361 8.54% $22,825 9.15% $145,468 9.09% $213,654 8.98%
======================================================================================
</TABLE>
Total Real Estate and
Non-Real Estate
--------------------
Weighted
Due During Years Average
Ending December 31, Amount Rate
- -----------------------------------------------
2000(1) $175,343 8.63%
2001 75,754 8.40
2002 60,329 8.46
2003 to 2004 113,357 8.26
2005 to 2009 105,971 8.04
2010 to 2014 49,372 8.07
2015 and Following 53,023 7.37
---------------
Total $633,149 8.27%
===============
- --------------------
(1) Includes demand loans and loans having no stated maturity.
6
<PAGE>
The following table sets forth the dollar amount of all loans at December
31, 1999 that have fixed interest rates, and that are contractually due after
December 31, 2000 and have floating or adjustable interest rates that change
after December 31, 2000.
Floating or
Adjustable
Fixed Rates Rates Total
----------- ----------- ---------
(In Thousands)
Real Estate:
One- to four-family.............. $250,035 $16,316 $266,351
Multi-family..................... 24,967 10,596 35,563
Commercial....................... 32,481 54,700 87,181
Agricultural..................... 2,982 8,643 11,625
Construction..................... 18,139 636 18,775
Other loans
Agricultural..................... 41,705 3,656 45,361
Commercial ...................... 21,106 1,719 22,825
Consumer......................... 143,156 2,312 145,468
-------- ------- --------
Total............................ $534,571 $98,578 $633,149
======== ======= ========
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 December 31, 1999,
based on the above, the Bank's regulatory loans-to-one-borrower limit was
approximately $11.2 million. On the same date, the Bank's largest amount of
loans to one borrower or group of related borrowers was 86 loans totaling
approximately $8.3 million, secured by leased equipment, and these loans were
performing in accordance with their contractual terms at December 31, 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.
Western Security has established underwriting criteria and lending limits
based upon loan type and dollar limits. Loan officers have individual approval
limits based upon their experience and expertise. In addition, the Bank employs
one- to four-family residential underwriters who have no origination duties and
can approve residential loans to secondary market conforming limits. Loan
requests in excess of $2,000,000 are approved by the Bank's Loan Committee. The
Loan committee consists of six senior officers of the Bank. The Bank's Board of
Directors approves loan requests in excess of $5,000,000.
All of the Bank's lending is subject to its written underwriting standards
and loan origination procedures. Decisions on loan applications are made on the
basis of detailed applications and property valuations (consistent with the
Bank's written appraisal policy) by qualified appraisers. The loan applications
are designed primarily to determine the borrower's ability to repay and the more
significant items on the application are verified through use of credit reports,
financial statements, tax returns and/or verifications of employment.
The Bank requires evidence of marketable title and lien position as well as
appropriate title insurance (except on certain home equity loans) on all loans
secured by real property and requires fire and extended
7
<PAGE>
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 December 31, 1999, $266.3 million, or 42.1%, 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
various institutional investors. 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
December 31, 1999, the Bank had $49.4 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 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 ratios, of the outstanding
principal amount of the loan if there has been a default, plus costs of
foreclosure.
8
<PAGE>
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 $252,700 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 December
31, 1999, $35.6 million, or 5.62% of the Bank's loan portfolio, consisted of
multi-family loans and $87.2 million, or 13.8% 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
December 31, 1999, $11.6 million, or 1.8% of the 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.
9
<PAGE>
COMMERCIAL AND AGRICULTURAL NON-REAL ESTATE LENDING
The Bank is permitted to make secured and unsecured loans for commercial,
corporate, business and agricultural purposes, including issuing letters of
credit and engaging in inventory financing and commercial leasing activities. In
general, the Bank's total investment in such loans is limited such that at any
one time it generally may not exceed 20% of assets, as defined in OTS
regulations. At December 31, 1999, $45.4 million, or 7.2% of the Bank's loan
portfolio, consisted of commercial non-real estate loans and $22.8 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 December 31, 1999,
approximately $18.8 million, or 3.0% 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 December 31, 1999, the Bank's consumer loans
totaled $145.5 million, or 23.0%, 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 decision was reached
after management determined that these two programs were not returning desired
levels of profitability and were hindering return on assets and equity. At
December 31, 1999, the Bank had $54.4 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 December
31, 1999 the Bank had $7.7 million outstanding under this program with an
additional $5.5 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
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 December 31, 1999, $528,000, or
approximately 0.36% 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
the six months ended December 31, 1999, Western Security did not sell or
securitize any loans to FHLMC.
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
11
<PAGE>
obtains a purchase commitment from the correspondent that does not require
delivery unless the loan is 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 the six months ended December 31, 1999, Western Security
sold $30.6 million of loans pursuant to correspondent agreements. While no
prediction can be made as to loan repurchases which may be required pursuant to
correspondent agreements in the future, as of December 31, 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. During the six months ended
December 31, 1999, Western Security sold $11.0 million of loans with servicing
retained to 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 $219.8
million at December 31, 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.
<TABLE>
<CAPTION>
Six Months
Ended Year Ended June 30,
December 31, -------------------------------------
1999 1999 1998 1997(1)
------------ --------- ----------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Beginning of Period:
Loans, net............................................... $ 631,371 $ 657,293 $ 630,277 $ 368,193
Mortgage-backed securities, net.......................... 151,749 126,433 149,169 104,947
--------- --------- --------- ---------
Total loans and mortgage-backed securities
receivable, net, at beginning of period............. 783,120 783,726 779,446 473,140
--------- --------- --------- ---------
Loan Originations:
Real Estate:
One- to four-family................................... 46,155 158,586 149,959 97,732
Multi-family.......................................... 3,635 6,775 5,107 4,101
Commercial and agricultural........................... 18,454 32,863 28,649 6,069
Construction.......................................... 14,131 21,787 28,127 13,650
--------- --------- --------- ---------
Total real estate loan originations................ 82,375 220,011 211,842 121,552
--------- --------- --------- ---------
Other Loans:
Commercial...................................... 25,143 36,959 44,245 11,684
Agricultural.................................... 12,192 19,643 19,420 9,024
Consumer........................................... 31,840 81,234 91,202 84,569
--------- --------- --------- ---------
Total other loan originations...................... 69,175 137,836 154,867 105,277
--------- --------- --------- ---------
Total loan originations.................................. 151,550 357,847 366,709 226,829
--------- --------- --------- ---------
Purchases:
Real estate loans........................................ --- --- 1,055 1,488
Loans purchased in acquisition .......................... --- --- --- 218,281
Mortgage-backed securities............................... 23,020 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.................. 23,020 58,499 8,045 318,164
--------- --------- --------- ---------
Total real estate loans and
mortgage-backed securities
originated, purchased and converted...... 174,570 416,346 374,754 544,993
--------- --------- --------- ---------
Principal Repayments and Sales:
Principal Repayments:
Loans.................................................... 120,581 278,981 244,519 127,723
Mortgage-backed securities............................... 13,760 31,764 26,616 23,010
Sales:
Real estate loans available-for-sale..................... 41,609 105,129 96,520 54,582
Mortgage-backed securities............................... 1,202 --- 3,193 31,932
--------- --------- --------- ---------
Total principal repayments, sales and conversions.. 177,152 415,874 370,848 237,247
--------- --------- --------- ---------
Net loan and mortgage-backed securities activity............ (2,582) 472 3,906 307,746
Changes in allowance for losses, undisbursed loan funds,
and unearned fees and discounts:
Real estate loans........................................ 20 341 291 (2,209)
Mortgage-backed securities............................... 51 (63) 58 689
Change in unrealized loss on mortgage-backed securities
available for sale.................................. (910) (1,356) 25 80
--------- --------- --------- ---------
End of Period:
Loans, net............................................... 620,751 631,371 657,293 630,277
Mortgage-backed securities............................... 158,948 151,749 126,433 149,169
--------- --------- --------- ---------
Total loans and mortgage-backed securities
receivable, net, at end of period................. $ 779,699 $ 783,120 $ 783,726 $ 779,446
========= ========= ========= =========
<FN>
(1) Includes balances from the Security Bancorp acquisition.
</FN>
</TABLE>
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 Credit Manager 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 classified and charged off per OTS Retail Loan
Classification guidelines. 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 December 31, 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...... 93 $4,204 1.58% 26 $ 999 0.38% 16 $ 590 0.22% 135 $ 5,793 2.18%
Multi-family..... 1 1 -- -- -- -- -- -- -- 1 1 --
Commercial ...... 8 1,242 0.94 5 165 0.12 7 399 0.30 20 1,806 1.36
Agricultural..... 13 2,346 6.81 -- -- -- 11 1,112 3.23 24 3,458 10.04
Construction..... 2 144 0.77 -- -- -- 3 324 1.73 5 468 2.50
Consumer......... 203 1,871 1.29 64 427 0.29 51 528 0.36 318 2,826 1.94
--- ------ --- ------ --- ------ --- -------
Total........ 320 $9,808 95 $1,591 88 $2,953 503 $14,352
=== ====== === ====== === ====== === =======
</TABLE>
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 5.71
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>
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
14
<PAGE>
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 reviews its internal classification of its assets
on a regular basis. On the basis of management's review of its assets, at
December 31, 1999 on a net basis, the Bank had classified $7.8 million as
Substandard and $155,000 as Doubtful.
The following table sets forth as of December 31, 1999 the Bank's
classified assets by type. No multi-family real estate loans, commercial real
estate or construction loans were classified at December 31, 1999.
(In Thousands)
Substandard Doubtful Loss Total
----------- -------- ---- -------
One- tofour-family................. $ 589 $ -- $-- $ 589
Multi-family....................... 101 -- -- 101
Commercial Real Estate............. 169 6 -- 175
Agriculture Real Estate............ 1,401 -- -- 1,401
Construction....................... 324 -- -- 324
Commercial ........................ 126 149 -- 275
Agriculture ....................... 4,618 -- -- 4,618
Consumer........................... 508 -- -- 508
------ ----- --- -------
Total.............................. $7,836 $ 155 $-- $ 7,991
====== ===== === =======
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. 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.
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.
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
15
<PAGE>
rates). Foreclosed assets include assets acquired in settlement of loans, and
are recorded at the lower of the related loan balance, less any specific
allowance for loss, or fair value at the date of foreclosure.
<TABLE>
<CAPTION>
June 30,
December 31, ----------------------------------------------------
1999 1999 1998 1997(1) 1996 1995
------- ------ -------- -------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-accruing loans:
Real Estate:
One- to four-family............... $ 549 $ 521 $ 1,967 $ 842 $ 21 $ --
Multi-family...................... -- -- 89 -- -- --
Commercial........................ 348 -- 35 -- -- 166
Construction...................... 324 112 362 -- -- --
Agriculture non-real estate................ 1,113 1,098 -- -- -- --
Commercial non-real estate............ 51 106 32 102 -- --
Consumer.............................. 508 1,212 1,504 573 383 153
------- ------- ------- ------- ------ ------
Total............................. 2,893 3,049 3,989 1,517 404 319
------- ------- ------- ------- ------ ------
Accruing loans delinquent 90 days or more:
Real Estate
One- to four-family............... 40 426 442 231 288 253
Multi-family...................... -- -- -- -- -- --
Commercial........................ -- -- -- -- -- --
Construction...................... -- 344 -- -- -- --
Agriculture non-real estate................ -- -- -- -- -- --
Commercial non-real estate................. -- -- 10 -- -- --
Consumer 20 5 174 605 23 1
------- ------- ------- ------- ------ ------
Total............................. 60 775 626 836 311 254
------- ------- ------- ------- ------ ------
Foreclosed assets:
Real Estate:
One- to four-family............... 94 238 279 -- -- --
Multi-family...................... -- -- -- -- -- --
Commercial........................ -- -- -- -- -- --
Land.............................. 26 26 28 -- -- --
Consumer .................................. 48 106 114 82 -- --
------- ------- ------- ------- ------ ------
Total............................. 168 370 421 82 -- --
------- ------- ------- ------- ------ ------
Total non-performing assets................ $ 3,121 $ 4,194 $ 5,036 $ 2,435 $ 715 $ 573
======= ======= ======= ======= ====== ======
Total as a percentage of total assets...... 0.31% 0.42% 0.49% 0.25% 0.13% 0.10%
Total allowance for loan losses to non-
performing loans (exclusive of
foreclosed)................................ 174.77% 132.85% 106.33% 197.66% 280.42% 350.35%
Total allowance for loan losses to total
non-performing assets................... 165.36% 121.13% 97.44% 191.01% 280.42% 350.35%
<FN>
(1) Includes assets from the Security Bancorp acquisition.
</FN>
</TABLE>
For the six months ended December 31, 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 $193,000.
At December 31, 1999, Western Security's non-accruing loans were comprised
of fifteen one- to four-family loans totaling $549,000, four non-residential
property loans totaling $348,000, three construction loans totaling $324,000,
eleven agriculture non-real estate loans totaling $1.1 million, three commercial
non-real estate loans totaling $51,000 and forty-seven consumer loans totaling
$508,000. Accruing loans delinquent 90 days or more at December 31, 1999,
includes one, one- to four-family loans totaling $40,000, and three consumer
loans totaling $20,000 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 December 31, 1999, there were $94,000 in three foreclosed real estate
loans and $26,000 in one foreclosed residential land loan.
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 December 31, 1999, there were no other loans
16
<PAGE>
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.
LOAN LOSS RESERVE ANALYSIS. The allowance for 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, problem loans and other loans of
concern.
While management believes that it uses the best information available to
determine the allowance for loan losses, unforeseen market conditions could
result in adjustments to the allowance for loan losses, and net earnings could
be significantly affected, if circumstances differ substantially from the
assumptions used in making the final determination.
The following table sets forth an analysis of the Bank's allowance for loan
losses.
<TABLE>
<CAPTION>
Six Months
Ended Year Ended June 30,
December 31, -----------------------------------------------
1999 1999 1998 1997(1) 1996 1995
------------ ------- -------- --------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period $ 5,079 $ 4,907 $ 4,651 $ 2,005 $ 2,011 $ 2,030
======== ======== ======== ======== ======== =======
Charge-Offs:
Real Estate:
One- to four-family (27) (177) --- (53) --- (2)
Commercial --- --- --- (43) --- ---
Other:
Commercial (161) (49) (26) (47) --- ---
Consumer (798) (1,002) (611) (110) (11) (26)
-------- -------- -------- -------- -------- -------
Total charge-offs (986) (1,228) (637) (253) (11) (28)
-------- -------- -------- -------- -------- -------
Recoveries:
Other:
Commercial 2 6 3 --- --- ---
Consumer 186 94 50 18 5 9
-------- -------- -------- -------- -------- -------
Total recoveries 188 100 53 18 5 9
-------- -------- -------- -------- -------- -------
Net charge-offs (798) (1,128) (584) (235) (6) (19)
Provisions charged to operations 880 1,300 840 400 --- ---
Reserves acquired --- --- --- 2,481 --- ---
-------- -------- -------- -------- -------- -------
Balance at end of period $ 5,161 $ 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 0.13% 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 22.06% 25.21% 11.92% 13.12% 1.39% 2.91%
Ratio of allowance for loan losses to loans 0.82% 0.80% 0.74% 0.73% 0.54% 0.64%
receivable, net
- -------------
<FN>
(1) Includes reserves acquired in the Security Bancorp acquisition.
</FN>
</TABLE>
17
<PAGE>
The following table sets forth the distribution of the Bank's allowance for
loan losses at the dates indicated is summarized as follows:
<TABLE>
<CAPTION>
At December 31, At June 30,
--------------------- ---------------------------------------------------------------------------
1999 1999 1998 1997(1)
--------------------- --------------------- -------------------- ---------------------
Percent Percent Percent Percent
of Loans of Loans of Loans of Loans
in Each in Each in Each in Each
Category Category Category Category
to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans
--------- ---------- --------- -------- ------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four- family $ 760 17.15% $ 838 18.56% $ 927 47.56% $ 2,244 53.82%
Multi-family 265 5.98 305 6.75 300 6.38 259 6.21
Commercial 790 17.82 710 15.72 550 9.57 479 7.73
Agricultural 290 6.54 210 4.65 150 1.65 471 1.23
Construction 248 5.60 156 3.45 250 2.62 128 3.07
Other loans:
Commercial 388 8.75 468 10.36 450 5.13 --- 4.47
Agricultural 540 12.18 460 10.19 400 3.59 --- 2.91
Consumer 1,151 25.98 1,369 30.32 1,480 23.50 918 20.56
Unallocated 729 --- 563 --- 400 --- 152 ---
--------- ------ --------- ------ ------- ------ -------- ------
Total $ 5,161 100.00% $ 5,079 100.00% $ 4,907 100.00% $ 4,651 100.00%
========= ====== ========= ====== ======= ====== ======== ======
<FN>
(1) Includes reserves acquired in the Security Bancorp acquisition.
</FN>
</TABLE>
At June 30,
-----------------------------------------------
1996 1995
--------------------- --------------------
Percent Percent
of Loans of Loans
in Each in Each
Category Category
to Total to Total
Amount Loans Amount Loans
--------- --------- --------- --------
(Dollars in Thousands)
Real Estate:
One- to four- family $ 539 74.69% $ 175 76.94%
Multi-family 136 5.30 12 5.91
Commercial 152 4.87 75 3.86
Agricultural --- --- --- ---
Construction 164 3.45 5 3.34
Other loans:
Commercial --- --- --- ---
Agricultural --- --- --- ---
Consumer 126 11.69 132 9.95
Unallocated 888 --- 1,612 ---
--------- ------ --------- ------
Total $ 2,005 100.00% $ 2,011 100.00%
========= ====== ========= ======
18
<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 December 31, 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 December 31, 1999, the Bank owned $85.2 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 December 31, 1999, the Bank's liquidity ratio
(liquid assets as a percentage of net withdrawable savings and current
borrowings) was 15.99% 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 16 of the Notes to Consolidated Financial
Statements in the Annual Report incorporated by reference herein as Exhibit 13.
At December 31, 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 December 31, At June 30,
----------------- ---------------------------------------------------------
1999 1999 1998 1997(1)
----------------- ----------------- ----------------- -----------------
Book % of Book % of Book % of Book % of
Value Total Value Total Value Total Value Total
------- ----- ------- ----- ----- ----- ----- ------
(Dollars in Thousands)
<S> <C> <C> <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 6,991 6.06 6,985 6.20 11,473 9.15 5,980 7.55
Other investments 2,214 1.92 2,250 2.00 2,280 1.82 2,385 3.01
-------- ------ ------- ------ -------- ------ ------- ------
Total investment securities held-to-maturity 9,205 7.98 9,235 8.20 16,847 13.44 27,466 34.70
-------- ------ ------- ------ -------- ------ ------- ------
Investments available-for-sale:
Federal agency obligations 85,167 73.79 79,985 70.99 89,781 71.62 45,969 58.08
Corporate obligations 18,060 15.64 23,374 20.74 18,720 14.93 5,675 7.17
Other 2,985 2.59 82 0.07 10 0.01 39 0.05
-------- ------ ------- ------ -------- ------ ------- ------
Total investments available for sale 106,212 92.02 103,441 91.80 108,511 86.56 51,683 65.30
-------- ------ ------- ------ -------- ------ ------- ------
Total investment securities $115,417 100.00% $112,676 100.00% $125,358 100.00% $79,149 100.00%
======== ====== ======== ====== ======== ====== ======= ======
Average remaining life or term to repricing of
securities 39 mos. 37 mos. 33 mos. 41 mos.
<FN>
(1) Includes assets from the Security Bancorp acquisition.
</FN>
</TABLE>
For information regarding the estimated market value of investment
securities at December 31, 1999, see Notes 1 and 4 of the Notes to Consolidated
Financial Statements in the Annual Report incorporated by reference herein as
Exhibit 13.
19
<PAGE>
The following table sets forth the composition and maturities of the
investment securities portfolio as of December 31, 1999.
<TABLE>
<CAPTION>
At December 31, 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 2,997 3,994 --- --- 6,991 6,981
Other investments --- 238 330 1,646 2,214 2,214
------ -------- ------ ------ -------- --------
Total investment securities held-to-maturity 2,997 4,232 330 1,646 9,205 9,195
------ -------- ------ ------ -------- --------
Investments available-for-sale:
Federal agency obligations --- 82,968 2,500 1,863 87,331 85,167
Corporate obligations 5,564 12,802 --- 66 18,432 18,060
Other investments 93 --- 149 2,651 2,893 2,985
------ -------- ------ ------ -------- --------
Total investments available for sale 5,657 95,770 2,649 4,580 108,656 106,212
------ -------- ------ ------ -------- --------
Total securities $8,654 $100,002 $2,979 $6,226 $117,861 $115,407
====== ======== ====== ====== ======== ========
Average weighted yield 6.09% 5.70% 7.21% 6.41% 5.80%
</TABLE>
20
<PAGE>
MORTGAGE-BACKED SECURITIES. The Bank purchases mortgage-backed securities
to supplement residential loan production. The type of securities purchased is
based upon the Bank's asset/liability management strategy and balance sheet
objectives. For instance, most of the mortgage-backed investments purchased by
the Bank over the last several years have had adjustable interest rates or short
or intermediate effective terms to maturity. In addition, the Bank has purchased
investment grade, fixed-rate and variable-rate Collateralized Mortgage
Obligations ("CMOs") having estimated average lives from one to twenty years.
CMOs are securities derived by reallocating cash flows from mortgage-backed
securities or from pools of mortgage loans held by a trust. The CMOs acquired by
the Bank are not interest-only or principal- only or residual interests except
for one interest-only CMO totaling $24,000. At December 31, 1999, the book value
of the CMOs was $62.8 million. The book value of all the Bank's mortgage-backed
securities at December 31, 1999 was $158.9 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 December 31, 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 December 31, 1999. The Bank also holds $6.5 million of
mortgage-backed securities issued by private institutions.
For information regarding the estimated market values of mortgage backed
securities at December 31, 1999, see Notes 1 and 5 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.
<TABLE>
<CAPTION>
At December 31, At June 30,
--------------------------------------------------------
1999 1999 1998 1997(1)
----------- ------------ ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Issuers:
- -------
Federal Home Loan Mortgage Corporation $ 36,633 $ 42,632 $ 51,776 $ 66,070
Federal National Mortgage Association 19,387 17,021 7,721 12,344
Government National Mortgage Association 33,521 19,004 15,218 18,850
Collateralized Mortgage Obligations - federal agency 62,836 65,102 48,578 45,815
Other 6,571 7,990 3,140 6,090
-------- ---------- ---------- ---------
Total $158,948 $ 151,749 $ 126,433 $ 149,169
======== ========== ========== =========
<FN>
(1) Includes assets from the Security Bancorp acquisition.
</FN>
</TABLE>
21
<PAGE>
The following table sets forth the contractual maturities, without giving
effect to repricing, of the mortgage-backed securities portfolio, net, at
December 31, 1999.
<TABLE>
<CAPTION>
Market December 31,
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 $--- $1,118 $21,001 $ --- $ 982 $ --- $ 23,101
Government National Mortgage Association --- --- --- --- 9,765 --- 9,765
Collateralized Mortgage Obligations -
Federal Agency 39 144 5,977 485 36,312 --- 42,957
Other --- 24 24 --- 1,801 --- 1,849
------ ------ ------- ------- ------- ------- ---------
Subtotal
39 1,286 27,002 485 48,860 --- 77,672
------ ------ ------- ------- ------- ------- ---------
Available for sale:
Federal Home Loan Mortgage Corporation --- 1,460 4,657 1,797 5,845 (227) 13,532
Federal National Mortgage Corporation 611 --- 1,550 13,528 4,316 (618) 19,387
Government National Mortgage Association --- --- 13,384 10,577 288 (493) 23,756
Collateralized Mortgage Obligations -
Federal Agency --- 2,098 1,968 1,528 15,212 (927) 19,879
Other --- --- --- --- 4,744 (22) 4,722
------ ------ ------- ------- ------- ------- ---------
Subtotal 611 3,558 21,559 27,430 30,405 (2,287) 81,276
------ ------ ------- ------- ------- ------- ---------
Total $ 650 $4,844 $48,561 $27,915 $79,265 $(2,287) $ 158,948
====== ====== ======= ====== ======= ======= ==========
</TABLE>
The following schedule sets forth the contractual maturity and repricing of
the Bank's mortgage-backed securities portfolio, net, at December 31, 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 December 31,
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 $ 47 $ --- $ --- $22,119 $12,549 $ --- $ --- $ --- $ 34,715
Mortgage-Backed Securities
Available-for-Sale --- 1,292 2,342 8,153 25,216 18,281 7,473 (1,360) 61,397
Collateralized Mortgage
Obligations
Held-to-Maturity --- --- 39 8,404 34,514 --- --- --- 42,957
Collateralized Mortgage
Obligations
Available-for-Sale --- --- --- 2,098 12,735 1,528 4,445 (927) 19,879
----- ------- ------- ------- ------- ------- ------- ------- --------
Total $ 47 $ 1,292 $ 2,381 $40,774 $85,014 $19,809 $11,918 $(2,287) $158,948
===== ======= ======= ======= ======= ======= ======= ======= ========
</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 December 31, 1999
the Bank had $8.2 million in cash surrender value of life insurance policies.
22
<PAGE>
SOURCES OF FUNDS
GENERAL. Deposit accounts have traditionally been the principal source of
the Bank's funds for use in lending and for other general business purposes. In
addition to deposits, the Bank derives funds from loan repayments and cash flows
generated from operations. Scheduled loan payments are a relatively stable
source of funds, while deposit inflows and outflows and the related cost of such
funds have varied. Other potential sources of funds available to the Bank
include borrowings from the Federal Home Loan Bank ("FHLB") of Seattle and other
borrowings.
DEPOSITS. The Bank attracts both short-term and long-term deposits by
offering a wide assortment of accounts and rates. The Bank offers regular
savings accounts, NOW accounts, non-interest 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.
23
<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>
Six Months Ended
December 31, Year Ended June 30,
----------------- ------------------------------------------------------
1999 1999 1998 1997(1)
----------------- ------------------ ---------------- -----------------
Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total
-------- -------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Transactions and Savings Deposits:
Passbook and savings accounts (2.70 - 2.75%) $ 87,206 13.25% $ 89,975 13.94% $ 94,557 14.86% $102,923 16.31%
Money market accounts (2.96 - 4.98%) 78,482 11.92 75,398 11.68 55,464 8.71 49,062 7.78
NOW accounts (1.50%) 82,506 12.53 77,899 12.07 74,673 11.73 76,582 12.14
Non-Interest bearing demand 38,724 5.88 35,708 5.53 30,524 4.80 26,050 4.13
-------- ------ -------- ------ -------- ------ -------- ------
Total non-certificates 286,918 43.58 278,980 43.22 255,218 40.10 254,617 40.36
-------- ------ -------- ------ -------- ------ -------- ------
Certificates:
0.00 - 3.99% 3,765 0.57 3,385 0.52 1,894 0.30 1,276 0.20
4.00 - 5.99% 295,475 44.88 302,629 46.88 269,590 42.36 288,440 45.72
6.00 - 7.99% 72,246 10.97 60,545 9.38 109,731 17.24 86,341 13.69
8.00 - and over --- --- 10 --- 8 --- 195 0.03
-------- ------ -------- ------ -------- ------ -------- ------
Total certificates 371,486 56.42 366,569 56.78 381,223 59.90 376,252 59.64
-------- ------ -------- ------ -------- ------ -------- ------
Total deposits $658,404 100.00% $645,549 100.00% $636,441 100.00% $630,869 100.00%
======== ====== ======== ====== ======== ====== ======== ======
<FN>
(1) Includes deposits from the Security Bancorp acquisition.
</FN>
</TABLE>
The following table sets forth the amount of the Bank's certificates of
deposit and other deposits by time remaining until maturity as of December 31,
1999.
<TABLE>
<CAPTION>
0.00- 4.00- 6.00- Percent
3.99% 5.99% 7.99% Total of Total
------- ------- ------- ------ --------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Certificate accounts maturing in
quarter ending:
March 31, 2000 $3,295 $ 81,408 $ 11,437 $ 96,140 25.88%
June 30, 2000 61 68,032 2,793 70,886 19.08
September 30, 2000 181 42,787 5,246 48,214 12.98
December 31, 2000 146 40,577 36,750 77,473 20.85
March 31, 2001 --- 12,534 6,559 19,093 5.14
June 30, 2001 10 15,087 297 15,394 4.14
September 30, 2001 30 10,669 575 11,274 3.03
December 31, 2001 1 10,358 1,414 11,773 3.17
March 31, 2002 4 4,295 315 4,614 1.24
June 30, 2002 8 1,337 1,186 2,531 0.68
September 30, 2002 10 1,239 2,453 3,702 1.00
December 31, 2002 11 1,524 1,484 3,019 0.81
Thereafter 8 5,628 1,737 7,373 2.00
------ -------- -------- -------- ------
Total $3,765 $295,475 $ 72,246 $371,486 100.00%
====== ======== ======== ======== ======
Percent of total 1.01% 79.54% 19.45%
===== ======= =======
</TABLE>
24
<PAGE>
The following table sets forth the amount of the Bank's certificates of
deposit and other deposits by time remaining until maturity as of December 31,
1999.
<TABLE>
<CAPTION>
Maturity
---------------------------------------------------
3 Months Over 3 to 6 Over 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 $ 78,172 $ 62,099 $ 106,291 $ 70,949 $ 317,511
Certificates of deposit of $100,000 or more 12,290 5,856 16,230 7,581 41,957
Public funds(1) 5,678 2,931 3,166 243 12,018
---------- ---------- ---------- ---------- ------------
Total certificates of deposit $ 96,140 $ 70,886 $ 125,687 $ 78,773 $ 371,486
========== ========== ========== ========== ============
- -----------------------
<FN>
(1) Deposits from governmental and other public entities, includes both over and
under $100,000.
</FN>
</TABLE>
For additional information regarding the composition of the Bank's
deposits, see Note 9 of the Notes to the Consolidated Financial Statements in
the Annual Report incorporated by reference herein as Exhibit 13.
BORROWINGS. Western 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 11 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.
<TABLE>
<CAPTION>
Six Months
Ended
December 31, Year Ended June 30,
------------ ----------------------------------
1999 1999 1998 1997(1)
------------ --------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C>
Maximum Balance:
- ---------------
FHLB Advances $ 249,500 $ 257,277 $248,133 $190,338
Collateralized Mortgage Obligations 193 511 775 1,117
Other Borrowings and Repurchase Agreements 9,761 7,416 26,099 8,101
Average Balance:
- ----------------
FHLB Advances 236,910 222,336 231,613 142,715
Collateralized Mortgage Obligations 155 304 625 967
Other Borrowings and Repurchase Agreements 8,184 6,749 12,726 2,731
<FN>
(1) Includes liabilities from the Security Bancorp acquisition.
</FN>
</TABLE>
25
<PAGE>
The following table sets forth certain information as to the Bank's FHLB
advances, CMO's and other borrowings at the dates indicated.
<TABLE>
<CAPTION>
December 31, June 30,
------------- --------------------------------------
1999 1999 1998 1997(1)
------------- ------------ ---------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
FHLB Advances $ 226,769 $ 244,048 $ 248,133 $ 190,338
Collateralized Mortgage Obligations 123 242 511 797
Other Borrowings and Repurchase Agreements 7,917 6,895 6,542 8,101
------------- ---------- ---------- ---------
Total Borrowings $ 234,809 $ 251,185 $ 255,186 $ 199,236
============= ========== ========== =========
Weighted Average Interest Rate of FHLB Advances 5.83% 5.53% 5.83% 6.14%
============= ========== ========== =========
Weighted Average Interest Rate of
Collateralized Mortgage Obligations 11.46% 11.48% 11.48% 11.37%
============= ========== ========== =========
Weighted Average Interest Rate of Other Borrowings
and Repurchase Agreements 5.11% 4.34% 5.05% 5.30%
============= ========== ========== =========
<FN>
(1) Includes liabilities from the Security Bancorp acquisition.
</FN>
</TABLE>
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 16 of the Notes to Consolidated Financial Statements in the Annual
Report incorporated by reference herein as Exhibit 13, the Bank was party to one
interest rate exchange agreement. This agreement covered a total of $5.0 million
in notional principal amounts wherein the interest rate cap entitles 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 December 31, 1999 the amount of the unamortized premiums paid related
to the interest rate cap transactions was $12,460.
SUBSIDIARY ACTIVITIES
GENERAL. The Company has no direct subsidiaries other than the Bank.
Western Security has three wholly-owned service 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"). The company also
has a 97% partnership interest in COAD Limited Partnership ("COAD"). At
December 31, 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 the operation of these entities:
SERVICE CORP. OF MONTANA, INC. This service corporation owns and
operates a 30-unit apartment complex in Lewistown, Montana and two single
family residences in Hamilton, Montana. Western Security's investment
in Service Corp. totaled $427,000 at December 31, 1999.
WESTERN SECURITY INVESTMENT SERVICES, INC. Western Security Investment
conducts a securities brokerage business in Western Security's offices and a
real estate rental business. At December 31, 1999, Western Security's investment
in Western Security Investment totaled $585,000.
COAD LIMITED PARTNERSHIP. In August 1995, Western Security entered into a
Limited Partnership allowing the Bank to take advantage of low income housing
tax credits. The Partnership was involved with the construction of two six-unit
apartment buildings for low to moderate income people. Western Security's
investment in COAD totaled $259,000 at December 31, 1999.
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 $849,000 at December
31, 1999. Western Security's investment in Monte Mac as of December 31, 1999,
included approximately $726,000 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.
27
<PAGE>
REGULATION
GENERAL. The Bank is a federally chartered Bank, the deposits of which are
federally insured and backed by the full faith and credit of the United States
Government. Accordingly, the Bank is subject to broad federal regulation and
oversight extending to all of its operations. The Bank is a member of the FHLB
of Seattle and is subject to certain limited regulation by the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board"). As the
savings and loan holding company of the Bank, the Company is subject to federal
regulation and oversight. The purpose of the regulation of the Company and other
holding companies is to protect subsidiary savings associations. The Bank is a
member of the Savings Association Insurance Fund ("SAIF"), 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 December 31, 1999, was
approximately $91,000. 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 December 31,
1999, the Bank's lending limit under this restriction was approximately $11.2
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.
28
<PAGE>
Insurance of Accounts and Regulation by the FDIC. The deposits of the Bank
are presently insured by the SAIF. Deposits are insured up to applicable limits
by the FDIC and such insurance is backed by the full faith and credit of the
United States Government. As insurer, the FDIC imposes deposit insurance
premiums and is authorized to conduct examinations of and to require reporting
by FDIC-insured institutions. It also may prohibit any FDIC-insured institution
from engaging in any activity the FDIC determines by regulation or order 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 3 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 December 31, 1999, the Bank had unamortized purchased
mortgage servicing rights of $527,000 and goodwill and core deposit intangible
relating to the purchase of Security Bancorp of $18.2 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 December 31, 1999, the Bank was required to deduct $584,000 of
its investment in Service Corp. of Montana, Inc., $585,000 of its investment in
Western Security Investment under these rules and $259,000 of its investment in
COAD.
At December 31, 1999, the Bank had tangible capital of $69.1 million, or
7.1% of adjusted total assets, which is approximately $54.5 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,
29
<PAGE>
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 December 31, 1999, the Bank had no such
intangible assets.
At December 31, 1999, the Bank had core capital equal to $69.1 million, or
7.1% of adjusted total assets, which is $30.0 million above the minimum leverage
ratio requirement of 4% 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
December 31, 1999, the Bank had $33,000 of supplementary capital and had $5.2
million of general loss reserves, which was less than 1.25% of risk-weighted
assets, and were included in the $74.3 million of risk- based capital at
December 31, 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 December 31, 1999, the Bank had total risk-based capital of $74.3
million (including $69.1 million in core capital and $5.2 million in qualifying
supplementary capital) and risk-weighted assets of $614.7 million (including
$58,000 in converted off-balance sheet assets); or total risk-based capital of
12.1% of risk-weighted assets. This amount was $25.2 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.
30
<PAGE>
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.
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.
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 retained net income for the two preceding
years. 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, or would not remain well-capitalized following the 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 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 15.99% at December 31, 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 December 31, 1999, the
Bank met the test and has always met the test since its effectiveness.
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it 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."
31
<PAGE>
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 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.
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.
32
<PAGE>
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 December 31, 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 December 31, 1999, the Bank had $15.2 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 7.42% and were 7.25% and 7.69% for calendar
years 1999 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.
For the six months ended December 31, 1999, dividends paid by the FHLB of
Seattle to the Bank totaled $538,900 which constitutes a $12,800 increase over
the amount of dividends received over the same period in 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
33
<PAGE>
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
December 31, 1999 the Bank's bad debt reserve for tax purposes was approximately
$2.0 million. See Note 13 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.
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 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 17, Recent
Accounting Pronouncements Not Yet Adopted in Notes to Consolidated Financial
Statements in the Annual Report incorporated by reference herein as Exhibit 13.
34
<PAGE>
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.
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 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.
35
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information at December 31, 1999
regarding the executive officers of the Company and the Bank who are not also
directors.
<TABLE>
<CAPTION>
Name Age Position(s) Held
- ------------------ --- ---------------------------------------------------------------
<S> <C> <C>
James A. Salisbury 49 Executive Vice President, Treasurer and Chief Financial Officer
of the Company and the Bank
Charles E. Eiseman 49 Senior Vice President/Western Region
Barry L. Johnston 45 Senior Vice President/Credit Administrator
Marcia Johnson 40 Senior Vice President/Central Operations
John Cromwell 60 Senior Vice President/Human Resource Director
Suzanne Loewen 41 Vice President/Audit/Compliance
</TABLE>
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. Prior to such time, he was employed by Helena Federal Savings and Loan
from 1973 to 1975. Since July 1999, Mr. Eiseman's duties have included
management responsibilities for all Western Montana branches. Mr. Eiseman is a
graduate of the University of Montana.
BARRY L. JOHNSTON. Mr. Johnston joined Western Security Bank as Senior Vice
President and Credit Administrator in October, 1999. He has over 25 years of
lending and Credit Administration experience. Previous to joining the Bank, he
held Senior Lending Officer and Credit Administration positions with banks
located in Las Vegas, Nevada, Salt Lake City, Utah, and Boise, Idaho. He also
was employed as a National Bank Examiner for ten years. He is responsible for
the functional direction of all lending activities of the bank, including
administration of credit policy, credit support functions, and monitoring of
asset quality. Mr. Johnston 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. She
is currently responsible for all internal bank operations and information
services functions and serves as Secretary of Service Corporation of Montana.
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.
SUZANNE LOEWEN. Ms. Loewen joined Western Security Bank in February 1991,
was appointed Vice President/Audit/Compliance in October 1996 and elected
Corporate Secretary of the Holding Company in July 1999. Ms. Loewen has over
nineteen years of banking experience and, prior to her employment with the Bank,
worked as a Project Manager for the Department of Housing and Urban Development.
Her present duties include the supervision of the Bank's audit, compliance and
quality control functions. Ms. Loewen attended the University of Montana.
36
<PAGE>
EMPLOYEES
At December 31, 1999, the Company had a total of 308 full-time employees
and 63 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 December 31, 1999.
At December 31, 1999, the Bank's premises and equipment had an aggregate net
book value of approximately $22.2 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, 2000
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, 2000
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 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(2) Leased January 1, 2008
Missoula, Montana
2350 South Reserve 1995 Leased March 13, 2001
Missoula, Montana
221 Second Street NW 1989 Owned N/A
Sidney, Montana
324 Third Avenue 1989 Owned N/A
Havre, Montana
216 Second Avenue East 1994 Owned N/A
Malta, Montana
125 Fourth Street South 1989 Leased Monthly(3)
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(4) 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) Property sold 12/97 - leased for 10 years.
(3) Lease is on a month-to-month basis.
(4) Land is leased - Western Security owns the building.
Western Security is in the process of constructing a new full- service
branch at 3045 North Reserve Street in Missoula, Montana. The branch is expected
to be completed June 1, 2000.
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, liquidity or results of operations.
39
<PAGE>
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 December 31,
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 57 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 4 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 5 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 22 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 April 25, 2000, 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 April 25, 2000, 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
April 25, 2000, 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 April 25, 2000
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 December 31, 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 .......................................... 22
Consolidated Balance Sheets -- December 31, 1999 and
June 30, 1999......................................................... 23
Consolidated Statements of Income -- For the six months ended
December 31, 1999 and for each of the Years in the Three-Year
Period Ended June 30,1999............................................. 24
Consolidated Statements of Stockholders' Equity and
Comprehensive Income -- For the six months ended December 31, 1999
and for each of the Years in the Three-Year Period Ended
June 30, 1999......................................................... 25
Consolidated Statements of Cash Flows --For the six months ended
December 31, 1999 and for each of the Years in the Three-Year
Period Ended June 30, 1999 ........................................... 27
Notes to Consolidated Financial Statements............................. 28
(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:
--------
<TABLE>
<CAPTION>
Reference to Prior
Filing of Exhibit
Regulation S-K Number Attached
Exhibit Number Document Hereto
- -------------------- -------------------------------------------------------------------- -------------------
<S> <C> <C>
2 Plan of acquisition, reorganization, arrangement, liquidation or None
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
10.13 Change in Control Agreement for Charles E. Eiseman, Jr. 10.13
10.14 Change in Control Agreement for Ralph K. Holliday 10.14
10.15 Change in Control Agreement for Marcia L. Johnson 10.15
10.16 Change in Control Agreement for Barry L. Johnston 10.16
10.17 Change in Control Agreement for Suzanne M. Loewen 10.17
10.18 Change in Control Agreement for Sharon E. Woldstad 10.18
11 Statement re: computation of per share earnings None
12 Statement re: computation of ratios Not required
13 Annual Report to Security Holders 13
16 Letter re: change in certifying accountant None
18 Letter re: change in accounting principles None
19 Report furnished to security holders None
21 Subsidiaries of Registrant 21
22 Published report regarding matters submitted to vote of security None
holders
23 Consents of experts and counsel 23
24 Power of Attorney Not required
27 Financial Data Schedule 27
99 Additional exhibits None
- -------------------------
<FN>
* 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."
</FN>
</TABLE>
43
<PAGE>
(b) Reports on Form 8-K:
--------------------
The following reports on Form 8-K have been filed during the three-month
period ended December 31, 1999.
October 7, 1999 Press release to report quarterly dividend declaration of
$0.155 per share
October 22, 1999 Press release to report quarterly earnings release
November 4, 1999 Resolution regarding change in fiscal year end. Press
release to report change in fiscal year to December 31
December 8, 1999 Press release to report Ralph K. Holliday as new President/
Chief Executive Officer
December 23, 1999 Press release to report quarterly dividend declaration of
$0.160 per share
44
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
WESTERFED FINANCIAL CORPORATION
Date: March 30, 2000 By: /s/ Ralph K. Holliday
-------------- ---------------------------------
Ralph K. Holliday
(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.
<TABLE>
<S> <C>
By: /s/ Lyle R. Grimes By: /s/ Dr. Marvin Reynolds
--------------------------------------- ---------------------------------------
Lyle R. Grimes, Chairman of the Board Dr. Marvin Reynolds, Director
Date: March 30, 2000 Date: March 30, 2000
By: /s/ Dr. Otto G. Klein, Jr. By: /s/ John E. Roemer
--------------------------------------- ---------------------------------------
Dr. Otto G. Klein, Jr., Director John E. Roemer, Vice Chairman
Date: March 30, 2000 Date: March 30, 2000
By: /s/ Laurie C. DeMarois By: /s/ James A. Salisbury
--------------------------------------- ---------------------------------------
Laurie C. DeMarois, Director James A. Salisbury, Treasurer and Chief
Financial Officer (Principal Financial
and Accounting Officer)
Date: March 30, 2000 Date: March 30, 2000
By: /s/ Robert F. Burke By: /s/ William Leslie
--------------------------------------- ---------------------------------------
Robert F. Burke, Director William Leslie, Director
Date: March 30, 2000 Date: March 30, 2000
By: /s/ David W. Jorgenson By: /s/ Ralph K. Holliday
--------------------------------------- ---------------------------------------
David W. Jorgenson, Director and Ralph K. Holliday, Director
Vice President
Date: March 30, 2000 Date: March 30, 2000
</TABLE>
45
EXHIBIT 10.13
AGREEMENT
THIS AGREEMENT is made and entered into as of this 4thth day of
January, 2000, by and between WESTERN SECURITY BANK (the "Bank"), located at 100
E. Broadway, Missoula, Montana and CHARLES E. EISEMAN, JR. (the "Employee"),
whose address is 3565 Pattee Canyon Road, Missoula, Montana 59803.
WHEREAS, the Employee is currently serving as Senior Vice President
Western Region Manager of the Bank; and
WHEREAS, the Board of Directors of the Bank believes it is in the best
interests of the Bank to enter into this Agreement with the Employee in order to
assure continuity of management of the Bank and to reinforce and encourage the
continued attention and dedication of the Employee to her/his assigned duties;
and
WHEREAS, the Board of Directors of the Bank has approved and authorized
the execution of this Agreement with the Employee to take effect as stated in
Section 3 hereof;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein contained, it is AGREED as
follows:
1. Change in Control.
(a) Involuntary Termination. If the Employee's employment is
involuntarily terminated (other than for cause or pursuant to any of Sections
5(b) through 5(g) or Section 6 of this Agreement) in connection with or within
12 months after a change in control of the Bank or the Holding Company which
occurs at any time during the term of this Agreement, the Bank shall pay to the
Employee, over the period as provided in the following sentence, an amount equal
to the product of (x) two hundred percent (200%) of the Base Salary of the
Employee, as defined below, times (y) a fraction, the numerator of which is 730
minus the number of days from the date of the change in control to the date of
termination and the denominator of which is 730. The amount payable pursuant to
the preceding sentence shall be paid in equal consecutive monthly installments,
and the number of monthly installments shall be 24 minus the number of whole
months elapsed from the date of change in control to the date of termination.
(b) Definitions. (1) The term "Date of Termination" means the
date upon which the Employee ceases to serve as an Employee of the Bank.
(2) The term "change in control" is defined solely as any acquisition
of control of the Bank or Holding Company (other than by a trustee or other
fiduciary holding
1
<PAGE>
securities under an employee benefit plan of the Holding Company or a subsidiary
of the Holding Company), as defined in 12 C.F.R. ss. 574.4, or any successor
regulation, which would require the filing of an application for acquisition of
control or notice of change in control in a manner as set forth in 12 C.F.R. ss.
574.3, or any successor regulation.
(3) The term "base salary" is defined as the semi-monthly amount of
salary paid the Employee for the pay period immediately preceding the date of
termination annualized by multiplying by twenty-four (24).
(4) The Employee shall be considered to be involuntarily terminated (1)
if the employment of the Employee is involuntarily terminated for any reason
other than for "cause" as provided in this Section 1(b), pursuant to any of
Sections 5(b) through 5(g) or by reason of death or disability as provided in
Sections 5(c) and Section 6; or (2) there occurs a material diminution of or
interference with the Employee's duties, responsibilities and benefits as Senior
Vice President Western Region Manager. By way of example and not by way of
limitation, any of the following actions, if unreasonable or materially adverse
to the Employee, shall constitute such diminution or interference unless
consented to in writing by the Employee: (i) a change in the principal workplace
of the Employee to a location more than fifty (50) miles from the Bank's main
office; (ii) a material demotion of the Employee, a reduction in the number or
seniority of other Bank personnel reporting to the Employee, or a reduction in
the frequency with which, or in the nature of the matters with respect to which,
such personnel are to report to the Employee; or (iii) a reduction or adverse
change in the salary, perquisites, benefits, contingent benefits or vacation
time which had theretofore been provided to the Employee.
(5) Termination for "cause" shall include termination because of the
Employee's personal dishonesty, incompetence, willful misconduct, breach of a
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule, or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order. Notwithstanding
the foregoing, the Employee shall not be deemed to have been terminated for
cause unless and until there shall have been delivered to the Employee a copy of
a resolution, duly adopted by the affirmative vote of not less than a majority
of the disinterested members of the Board of Directors of the Bank at a meeting
of the Board called and held for such purpose (after reasonable notice to the
Employee and an opportunity for the Employee, together with the Employee's
counsel, to be heard before the Board), stating that in the good faith opinion
of the Board the Employee was guilty of conduct constituting "cause" as set
forth above and specifying the particulars thereof in detail.
(c) Compliance with Capital Requirements. Notwithstanding
anything in this Agreement to the contrary, no payments may be made pursuant to
this Section 1 hereof without the prior approval of the Regional Deputy Director
of the OTS if following such payment the Bank would not be in compliance with
its fully phased in capital
2
<PAGE>
requirements as defined in OTS regulations.
2. Certain Reduction of Payments by the Bank. (a) Anything in this
Agreement to the contrary notwithstanding, in the event it shall be determined
that any payment or distribution by the Bank to or for the benefit of the
Employee (whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise) (a 'Payment") would be nondeductible
(in whole or part) by the Bank for Federal income tax purposes because of
Section 280G of the Code, then the aggregate present value of amounts payable or
distributable to or for the benefit of the Employee pursuant to this Agreement
(such amounts payable or distributable pursuant to this Agreement are
hereinafter referred to as "Agreement Payments") shall be reduced to the Reduced
Amount. The "Reduced Amount" shall be an amount, not less than zero, expressed
in present value which maximizes the aggregate present value of Agreement
Payments without causing any Payment to be nondeductible by the Bank because of
Section 280G of the Code. For purposes of this Section 2, present value shall be
determined in accordance with Section 280G(d) (4) of the Code.
(b) All determinations required to be made under this Section
2 shall be made by the Bank's independent auditors, or at the election of such
auditors by such other firm or individuals of recognized expertise as such
auditors may select (such auditors or, if applicable, such other firm or
individual, are hereinafter referred to as the "Advisory Firm"). The Advisory
Firm shall within ten business days of the Date of Termination, or at such
earlier time as is requested by the Bank, provide to both the Bank and the
Employee an opinion (and detailed supporting calculations) that the Bank has
substantial authority to deduct for federal income tax purposes the full amount
of the Agreement Payments and that the Employee has substantial authority not to
report on her/his federal income tax return any excise tax imposed by Section
4999 of the Code with respect to the Agreement Payments. Any such determination
and opinion by the Advisory Firm shall be binding upon the Bank and the
Employee. The Employee shall determine which and how much, if any, of the
Agreement Payments shall be eliminated or reduced consistent with the
requirements of this Section 2, provided that, if the Employee does not make
such determination within ten business days of the receipt of the calculations
made by the Advisory Firm, the Bank shall elect which and how much, if any, of
the Agreement Payments shall be eliminated or reduced consistent with the
requirements of this Section 2 and shall notify the Employee promptly of such
election. Within five business days of the earlier of (i) the Bank's receipt of
the Employee's determination pursuant to the immediately preceding sentence of
this Agreement or (ii) the Bank's election in lieu of such determination, the
Bank shall pay to or distribute to or for the benefit of the Employee such
amounts as are then due the Employee under this Agreement. The Bank and the
Employee shall cooperate fully with the Advisory Firm, including without
limitation providing to the Advisory Firm all information and materials
reasonably requested by it, in connection with the making of the determinations
required under this Section 2.
(c) As a result of uncertainty in application of Section
280G of the
3
<PAGE>
Code at the time of the initial determination by the Advisory Firm hereunder, it
is possible that Agreement Payments will have been made by the Bank which should
not have been made ("Overpayment") or that additional Agreement Payments will
not have been made by the Bank which should have been made ("Underpayment"), in
each case, consistent with the calculations required to be made hereunder. In
the event that the Advisory Firm, based upon the assertion by the Internal
Revenue Service against the Employee of a deficiency which the Advisory Firm
believes has a high probability of success determines that an Overpayment has
been made, any such Overpayment paid or distributed by the Bank to or for the
benefit of Employee shall be treated for all purposes as a loan ab initio which
the Employee shall repay to the Bank together with interest at the applicable
federal rate provided for in Section 7872(f) (2) of the Code; provided, however,
that no such loan shall be deemed to have been made and no amount shall be
payable by the Employee to the Bank if and to the extent such deemed loan and
payment would not either reduce the amount on which the Employee is subject to
tax under Section 1 and Section 4999 of the Code or generate a refund of such
taxes. In the event that the Advisory Firm, based upon controlling preceding or
other substantial authority, determines that an Underpayment has occurred, any
such Underpayment shall be promptly paid by the Bank to or for the benefit of
the Employee together with interest at the applicable federal rate provided for
in Section 7872(f)(2) of the Code.
(d) Any payments made to the Employee, pursuant to this Agreement or
otherwise, are subject to and conditioned upon their compliance with 12 U.S.C.
ss. 1828(k) and any regulations adopted thereunder.
3. Term. The term of this Agreement shall be a period of two (2) years
commencing on January 4, 2000 and ending on January 3, 2002, subject to earlier
termination as provided herein.
4. Participation in Other Employee Benefit Plans. In addition to the
benefits provided under this agreement, the Employee shall be entitled while
employed to participate in, and receive benefits under, all plans relating to
stock options, stock purchases, pension, thrift, profit-sharing, group life
insurance, medical coverage, education, cash or stock bonuses, and other
retirement or employee benefits or combinations thereof, that are now or
hereafter maintained for the benefit of the Bank's employees of similar rank or
for its employees generally.
5. Termination; Death.
(a) In the event Bank terminates the Employee's employment for
cause, the obligations of the Bank under this Agreement shall cease. In case of
termination of the Employee's employment for cause, the Bank shall pay the
Employee her/his salary through the date of termination, and the Bank shall have
no further obligation to the Employee under this Agreement. The Employee shall
have no right to receive any of the compensation defined in Section 1(a) after
termination for cause.
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(b) The Employee's employment may be voluntarily terminated by
the Employee at any time upon ninety (90) days written notice to the Bank or
upon such shorter period as may be agreed upon between the Employee and the
Board of Directors of the Bank. In the event of such voluntary termination, the
Bank shall be obligated to continue to pay the Employee her/his salary only
through the date of termination, at the time such payments are due, and the Bank
shall have no further obligation to the Employee under this Agreement.
(c) In the event of the death of the Employee during the term
of this Agreement and prior to any termination hereunder, the Employee's estate,
or such person as the Employee may have previously designated in writing, shall
be entitled to receive from the Bank the salary of the Employee through the last
day of employment and this Agreement shall terminate and end on such last day of
employment.
(d) If the Employee is suspended from office and/or
temporarily prohibited from participating in the conduct of the Bank's affairs
by a notice served under Section 8(e) (3) or (g) (1) of the Federal Deposit
Insurance Act ("FDIA"), 12 U.S.C. ss. 1818(e) (3); (g) (l), the Bank's
obligations under this Agreement shall be suspended as of the date of service,
unless stayed by appropriate proceedings. If the charges in the notice are
dismissed, the Bank may in its discretion (i) pay the Employee all or part of
the compensation withheld while its obligations under this Agreement were
suspended and (ii) reinstate in whole or in part any of the obligations which
were suspended.
(e) If the Employee is removed from office and/or permanently
prohibited from participating in the conduct of the Bank's affairs by an order
issued under Section 8(e) (4) or (g) (1) of the FDIA, 12 U.S.C. ss. 1818(e) (4);
(g) (1), all obligations of the Bank under this Agreement shall terminate, as of
the effective date of the order, but vested rights of the parties shall not be
affected.
(f) If the Bank becomes in default (as defined in Section 3(x)
(1) of the FDIA, 12 U.S.C. ss. 1813(x) (1)), all obligations under this
Agreement shall terminate as of the date of default, but this provision shall
not affect any vested rights of the parties.
(g) All obligations under this Agreement shall be terminated,
except to the extent determined that continuation of this Agreement is necessary
for the continued operation of the Bank: (i) by the Director of the Office of
Thrift Supervision ("OTS") or his or her designee at the time the Federal
Deposit Insurance Corporation or the Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of the Bank under the authority
contained in Section 13(c) of the FDIA, 12 U.S.C. ss. 1823(c); or (ii) by the
Director of the OTS or his or her designee at the time the Director of the OTS
or his or her designee approves a supervisory merger to resolve problems related
to operation of the Bank or when the Bank is determined by the Director of the
OTS to be in an unsafe or unsound condition.
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Any rights of the parties that have already vested, however, shall not
be affected by any such action.
6. Disability. If during the term of this Agreement the Employee shall
become disabled or incapacitated to the extent that she/he is unable to perform
the duties of the Senior Vice President Western Region Manager, she/he shall be
entitled to receive disability benefits of the type provided for other officers
of the Bank of similar rank. If the employment of Employee is terminated due to
disability or incapacity to perform the duties and requirements of the
employment, this Agreement shall terminate and end on such last day of
employment.
7. No Assignments. (a) This Agreement is personal to each of the
parties hereto, and neither party may assign or delegate any of its rights or
obligations hereunder without first obtaining the written consent of the other
party; provided, however, that the Bank will require any successor or assign
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the Bank, by; an
assumption agreement in form and substance satisfactory to the Employee, to
expressly assume and agree to perform this Agreement in the same manner and to
the same extent that the Bank would be required to perform it if no such
succession or assignment had taken place. Failure of the Bank to obtain such an
assumption agreement prior to the effectiveness of any such succession or
assignment shall be a breach of this Agreement and shall entitle the Employee to
compensation from the Bank in the same amount and on the same terms as the
compensation pursuant to Section 1(a) hereof. For purposes of implementing the
provisions of this Section 7(a), the date on which any such succession becomes
effective shall be deemed the Date of Termination.
(b) This Agreement and all rights of the Employee hereunder
shall inure to the benefit of and be enforceable by the Employee's personal and
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Employee should die while any
amounts would still be payable to the Employee hereunder if the Employee had
continued to live, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement to the Employee's devisee,
legatee or other designee or if there is no such designee, to the Employee's
estate.
8. Notice. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, addressed to the respective
addresses set forth on the first page of this Agreement (provided that all
notices to the Bank shall be directed to the attention of the Board of Directors
of the Bank with a copy to the Secretary of the Bank), or to such other address
as either party may have furnished to the other in writing in accordance
herewith.
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<PAGE>
9. Amendments. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein otherwise
provided.
10. Paragraph Headings. The paragraph headings used in this Agreement
are included solely for convenience and shall not affect, or be used in
connection with, the interpretation of this Agreement.
11. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
12. Governing Law. This Agreement shall be governed by the laws of the
United States to the extent applicable and otherwise by the laws of the State of
Montana.
13. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
CHARLES E. EISEMAN, JR. Employee
Address: 3565 Pattee Canyon Road
Missoula, MT 59803
WESTERN SECURITY BANK
By:__________________________________
Ralph K. Holliday, President
and Chief Executive Officer
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<PAGE>
EXHIBIT 10.14
AGREEMENT
THIS AGREEMENT is made and entered into as of this __ day of April,
1999, by and between WESTERN SECURITY BANK (the "Bank"), located at 100 E.
Broadway, Missoula, Montana and RALPH K. HOLLIDAY (the "Employee"), whose
address is 4217 Fairwood Blvd, NE, Tacoma, Washington 98422.
WHEREAS, the Employee has been retained to serve as President and Chief
Executive Officer of the Bank effective July 1, 1999 and until that date he will
serve as President-Elect and Chief Executive Officer-Elect;
WHEREAS, the Board of Directors of the Bank believes it is in the best
interests of the Bank to enter into this Agreement with the Employee in order to
assure continuity of management of the Bank and to reinforce and encourage the
continued attention and dedication of the Employee to her/his assigned duties;
and
WHEREAS, the Board of Directors of the Bank has approved and authorized
the execution of this Agreement with the Employee to take effect as stated in
Section 3 hereof;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein contained, it is AGREED as
follows:
1. Change in Control.
(a) Involuntary Termination. If the Employee's employment is
involuntarily terminated (other than for cause or pursuant to any of Sections
5(b) through 5(g) or Section 6 of this Agreement) in connection with or within
12 months after a change in control of the Bank or the Holding Company which
occurs at any time during the term of this Agreement, the Bank shall pay to the
Employee, over the period as provided in the following sentence, an amount equal
to the product of (x) three hundred percent (300%) of the Base Salary of the
Employee, as defined below, times (y) a fraction, the numerator of which is 1095
minus the number of days from the date of the change in control to the date of
termination and the denominator of which is 1095. The amount payable pursuant to
the preceding sentence shall be paid in equal consecutive monthly installments,
and the number of monthly installments shall be thirty-six (36) minus the number
of whole months elapsed from the date of change in control to the date of
termination.
(b) Definitions. (1) The term "Date of Termination" means the
date upon which the Employee ceases to serve as an Employee of the Bank.
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<PAGE>
(2) The term "change in control" is defined solely as any acquisition
of control of the Bank or Holding Company (other than by a trustee or other
fiduciary holding securities under an employee benefit plan of the Holding
Company or a subsidiary of the Holding Company), as defined in 12 C.F.R. ss.
574.4, or any successor regulation, which would require the filing of an
application for acquisition of control or notice of change in control in a
manner as set forth in 12 C.F.R. ss. 574.3, or any successor regulation.
(3) The term "base salary" is defined as the semi-monthly amount of
salary paid the Employee for the pay period immediately preceding the date of
termination annualized by multiplying by twenty-four (24).
(4) The Employee shall be considered to be involuntarily terminated (1)
if the employment of the Employee is involuntarily terminated for any reason
other than for "cause" as provided in this Section 1(b), pursuant to any of
Sections 5(b) through 5(g) or by reason of death or disability as provided in
Sections 5(c) and Section 6; or (2) there occurs a material diminution of or
interference with the Employee's duties, responsibilities and benefits as
President and Chief Executive Officer. By way of example and not by way of
limitation, any of the following actions, if unreasonable or materially adverse
to the Employee, shall constitute such diminution or interference unless
consented to in writing by the Employee: (i) a change in the principal workplace
of the Employee to a location more than fifty (50) miles from the Bank's main
office; (ii) a material demotion of the Employee, a reduction in the number or
seniority of other Bank personnel reporting to the Employee, or a reduction in
the frequency with which, or in the nature of the matters with respect to which,
such personnel are to report to the Employee; or (iii) a reduction or adverse
change in the salary, perquisites, benefits, contingent benefits or vacation
time which had theretofore been provided to the Employee.
(5) Termination for "cause" shall include termination because of the
Employee's personal dishonesty, incompetence, willful misconduct, breach of a
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule, or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order. Notwithstanding
the foregoing, the Employee shall not be deemed to have been terminated for
cause unless and until there shall have been delivered to the Employee a copy of
a resolution, duly adopted by the affirmative vote of not less than a majority
of the disinterested members of the Board of Directors of the Bank at a meeting
of the Board called and held for such purpose (after reasonable notice to the
Employee and an opportunity for the Employee, together with the Employee's
counsel, to be heard before the Board), stating that in the good faith opinion
of the Board the Employee was guilty of conduct constituting "cause" as set
forth above and specifying the particulars thereof in detail.
(c) Compliance with Capital Requirements. Notwithstanding
anything in this Agreement to the contrary, no payments may be made pursuant to
this Section 1
2
<PAGE>
hereof without the prior approval of the Regional Deputy Director of the OTS if
following such payment the Bank would not be in compliance with its fully phased
in capital requirements as defined in OTS regulations.
2. Certain Reduction of Payments by the Bank. (a) Anything in this
Agreement to the contrary notwithstanding, in the event it shall be determined
that any payment or distribution by the Bank to or for the benefit of the
Employee (whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise) (a 'Payment") would be nondeductible
(in whole or part) by the Bank for Federal income tax purposes because of
Section 280G of the Code, then the aggregate present value of amounts payable or
distributable to or for the benefit of the Employee pursuant to this Agreement
(such amounts payable or distributable pursuant to this Agreement are
hereinafter referred to as "Agreement Payments") shall be reduced to the Reduced
Amount. The "Reduced Amount" shall be an amount, not less than zero, expressed
in present value which maximizes the aggregate present value of Agreement
Payments without causing any Payment to be nondeductible by the Bank because of
Section 280G of the Code. For purposes of this Section 2, present value shall be
determined in accordance with Section 280G(d) (4) of the Code.
(b) All determinations required to be made under this Section
2 shall be made by the Bank's independent auditors, or at the election of such
auditors by such other firm or individuals of recognized expertise as such
auditors may select (such auditors or, if applicable, such other firm or
individual, are hereinafter referred to as the "Advisory Firm"). The Advisory
Firm shall within ten business days of the Date of Termination, or at such
earlier time as is requested by the Bank, provide to both the Bank and the
Employee an opinion (and detailed supporting calculations) that the Bank has
substantial authority to deduct for federal income tax purposes the full amount
of the Agreement Payments and that the Employee has substantial authority not to
report on his federal income tax return any excise tax imposed by Section 4999
of the Code with respect to the Agreement Payments. Any such determination and
opinion by the Advisory Firm shall be binding upon the Bank and the Employee.
The Employee shall determine which and how much, if any, of the Agreement
Payments shall be eliminated or reduced consistent with the requirements of this
Section 2, provided that, if the Employee does not make such determination
within ten business days of the receipt of the calculations made by the Advisory
Firm, the Bank shall elect which and how much, if any, of the Agreement Payments
shall be eliminated or reduced consistent with the requirements of this Section
2 and shall notify the Employee promptly of such election. Within five business
days of the earlier of (i) the Bank's receipt of the Employee's determination
pursuant to the immediately preceding sentence of this Agreement or (ii) the
Bank's election in lieu of such determination, the Bank shall pay to or
distribute to or for the benefit of the Employee such amounts as are then due
the Employee under this Agreement. The Bank and the Employee shall cooperate
fully with the Advisory Firm, including without limitation providing to the
Advisory Firm all information and materials reasonably requested by it, in
connection with the making of the determinations required under this Section 2.
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<PAGE>
(c) As a result of uncertainty in application of Section 280G
of the Code at the time of the initial determination by the Advisory Firm
hereunder, it is possible that Agreement Payments will have been made by the
Bank which should not have been made ("Overpayment") or that additional
Agreement Payments will not have been made by the Bank which should have been
made ("Underpayment"), in each case, consistent with the calculations required
to be made hereunder. In the event that the Advisory Firm, based upon the
assertion by the Internal Revenue Service against the Employee of a deficiency
which the Advisory Firm believes has a high probability of success determines
that an Overpayment has been made, any such Overpayment paid or distributed by
the Bank to or for the benefit of Employee shall be treated for all purposes as
a loan ab initio which the Employee shall repay to the Bank together with
interest at the applicable federal rate provided for in Section 7872(f) (2) of
the Code; provided, however, that no such loan shall be deemed to have been made
and no amount shall be payable by the Employee to the Bank if and to the extent
such deemed loan and payment would not either reduce the amount on which the
Employee is subject to tax under Section 1 and Section 4999 of the Code or
generate a refund of such taxes. In the event that the Advisory Firm, based upon
controlling preceding or other substantial authority, determines that an
Underpayment has occurred, any such Underpayment shall be promptly paid by the
Bank to or for the benefit of the Employee together with interest at the
applicable federal rate provided for in Section 7872(f)(2) of the Code.
(d) Any payments made to the Employee, pursuant to this Agreement or
otherwise, are subject to and conditioned upon their compliance with 12 U.S.C.
ss. 1828(k) and any regulations adopted thereunder.
3. Term. The term of this Agreement shall be a period of three (3)
years commencing on April 19, 1999, subject to earlier termination as provided
herein. Beginning on the first anniversary the commencement date and on each
anniversary thereafter, the term of this Agreement shall be extended for a
period of one (1) year unless either the Bank or the Employee gives contrary
written notice to the other not less than 90 days in advance of the date on
which the term of this Agreement would otherwise be extended. Notwithstanding
any other statement or provision in this Agreement, this Agreement will not be
automatically extended unless, prior thereto, such extension is approved by the
Board of Directors of the Bank following the Board's review of a formal
performance evaluation of the Employee performed by the disinterested members of
the Board of Directors of the Bank and reflected in the minutes of the Board of
Directors. Reference herein to the term under this Agreement shall refer to both
such initial term and such extended terms.
4. Participation in Other Employee Benefit Plans. In addition to the
benefits provided under this agreement, the Employee shall be entitled while
employed to participate in, and receive benefits under, all plans relating to
stock options, stock purchases, pension, thrift, profit-sharing, group life
insurance, medical coverage, education, cash or stock bonuses, and other
retirement or employee benefits or
4
<PAGE>
combinations thereof, that are now or hereafter maintained for the benefit of
the Bank's employees of similar rank or for its employees generally.
5. Termination; Death.
(a) In the event Bank terminates the Employee's employment for
cause, the obligations of the Bank under this Agreement shall cease. In case of
termination of the Employee's employment for cause, the Bank shall pay the
Employee her/his salary through the date of termination, and the Bank shall have
no further obligation to the Employee under this Agreement. The Employee shall
have no right to receive any of the compensation defined in Section 1(a) after
termination for cause.
(b) The Employee's employment may be voluntarily terminated by
the Employee at any time upon ninety (90) days written notice to the Bank or
upon such shorter period as may be agreed upon between the Employee and the
Board of Directors of the Bank. In the event of such voluntary termination, the
Bank shall be obligated to continue to pay the Employee her/his salary only
through the date of termination, at the time such payments are due, and the Bank
shall have no further obligation to the Employee under this Agreement.
(c) In the event of the death of the Employee during the term
of this Agreement and prior to any termination hereunder, the Employee's estate,
or such person as the Employee may have previously designated in writing, shall
be entitled to receive from the Bank the salary of the Employee through the last
day of employment and this Agreement shall terminate and end on such last day of
employment.
(d) If the Employee is suspended from office and/or
temporarily prohibited from participating in the conduct of the Bank's affairs
by a notice served under Section 8(e) (3) or (g) (1) of the Federal Deposit
Insurance Act ("FDIA"), 12 U.S.C. ss. 1818(e) (3); (g) (l), the Bank's
obligations under this Agreement shall be suspended as of the date of service,
unless stayed by appropriate proceedings. If the charges in the notice are
dismissed, the Bank may in its discretion (i) pay the Employee all or part of
the compensation withheld while its obligations under this Agreement were
suspended and (ii) reinstate in whole or in part any of the obligations which
were suspended.
(e) If the Employee is removed from office and/or permanently
prohibited from participating in the conduct of the Bank's affairs by an order
issued under Section 8(e) (4) or (g) (1) of the FDIA, 12 U.S.C. ss. 1818(e) (4);
(g) (1), all obligations of the Bank under this Agreement shall terminate, as of
the effective date of the order, but vested rights of the parties shall not be
affected.
(f) If the Bank becomes in default (as defined in Section 3(x)
(1) of the FDIA, 12 U.S.C. ss. 1813(x) (1)), all obligations under this
Agreement shall terminate as of the date of default, but this provision shall
not affect any vested rights of
5
<PAGE>
the parties.
(g) All obligations under this Agreement shall be terminated,
except to the extent determined that continuation of this Agreement is necessary
for the continued operation of the Bank: (i) by the Director of the Office of
Thrift Supervision ("OTS") or his or her designee at the time the Federal
Deposit Insurance Corporation or the Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of the Bank under the authority
contained in Section 13(c) of the FDIA, 12 U.S.C. ss. 1823(c); or (ii) by the
Director of the OTS or his or her designee at the time the Director of the OTS
or his or her designee approves a supervisory merger to resolve problems related
to operation of the Bank or when the Bank is determined by the Director of the
OTS to be in an unsafe or unsound condition.
Any rights of the parties that have already vested, however, shall not
be affected by any such action.
6. Disability. If during the term of this Agreement the Employee shall
become disabled or incapacitated to the extent that she/he is unable to perform
the duties of the President-Elect, President, Chief Executive Officer-Elect or
Chief Executive Officer, she/he shall be entitled to receive disability benefits
of the type provided for other officers of the Bank of similar rank. If the
employment of Employee is terminated due to disability or incapacity to perform
the duties and requirements of the employment, this Agreement shall terminate
and end on such last day of employment.
7. No Assignments. (a) This Agreement is personal to each of the
parties hereto, and neither party may assign or delegate any of its rights or
obligations hereunder without first obtaining the written consent of the other
party; provided, however, that the Bank will require any successor or assign
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the Bank, by; an
assumption agreement in form and substance satisfactory to the Employee, to
expressly assume and agree to perform this Agreement in the same manner and to
the same extent that the Bank would be required to perform it if no such
succession or assignment had taken place. Failure of the Bank to obtain such an
assumption agreement prior to the effectiveness of any such succession or
assignment shall be a breach of this Agreement and shall entitle the Employee to
compensation from the Bank in the same amount and on the same terms as the
compensation pursuant to Section 1(a) hereof. For purposes of implementing the
provisions of this Section 7(a), the date on which any such succession becomes
effective shall be deemed the Date of Termination.
(b) This Agreement and all rights of the Employee hereunder
shall inure to the benefit of and be enforceable by the Employee's personal and
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Employee should die while any
amounts would still be payable to
6
<PAGE>
the Employee hereunder if the Employee had continued to live, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the terms of
this Agreement to the Employee's devisee, legatee or other designee or if there
is no such designee, to the Employee's estate.
8. Notice. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, addressed to the respective
addresses set forth on the first page of this Agreement (provided that all
notices to the Bank shall be directed to the attention of the Board of Directors
of the Bank with a copy to the Secretary of the Bank), or to such other address
as either party may have furnished to the other in writing in accordance
herewith.
9. Amendments. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein otherwise
provided.
10. Paragraph Headings. The paragraph headings used in this Agreement
are included solely for convenience and shall not affect, or be used in
connection with, the interpretation of this Agreement.
11. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
12. Governing Law. This Agreement shall be governed by the laws of the
United States to the extent applicable and otherwise by the laws of the State of
Montana.
13. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
RALPH K. HOLLIDAY Employee
Address: 4217 Fairwood Blvd, NE,
Tacoma, Washington 98422.
WESTERN SECURITY BANK
By:__________________________________
Lyle R. Grimes, President
and Chief Executive Officer
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EXHIBIT 10.15
AGREEMENT
THIS AGREEMENT is made and entered into as of this 16th day of June,
1999, by and between WESTERN SECURITY BANK (the "Bank"), located at 100 E.
Broadway, Missoula, Montana and MARCIA L. JOHNSON (the "Employee"), whose
address is, ______________________________________________________.
WHEREAS, the Employee is currently serving as Senior Vice President,
Manager of Central Operations of the Bank; and
WHEREAS, the Board of Directors of the Bank believes it is in the best
interests of the Bank to enter into this Agreement with the Employee in order to
assure continuity of management of the Bank and to reinforce and encourage the
continued attention and dedication of the Employee to her assigned duties; and
WHEREAS, the Board of Directors of the Bank has approved and authorized
the execution of this Agreement with the Employee to take effect as stated in
Section 3 hereof;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein contained, it is AGREED as
follows:
1. Change in Control.
(a) Involuntary Termination. If the Employee's employment is
involuntarily terminated (other than for cause or pursuant to any of Sections
5(b) through 5(g) or Section 6 of this Agreement) in connection with or within
12 months after a change in control of the Bank or the Holding Company which
occurs at any time during the term of this Agreement, the Bank shall pay to the
Employee, over the period as provided in the following sentence, an amount equal
to the product of (x) two hundred percent (200%) of the Base Salary of the
Employee, as defined below, times (y) a fraction, the numerator of which is 730
minus the number of days from the date of the change in control to the date of
termination and the denominator of which is 730. The amount payable pursuant to
the preceding sentence shall be paid in equal consecutive monthly installments,
and the number of monthly installments shall be 24 minus the number of whole
months elapsed from the date of change in control to the date of termination.
(b) Definitions. (1) The term "Date of Termination" means the
date upon which the Employee ceases to serve as an Employee of the Bank.
(2) The term "change in control" is defined solely as any acquisition
of control of the Bank or Holding Company (other than by a trustee or other
fiduciary holding
1
<PAGE>
securities under an employee benefit plan of the Holding Company or a subsidiary
of the Holding Company), as defined in 12 C.F.R. ss. 574.4, or any successor
regulation, which would require the filing of an application for acquisition of
control or notice of change in control in a manner as set forth in 12 C.F.R. ss.
574.3, or any successor regulation.
(3) The term "base salary" is defined as the semi-monthly amount of
salary paid the Employee for the pay period immediately preceding the date of
termination annualized by multiplying by twenty-four (24).
(4) The Employee shall be considered to be involuntarily terminated:
(1) if the employment of the Employee is involuntarily terminated for any reason
other than for "cause" as provided in this Section 1(b), pursuant to any of
Sections 5(b) through 5(g) or by reason of death or disability as provided in
Sections 5(c) and Section 6; or (2) there occurs a material diminution of or
interference with the Employee's duties, responsibilities and benefits as Senior
Vice President, Manager of Central Operations. By way of example and not by way
of limitation, any of the following actions, if unreasonable or materially
adverse to the Employee, shall constitute such diminution or interference unless
consented to in writing by the Employee: (i) a change in the principal workplace
of the Employee to a location more than fifty (50) miles from the Bank's main
office; (ii) a material demotion of the Employee, a reduction in the number or
seniority of other Bank personnel reporting to the Employee, or a reduction in
the frequency with which, or in the nature of the matters with respect to which,
such personnel are to report to the Employee; or (iii) a reduction or adverse
change in the salary, perquisites, benefits, contingent benefits or vacation
time which had theretofore been provided to the Employee.
(5) Termination for "cause" shall include termination because of the
Employee's personal dishonesty, incompetence, willful misconduct, breach of a
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule, or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order. Notwithstanding
the foregoing, the Employee shall not be deemed to have been terminated for
cause unless and until there shall have been delivered to the Employee a copy of
a resolution, duly adopted by the affirmative vote of not less than a majority
of the disinterested members of the Board of Directors of the Bank at a meeting
of the Board called and held for such purpose (after reasonable notice to the
Employee and an opportunity for the Employee, together with the Employee's
counsel, to be heard before the Board), stating that in the good faith opinion
of the Board the Employee was guilty of conduct constituting "cause" as set
forth above and specifying the particulars thereof in detail.
(c) Compliance with Capital Requirements. Notwithstanding
anything in this Agreement to the contrary, no payments may be made pursuant to
this Section 1 hereof without the prior approval of the Regional Deputy Director
of the OTS if following
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such payment the Bank would not be in compliance with its fully phased in
capital requirements as defined in OTS regulations.
2. Certain Reduction of Payments by the Bank. (a) Anything in this
Agreement to the contrary notwithstanding, in the event it shall be determined
that any payment or distribution by the Bank to or for the benefit of the
Employee (whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise) (a "Payment") would be nondeductible
(in whole or part) by the Bank for Federal income tax purposes because of
Section 280G of the Internal Revenue Code ("Code"), then the aggregate present
value of amounts payable or distributable to or for the benefit of the Employee
pursuant to this Agreement (such amounts payable or distributable pursuant to
this Agreement are hereinafter referred to as "Agreement Payments") shall be
reduced to the Reduced Amount. The "Reduced Amount" shall be an amount, not less
than zero, expressed in present value which maximizes the aggregate present
value of Agreement Payments without causing any Payment to be nondeductible by
the Bank because of Section 280G of the Code. For purposes of this Section 2,
present value shall be determined in accordance with Section 280G(d) (4) of the
Code.
(b) All determinations required to be made under this Section
2 shall be made by the Bank's independent auditors, or at the election of such
auditors by such other firm or individuals of recognized expertise as such
auditors may select (such auditors or, if applicable, such other firm or
individual, are hereinafter referred to as the "Advisory Firm"). The Advisory
Firm shall within ten business days of the Date of Termination, or at such
earlier time as is requested by the Bank, provide to both the Bank and the
Employee an opinion (and detailed supporting calculations) that the Bank has
substantial authority to deduct for federal income tax purposes the full amount
of the Agreement Payments and that the Employee has substantial authority not to
report on her federal income tax return any excise tax imposed by Section 4999
of the Code with respect to the Agreement Payments. Any such determination and
opinion by the Advisory Firm shall be binding upon the Bank and the Employee.
The Employee shall determine which and how much, if any, of the Agreement
Payments shall be eliminated or reduced consistent with the requirements of this
Section 2, provided that, if the Employee does not make such determination
within ten business days of the receipt of the calculations made by the Advisory
Firm, the Bank shall elect which and how much, if any, of the Agreement Payments
shall be eliminated or reduced consistent with the requirements of this Section
2 and shall notify the Employee promptly of such election. Within five business
days of the earlier of: (i) the Bank's receipt of the Employee's determination
pursuant to the immediately preceding sentence of this Agreement; or (ii) the
Bank's election in lieu of such determination, the Bank shall pay to or
distribute to or for the benefit of the Employee such amounts as are then due
the Employee under this Agreement. The Bank and the Employee shall cooperate
fully with the Advisory Firm, including without limitation providing to the
Advisory Firm all information and materials reasonably requested by it, in
connection with the making of the determinations required under this Section 2.
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(c) As a result of uncertainty in application of Section 280G
of the Code at the time of the initial determination by the Advisory Firm
hereunder, it is possible that Agreement Payments will have been made by the
Bank which should not have been made ("Overpayment") or that additional
Agreement Payments will not have been made by the Bank which should have been
made ("Underpayment"), in each case, consistent with the calculations required
to be made hereunder. In the event that the Advisory Firm, based upon the
assertion by the Internal Revenue Service against the Employee of a deficiency
which the Advisory Firm believes has a high probability of success determines
that an Overpayment has been made, any such Overpayment paid or distributed by
the Bank to or for the benefit of Employee shall be treated for all purposes as
a loan ab initio which the Employee shall repay to the Bank together with
interest at the applicable federal rate provided for in Section 7872(f) (2) of
the Code; provided, however, that no such loan shall be deemed to have been made
and no amount shall be payable by the Employee to the Bank if and to the extent
such deemed loan and payment would not either reduce the amount on which the
Employee is subject to tax under Section 1 and Section 4999 of the Code or
generate a refund of such taxes. In the event that the Advisory Firm, based upon
controlling preceding or other substantial authority, determines that an
Underpayment has occurred, any such Underpayment shall be promptly paid by the
Bank to or for the benefit of the Employee together with interest at the
applicable federal rate provided for in Section 7872(f)(2) of the Code.
(d) Any payments made to the Employee, pursuant to this Agreement or
otherwise, are subject to and conditioned upon their compliance with 12 U.S.C.
ss. 1828(k) and any regulations adopted thereunder.
3. Term. The term of this Agreement shall be a period of two (2) years
commencing on June 16, 1999, and ending June 15, 2001, subject to earlier
termination as provided herein.
4. Participation in Other Employee Benefit Plans. In addition to the
benefits provided under this agreement, the Employee shall be entitled while
employed to participate in, and receive benefits under, all plans relating to
stock options, stock purchases, pension, thrift, profit-sharing, group life
insurance, medical coverage, education, cash or stock bonuses, and other
retirement or employee benefits or combinations thereof, that are now or
hereafter maintained for the benefit of the Bank's employees of similar rank or
for its employees generally.
5. Termination; Death.
(a) In the event the Bank terminates the Employee's employment
for cause, the obligations of the Bank under this Agreement shall cease. In case
of termination of the Employee's employment for cause, the Bank shall pay the
Employee her salary through the date of termination, and the Bank shall have no
further obligation
4
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to the Employee under this Agreement. The Employee shall have no right to
receive any of the compensation defined in Section 1(a) after termination for
cause.
(b) The Employee's employment may be voluntarily terminated by
the Employee at any time upon ninety (90) days written notice to the Bank or
upon such shorter period as may be agreed upon between the Employee and the
Board of Directors of the Bank. In the event of such voluntary termination, the
Bank shall be obligated to continue to pay the Employee her salary only through
the date of termination, at the time such payments are due, and the Bank shall
have no further obligation to the Employee under this Agreement.
(c) In the event of the death of the Employee during the term
of this Agreement and prior to any termination hereunder, the Employee's estate,
or such person as the Employee may have previously designated in writing, shall
be entitled to receive from the Bank the salary of the Employee through the last
day of employment and this Agreement shall terminate and end on such last day of
employment.
(d) If the Employee is suspended from office and/or
temporarily prohibited from participating in the conduct of the Bank's affairs
by a notice served under Section 8(e) (3) or (g) (1) of the Federal Deposit
Insurance Act ("FDIA"), 12 U.S.C. ss. 1818(e) (3); (g) (l), the Bank's
obligations under this Agreement shall be suspended as of the date of service,
unless stayed by appropriate proceedings. If the charges in the notice are
dismissed, the Bank may in its discretion: (i) pay the Employee all or part of
the compensation withheld while its obligations under this Agreement were
suspended; and (ii) reinstate in whole or in part any of the obligations which
were suspended.
(e) If the Employee is removed from office and/or permanently
prohibited from participating in the conduct of the Bank's affairs by an order
issued under Section 8(e) (4) or (g) (1) of the FDIA, 12 U.S.C. ss. 1818(e) (4);
(g) (1), all obligations of the Bank under this Agreement shall terminate, as of
the effective date of the order, but vested rights of the parties shall not be
affected.
(f) If the Bank becomes in default (as defined in Section 3(x)
(1) of the FDIA, 12 U.S.C. ss. 1813(x) (1)), all obligations under this
Agreement shall terminate as of the date of default, but this provision shall
not affect any vested rights of the parties.
(g) All obligations under this Agreement shall be terminated,
except to the extent determined that continuation of this Agreement is necessary
for the continued operation of the Bank: (i) by the Director of the Office of
Thrift Supervision ("OTS") or his or her designee at the time the Federal
Deposit Insurance Corporation or the Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of the Bank under the authority
contained in Section 13(c) of the FDIA, 12 U.S.C. ss. 1823(c); or (ii) by the
Director of the OTS or his or her designee at the time the
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Director of the OTS or his or her designee approves a supervisory merger to
resolve problems related to operation of the Bank or when the Bank is determined
by the Director of the OTS to be in an unsafe or unsound condition.
Any rights of the parties that have already vested, however, shall not
be affected by any such action.
6. Disability. If during the term of this Agreement the Employee shall
become disabled or incapacitated to the extent that she is unable to perform the
duties of the Senior Vice President, Manager of Central Operations, she shall be
entitled to receive disability benefits of the type provided for other officers
of the Bank of similar rank. If the employment of Employee is terminated due to
disability or incapacity to perform the duties and requirements of the
employment, this Agreement shall terminate and end on such last day of
employment.
7. No Assignments. (a) This Agreement is personal to each of the
parties hereto, and neither party may assign or delegate any of its rights or
obligations hereunder without first obtaining the written consent of the other
party; provided, however, that the Bank will require any successor or assign
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the Bank, by; an
assumption agreement in form and substance satisfactory to the Employee, to
expressly assume and agree to perform this Agreement in the same manner and to
the same extent that the Bank would be required to perform it if no such
succession or assignment had taken place. Failure of the Bank to obtain such an
assumption agreement prior to the effectiveness of any such succession or
assignment shall be a breach of this Agreement and shall entitle the Employee to
compensation from the Bank in the same amount and on the same terms as the
compensation pursuant to Section 1(a) hereof. For purposes of implementing the
provisions of this Section 7(a), the date on which any such succession becomes
effective shall be deemed the Date of Termination.
(b) This Agreement and all rights of the Employee hereunder
shall inure to the benefit of and be enforceable by the Employee's personal and
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Employee should die while any
amounts would still be payable to the Employee hereunder if the Employee had
continued to live, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement to the Employee's devisee,
legatee or other designee or if there is no such designee, to the Employee's
estate.
8. Notice. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, addressed to the respective
addresses set forth on the first page of this Agreement (provided that all
notices to the Bank shall be directed
6
<PAGE>
to the attention of the Board of Directors of the Bank with a copy to the
Secretary of the Bank), or to such other address as either party may have
furnished to the other in writing in accordance herewith.
9. Amendments. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein otherwise
provided.
10. Paragraph Headings. The paragraph headings used in this Agreement
are included solely for convenience and shall not affect, or be used in
connection with, the interpretation of this Agreement.
11. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
12. Governing Law. This Agreement shall be governed by the laws of the
United States to the extent applicable and otherwise by the laws of the State of
Montana.
13. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
MARCIA L. JOHNSON, Employee
Address:
WESTERN SECURITY BANK
By:
Lyle R. Grimes, President
and Chief Executive Officer
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EXHIBIT 10.16
AGREEMENT
THIS AGREEMENT is made and entered into as of this ___ day of
_________, 1999, by and between WESTERN SECURITY BANK (the "Bank"), located at
100 E. Broadway, Missoula, Montana and BARRY L. JOHNSTON (the "Employee"), whose
address is,7267 Highway 83, Bigfork, Montana 59911.
WHEREAS, the Employee is currently serving as Senior Vice President,
Credit Administrator of the Bank; and
WHEREAS, the Board of Directors of the Bank believes it is in the best
interests of the Bank to enter into this Agreement with the Employee in order to
assure continuity of management of the Bank and to reinforce and encourage the
continued attention and dedication of the Employee to his assigned duties; and
WHEREAS, the Board of Directors of the Bank has approved and authorized
the execution of this Agreement with the Employee to take effect as stated in
Section 3 hereof;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein contained, it is AGREED as
follows:
1. Change in Control.
(a) Involuntary Termination. If the Employee's employment is
involuntarily terminated (other than for cause or pursuant to any of Sections
5(b) through 5(g) or Section 6 of this Agreement) in connection with or within
12 months after a change in control of the Bank or the Holding Company which
occurs at any time during the term of this Agreement, the Bank shall pay to the
Employee, over the period as provided in the following sentence, an amount equal
to the product of (x) two hundred percent (200%) of the Base Salary of the
Employee, as defined below, times (y) a fraction, the numerator of which is 730
minus the number of days from the date of the change in control to the date of
termination and the denominator of which is 730. The amount payable pursuant to
the preceding sentence shall be paid in equal consecutive monthly installments,
and the number of monthly installments shall be 24 minus the number of whole
months elapsed from the date of change in control to the date of termination.
(b) Definitions. (1) The term "Date of Termination" means the
date upon which the Employee ceases to serve as an Employee of the Bank.
(2) The term "change in control" is defined solely as any acquisition
of control of the Bank or Holding Company (other than by a trustee or other
fiduciary holding
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securities under an employee benefit plan of the Holding Company or a subsidiary
of the Holding Company), as defined in 12 C.F.R. ss. 574.4, or any successor
regulation, which would require the filing of an application for acquisition of
control or notice of change in control in a manner as set forth in 12 C.F.R. ss.
574.3, or any successor regulation.
(3) The term "base salary" is defined as the semi-monthly amount of
salary paid the Employee for the pay period immediately preceding the date of
termination annualized by multiplying by twenty-four (24).
(4) The Employee shall be considered to be involuntarily terminated:
(1) if the employment of the Employee is involuntarily terminated for any reason
other than for "cause" as provided in this Section 1(b), pursuant to any of
Sections 5(b) through 5(g) or by reason of death or disability as provided in
Sections 5(c) and Section 6; or (2) there occurs a material diminution of or
interference with the Employee's duties, responsibilities and benefits as Senior
Vice President, Credit Administrator. By way of example and not by way of
limitation, any of the following actions, if unreasonable or materially adverse
to the Employee, shall constitute such diminution or interference unless
consented to in writing by the Employee: (i) a change in the principal workplace
of the Employee to a location more than fifty (50) miles from the Bank's main
office; (ii) a material demotion of the Employee, a reduction in the number or
seniority of other Bank personnel reporting to the Employee, or a reduction in
the frequency with which, or in the nature of the matters with respect to which,
such personnel are to report to the Employee; or (iii) a reduction or adverse
change in the salary, perquisites, benefits, contingent benefits or vacation
time which had theretofore been provided to the Employee.
(5) Termination for "cause" shall include termination because of the
Employee's personal dishonesty, incompetence, willful misconduct, breach of a
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule, or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order. Notwithstanding
the foregoing, the Employee shall not be deemed to have been terminated for
cause unless and until there shall have been delivered to the Employee a copy of
a resolution, duly adopted by the affirmative vote of not less than a majority
of the disinterested members of the Board of Directors of the Bank at a meeting
of the Board called and held for such purpose (after reasonable notice to the
Employee and an opportunity for the Employee, together with the Employee's
counsel, to be heard before the Board), stating that in the good faith opinion
of the Board the Employee was guilty of conduct constituting "cause" as set
forth above and specifying the particulars thereof in detail.
(c) Compliance with Capital Requirements. Notwithstanding
anything in this Agreement to the contrary, no payments may be made pursuant to
this Section 1 hereof without the prior approval of the Regional Deputy Director
of the OTS if following
2
<PAGE>
such payment the Bank would not be in compliance with its fully phased in
capital requirements as defined in OTS regulations.
2. Certain Reduction of Payments by the Bank. (a) Anything in this
Agreement to the contrary notwithstanding, in the event it shall be determined
that any payment or distribution by the Bank to or for the benefit of the
Employee (whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise) (a "Payment") would be nondeductible
(in whole or part) by the Bank for Federal income tax purposes because of
Section 280G of the Internal Revenue Code ("Code"), then the aggregate present
value of amounts payable or distributable to or for the benefit of the Employee
pursuant to this Agreement (such amounts payable or distributable pursuant to
this Agreement are hereinafter referred to as "Agreement Payments") shall be
reduced to the Reduced Amount. The "Reduced Amount" shall be an amount, not less
than zero, expressed in present value which maximizes the aggregate present
value of Agreement Payments without causing any Payment to be nondeductible by
the Bank because of Section 280G of the Code. For purposes of this Section 2,
present value shall be determined in accordance with Section 280G(d) (4) of the
Code.
(b) All determinations required to be made under this Section
2 shall be made by the Bank's independent auditors, or at the election of such
auditors by such other firm or individuals of recognized expertise as such
auditors may select (such auditors or, if applicable, such other firm or
individual, are hereinafter referred to as the "Advisory Firm"). The Advisory
Firm shall within ten business days of the Date of Termination, or at such
earlier time as is requested by the Bank, provide to both the Bank and the
Employee an opinion (and detailed supporting calculations) that the Bank has
substantial authority to deduct for federal income tax purposes the full amount
of the Agreement Payments and that the Employee has substantial authority not to
report on his federal income tax return any excise tax imposed by Section 4999
of the Code with respect to the Agreement Payments. Any such determination and
opinion by the Advisory Firm shall be binding upon the Bank and the Employee.
The Employee shall determine which and how much, if any, of the Agreement
Payments shall be eliminated or reduced consistent with the requirements of this
Section 2, provided that, if the Employee does not make such determination
within ten business days of the receipt of the calculations made by the Advisory
Firm, the Bank shall elect which and how much, if any, of the Agreement Payments
shall be eliminated or reduced consistent with the requirements of this Section
2 and shall notify the Employee promptly of such election. Within five business
days of the earlier of: (i) the Bank's receipt of the Employee's determination
pursuant to the immediately preceding sentence of this Agreement; or (ii) the
Bank's election in lieu of such determination, the Bank shall pay to or
distribute to or for the benefit of the Employee such amounts as are then due
the Employee under this Agreement. The Bank and the Employee shall cooperate
fully with the Advisory Firm, including without limitation providing to the
Advisory Firm all information and materials reasonably requested by it, in
connection with the making of the determinations required under this Section 2.
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<PAGE>
(c) As a result of uncertainty in application of Section 280G
of the Code at the time of the initial determination by the Advisory Firm
hereunder, it is possible that Agreement Payments will have been made by the
Bank which should not have been made ("Overpayment") or that additional
Agreement Payments will not have been made by the Bank which should have been
made ("Underpayment"), in each case, consistent with the calculations required
to be made hereunder. In the event that the Advisory Firm, based upon the
assertion by the Internal Revenue Service against the Employee of a deficiency
which the Advisory Firm believes has a high probability of success determines
that an Overpayment has been made, any such Overpayment paid or distributed by
the Bank to or for the benefit of Employee shall be treated for all purposes as
a loan ab initio which the Employee shall repay to the Bank together with
interest at the applicable federal rate provided for in Section 7872(f) (2) of
the Code; provided, however, that no such loan shall be deemed to have been made
and no amount shall be payable by the Employee to the Bank if and to the extent
such deemed loan and payment would not either reduce the amount on which the
Employee is subject to tax under Section 1 and Section 4999 of the Code or
generate a refund of such taxes. In the event that the Advisory Firm, based upon
controlling preceding or other substantial authority, determines that an
Underpayment has occurred, any such Underpayment shall be promptly paid by the
Bank to or for the benefit of the Employee together with interest at the
applicable federal rate provided for in Section 7872(f)(2) of the Code.
(d) Any payments made to the Employee, pursuant to this Agreement or
otherwise, are subject to and conditioned upon their compliance with 12 U.S.C.
ss. 1828(k) and any regulations adopted thereunder.
3. Term. The term of this Agreement shall be a period of two (2) years
commencing on October 18, 1999, and ending October 17, 2001, subject to earlier
termination as provided herein.
4. Participation in Other Employee Benefit Plans. In addition to the
benefits provided under this agreement, the Employee shall be entitled while
employed to participate in, and receive benefits under, all plans relating to
stock options, stock purchases, pension, thrift, profit-sharing, group life
insurance, medical coverage, education, cash or stock bonuses, and other
retirement or employee benefits or combinations thereof, that are now or
hereafter maintained for the benefit of the Bank's employees of similar rank or
for its employees generally.
5. Termination; Death.
(a) In the event the Bank terminates the Employee's employment
for cause, the obligations of the Bank under this Agreement shall cease. In case
of termination of the Employee's employment for cause, the Bank shall pay the
Employee his salary through the date of termination, and the Bank shall have no
further obligation
4
<PAGE>
to the Employee under this Agreement. The Employee shall have no right to
receive any of the compensation defined in Section 1(a) after termination for
cause.
(b) The Employee's employment may be voluntarily terminated by
the Employee at any time upon ninety (90) days written notice to the Bank or
upon such shorter period as may be agreed upon between the Employee and the
Board of Directors of the Bank. In the event of such voluntary termination, the
Bank shall be obligated to continue to pay the Employee his salary only through
the date of termination, at the time such payments are due, and the Bank shall
have no further obligation to the Employee under this Agreement.
(c) In the event of the death of the Employee during the term
of this Agreement and prior to any termination hereunder, the Employee's estate,
or such person as the Employee may have previously designated in writing, shall
be entitled to receive from the Bank the salary of the Employee through the last
day of employment and this Agreement shall terminate and end on such last day of
employment.
(d) If the Employee is suspended from office and/or
temporarily prohibited from participating in the conduct of the Bank's affairs
by a notice served under Section 8(e) (3) or (g) (1) of the Federal Deposit
Insurance Act ("FDIA"), 12 U.S.C. ss. 1818(e) (3); (g) (l), the Bank's
obligations under this Agreement shall be suspended as of the date of service,
unless stayed by appropriate proceedings. If the charges in the notice are
dismissed, the Bank may in its discretion: (i) pay the Employee all or part of
the compensation withheld while its obligations under this Agreement were
suspended; and (ii) reinstate in whole or in part any of the obligations which
were suspended.
(e) If the Employee is removed from office and/or permanently
prohibited from participating in the conduct of the Bank's affairs by an order
issued under Section 8(e) (4) or (g) (1) of the FDIA, 12 U.S.C. ss. 1818(e) (4);
(g) (1), all obligations of the Bank under this Agreement shall terminate, as of
the effective date of the order, but vested rights of the parties shall not be
affected.
(f) If the Bank becomes in default (as defined in Section 3(x)
(1) of the FDIA, 12 U.S.C. ss. 1813(x) (1)), all obligations under this
Agreement shall terminate as of the date of default, but this provision shall
not affect any vested rights of the parties.
(g) All obligations under this Agreement shall be terminated,
except to the extent determined that continuation of this Agreement is necessary
for the continued operation of the Bank: (i) by the Director of the Office of
Thrift Supervision ("OTS") or his or her designee at the time the Federal
Deposit Insurance Corporation or the Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of the Bank under the authority
contained in Section 13(c) of the FDIA, 12 U.S.C. ss. 1823(c); or (ii) by the
Director of the OTS or his or her designee at the time the
5
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Director of the OTS or his or her designee approves a supervisory merger to
resolve problems related to operation of the Bank or when the Bank is determined
by the Director of the OTS to be in an unsafe or unsound condition.
Any rights of the parties that have already vested, however, shall not
be affected by any such action.
6. Disability. If during the term of this Agreement the Employee shall
become disabled or incapacitated to the extent that he is unable to perform the
duties of the Senior Vice President, Credit Adminstrator, he shall be entitled
to receive disability benefits of the type provided for other officers of the
Bank of similar rank. If the employment of Employee is terminated due to
disability or incapacity to perform the duties and requirements of the
employment, this Agreement shall terminate and end on such last day of
employment.
7. No Assignments. (a) This Agreement is personal to each of the
parties hereto, and neither party may assign or delegate any of its rights or
obligations hereunder without first obtaining the written consent of the other
party; provided, however, that the Bank will require any successor or assign
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the Bank, by; an
assumption agreement in form and substance satisfactory to the Employee, to
expressly assume and agree to perform this Agreement in the same manner and to
the same extent that the Bank would be required to perform it if no such
succession or assignment had taken place. Failure of the Bank to obtain such an
assumption agreement prior to the effectiveness of any such succession or
assignment shall be a breach of this Agreement and shall entitle the Employee to
compensation from the Bank in the same amount and on the same terms as the
compensation pursuant to Section 1(a) hereof. For purposes of implementing the
provisions of this Section 7(a), the date on which any such succession becomes
effective shall be deemed the Date of Termination.
(b) This Agreement and all rights of the Employee hereunder
shall inure to the benefit of and be enforceable by the Employee's personal and
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Employee should die while any
amounts would still be payable to the Employee hereunder if the Employee had
continued to live, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement to the Employee's devisee,
legatee or other designee or if there is no such designee, to the Employee's
estate.
8. Notice. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, addressed to the respective
addresses set forth on the first page of this Agreement (provided that all
notices to the Bank shall be directed
6
<PAGE>
to the attention of the Board of Directors of the Bank with a copy to the
Secretary of the Bank), or to such other address as either party may have
furnished to the other in writing in accordance herewith.
9. Amendments. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein otherwise
provided.
10. Paragraph Headings. The paragraph headings used in this Agreement
are included solely for convenience and shall not affect, or be used in
connection with, the interpretation of this Agreement.
11. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
12. Governing Law. This Agreement shall be governed by the laws of the
United States to the extent applicable and otherwise by the laws of the State of
Montana.
13. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
BARRY L. JOHNSTON, Employee
Address: 7267 Highway 83
Bigfork, Montana 59911
WESTERN SECURITY BANK
By:
Ralph K. Holliday, President
and Chief Executive Officer
7
<PAGE>
EXHIBIT 10.17
AGREEMENT
THIS AGREEMENT is made and entered into as of this 17th day of
December, 1999, by and between WESTERN SECURITY BANK (the "Bank"), located at
100 E. Broadway, Missoula, Montana and SUZANNE M. LOEWEN (the "Employee"), whose
address is 2228 36th Street, Missoula, Montana 59801.
WHEREAS, the Employee is currently serving as Vice President Internal
Auditor Compliance Officer of the Bank; and
WHEREAS, the Board of Directors of the Bank believes it is in the best
interests of the Bank to enter into this Agreement with the Employee in order to
assure continuity of management of the Bank and to reinforce and encourage the
continued attention and dedication of the Employee to her/his assigned duties;
and
WHEREAS, the Board of Directors of the Bank has approved and authorized
the execution of this Agreement with the Employee to take effect as stated in
Section 3 hereof;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein contained, it is AGREED as
follows:
1. Change in Control.
(a) Involuntary Termination. If the Employee's employment is
involuntarily terminated (other than for cause or pursuant to any of Sections
5(b) through 5(g) or Section 6 of this Agreement) in connection with or within
12 months after a change in control of the Bank or the Holding Company which
occurs at any time during the term of this Agreement, the Bank shall pay to the
Employee, over the period as provided in the following sentence, an amount equal
to the product of (x) two hundred percent (200%) of the Base Salary of the
Employee, as defined below, times (y) a fraction, the numerator of which is 730
minus the number of days from the date of the change in control to the date of
termination and the denominator of which is 730. The amount payable pursuant to
the preceding sentence shall be paid in equal consecutive monthly installments,
and the number of monthly installments shall be 24 minus the number of whole
months elapsed from the date of change in control to the date of termination.
(b) Definitions. (1) The term "Date of Termination" means the
date upon which the Employee ceases to serve as an Employee of the Bank.
(2) The term "change in control" is defined solely as any acquisition
of control of the Bank or Holding Company (other than by a trustee or other
fiduciary holding
1
<PAGE>
securities under an employee benefit plan of the Holding Company or a subsidiary
of the Holding Company), as defined in 12 C.F.R. ss. 574.4, or any successor
regulation, which would require the filing of an application for acquisition of
control or notice of change in control in a manner as set forth in 12 C.F.R. ss.
574.3, or any successor regulation.
(3) The term "base salary" is defined as the semi-monthly amount of
salary paid the Employee for the pay period immediately preceding the date of
termination annualized by multiplying by twenty-four (24).
(4) The Employee shall be considered to be involuntarily terminated (1)
if the employment of the Employee is involuntarily terminated for any reason
other than for "cause" as provided in this Section 1(b), pursuant to any of
Sections 5(b) through 5(g) or by reason of death or disability as provided in
Sections 5(c) and Section 6; or (2) there occurs a material diminution of or
interference with the Employee's duties, responsibilities and benefits as Vice
President Internal Auditor Compliance Officer. By way of example and not by way
of limitation, any of the following actions, if unreasonable or materially
adverse to the Employee, shall constitute such diminution or interference unless
consented to in writing by the Employee: (i) a change in the principal workplace
of the Employee to a location more than fifty (50) miles from the Bank's main
office; (ii) a material demotion of the Employee, a reduction in the number or
seniority of other Bank personnel reporting to the Employee, or a reduction in
the frequency with which, or in the nature of the matters with respect to which,
such personnel are to report to the Employee; or (iii) a reduction or adverse
change in the salary, perquisites, benefits, contingent benefits or vacation
time which had theretofore been provided to the Employee.
(5) Termination for "cause" shall include termination because of the
Employee's personal dishonesty, incompetence, willful misconduct, breach of a
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule, or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order. Notwithstanding
the foregoing, the Employee shall not be deemed to have been terminated for
cause unless and until there shall have been delivered to the Employee a copy of
a resolution, duly adopted by the affirmative vote of not less than a majority
of the disinterested members of the Board of Directors of the Bank at a meeting
of the Board called and held for such purpose (after reasonable notice to the
Employee and an opportunity for the Employee, together with the Employee's
counsel, to be heard before the Board), stating that in the good faith opinion
of the Board the Employee was guilty of conduct constituting "cause" as set
forth above and specifying the particulars thereof in detail.
(c) Compliance with Capital Requirements. Notwithstanding
anything in this Agreement to the contrary, no payments may be made pursuant to
this Section 1 hereof without the prior approval of the Regional Deputy Director
of the OTS if following such payment the Bank would not be in compliance with
its fully phased in capital
2
<PAGE>
requirements as defined in OTS regulations.
2. Certain Reduction of Payments by the Bank. (a) Anything in this
Agreement to the contrary notwithstanding, in the event it shall be determined
that any payment or distribution by the Bank to or for the benefit of the
Employee (whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise) (a 'Payment") would be nondeductible
(in whole or part) by the Bank for Federal income tax purposes because of
Section 280G of the Code, then the aggregate present value of amounts payable or
distributable to or for the benefit of the Employee pursuant to this Agreement
(such amounts payable or distributable pursuant to this Agreement are
hereinafter referred to as "Agreement Payments") shall be reduced to the Reduced
Amount. The "Reduced Amount" shall be an amount, not less than zero, expressed
in present value which maximizes the aggregate present value of Agreement
Payments without causing any Payment to be nondeductible by the Bank because of
Section 280G of the Code. For purposes of this Section 2, present value shall be
determined in accordance with Section 280G(d) (4) of the Code.
(b) All determinations required to be made under this Section
2 shall be made by the Bank's independent auditors, or at the election of such
auditors by such other firm or individuals of recognized expertise as such
auditors may select (such auditors or, if applicable, such other firm or
individual, are hereinafter referred to as the "Advisory Firm"). The Advisory
Firm shall within ten business days of the Date of Termination, or at such
earlier time as is requested by the Bank, provide to both the Bank and the
Employee an opinion (and detailed supporting calculations) that the Bank has
substantial authority to deduct for federal income tax purposes the full amount
of the Agreement Payments and that the Employee has substantial authority not to
report on her/his federal income tax return any excise tax imposed by Section
4999 of the Code with respect to the Agreement Payments. Any such determination
and opinion by the Advisory Firm shall be binding upon the Bank and the
Employee. The Employee shall determine which and how much, if any, of the
Agreement Payments shall be eliminated or reduced consistent with the
requirements of this Section 2, provided that, if the Employee does not make
such determination within ten business days of the receipt of the calculations
made by the Advisory Firm, the Bank shall elect which and how much, if any, of
the Agreement Payments shall be eliminated or reduced consistent with the
requirements of this Section 2 and shall notify the Employee promptly of such
election. Within five business days of the earlier of (i) the Bank's receipt of
the Employee's determination pursuant to the immediately preceding sentence of
this Agreement or (ii) the Bank's election in lieu of such determination, the
Bank shall pay to or distribute to or for the benefit of the Employee such
amounts as are then due the Employee under this Agreement. The Bank and the
Employee shall cooperate fully with the Advisory Firm, including without
limitation providing to the Advisory Firm all information and materials
reasonably requested by it, in connection with the making of the determinations
required under this Section 2.
(c) As a result of uncertainty in application of Section
280G of the
3
<PAGE>
Code at the time of the initial determination by the Advisory Firm hereunder, it
is possible that Agreement Payments will have been made by the Bank which should
not have been made ("Overpayment") or that additional Agreement Payments will
not have been made by the Bank which should have been made ("Underpayment"), in
each case, consistent with the calculations required to be made hereunder. In
the event that the Advisory Firm, based upon the assertion by the Internal
Revenue Service against the Employee of a deficiency which the Advisory Firm
believes has a high probability of success determines that an Overpayment has
been made, any such Overpayment paid or distributed by the Bank to or for the
benefit of Employee shall be treated for all purposes as a loan ab initio which
the Employee shall repay to the Bank together with interest at the applicable
federal rate provided for in Section 7872(f) (2) of the Code; provided, however,
that no such loan shall be deemed to have been made and no amount shall be
payable by the Employee to the Bank if and to the extent such deemed loan and
payment would not either reduce the amount on which the Employee is subject to
tax under Section 1 and Section 4999 of the Code or generate a refund of such
taxes. In the event that the Advisory Firm, based upon controlling preceding or
other substantial authority, determines that an Underpayment has occurred, any
such Underpayment shall be promptly paid by the Bank to or for the benefit of
the Employee together with interest at the applicable federal rate provided for
in Section 7872(f)(2) of the Code.
(d) Any payments made to the Employee, pursuant to this Agreement or
otherwise, are subject to and conditioned upon their compliance with 12 U.S.C.
ss. 1828(k) and any regulations adopted thereunder.
3. Term. The term of this Agreement shall be a period of two (2) years
commencing on December 17, 1999 and ending on December 16, 2001, subject to
earlier termination as provided herein.
4. Participation in Other Employee Benefit Plans. In addition to the
benefits provided under this agreement, the Employee shall be entitled while
employed to participate in, and receive benefits under, all plans relating to
stock options, stock purchases, pension, thrift, profit-sharing, group life
insurance, medical coverage, education, cash or stock bonuses, and other
retirement or employee benefits or combinations thereof, that are now or
hereafter maintained for the benefit of the Bank's employees of similar rank or
for its employees generally.
5. Termination; Death.
(a) In the event Bank terminates the Employee's employment for
cause, the obligations of the Bank under this Agreement shall cease. In case of
termination of the Employee's employment for cause, the Bank shall pay the
Employee her/his salary through the date of termination, and the Bank shall have
no further obligation to the Employee under this Agreement. The Employee shall
have no right to receive any of the compensation defined in Section 1(a) after
termination for cause.
4
<PAGE>
(b) The Employee's employment may be voluntarily terminated by
the Employee at any time upon ninety (90) days written notice to the Bank or
upon such shorter period as may be agreed upon between the Employee and the
Board of Directors of the Bank. In the event of such voluntary termination, the
Bank shall be obligated to continue to pay the Employee her/his salary only
through the date of termination, at the time such payments are due, and the Bank
shall have no further obligation to the Employee under this Agreement.
(c) In the event of the death of the Employee during the term
of this Agreement and prior to any termination hereunder, the Employee's estate,
or such person as the Employee may have previously designated in writing, shall
be entitled to receive from the Bank the salary of the Employee through the last
day of employment and this Agreement shall terminate and end on such last day of
employment.
(d) If the Employee is suspended from office and/or
temporarily prohibited from participating in the conduct of the Bank's affairs
by a notice served under Section 8(e) (3) or (g) (1) of the Federal Deposit
Insurance Act ("FDIA"), 12 U.S.C. ss. 1818(e) (3); (g) (l), the Bank's
obligations under this Agreement shall be suspended as of the date of service,
unless stayed by appropriate proceedings. If the charges in the notice are
dismissed, the Bank may in its discretion (i) pay the Employee all or part of
the compensation withheld while its obligations under this Agreement were
suspended and (ii) reinstate in whole or in part any of the obligations which
were suspended.
(e) If the Employee is removed from office and/or permanently
prohibited from participating in the conduct of the Bank's affairs by an order
issued under Section 8(e) (4) or (g) (1) of the FDIA, 12 U.S.C. ss. 1818(e) (4);
(g) (1), all obligations of the Bank under this Agreement shall terminate, as of
the effective date of the order, but vested rights of the parties shall not be
affected.
(f) If the Bank becomes in default (as defined in Section 3(x)
(1) of the FDIA, 12 U.S.C. ss. 1813(x) (1)), all obligations under this
Agreement shall terminate as of the date of default, but this provision shall
not affect any vested rights of the parties.
(g) All obligations under this Agreement shall be terminated,
except to the extent determined that continuation of this Agreement is necessary
for the continued operation of the Bank: (i) by the Director of the Office of
Thrift Supervision ("OTS") or his or her designee at the time the Federal
Deposit Insurance Corporation or the Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of the Bank under the authority
contained in Section 13(c) of the FDIA, 12 U.S.C. ss. 1823(c); or (ii) by the
Director of the OTS or his or her designee at the time the Director of the OTS
or his or her designee approves a supervisory merger to resolve problems related
to operation of the Bank or when the Bank is determined by the Director of the
OTS to be in an unsafe or unsound condition.
5
<PAGE>
Any rights of the parties that have already vested, however, shall not
be affected by any such action.
6. Disability. If during the term of this Agreement the Employee shall
become disabled or incapacitated to the extent that she/he is unable to perform
the duties of the Vice President Internal Auditor Compliance Officer, she/he
shall be entitled to receive disability benefits of the type provided for other
officers of the Bank of similar rank. If the employment of Employee is
terminated due to disability or incapacity to perform the duties and
requirements of the employment, this Agreement shall terminate and end on such
last day of employment.
7. No Assignments. (a) This Agreement is personal to each of the
parties hereto, and neither party may assign or delegate any of its rights or
obligations hereunder without first obtaining the written consent of the other
party; provided, however, that the Bank will require any successor or assign
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the Bank, by; an
assumption agreement in form and substance satisfactory to the Employee, to
expressly assume and agree to perform this Agreement in the same manner and to
the same extent that the Bank would be required to perform it if no such
succession or assignment had taken place. Failure of the Bank to obtain such an
assumption agreement prior to the effectiveness of any such succession or
assignment shall be a breach of this Agreement and shall entitle the Employee to
compensation from the Bank in the same amount and on the same terms as the
compensation pursuant to Section 1(a) hereof. For purposes of implementing the
provisions of this Section 7(a), the date on which any such succession becomes
effective shall be deemed the Date of Termination.
(b) This Agreement and all rights of the Employee hereunder
shall inure to the benefit of and be enforceable by the Employee's personal and
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Employee should die while any
amounts would still be payable to the Employee hereunder if the Employee had
continued to live, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement to the Employee's devisee,
legatee or other designee or if there is no such designee, to the Employee's
estate.
8. Notice. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, addressed to the respective
addresses set forth on the first page of this Agreement (provided that all
notices to the Bank shall be directed to the attention of the Board of Directors
of the Bank with a copy to the Secretary of the Bank), or to such other address
as either party may have furnished to the other in writing in accordance
herewith.
6
<PAGE>
9. Amendments. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein otherwise
provided.
10. Paragraph Headings. The paragraph headings used in this Agreement
are included solely for convenience and shall not affect, or be used in
connection with, the interpretation of this Agreement.
11. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
12. Governing Law. This Agreement shall be governed by the laws of the
United States to the extent applicable and otherwise by the laws of the State of
Montana.
13. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
SUZANNE M. LOEWEN Employee
Address: 2228 36th Street
Missoula, MT 59 801
WESTERN SECURITY BANK
By:__________________________________
Ralph K. Holliday, President
and Chief Executive Officer
7
<PAGE>
EXHIBIT 10.18
AGREEMENT
THIS AGREEMENT is made and entered into as of this 31th day of January,
2000, by and between WESTERN SECURITY BANK (the "Bank"), located at 100 E.
Broadway, Missoula, Montana and SHARON E. WOLDSTAD (the "Employee"), whose
address is Potomac, Montana 59823.
WHEREAS, the Employee is currently serving as Corporate Secretary Senior
Vice President Data Center Coordinator of the Bank; and
WHEREAS, the Board of Directors of the Bank believes it is in the best
interests of the Bank to enter into this Agreement with the Employee in order to
assure continuity of management of the Bank and to reinforce and encourage the
continued attention and dedication of the Employee to her/his assigned duties;
and
WHEREAS, the Board of Directors of the Bank has approved and authorized
the execution of this Agreement with the Employee to take effect as stated in
Section 3 hereof;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein contained, it is AGREED as
follows:
1. Change in Control.
(a) Involuntary Termination. If the Employee's employment is
involuntarily terminated (other than for cause or pursuant to any of Sections
5(b) through 5(g) or Section 6 of this Agreement) in connection with or within
12 months after a change in control of the Bank or the Holding Company which
occurs at any time during the term of this Agreement, the Bank shall pay to the
Employee, over the period as provided in the following sentence, an amount equal
to the product of (x) two hundred percent (200%) of the Base Salary of the
Employee, as defined below, times (y) a fraction, the numerator of which is 730
minus the number of days from the date of the change in control to the date of
termination and the denominator of which is 730. The amount payable pursuant to
the preceding sentence shall be paid in equal consecutive monthly installments,
and the number of monthly installments shall be 24 minus the number of whole
months elapsed from the date of change in control to the date of termination.
(b) Definitions. (1) The term "Date of Termination" means the
date upon which the Employee ceases to serve as an Employee of the Bank.
(2) The term "change in control" is defined solely as any acquisition
of control of the Bank or Holding Company (other than by a trustee or other
fiduciary holding
1
<PAGE>
securities under an employee benefit plan of the Holding Company or a subsidiary
of the Holding Company), as defined in 12 C.F.R. ss. 574.4, or any successor
regulation, which would require the filing of an application for acquisition of
control or notice of change in control in a manner as set forth in 12 C.F.R. ss.
574.3, or any successor regulation.
(3) The term "base salary" is defined as the semi-monthly amount of
salary paid the Employee for the pay period immediately preceding the date of
termination annualized by multiplying by twenty-four (24).
(4) The Employee shall be considered to be involuntarily terminated (1)
if the employment of the Employee is involuntarily terminated for any reason
other than for "cause" as provided in this Section 1(b), pursuant to any of
Sections 5(b) through 5(g) or by reason of death or disability as provided in
Sections 5(c) and Section 6; or (2) there occurs a material diminution of or
interference with the Employee's duties, responsibilities and benefits as
Corporate Secretary Senior Vice President Data Center Coordinator. By way of
example and not by way of limitation, any of the following actions, if
unreasonable or materially adverse to the Employee, shall constitute such
diminution or interference unless consented to in writing by the Employee: (i) a
change in the principal workplace of the Employee to a location more than fifty
(50) miles from the Bank's main office; (ii) a material demotion of the
Employee, a reduction in the number or seniority of other Bank personnel
reporting to the Employee, or a reduction in the frequency with which, or in the
nature of the matters with respect to which, such personnel are to report to the
Employee; or (iii) a reduction or adverse change in the salary, perquisites,
benefits, contingent benefits or vacation time which had theretofore been
provided to the Employee.
(5) Termination for "cause" shall include termination because of the
Employee's personal dishonesty, incompetence, willful misconduct, breach of a
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule, or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order. Notwithstanding
the foregoing, the Employee shall not be deemed to have been terminated for
cause unless and until there shall have been delivered to the Employee a copy of
a resolution, duly adopted by the affirmative vote of not less than a majority
of the disinterested members of the Board of Directors of the Bank at a meeting
of the Board called and held for such purpose (after reasonable notice to the
Employee and an opportunity for the Employee, together with the Employee's
counsel, to be heard before the Board), stating that in the good faith opinion
of the Board the Employee was guilty of conduct constituting "cause" as set
forth above and specifying the particulars thereof in detail.
(c) Compliance with Capital Requirements. Notwithstanding
anything in this Agreement to the contrary, no payments may be made pursuant to
this Section 1 hereof without the prior approval of the Regional Deputy Director
of the OTS if following such payment the Bank would not be in compliance with
its fully phased in capital
2
<PAGE>
requirements as defined in OTS regulations.
2. Certain Reduction of Payments by the Bank. (a) Anything in this
Agreement to the contrary notwithstanding, in the event it shall be determined
that any payment or distribution by the Bank to or for the benefit of the
Employee (whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise) (a 'Payment") would be nondeductible
(in whole or part) by the Bank for Federal income tax purposes because of
Section 280G of the Code, then the aggregate present value of amounts payable or
distributable to or for the benefit of the Employee pursuant to this Agreement
(such amounts payable or distributable pursuant to this Agreement are
hereinafter referred to as "Agreement Payments") shall be reduced to the Reduced
Amount. The "Reduced Amount" shall be an amount, not less than zero, expressed
in present value which maximizes the aggregate present value of Agreement
Payments without causing any Payment to be nondeductible by the Bank because of
Section 280G of the Code. For purposes of this Section 2, present value shall be
determined in accordance with Section 280G(d) (4) of the Code.
(b) All determinations required to be made under this Section
2 shall be made by the Bank's independent auditors, or at the election of such
auditors by such other firm or individuals of recognized expertise as such
auditors may select (such auditors or, if applicable, such other firm or
individual, are hereinafter referred to as the "Advisory Firm"). The Advisory
Firm shall within ten business days of the Date of Termination, or at such
earlier time as is requested by the Bank, provide to both the Bank and the
Employee an opinion (and detailed supporting calculations) that the Bank has
substantial authority to deduct for federal income tax purposes the full amount
of the Agreement Payments and that the Employee has substantial authority not to
report on her/his federal income tax return any excise tax imposed by Section
4999 of the Code with respect to the Agreement Payments. Any such determination
and opinion by the Advisory Firm shall be binding upon the Bank and the
Employee. The Employee shall determine which and how much, if any, of the
Agreement Payments shall be eliminated or reduced consistent with the
requirements of this Section 2, provided that, if the Employee does not make
such determination within ten business days of the receipt of the calculations
made by the Advisory Firm, the Bank shall elect which and how much, if any, of
the Agreement Payments shall be eliminated or reduced consistent with the
requirements of this Section 2 and shall notify the Employee promptly of such
election. Within five business days of the earlier of (i) the Bank's receipt of
the Employee's determination pursuant to the immediately preceding sentence of
this Agreement or (ii) the Bank's election in lieu of such determination, the
Bank shall pay to or distribute to or for the benefit of the Employee such
amounts as are then due the Employee under this Agreement. The Bank and the
Employee shall cooperate fully with the Advisory Firm, including without
limitation providing to the Advisory Firm all information and materials
reasonably requested by it, in connection with the making of the determinations
required under this Section 2.
(c) As a result of uncertainty in application of Section
280G of the
3
<PAGE>
Code at the time of the initial determination by the Advisory Firm hereunder, it
is possible that Agreement Payments will have been made by the Bank which should
not have been made ("Overpayment") or that additional Agreement Payments will
not have been made by the Bank which should have been made ("Underpayment"), in
each case, consistent with the calculations required to be made hereunder. In
the event that the Advisory Firm, based upon the assertion by the Internal
Revenue Service against the Employee of a deficiency which the Advisory Firm
believes has a high probability of success determines that an Overpayment has
been made, any such Overpayment paid or distributed by the Bank to or for the
benefit of Employee shall be treated for all purposes as a loan ab initio which
the Employee shall repay to the Bank together with interest at the applicable
federal rate provided for in Section 7872(f) (2) of the Code; provided, however,
that no such loan shall be deemed to have been made and no amount shall be
payable by the Employee to the Bank if and to the extent such deemed loan and
payment would not either reduce the amount on which the Employee is subject to
tax under Section 1 and Section 4999 of the Code or generate a refund of such
taxes. In the event that the Advisory Firm, based upon controlling preceding or
other substantial authority, determines that an Underpayment has occurred, any
such Underpayment shall be promptly paid by the Bank to or for the benefit of
the Employee together with interest at the applicable federal rate provided for
in Section 7872(f)(2) of the Code.
(d) Any payments made to the Employee, pursuant to this Agreement or
otherwise, are subject to and conditioned upon their compliance with 12 U.S.C.
ss. 1828(k) and any regulations adopted thereunder.
3. Term. The term of this Agreement shall be a period of two (2) years
commencing on January 31, 2000 and ending on January 30, 2002, subject to
earlier termination as provided herein.
4. Participation in Other Employee Benefit Plans. In addition to the
benefits provided under this agreement, the Employee shall be entitled while
employed to participate in, and receive benefits under, all plans relating to
stock options, stock purchases, pension, thrift, profit-sharing, group life
insurance, medical coverage, education, cash or stock bonuses, and other
retirement or employee benefits or combinations thereof, that are now or
hereafter maintained for the benefit of the Bank's employees of similar rank or
for its employees generally.
5. Termination; Death.
(a) In the event Bank terminates the Employee's employment for
cause, the obligations of the Bank under this Agreement shall cease. In case of
termination of the Employee's employment for cause, the Bank shall pay the
Employee her/his salary through the date of termination, and the Bank shall have
no further obligation to the Employee under this Agreement. The Employee shall
have no right to receive any of the compensation defined in Section 1(a) after
termination for cause.
4
<PAGE>
(b) The Employee's employment may be voluntarily terminated by
the Employee at any time upon ninety (90) days written notice to the Bank or
upon such shorter period as may be agreed upon between the Employee and the
Board of Directors of the Bank. In the event of such voluntary termination, the
Bank shall be obligated to continue to pay the Employee her/his salary only
through the date of termination, at the time such payments are due, and the Bank
shall have no further obligation to the Employee under this Agreement.
(c) In the event of the death of the Employee during the term
of this Agreement and prior to any termination hereunder, the Employee's estate,
or such person as the Employee may have previously designated in writing, shall
be entitled to receive from the Bank the salary of the Employee through the last
day of employment and this Agreement shall terminate and end on such last day of
employment.
(d) If the Employee is suspended from office and/or
temporarily prohibited from participating in the conduct of the Bank's affairs
by a notice served under Section 8(e) (3) or (g) (1) of the Federal Deposit
Insurance Act ("FDIA"), 12 U.S.C. ss. 1818(e) (3); (g) (l), the Bank's
obligations under this Agreement shall be suspended as of the date of service,
unless stayed by appropriate proceedings. If the charges in the notice are
dismissed, the Bank may in its discretion (i) pay the Employee all or part of
the compensation withheld while its obligations under this Agreement were
suspended and (ii) reinstate in whole or in part any of the obligations which
were suspended.
(e) If the Employee is removed from office and/or permanently
prohibited from participating in the conduct of the Bank's affairs by an order
issued under Section 8(e) (4) or (g) (1) of the FDIA, 12 U.S.C. ss. 1818(e) (4);
(g) (1), all obligations of the Bank under this Agreement shall terminate, as of
the effective date of the order, but vested rights of the parties shall not be
affected.
(f) If the Bank becomes in default (as defined in Section 3(x)
(1) of the FDIA, 12 U.S.C. ss. 1813(x) (1)), all obligations under this
Agreement shall terminate as of the date of default, but this provision shall
not affect any vested rights of the parties.
(g) All obligations under this Agreement shall be terminated,
except to the extent determined that continuation of this Agreement is necessary
for the continued operation of the Bank: (i) by the Director of the Office of
Thrift Supervision ("OTS") or his or her designee at the time the Federal
Deposit Insurance Corporation or the Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of the Bank under the authority
contained in Section 13(c) of the FDIA, 12 U.S.C. ss. 1823(c); or (ii) by the
Director of the OTS or his or her designee at the time the Director of the OTS
or his or her designee approves a supervisory merger to resolve problems related
to operation of the Bank or when the Bank is determined by the Director of the
OTS to be in an unsafe or unsound condition.
5
<PAGE>
Any rights of the parties that have already vested, however, shall not
be affected by any such action.
6. Disability. If during the term of this Agreement the Employee shall
become disabled or incapacitated to the extent that she/he is unable to perform
the duties of the Corporate Secretary Senior Vice President Data Center
Coordinator, she/he shall be entitled to receive disability benefits of the type
provided for other officers of the Bank of similar rank. If the employment of
Employee is terminated due to disability or incapacity to perform the duties and
requirements of the employment, this Agreement shall terminate and end on such
last day of employment.
7. No Assignments. (a) This Agreement is personal to each of the
parties hereto, and neither party may assign or delegate any of its rights or
obligations hereunder without first obtaining the written consent of the other
party; provided, however, that the Bank will require any successor or assign
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the Bank, by; an
assumption agreement in form and substance satisfactory to the Employee, to
expressly assume and agree to perform this Agreement in the same manner and to
the same extent that the Bank would be required to perform it if no such
succession or assignment had taken place. Failure of the Bank to obtain such an
assumption agreement prior to the effectiveness of any such succession or
assignment shall be a breach of this Agreement and shall entitle the Employee to
compensation from the Bank in the same amount and on the same terms as the
compensation pursuant to Section 1(a) hereof. For purposes of implementing the
provisions of this Section 7(a), the date on which any such succession becomes
effective shall be deemed the Date of Termination.
(b) This Agreement and all rights of the Employee hereunder
shall inure to the benefit of and be enforceable by the Employee's personal and
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Employee should die while any
amounts would still be payable to the Employee hereunder if the Employee had
continued to live, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement to the Employee's devisee,
legatee or other designee or if there is no such designee, to the Employee's
estate.
8. Notice. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, addressed to the respective
addresses set forth on the first page of this Agreement (provided that all
notices to the Bank shall be directed to the attention of the Board of Directors
of the Bank with a copy to the Secretary of the Bank), or to such other address
as either party may have furnished to the other in writing in accordance
herewith.
6
<PAGE>
9. Amendments. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein otherwise
provided.
10. Paragraph Headings. The paragraph headings used in this Agreement
are included solely for convenience and shall not affect, or be used in
connection with, the interpretation of this Agreement.
11. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
12. Governing Law. This Agreement shall be governed by the laws of the
United States to the extent applicable and otherwise by the laws of the State of
Montana.
13. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
SHARON E. WOLDSTAD Employee
Address: Potomac, MT 59823
WESTERN SECURITY BANK
By:__________________________________
Ralph K. Holliday, President
and Chief Executive Officer
7
EXHIBIT 13
[FRONT COVER]
<PAGE>
Financial Highlights
FOR THE Six Months Ended 12/31/99
(Dollars in thousands, except share and per share amounts)
FOR Six Months
Net Income $ 3,975
Net Interest Income $16,221
PER COMMON SHARE
Net Income $ 0.89
Book Value $ 20.57
AT YEAR END
Assets $ 1,000,885
Loans $ 620,751
Deposits $ 658,404
Stockholders' Equity $ 89,525
Shares Outstanding 4,351,404
FINANCIAL RATIOS
Return on average assets 0.79%
Return on equity 8.75%
Stockholders' equity
to total assets 8.94%
Net interest margin
for the year 3.50%
Non-performing assets
to total assets 0.31%
COMPANY FACTS
Deposit Accounts 94,017
Loan Accounts 25,559
Percent of Total Loan Portfolio
The following pie charts detail how the bank's total gross loan portfolio
continues to become more diversified.
[GRAPHIC OMITTED]
June 30, 1998 June 30, 1999 December 31, 1999
------------- ------------- -----------------
Agriculture 5.2% 5.4% 5.4%
Commercial 14.7% 18.1% 19.6%
Consumer 23.5% 23.3% 23.0%
Construction 2.6% 2.0% 3.0%
Residential Mortgage 54.0% 51.2% 49.0%
<PAGE>
To Our Shareholders
If it seems as though it hasn't been long since you last received an annual
report from WesterFed, there's a good reason for that. It hasn't. In October of
1999, the WesterFed Board changed the Company's fiscal year to coincide with the
calendar year. Therefore, just six months after my first annual report letter to
you, I've drafted my second.
You might be tempted to think there's little to discuss in the way of
accomplishments given the shortened time period. I'm pleased to report, that
couldn't be farther from the truth.
WesterFed reported fourth quarter earnings for 1999 of $2.0 million, or
$0.45 per share (cash earnings of $0.53 per share). Earnings for the six-month
period ended December 31, 1999 were $4.0 million, or $0.89 per share (cash
earnings of $1.05 per share). These figures reflect record per share earnings,
and follow on the heels of the Bank's record per share earnings for the year
($6.9 million, or $1.37 per share) outlined in our previous annual report.
In only six months, our streamlined management team, our renewed focus on
forging relationships with clients, and our ability to improve our efficiency
ratio have helped continue our financial growth.
Consider what your management team has been able to accomplish since June
30, 1999.
One of the primary goals outlined in our 1999 annual report was to improve
our efficiency ratio, the ratio of non-interest expense to net-interest income
and non-interest income, and a leading indicator of a bank's financial health.
At the time, the ratio was 69.1%. In two quarters, we've improved that to 63.9%.
In other words, I'm pleased to report that we've lowered our cost of doing
business by 7.5%. This improved efficiency rating came by way of management
reorganization and greater management accountability.
Credit quality remains favorable at Western Security Bank. As of December
31, 1999, the Company had $3.1 million of non-performing assets (0.31% of total
assets) compared to $4.2 million (0.42% of total assets) just six months
earlier. During the six-month period ended December 31, 1999, our provision for
loan losses was $880,000, which was $370,000 greater than the same period last
year. As of December 31, 1999, the Company's allowance for loan losses to
non-performing assets was 165.4% as compared to 121.1% at June 30, 1999.
In order to enhance the value of our stock, your Board of Directors
approved, and management completed, a 5% repurchase of WesterFed Stock. A second
repurchase of up to 7.5% has been approved for calendar year 2000. This
repurchase is intended to enhance shareholder value in the coming year.
Improving customer service is also a primary goal for your Bank. Toward
this end, we are pleased to announce several accomplishments. Our Western
Security web site is up and running. We reached out to consumers through a new
image campaign and theme. We began offering Compass, a quarterly economic
report, to small businesses across the state. And our Y2K readiness program was
successful. Not a single Y2K related incident was reported in any Western
Security branch.
In the interest of further enhancing Bank efficiency and service, we
announced the consolidation of two Missoula branches, and began constructing a
new branch on Reserve Street in Missoula. In addition, we announced the sale of
six Eastern branches located in Glasgow, Hardin, Malta, Miles City, Plentywood
and Sidney to Stockman Bank of Montana. We expect this transaction to close
during the second quarter of 2000.
That's quite a lot to report in six months. But it's only the beginning.
As the new millennium dawns, the national economy is experiencing a rising
interest rate environment. Given our Bank's interest rate sensitive balance
sheet, this could negatively influence the Bank's profits. We intend to counter
any potential negative impact by continuing our course of conservative
management. It is more important than ever to improve our efficiency ratio by
lowering our cost of doing business. And it is imperative that we continue to
provide new, innovative products, stress the importance of relationship banking,
and attract more small business depositors.
In other words, efficiency, customer loyalty and new deposits will be our
keys to success in a rising interest rate environment.
If we can make progress toward these goals - creating a more efficient
management and network structure, landing more small business clients, and
selling more banking products per customer - my next letter, 12 months from now,
should be a pleasure to write as well.
Sincerely,
/s/ Ralph K. Holliday
Ralph K. Holliday
President and Chief Executive Officer
<PAGE>
WesterFed Financial Corporation and Subsidiaries
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
At December 31, At June 30,
--------------- ---------------------------------------------------------
(Dollars in thousands, except per share data) 1999 1999 1998 1997(1) 1996 1995
---------------- --------- ------------ ---------- ---------- ---------
SELECTED FINANCIAL CONDITION DATA:
<S> <C> <C> <C> <C> <C> <C>
Total assets $1,000,885 $1,007,349 $1,022,136 $955,639 $563,931 $563,285
Loans receivable, net and loans
held for sale 620,751 631,371 657,293 630,277 368,193 313,121
Mortgage-backed securities, net 158,948 151,749 126,433 149,169 104,947 143,825
Investment securities, FHLB stock
and other interest-earning assets 144,745 139,271 155,351 98,885 64,108 82,375
Deposits 658,404 645,549 636,441 630,869 350,212 344,155
Borrowed funds and repurchase
agreements 234,809 251,185 255,186 199,236 125,838 134,704
Stockholders' equity 89,525 91,149 109,700 104,259 78,607 75,146
Book value per common share
outstanding 20.57 20.08 19.64 18.74 17.88 17.09
Tangible book value per common
share outstanding 16.40 15.93 16.01 14.99 17.88 17.09
</TABLE>
<TABLE>
<CAPTION>
Periods Ended: Six Months Ended
December 31, Fiscal Years Ended June 30,
---------------- ---------------------------------------------------------------
1999 1999 1998 1997(1) 1996 1995
---------------- ----------- ------------ ----------- ------------ ---------
SELECTED OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C>
Total interest income $35,606 $70,798 $74,524 $51,260 $42,544 $37,783
Total interest expense 19,385 39,244 42,286 28,407 24,737 20,984
-------- -------- -------- -------- -------- --------
Net interest income 16,221 31,554 32,238 22,853 17,807 16,799
Provision for loan losses (880) (1,300) (840) (400) -- --
Non-interest income 4,127 9,298 8,381 4,685 3,312 2,670
Non-interest expense (13,010) (28,226) (27,759) (20,568) (14,004) (12,868)
-------- -------- -------- -------- -------- --------
Income before income taxes 6,458 11,326 12,020 6,570 7,115 6,601
Income taxes (2,483) (4,403) (4,760) (2,063) (2,556) (2,473)
-------- -------- -------- -------- -------- --------
Net income $3,975 $6,923 $7,260 $4,507 $4,559 $4,128
======== ======== ======== ======== ======== ========
Net income per common share - basic $0.93 $1.43 $1.37 $1.01 $1.08 $ 1.01
======== ======== ======== ======== ======== ========
Net income per common share - diluted $0.89 $1.37 $1.29 $0.96 $1.08 $1.01
======== ======== ======== ======== ======== ========
Dividends per share $0.32 $0.62 $0.54 $0.45 $0.36 $0.30
======== ======== ======== ======== ======== ========
Dividend payout ratio(2) 34.41% 43.36% 39.42% 44.55% 33.33% 29.70%
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Return on assets (ratio of net income
to average total assets) 0.79% 0.70% 0.72% 0.65% 0.79% 0.76%
Return on equity (ratio of net income
to average equity) 8.75 6.93 6.73 5.15 5.90 5.54
Interest rate spread, at end of period 3.10 3.16 2.99 3.38 2.67 2.38
Net interest margin(3) 3.50 3.46 3.46 3.53 3.23 3.23
Ratio of non-interest expense to
average total assets 2.58 2.84 2.74 2.98 2.43 2.47
Non-performing assets to total assets,
at end of period 0.31 0.42 0.49 0.25 0.13 0.10
Total allowance for loan losses to
total non-performing assets 165.36 121.13 97.44 191.01 280.42 350.35
Stockholders' equity to total
assets, at end of period 8.94 9.05 10.73 10.91 13.94 13.34
Ratio of average interest-earning
assets to average
interest-bearing liabilities 103.59 104.69 105.74 110.57 113.58 113.51
Number of offices 34 34 34 36 19 18
<FN>
- -------------
(1) Includes assets and liabilities from the Security Bancorp acquisition and
operations for only four months of fiscal 1997.
(2) Dividends per share divided by net income per share - basic.
(3) Net interest income divided by average interest-bearing assets.
</FN>
</TABLE>
4
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
GENERAL
WesterFed Financial Corporation ("WesterFed" or the "Company") was formed as
part of the conversion of Western 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, 1999 TO DECEMBER 31, 1999
Total assets decreased $6.4 million to $1.001 billion at December 31, 1999 as
compared to $1.007 billion at June 30, 1999. Loans receivable and loans
available-for-sale decreased $10.6 million and other non-interest earning assets
decreased $8.5 million while investment securities, Federal Home Loan Bank stock
and all other interest earning assets increased $5.4 million and mortgage-backed
securities increased $7.2 million. Total deposits increased $12.9 million while
borrowed funds and repurchase agreements decreased $16.4 million and
stockholders' equity decreased $1.6 million.
Loans receivable and loans available-for-sale decreased $10.6 million to $620.8
million at December 31, 1999 from $631.4 million at June 30, 1999. The $10.6
million decrease was the result of principal repayments of $120.6 million and
the sale of loans available for sale of $41.6 million that exceeded new loan
originations of $151.6 million. Included in the $151.6 million in new loan
originations were $31.8 million in consumer loan originations and $37.3 million
in commercial and agriculture loan originations. Loans receivable at December
31, 1999 included $78.8 million of commercial real estate loans, $11.6 million
of agriculture real estate loans and non-real estate commercial and agriculture
loans of $45.4 million and $22.8 million respectively, as compared to $71.2
million, $11.4 million, $40.2 million and $23.2 million respectively, at June
30, 1999. One- to four-family residential loans decreased $16.2 million, or
5.9%, to $259.6 million at December 31, 1999 from $275.8 million at June 30,
1999. 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 by reducing longer term fixed rate mortgage
loans held in portfolio.
Mortgage-backed securities increased $7.2 million to $158.9 million at December
31, 1999 from $151.7 million at June 30, 1999. The $7.2 million increase was
primarily the result of the purchase of $23.0 million of mortgage-backed
securities that
5
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
exceeded principal repayments of $13.8 million and the sale of $1.2 million of
securities. The $23.0 million of purchases were comprised of fifteen-year or
less fixed rate securities to partially offset the decline in the balances of
real estate mortgage loans.
Investment securities, FHLB stock and other interest earning assets increased
$5.4 million to $144.7 million at December 31, 1999 from $139.3 million at June
30, 1999. The $5.4 million increase was primarily the result of the purchase of
$17.8 million of investment securities, an increase of $1.8 million in FHLB
stock and the cash surrender value of life insurance policies and increases in
interest-bearing deposits and due from banks of $900,000, partially offset by
maturities and principal payments of $12.1 million and the sale of $2.1 million
of investment securities available-for-sale.
Deposits increased $12.9 million to $658.4 million at December 31, 1999 from
$645.5 million at June 30, 1999. Certificates of deposit, checking and money
market accounts increased $4.9 million, $7.6 million and $3.1 million
respectively, while savings accounts decreased $2.7 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 the six months ending December 31, 1999 was
$12.1 million.
Borrowed funds and repurchase agreements decreased $16.4 million to $234.8
million at December 31, 1999 from $251.2 million at June 30, 1999. The decrease
in borrowed funds was due to principal repayments of $261.5 million, partially
offset by a net increase in repurchase agreements of $1.0 million and $244.1
million of additional new borrowings. The $244.1 million of additional new
borrowings were comprised of $21.3 million of advances of one year or more to
partially fund new longer term fixed rate loans added to the portfolio and
$222.8 million of borrowings less than one year in maturity which were used to
fund short-term cash requirements.
Stockholders' equity decreased $1.6 million to $89.5 million at December 31,
1999 from $91.1 million at June 30, 1999. This decrease was due to the
repurchase of 219,000 shares of common stock totaling $3.7 million, $1.3 million
for dividends declared during the fiscal year and a decrease of $1.2 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. These decreases was partially offset
by increases in equity resulting from net income for the six month period ending
December 31, 1999 of $4.0 million, $218,000 related to contributions to Employee
Stock Ownership Plan and shares earned and issued under the Recognition and
Retention plan, and the issuance of 35,716 new common shares with a recorded
value of $443,000 related to exercised stock options.
6
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
NET INTEREST INCOME ANALYSIS. The following table presents for the periods
indicated the total dollar amount of interest income from average
interest-earning assets and the resultant yields, as well as the interest
expense on average interest-bearing liabilities, expressed both in dollars and
rates. No tax equivalent adjustments were made. Non-accruing loans have been
included in the table as loans carrying a zero yield.
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
December 31, 1999 December 31, 1998
----------------------------- -------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance(1) Paid Rate(1) Balance(1) Paid Rate(1)
----------- --------- ------- ------------ -------- ---------
(Dollars in Thousands) (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-Earnings Assets:
Loans receivable(2)(3) $624,230 $25,980 8.32% $650,235 $27,670 8.51%
Mortgage-backed securities 161,611 5,270 6.52 116,978 3,920 6.70
Investments 128,731 4,004 6.22 128,496 4,137 6.44
Other interest-earning assets(4) 4,926 172 6.98 13,163 361 5.49
Cash surrender value of life insurance 7,752 180 4.64 6,789 160 4.71
-------- ------- ---- -------- ------- ----
Total interest-earning assets $927,250 $35,606 7.68% $915,661 $36,248 7.92%
======== ======= ==== ======== ======= ====
Interest-Bearing Liabilities:
Certificates of deposit $364,503 $ 9,398 5.16% $377,251 $10,692 5.67%
Savings deposits 89,566 1,097 2.45 91,179 1,223 2.68
Demand and NOW deposits 118,364 401 0.68 112,876 491 0.87
Money market accounts 77,405 1,546 3.99 59,213 1,182 3.99
-------- ------- ---- -------- ------- ----
Total deposits 649,838 12,442 3.83 640,519 13,588 4.24
FHLB advances and other borrowed money 245,249 6,943 5.66 226,623 6,842 6.04
-------- ------- ---- -------- ------- ----
Total interest-bearing liabilities $895,087 $19,385 4.33% $867,142 $20,430 4.71%
======== ======= ==== ======== ======= ====
Net interest income $16,221 $15,818
======= =======
Net interest rate spread 3.35% 3.21%
==== ====
Net interest=earning assets $ 32,163 $ 48,519
======== ========
Net interest margin(5) 3.50% 3.45%
==== ====
Average interest=earning assets to average
interest=bearing liabilities 103.59% 105.60%
====== ======
<FN>
(1) Based on average monthly balances.
(2) Calculated net of deferred loan fees, loan discounts and loans in process.
(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>
7
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended June 30, 1999 Year Ended June 30, 1998 Year Ended June 30, 1997(1)
----------------------------- ----------------------------- ------------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance(2) Paid Rate(2) Balance(2) Paid Rate(2) Balance(2) Paid Rate(2)
-------- ------- ---- -------- ------- ---- -------- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earnings Assets:
Loans receivable(3)(4) $641,001 $53,773 8.39% $662,536 $56,261 8.49% $451,771 $37,923 8.39%
Mortgage-backed securities 126,339 8,033 6.36 140,994 9,676 6.86 116,836 8,185 7.01
Investments 128,920 8,048 6.24 113,412 7,580 6.68 61,241 3,884 6.34
Other interest-earning assets(5) 9,090 606 6.67 8,702 675 7.76 13,732 1,045 7.61
Cash surrender value of life insurance 6,842 338 4.94 6,540 332 5.08 4,187 223 5.33
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-earning assets $912,192 $70,798 7.76% $932,184 $ 74,524 7.99% $647,767 $51,260 7.91%
======== ======= ==== ======== ======= ==== ======== ======= ====
Interest-Bearing Liabilities
Certificates of deposit $374,155 $20,444 5.46% $380,726 $21,824 5.73% $264,588 $14,986 5.66%
Savings deposits 90,586 2,264 2.50 96,966 2,658 2.74 76,829 2,223 2.89
Demand and NOW deposits 112,744 876 0.78 106,392 1,209 1.14 66,203 883 1.33
Money market accounts 64,481 2,503 3.88 52,496 2,112 4.02 31,873 1,146 3.60
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total deposits 641,966 26,087 4.06 636,580 27,803 4.37 439,493 19,238 4.38
FHLB advances and other borrowed money 229,389 13,157 5.74 244,964 14,483 5.91 146,413 9,169 6.26
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-bearing liabilities $871,355 $39,244 4.50% $881,544 $42,286 4.80% $585,906 $28,407 4.85%
======== ======= ==== ======== ======= ==== ======== ======= ====
Net interest income $31,554 $32,238 $22,853
======= ======= =======
Net interest rate spread 3.26% 3.19% 3.06%
==== ==== ====
Net interest=earning assets $ 40,837 $ 50,640 $ 61,861
======== ======== ========
Net interest margin(6) 3.46% 3.46% 3.53%
==== ==== ====
Average interest=earning assets to average
interest=bearing liabilities 104.69% 105.74% 110.57%
====== ====== ======
<FN>
(1) Includes assets and liabilities from the Security Bancorp acquisition and
operations for only four months of fiscal 1997.
(2) based on average monthly balances.
(3) Calculated net of deferred fees, loan discounts and loans in process.
(4) Includes loans held for sale.
(5) Includes primarily short-term liquid assets.
(6) Net interest income divided by average interest-earning assets.
</FN>
</TABLE>
8
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
RATE/VOLUME ANALYSIS
The following table presents the dollar amount of changes in interest income and
interest expense for components of interest-earning assets and interest-bearing
liabilities. It distinguishes between the increase related to higher outstanding
balances and that due to the volatility of interest rates. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (I) changes in volume (i.e., changes in
volume multiplied by old rate), (ii) changes in rate (i.e., changes in rate
multiplied by old volume), (iii) changes in rate-volume (changes in rate
multiplied by the change in volume), and (iv) the net change.
<TABLE>
<CAPTION>
December 31, 1999 vs December 31,1998
---------------------------------------------------
Increase/(Decrease) Due To:
--------------------------- Rate/ Increase
Volume Rate Volume (Decrease)
------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable $(2,213) $(1,216) $ 1,739 $(1,690)
Mortgage-backed securities 2,991 (211) (1,430) 1,350
Investments (60) (208) 135 (133)
Other interest-earning assets (192) (253) 256 (189)
Cash surrender value of life insurance 45 (5) (20) 20
------- ------- ------- -------
Total interest-earning assets $ 571 $(1,893) $ 680 $ (642)
======= ======= ======= =======
Interest-Bearing Liabilities:
Certificates of deposit $ (723) $(1,928) $ 1,357 $(1,294)
Savings deposits (43) (212) 129 (126)
Demand and NOW deposits 48 (217) 79 (90)
Money market accounts 726 2 (364) 364
------- ------- ------- -------
Total Deposits 8 (2,355) 1,201 (1,146)
FHLB advances and other borrowed money 1,125 (852) (172) 101
------- ------- ------- -------
Total interest=bearing liabilities $ 1,133 $(3,207) $ 1,029 $(1,045)
======= ======= ======= =======
Changes to net interest income $ (562) $ 1,314 $ (349) $ 403
======= ======= ======= =======
</TABLE>
9
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, 1999 vs June 30, 1998 June 30, 1998 vs June 30, 1997(1)
--------------------------------------- ---------------------------------------
Increase/(Decrease) Due To: Increase/(Decrease) Due To:
--------------------------- Total --------------------------- Total
Rate/ Increase Rate/ Increase
Volume Rate Volume (Decrease) Volume Rate Volume (Decrease)
------- ------- ----- ------- ------- ----- ----- -------
(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
======= ======= ===== ======= ======= ===== ===== =======
<FN>
(1) Includes assets and liabilities from Security Bancorp acquisition and
operations for only four months of fiscal 1997.
</FN>
</TABLE>
10
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
The following table sets forth the weighted average yields on the Company's
interest-earning assets, the weighted average interest rates on interest-bearing
liabilities and the interest rate spread between the weighted average yields and
rates for the Company at the dates indicated. Non-accruing loans have been
included in the table as loans carrying a zero yield.
At December 31, At June 30,
--------------- ----------------------
1999 1999 1998 1997(1)
--------------- ------- ------ -------
Weighted average yield on:
Loans receivable(2)(3) 8.11% 8.01% 8.34% 8.49%
Mortgage-backed securities 6.58 6.48 6.73 7.27
Investments 6.05 6.09 6.32 6.73
Other interest-earning assets 5.11 5.46 6.15 5.58
Cash surrender value of life insurance 5.07 5.07 5.22 5.11
----- ----- ----- -----
Combined weighted average yield on interest-
earning assets 7.52 7.46 7.78 8.08
----- ----- ----- -----
Weighted average rate paid on:
Certificates of deposit 5.32 5.21 5.77 5.52
Savings deposits 2.47 2.34 2.77 2.80
Demand and NOW deposits 0.65 0.65 0.96 1.15
Money market accounts 4.02 3.69 4.10 3.94
----- ----- ----- -----
Total deposits 3.93 3.83 4.38 4.24
FHLB advances and other borrowed money 5.79 5.49 5.81 6.11
Collateralized mortgage obligations 11.46 11.48 11.48 11.37
----- ----- ----- -----
Combined weighted average rate paid on
interest-bearing liabilities 4.42 4.30 4.79 4.70
----- ----- ----- -----
Interest rate spread 3.10% 3.16% 2.99% 3.38%
===== ===== ===== =====
(1) Includes assets and liabilities from Security Bancorp acquisition and
operations for only four months of fiscal 1997.
(2) Calculated net of deferred loan fees, loan discounts and loans in process.
(3) Does not include interest on loans 90 days or more delinquent.
11
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
The following table summarizes the major components of the Company's net income
for the six months ended December 31, 1999 and for the last three fiscal years
and the changes which occurred between the periods shown:
<TABLE>
<CAPTION>
Six Months Ended December 31, Year Ended June 30,
------------------------------ ---------------------------------------------------
Components of net income: 1999 1998 1999 1998 1997(1)
------------------- --------- ------------------- ------------------- ---------
Amount Change Amount Amount Change Amount Change Amount
--------- -------- --------- --------- -------- --------- -------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 35,606 $ (642) $ 36,248 $ 70,798 $(3,726) $ 74,524 $23,264 $ 51,260
Interest expense 19,385 (1,045) 20,430 39,244 (3,042) 42,286 13,879 28,407
-------- ------- -------- -------- ------- -------- ------- --------
Net interest income 16,221 403 15,818 31,554 (684) 32,238 9,385 22,853
Provision for loan losses (880) (370) (510) (1,300) (460) (840) (440) (400)
Non-interest income 4,127 (577) 4,704 9,298 917 8,381 3,696 4,685
Non-interest expense (13,010) 944 (13,954) (28,226) (467) (27,759) (7,191) (20,568)
-------- ------- -------- -------- ------- -------- ------- --------
Income before income taxes 6,458 400 6,058 11,326 (694) 12,020 5,450 6,570
Income taxes (2,483) 8 (2,475) (4,403) (357) (4,760) 2,697 (2,063)
-------- ------- -------- -------- ------- -------- ------- --------
Net income increase (decrease) $ 3,975 $ 392 $ 3,583 $ 6,923 $ (337) $ 7,260 $ 2,753 $ 4,507
======== ======= ======== ======== ======= ======== ======= ========
<FN>
(1) Includes assets and liabilities from Security Bancorp acquisition and
operations for only four months of fiscal 1997.
</FN>
</TABLE>
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED DECEMBER 31, 1999
AND DECEMBER 31, 1998
GENERAL. Net income increased $392,000 to $4.0 million for the six month period
ended December 31, 1999 as compared to $3.6 million for the same period last
year. The $392,000 increase in net income was comprised primarily of an increase
in net interest income of $403,000 and a $944,000 decrease in non-interest
expense, partially offset by a $370,000 increase in provision for loan losses
and a decrease in non-interest income of $577,000. The interest rate spread
decreased to 3.10% at December 31, 1999 from 3.16% at June 30, 1999. 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 expected in a rising interest rate environment. See
"Quantitative and Qualitative Disclosures About Market Risk."
INTEREST INCOME. Interest income decreased $642,000 to $35.6 million for the six
month period ended December 31, 1999 from $36.2 million for the same period last
year. This decrease resulted from a decrease in the average yield on
interest-earning assets to 7.68% during the six month period ended December 31,
1999 from 7.92% during the same period last year, partially offset by an
increase in the average balance of interest earning assets of $11.5 million to
$927.2 million during the six month period ended December 31, 1999 from $915.7
million during the same period last year.
Interest earned on loans receivable decreased $1.7 million due primarily to a
$26.0 million decrease in the average balance of loans receivable to $624.2
million during the six month period ended December 31, 1999 from $650.2 million
during the same period last year. In addition, the average yield on loans
decreased to 8.32% during the six month period ended December 31, 1999 from
8.51% during the same period last year. The decrease in the yield during the six
month period ended December 31, 1999 from the same period last year is
attributable to a general decline in interest rates during most of calendar year
1999 which resulted in loans being originated at lower rates than the prior
year.
Interest earned on mortgage-backed securities increased $1.4 million due to a
$44.6 million increase in the average balance of mortgage-backed securities
outstanding to $161.6 million during the six month period ended December 31,
1999 from $117.0 million during the same period last year. The average yield on
mortgage-backed securities decreased to 6.52% during the six month period ended
December 31, 1999 from 6.70% during the same period last year as new purchases
were completed at rates lower than the average portfolio rate.
12
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
Interest earned on investment securities and other interest-earning assets
decreased $322,000 due primarily to a $8.0 million decrease in the average
balances to $133.7 million during the six month period ended December 31, 1999
from $141.7 million during the same period last year. The average yield earned
on investment securities and other interest-earning assets decreased to 6.25%
during the six month period ended December 31, 1999 from 6.35% during the same
period last year.
INTEREST EXPENSE. Interest expense decreased $1.0 million to $19.4 million
during the six month period ended December 31, 1999 from $20.4 million during
the same period last year. This decrease resulted from a decrease in the average
rate paid on interest-bearing liabilities to 4.33% during the six month period
ended December 31, 1999 from 4.71% during the same period last year. The average
balance of interest-bearing liabilities increased $28.0 million to $895.1
million during the six month period ended December 31, 1999 from $867.1 million
during the same period last year. Interest expense on deposits decreased $1.1
million primarily due to a decrease in the average rate paid on certificates of
deposit to 5.16% during the six month period ended December 31, 1999 from 5.67%
during the same period last year. The average balance of deposits increased $9.3
million to $649.8 million during the six month period ended December 31, 1999
from $640.5 million during the same period last year while the average rate paid
on deposits decreased to 3.83% during the six month period ended December 31,
1999 from 4.24% during the same period last year. The decrease in cost of funds
was the result of a general decline in interest rates during the majority of
calendar year 1999.
PROVISION FOR LOAN LOSSES. The provision for loan losses increased $370,000 to
$880,000 for the six month period ended December 31, 1999 from $510,000 for the
same period last year. The increased provision for loan losses is primarily
related to an increase in dealer finance and other consumer loans. 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 December 31, 1999, the Company had $3.1 million of non-performing assets
(representing 0.31% of total assets) compared to $4.2 million at June 30, 1999
(representing 0.42% of total assets). At December 31, 1999, the Company had
allowance for loan losses to non-performing assets of 165.4% as compared to
121.1% at June 30, 1999. 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 $880,000 provision for loan losses. Future
additions to the Company's allowance for loan losses and any change in the
related ratio of the allowance for loan losses to non-performing loans are
dependent upon the performance and composition of the Company's loan portfolio
and the amount of loans charged off, 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 decreased $577,000 to $4.1 million
during the six month period ended December 31, 1999 from $4.7 million during the
same period last year. The $577,000 decrease resulted primarily from decreases
in loan origination fees on loans sold and net gain on sale of loans and
securities available-for-sale of $764,000, while service fees increased
$208,000. The increasing interest rate environment that existed during the six
month period ended December 31, 1999 reduced loan refinance activity, resulting
in a decrease in loans sold to $41.6 million during the six month period ended
December 31, 1999 as compared to $66.6 million during the same period last year.
Seasonal fluctuations in loan volume and a decline in loan volume due to
increased interest rates could continue to adversely affect origination fees and
gains on sale of loans available-for-sale.
NON-INTEREST EXPENSE. Non-interest expense decreased $944,000, or 6.8%, to $13.0
million during the six month period ended December 31, 1999 from $14.0 million
during the same period last year. Compensation and employee benefits, equipment
and furnishings expense and other expenses decreased $436,000, $110,000 and
$339,000 respectively while marketing and advertising increased $102,000. The
Company's efficiency ratio, (the ratio of non-interest expense to net interest
income and non-interest income) was 63.94% for the six month period ended
December 31, 1999 as compared to 67.99% for the same period last year, a 6.0%
reduction. The efficiency ratio without intangibles amortization decreased to
60.63% for the six month period ended December 31, 1999 as compared to 64.36%
for the same period last year, a 5.8% reduction.
INCOME TAXES. Income tax expense decreased $8,000 even though pre-tax income
increased $400,000. The Company's effective tax rate decreased slightly to 38.4%
for the six month period ended December 31, 1999 from 38.9% for the fiscal year
ended June 30, 1999.
13
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 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.
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 of $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.
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. 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.
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
14
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
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.
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.
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 securities 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.
15
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
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.
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 $1.1 million to $3.1 million at December
31, 1999 from $4.2 million at June 30, 1999. The $1.1 million decrease was
primarily the result of a $747,000 decrease in consumer non-performing loans.
Non-performing assets as a percentage of total assets decreased to 0.31% at
December 31, 1999 from 0.42% at June 30, 1999. The 0.31% ratio is substantially
less than the national composite for thrifts of 0.65% at September 30, 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
December 31, 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.
16
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
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 and interest-bearing liabilities, other than those which possess a short
term to maturity. All significant interest rate risk management procedures are
performed at the Bank 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 Six Months Ended December 31, 1999 and December 31,
1998 - Provision for Loan Losses." The Company does not own any trading assets.
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 also engages outside consultants to advise the
Asset/Liability Management Committee on asset/liability issues and strategies.
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 other internal
models simulating the effect on the Bank's capital or net interest income 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 real-estate loans and consumer loans for its portfolio with
shorter terms to maturity or terms to interest rate adjustment. The Bank has
also 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. During the six month period ended December 31, 1999 the
Bank sold $41.6 million of primarily 30 year-fixed rate 1-4 family residential
mortgage loans to the secondary market in an attempt to limit its 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.
17
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
At December 31, 1999, the Bank was a party to one $5.0 million notional amount
interest rate exchange agreement with an investment firm. Historically, 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 1999 this cap had the effect of increasing the Bank's cost of
funds. During the six months ended December 31, 1999, the increase in the cost
of funds attributable to these swaps and caps was $11,000. The Bank's interest
rate cap expires in July, 2000.
At December 31, 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 quarterly basis. Currently, the Board of Directors has authorized
management to engage in interest rate swaps and caps with notional principal of
up to $108 million. An increase in this type of activity may result in a
decrease in the Bank's income in the future if interest rates do not rise
significantly. See Note 16 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. There
are six scenarios 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 December 31, 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. Assumptions used in calculating the amounts in this table are
OTS assumptions.
Actual at December 31, 1999 Actual at June 30, 1999
as Measured by OTS as Measured by OTS
---------------------------- ----------------------------
NPV as a % of PV of assets NPV as a % of PV of assets
Change in Market ---------------------------- ----------------------------
Interest Rate Change Change
(Basis Points) NPV Ratio (Basis Points) NPV Ratio (Basis Points)
---------------- ---------- -------------- ------------ --------------
+300 5.41% -277 6.51% -271
+200 6.42% -176 7.55% -167
+100 7.37% -81 8.48% -74
-0- 8.18% -0- 9.22% -0-
-100 8.75% +57 9.71% +49
-200 9.14% +96 10.05% +84
-300 9.43% +125 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 6.42 % NPV ratio,
representing a 176 basis point change from the 8.18% pre-shock NPV ratio,
indicates a risk rating of "minimal" for the Bank at December 31, 1999.
18
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
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 125 basis point increase in NPV in a
declining rate environment and a 277 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 277
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.
In evaluating the Bank's exposure to interest rate risk, certain shortcomings
inherent in the method of analysis presented in the foregoing table must be
considered. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Further, in the event of a change in interest rates, prepayments and
early withdrawal levels would likely deviate significantly from those assumed in
calculating the table. Finally, the ability of many borrowers to service their
debt may decrease in the event of an interest rate increase. As a result, the
actual effect of changing interest rates may differ from that presented in the
foregoing table.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are new deposits and the payment of
principal and interest on loans, mortgage-backed securities and maturing
investments. The holding company is dependent on the payment of principal and
interest on it's investments and dividends from Western Security Bank. 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 operating, investing and financing activities. These activities are
summarized below for the six months ended December 31, 1999 and the fiscal years
ended June 30, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
For the Six
Months Ended For the Year Ended
December 31, June 30,
------------ -----------------------------
1999 1999 1998 1997(1)
------------ ------- ----------- ---------
(In Thousands)
<S> <C> <C> <C> <C>
Net Income $ 3,975 $ 6,923 $ 7,260 $ 4,507
Adjustments to reconcile net income to net
cash provided by operating activities 13,960 32,740 23,475 19,598
-------- -------- -------- --------
Net cash provided by operating activities 17,935 39,663 30,735 24,105
Net cash provided (used) by investing activities (341) 4,606 (51,101) (21,642)
Net cash provided (used) by financing activities (20,397) (44,391) 32,275 1,397
-------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents (2,803) (122) 11,909 3,860
Cash and cash equivalents at beginning of period 28,946 29,068 17,159 13,299
-------- -------- -------- --------
Cash and cash equivalents at end of period $ 26,143 $ 28,946 $ 29,068 $ 17,159
======== ======== ======== ========
<FN>
(1) Includes assets and liabilities from Security Bancorp acquisition and
operations for only four months of fiscal 1997.
</FN>
</TABLE>
19
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
The primary investing activities of the Company are the origination of loans and
the purchase of investment and mortgage-backed securities. During the six months
ended December 31, 1999 and the fiscal years ended June 30, 1999, 1998 and 1997,
the Company's loan originations totaled $151.6 million, $357.9 million, $366.7
million and $226.8 million, respectively.
Purchases of mortgage-backed securities totaled $23.0 million, $58.5 million,
$7.0 million and $98.4 million for the six months ended December 31, 1999 and
the fiscal years ended June 30, 1999, 1998 and 1997, respectively. Purchases of
investment securities totaled $17.8 million, $146.1 million, $148.8 million and
$109.7 million for the six months ended December 31, 1999 and 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 six months ended December 31, 1999 and 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 $191.4 million, $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 increases in
deposits into savings accounts and additional borrowings. The major uses of cash
flows from financing activities are withdrawals from deposit 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 and $20.4 million during the six months ended December 31,
1999.
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 15.99 % at December 31, 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 December 31, 1999, the Bank's regulatory liquid assets totaled $117.5
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 and overnight investments. 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
December 31, 1999, the Bank had outstanding borrowings of $234.8 million, which
included $226.8 million of FHLB advances, $7.7 million of repurchase agreements
and $309,000 of collateralized mortgage obligations and other borrowed money.
At December 31, 1999, the Bank had outstanding commitments to originate loans
of $9.0 million, of which $2.4 million was at fixed interest rates. These loans
are to be secured by properties located in the Bank's primary market areas. The
Bank anticipates that it will have sufficient funds available to meet its
current loan commitments. Certificates of deposit scheduled to mature in less
than one year from December 31, 1999 totaled $292.7 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.
20
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
- --------------------------------------------------------------------------------
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, whose payments are subject to regulations and the Bank's continued
compliance with all regulatory capital requirements. See Note 3 of the Notes to
Consolidated Financial Statements for information regarding limitations of the
Bank's ability to pay dividends to the Company.
FORWARD LOOKING STATEMENTS
When used in this annual report or other public shareholder communications, or
in oral statements made with the approval of an authorized executive officer,
the words or phrases "will likely result," "are expected to," "will continue,"
"is anticipated," "estimate," "project," "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 forward-looking statements, which
speak only as of the date made, and to advise readers that various factors
including regional and national economic conditions, changes in levels of market
interest rates, credit risks of lending activities, competitive and regulatory
factors could affect the Bank'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
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
21
<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 December 31, 1999 and June 30,
1999, and the related consolidated statements of income, stockholders' equity
and comprehensive income, and cash flows for the six months ended December 31,
1999 and for each of the years in the three-year period ended June 30, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of WesterFed Financial
Corporation and subsidiaries as of December 31, 1999 and June 30, 1999, and the
results of their operations and their cash flows for the six months ended
December 31, 1999 and for each of the years in the three-year period ended June
30, 1999 in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Billings, Montana
March 10, 2000
22
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
(Dollars in thousands, except share and per share data)
December 31, June 30,
1999 1999
------------ -----------
Assets
Cash and due from banks................................$ 20,233 $ 25,867
Interest-bearing bank deposits......................... 5,910 3,079
---------- ----------
Cash and cash equivalents..................... 26,143 28,946
Interest-bearing deposits.............................. 100 1,985
Investment securities available-for-sale............... 106,212 103,441
Investment securities, at amortized cost
(estimated fair value of $9,195 at
December 31, 1999 and $9,255 at June 30, 1999).... 9,205 9,235
Mortgage-backed securities available-for-sale.......... 81,276 68,029
Mortgage-backed securities, at amortized cost
(estimated fair value of $77,926 at
December 31, 1999 and $85,252 at June 30, 1999)... 77,672 83,720
Loans available-for-sale............................... 4,470 3,740
Loans receivable, net.................................. 616,281 627,631
Interest receivable.................................... 7,492 7,635
Stock in Federal Home Loan Bank of Seattle, at cost.... 15,154 14,615
Premises and equipment, net............................ 27,477 28,269
Core deposit intangible................................ 3,401 3,741
Goodwill .............................................. 14,763 15,096
Cash surrender value of life insurance policies........ 8,164 6,916
Other assets........................................... 3,075 4,350
---------- ----------
$1,000,885 $1,007,349
========== ==========
Liabilities and Stockholders' Equity
Deposits...............................................$ 658,404 $ 645,549
Repurchase agreements.................................. 7,731 6,702
Borrowed funds......................................... 227,078 244,483
Advances from borrowers for taxes and insurance........ 3,296 3,302
Income taxes - current and deferred.................... 597 1,552
Accrued interest payable............................... 6,476 6,156
Accrued expenses and other liabilities................. 7,778 8,456
---------- ----------
Total liabilities............................. 911,360 916,200
---------- ----------
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000
shares authorized; none outstanding............ - -
Common stock, $.01 par value, 10,000,000
shares authorized; 5,904,661 shares issued,
4,351,404 outstanding at December 31, 1999;
5,872,807 shares issued, 4,538,557
outstanding at June 30, 1999.................. 56 56
Paid-in capital................................... 70,040 69,572
Common stock acquired by ESOP/RRP................. (2,090) (2,216)
Treasury stock, at cost; 1,553,257
at December 31, 1999 and
1,334,250 at June 30, 1999.................... (28,974) (25,319)
Accumulated other comprehensive loss.............. (2,930) (1,717)
Retained earnings................................. 53,423 50,773
---------- ----------
Total stockholders' equity.................... 89,525 91,149
---------- ----------
Commitments and contingencies
$1,000,885 $1,007,349
========== ==========
Book value per common share outstanding................$ 20.57 $ 20.08
========== ==========
See accompanying notes to consolidated financial statements.
23
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Consolidated Statements of Income
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Six Months
Ended Year Ended June 30,
December 31,
------------ -----------------------------
31, 1999 1999 1998 1997
------------ --------- --------- --------
<S> <C> <C> <C> <C>
Interest income:
Loans receivable.......................... $25,980 $53,773 $56,261 $37,923
Mortgage-backed securities................ 5,270 8,033 9,676 8,185
Investment securities..................... 4,004 8,048 7,580 3,884
Interest-bearing deposits................. 172 606 675 1,045
Other..................................... 180 338 332 223
------- ------- ------- -------
Total interest income............ 35,606 70,798 74,524 51,260
------- ------- ------- -------
Interest expense:
NOW and money market demand............... 1,947 3,379 3,321 2,029
Savings ................................. 1,097 2,264 2,658 2,223
Certificates of deposit................... 9,398 20,444 21,824 14,986
------- ------- ------- -------
12,442 26,087 27,803 19,238
Borrowed funds and repurchase agreements.. 6,943 13,157 14,483 9,169
------- ------- ------- -------
Total interest expense........... 19,385 39,244 42,286 28,407
------- ------- ------- -------
Net interest income................... 16,221 31,554 32,238 22,853
Provision for loan losses...................... 880 1,300 840 400
------- ------- ------- -------
Net interest income after provision
for loan losses.............. 15,341 30,254 31,398 22,453
------- ------- ------- -------
Non-interest income:
Loan origination fees on loans sold....... 957 2,633 2,268 667
Service fees.............................. 2,600 4,471 4,486 3,034
Net gain on sale of loans and securities
available-for-sale.................... 290 1,149 1,053 678
Other..................................... 280 1,045 574 306
------- ------- ------- -------
Total non-interest income........ 4,127 9,298 8,381 4,685
------- ------- ------- -------
Non-interest expense:
Compensation and employee benefits........ 6,156 13,695 13,149 9,342
Net occupancy expense of premises......... 943 2,035 2,153 1,373
Equipment and furnishings................. 985 2,313 1,846 1,009
Data processing........................... 820 1,627 1,644 962
Deposit insurance premium................. 170 344 358 517
SAIF assessment........................... - - - 2,297
Intangibles amortization.................. 673 1,443 1,391 532
Marketing and advertising................. 475 616 789 571
Other..................................... 2,788 6,153 6,429 3,965
------- ------- ------- -------
Total non-interest expense....... 13,010 28,226 27,759 20,568
------- ------- ------- -------
Income before income taxes....... 6,458 11,326 12,020 6,570
Income taxes................................... 2,483 4,403 4,760 2,063
------- ------- ------- -------
Net income....................... $ 3,975 $ 6,923 $ 7,260 $ 4,507
======= ======= ======= =======
Net income per common share:
Basic..................................... $ 0.93 $ 1.43 $ 1.37 $ 1.01
======= ======= ======= =======
Diluted................................... $ 0.89 $ 1.37 $ 1.29 $ .96
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity and Comprehensive Income
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Accumulated
other
Common Paid-in ESOP/ Treasury comprehensive 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 for the year ended June 30, 1997 - - - - - 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 $104,259
Comprehensive income:
Net income for the year ended
June 30, 1998....................... - - - - - 7,260 7,260
Unrealized gain on securities
available-for-sale, net
of reclassification adjustment...... - - - - 58 - 58
--------
Total comprehensive income 7,318
Purchase of treasury stock, at cost -
17,500 shares........................... - - - (379) - - (379)
ESOP shares committed to be released........ - 425 227 - - - 652
Amortization of RRP......................... - - 188 - - - 188
Shares forfeited by RRP participants
(75 shares) - - 1 (1) - - -
Common stock options exercised (37,978 shares) - 557 - - - - 557
Cash dividends declared ($.54 per share).... - - - - - (2,895) (2,895)
------- ------- ------- ------- ------ ------- --------
Balance at June 30, 1998.................... 56 68,923 (2,520) (3,461) 23 46,679 109,700
</TABLE>
(Continued)
25
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
and Comprehensive Income, Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Accumulated
other
Common Paid-in ESOP/ Treasury comprehensive Retained
stock capital RRP Stock income (loss) earnings Total
-------- ------- ------- -------- -------------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1998.................... $ 56 $68,923 $(2,520) $ (3,461) $ 23 $46,679 $109,700
Comprehensive income:
Net income for the year ended June 30,
1999................................... - - - - - 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
Comprehensive income:
Net income for the six months
ended December 31, 1999................ - - - - - 3,975 3,975
Unrealized loss on securities
available-for-sale, net
of reclassification adjustment..... - - - - (1,213) - (1,213)
--------
Total comprehensive income 2,762
Purchase of 219,006 shares of treasury
stock, at cost......................... - - - (3,655) - - (3,655)
ESOP shares committed to be released........ - 92 113 - - - 205
Amortization of RRP......................... - - 13 - - - 13
Common stock options exercised (35,716 shares) - 443 - - - - 443
Security Bancorp shares not exchanged
(3,862 shares).................... - (67) - - - - (67)
Cash dividends declared ($0.315 per share).. - - - - - (1,325) (1,325)
------- ------- ------- ------- ------ ------- --------
Balance at December 31, 1999................ $ 56 70,040 (2,090) (28,974) (2,930) 53,423 89,525
======= ======= ======= ======= ====== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months
Ended Year Ended June 30,
December 31, ----------------------------
1999 1999 1998 1997
------------ --------- --------- --------
<S> <C> <C> <C> <C>
Net cash provided by operating activities...... $ 17,935 39,663 30,735 24,105
--------- -------- -------- --------
Cash flows from investing activities:
Decrease (increase) in interest-bearing
deposits.............................. 1,885 (1,885) 1,900 1,000
Purchases of:
FHLB stock............................ - - (1,129) -
Investment securities................. - - (5,483) (9,956)
Investment securities available-for-sale (17,844) (146,138) (143,279) (79,804)
Mortgage-backed securities............ - - - (5,950)
Mortgage-backed securities
available-for-sale............... (23,020) (58,499) (6,990) (983)
Proceeds from maturities:
Investment securities................. 38 7,636 16,316 9,351
Investment securities available-for-sale 11,600 127,651 70,545 61,289
Proceeds from sales of:
Investment securities available-for-sale 2,107 21,961 16,065 5,192
Mortgage-backed securities
available-for-sale............... 1,207 - 3,222 31,937
Real estate owned..................... 321 204 - -
Principal payments from:
Investment securities available-for-sale 444 748 437 385
Mortgage-backed securities............ 6,151 18,782 15,661 8,897
Mortgage-backed securities
available-for-sale............... 7,609 12,981 10,955 14,113
Decrease (increase) in loans receivable, net 10,532 21,557 (24,516) (43,911)
Proceeds from sales of premises and
equipment............................. 33 611 1,162 -
Purchases of premises and equipment....... (317) (1,003) (5,682) (2,426)
Purchase of life insurance policies....... (1,087) - (285) -
Acquisition of Security Bancorp, net of cash
and net cash equivalents acquired
of $16,013............................ - - - (10,776)
--------- -------- -------- --------
Net cash provided by (used in)
investing activities......... (341) 4,606 (51,101) (21,642)
--------- -------- -------- --------
Cash flows from financing activities:
Net change in deposits.................... 755 (15,212) (21,366) (25,093)
Net change in repurchase agreements....... 1,029 469 (1,553) 974
Proceeds from borrowings.................. 244,100 319,560 344,165 136,090
Payments on borrowings.................... (261,527) (324,078) (286,719) (108,606)
Net change in advances from borrowers for
taxes and insurance................... (6) (750) 299 (295)
Dividends paid to stockholders............ (1,536) (2,926) (2,729) (1,867)
Proceeds from exercise of options and
stock issuances....................... 443 404 557 194
Payments to acquire treasury stock........ (3,655) (21,858) (379) -
--------- -------- -------- --------
Net cash provided by (used in)
financing activities......... (20,397) (44,391) 32,275 1,397
--------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents (2,803) (122) 11,909 3,860
Cash and cash equivalents at beginning of period 28,946 29,068 17,159 13,299
--------- -------- -------- --------
Cash and cash equivalents at end of period..... $ 26,143 28,946 29,068 17,159
========= ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except share and 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 communities located in
western and central 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 and Monte Mac I, Inc., 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.
Segment Reporting
The Company currently operates in one significant business segment - community
banking. Management evaluates the Company's performance and allocates resources
to this segment based on consolidated performance measurements consistent with
those of the consolidated financial statements.
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 December 31, 1999, the Company was required to have aggregate reserves with
the Federal Reserve Bank of approximately $8,634.
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. Declines in the fair value of held-to-maturity and available-for-sale
securities below their cost that are deemed to be other than temporary are
reflected in earnings as realized losses. All securities are adjusted for
amortization of premiums and accretion of discounts using the level-yield method
over the estimated lives of the securities.
28
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except share and per share data)
Management determines the appropriate classification of investment and
mortgage-backed securities at the purchase date.
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. The
FHLB provides a source of borrowed funds for the Company which are secured, in
part, 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.
Loan fees and certain direct loan origination costs are deferred, and the net
fee or cost is recognized in interest income using the level-yield method over
the contractual life of the individual loans, adjusted for actual prepayments.
Amortization of deferred loan origination fees are suspended during periods in
which the related loan is on 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, resulting from the difference between
sales proceeds and the underlying carrying value, are recorded using the
specific identification method. A sale is recognized when control over the
underlying loan is surrendered and exchanged for consideration.
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.
Servicing assets are evaluated for impairment based upon the fair value of the
rights as compared to amortized cost. Impairment is determined by stratifying
rights by predominant characteristics, such as interest rates and terms. Fair
value is determined using prices for similar assets with similar
characteristics, when available, or based upon discounted cash flows using
market-based assumptions. Impairment is recognized through a valuation allowance
for an individual stratum, to the extent that fair value is less than the
capitalized amount for the stratum.
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.
29
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except share and per share data)
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.
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 $168 and
$370 of real estate and other personal property acquired through foreclosure at
December 31, 1999 and June 30, 1999, 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 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.
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 as of December 31, 1999 and June 30, 1999 was $1,832
and $1,499, 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 as of
December 31, 1999 and June 30, 1999 was $2,207 and $1,867, respectively.
Long-Lived Assets
Long-lived tangible and intangible assets including goodwill 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 undiscounted expected future cash flows is less
than the carrying amount of the asset. The amount of the impairment loss, if
any, is based on the asset's fair value which may be estimated by discounting
the expected future cash flows.
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.
30
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except share and per share data)
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.
Comprehensive Income
Comprehensive income 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 other
comprehensive income is unrealized gains and losses on available-for-sale
securities.
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 June 30, 1999, 1998 and 1997
financial statements to conform with the December 31, 1999 presentation.
(2) CHANGE IN FISCAL YEAR
Effective December 31, 1999, WesterFed changed its reporting period from a
fiscal year ended June 30 to a calendar year end. Accordingly, results of
operations for the transition period ended December 31, 1999 cover a six-month
period. The following statements of income present financial data for the six
months ended December 31, 1999 and the comparable six month period of the prior
year. These statements are for comparative purposes only.
Six Months Ended
December 31,
--------------------
1999 1998
--------- ----------
(Unaudited)
Interest income............................................ $ 35,606 36,248
Interest expense........................................... 19,385 20,430
-------- --------
Net interest income................................... 16,221 15,818
Provision for loan losses.................................. (880) (510)
-------- --------
Net interest income after provision for loan losses... 15,341 15,308
31
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except share and per share data)
Six Months Ended
December 31,
--------------------
1999 1998
--------- ----------
(Unaudited)
Noninterest income......................................... $ 4,127 4,704
Noninterest expense........................................ (13,010) (13,954)
-------- --------
Income before income tax expense...................... 6,458 6,058
Income tax expense......................................... (2,483) (2,475)
-------- --------
Net income............................................ $ 3,975 3,583
======== ========
Net income per common share:
Basic................................................. $ 0.93 0.67
======== ========
Diluted............................................... $ 0.89 0.64
======== ========
(3) 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" (PCA) 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. At December
31, 1999 and June 30, 1999, the most recent notification from the OTS
categorized the Bank as well capitalized for PCA purposes.
32
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except share and per share data)
The Bank's compliance with capital requirements follows:
<TABLE>
<CAPTION>
Minimum to Minimum
be adequately to be well
capitalized under capitalized under
prompt corrective prompt corrective
Actual action provision action provision
------------------- ------------------ -----------------
Amount Ratio Amount Ratio Amount Ratio
--------- ------- --------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total capital (to risk-weighted assets).... $74,336 12.09% $49,179 8.00% $61,473 10.00%
Core (Tier 1) capital (to risk-weighted
assets)................................ 69,142 11.25 24,589 4.00 36,884 6.00
Core (Tier 1) capital (to adjusted
assets)................................ 69,142 7.06 39,177 4.00 48,971 5.00
Tangible capital (to tangible assets) 69,142 7.06 14,691 1.50 14,691 1.50
======= ====== ======= ===== ======= =====
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
======= ====== ======= ===== ======= =====
</TABLE>
The following is a reconciliation of total stockholders' equity as shown on the
consolidated balance sheet and tangible, core and risk-based regulatory capital
of the Bank at December 31, 1999 and June 30, 1999:
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
------------------ ---------------
<S> <C> <C>
Total stockholders' equity...................................................... $ 89,525 91,149
Less: Nonqualifying equity of WesterFed and nonqualifying subsidiaries..... (4,622) (2,160)
Goodwill and other intangibles....................................... (18,164) (18,837)
Nonqualifying purchased mortgage loan servicing...................... (527) (602)
Unrealized losses on certain securities available-for-sale........... 2,930 1,725
----------- --------
Tangible and Core capital....................................................... 69,142 71,275
Add:Allowance for loan losses.............................................. 5,161 5,079
Unrealized gain on certain available-for-sale equity securities...... 33 30
----------- --------
Risk-based capital.............................................................. $ 74,336 76,384
=========== ========
</TABLE>
33
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
(4) INVESTMENT SECURITIES
The amortized cost and estimated fair values of investment securities follow:
<TABLE>
<CAPTION>
December 31, 1999
-----------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------------- -------------- --------------- ------------
<S> <C> <C> <C> <C>
Investment securities held-to-maturity:
Corporate obligations................................ $ 6,991 7 (17) 6,981
Other investments.................................... 2,214 - - 2,214
----------- ----- ------ -------
Total investment securities held-to-maturity.... $ 9,205 7 (17) 9,195
=========== ===== ====== =======
Investment securities available-for-sale:
Federal agency obligations........................... $ 87,331 - (2,164) 85,167
Corporate obligations................................ 18,432 6 (378) 18,060
Other................................................ 2,893 92 - 2,985
----------- ----- ------ -------
Total investment securities available-for-sale.. $ 108,656 98 (2,542) 106,212
=========== ===== ====== =======
</TABLE>
<TABLE>
<CAPTION>
June 30, 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>
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
December 31, 1999, by contractual maturity, are shown below:
Fair
Cost value
------------ ----------
Investment securities held-to-maturity
Due in:
Less than one year.......................... $ 2,997 3,004
One to five years........................... 4,232 4,215
Five to ten years........................... 330 330
After ten years............................. 1,646 1,646
----------- --------
$ 9,205 9,195
=========== ========
34
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Fair
Cost value
------------ ----------
Investment securities available-for-sale
Due in:
Less than one year......................... $ 5,564 5,534
One to five years.......................... 95,770 93,460
Five to ten years.......................... 2,649 2,618
After ten years............................ 4,580 4,434
Other...................................... 93 166
----------- ---------
$ 108,656 106,212
=========== =========
Gross proceeds from sales of investment securities available-for-sale for the
six months ended December 31, 1999 and for the years ended June 30, 1999, 1998
and 1997 were $2,107, $21,961, $16,065 and $5,192, respectively. These sales
resulted in gross gains of $8, $89, $68 and $18 for the six months ended
December 31, 1999 and for the years ended June 30, 1999, 1998 and 1997,
respectively, and gross losses of $0, $0, $0 and $34 for the six months ended
December 31, 1999 and for the years ended June 30, 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.
(5) MORTGAGE-BACKED SECURITIES
A summary of mortgage-backed securities follows:
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------------- ------------- --------------- ------------
<S> <C> <C> <C> <C>
Mortgage-backed securities held-to-maturity:
Collateralized mortgage obligations - federal agency.. $ 42,957 706 (26) 43,637
FHLMC ............................................. 23,101 11 (403) 22,709
GNMA ................................................. 9,765 21 (30) 9,756
Other................................................. 1,849 - (25) 1,824
----------- ------- ------- ----------
Total mortgage-backed securities
held-to-maturity............................. $ 77,672 738 (484) 77,926
=========== ======= ======= ==========
Mortgage-backed securities available-for-sale:
Collateralized mortgage obligations - federal agency.. $ 20,806 13 (940) 19,879
FHLMC ............................................. 13,759 188 (415) 13,532
GNMA ................................................. 24,249 2 (495) 23,756
FNMA ................................................. 20,005 26 (644) 19,387
Other................................................. 4,744 - (22) 4,722
----------- ------- ------- ----------
Total mortgage-backed securities
available-for-sale........................... $ 83,563 229 (2,516) 81,276
=========== ======= ======= ==========
</TABLE>
35
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
June 30, 1999
----------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------- -------------- --------------- ------------
<S> <C> <C> <C> <C>
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
Other................................................. 2,067 218 (28) 2,257
----------- ------- ------- -------
Total mortgage-backed securities
held-to-maturity............................. $ 83,720 1,600 (68) 85,252
=========== ======= ======= =======
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
=========== ======= ======= =======
</TABLE>
Gross proceeds from sales of mortgage-backed securities available-for-sale for
the six months ended December 31, 1999 and for the years ended June 30, 1999,
1998 and 1997 were $1,207, $0, $3,222 and $31,937, resulting in gross gains of
$5, $0, $40 and $76 and gross losses of $0, $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 approximately 16 years at December 31, 1999.
Mortgaged backed securities with amortized cost of $38,621 and $31,674 at
December 31, 1999 and June 30, 1999, respectively, were pledged to secure public
deposits and securities sold under repurchase agreements. The approximate market
value of securities pledged at December 31, 1999 and June 30, 1999 was $38,597
and $31,949, respectively.
Mortgage-backed securities with a recorded value of approximately $849 and
$1,039 have been pledged to secure collateralized mortgage obligations at
December 31, 1999 and June 30, 1999, respectively.
36
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
(6) LOANS RECEIVABLE
A summary of loans receivable follows:
December 31, June 30,
1999 1999
--------------- -----------
Loans secured by real estate:
1-4 residential units.......................... $ 259,570 275,792
5 or more residential units.................... 35,563 41,619
Construction................................... 18,775 12,542
Commercial..................................... 78,833 71,221
Agriculture.................................... 11,625 11,421
Other nonresidential........................... 8,348 4,445
FHA insured or VA guaranteed................... 6,781 10,122
----------- ---------
Total real estate loans ................... 419,495 427,162
Less:
Net deferred loan origination fees............. (1,145) (1,144)
Undisbursed loan funds......................... (5,240) (3,611)
Purchased discounts............................ (852) (954)
Allowance for loan losses...................... (2,353) (2,219)
----------- ---------
Net real estate loans...................... 409,905 419,234
Other loans:
Commercial (Non real estate)................... 45,361 40,237
Agriculture (Non real estate).................. 22,825 23,193
Loans to depositors, secured by deposits....... 1,387 1,745
Indirect consumer loans........................ 54,418 66,406
Other consumer loans - real estate secured..... 36,153 39,031
Other consumer loans........................... 53,510 44,385
Allowance for loan losses...................... (2,808) (2,860)
----------- ---------
Net other loans............................ 210,846 212,137
----------- ---------
Net loans........................................... 620,751 631,371
Less loans available-for-sale....................... (4,470) (3,740)
----------- ---------
Loans receivable, net............................... $ 616,281 627,631
=========== =========
A summary of nonperforming loans follows:
<TABLE>
<CAPTION>
June 30,
December 31, --------------------
1999 1999 1998 1997
----------- ------- ------- ----
<S> <C> <C> <C> <C>
Nonaccrual loans..................................... $2,893 3,049 3,989 1,517
Loans 90 days or more delinquent and still accruing.. 60 775 626 836
------ ----- ----- -----
Total nonperforming loans....................... $2,953 3,824 4,615 2,353
====== ===== ===== =====
Contractual interest due............................. $ 193 223 271 71
====== ===== ===== =====
</TABLE>
37
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Interest income recognized on nonaccrual loans during the six months ended
December 31, 1999 and for the years ended June 30, 1999, 1998 and 1997 was
insignificant. At December 31, 1999, there were no commitments to lend
additional funds to borrowers whose loans are classified as nonperforming.
Impaired loans at December 31, 1999 and June 30, 1999 are $2,385 and $1,837,
respectively, of which no impairment allowance was deemed necessary. The average
recorded investment in impaired loans for the six months ended December 31, 1999
and for the years ended June 30, 1999, 1998 and 1997 was approximately $2,111,
$2,161, $1,715 and $483, respectively. Interest income recognized on impaired
loans for the six months ended December 31, 1999 and for the years ended June
30, 1999, 1998 and 1997 was not significant.
An analysis of the allowance for loan losses follows:
Six Months
Ended Year Ended June 30,
December 31, --------------------------
1999 1999 1998 1997
------------ -------- -------- --------
Balance at beginning of period... $ 5,079 4,907 4,651 2,005
Reserves acquired................ - - - 2,481
Provision charged to operations.. 880 1,300 840 400
Charge-offs...................... (986) (1,228) (637) (253)
Recoveries....................... 188 100 53 18
---------- ------- ------ ------
Balance at end of period......... $ 5,161 5,079 4,907 4,651
========== ======= ====== ======
Mortgage loans serviced for others are not included in the accompanying
consolidated financial statements. The unpaid balances of these loans were
approximately $219,800, $223,400 and $260,300 at December 31, 1999 and June 30,
1999 and 1998, respectively.
Mortgage servicing rights are included in other assets and an analysis of
activity follows:
Six Months
Ended Year Ended June 30,
December 31, --------------------------
1999 1999 1998 1997
------------- -------- -------- --------
Balance at beginning of period.... $ 602 1,062 1,239 132
Additions......................... 15 23 37 1,221
Amortization...................... (90) (213) (214) (114)
Provision for impairment.......... - (270) - -
------- ------- ------ ------
Balance at end of period.......... $ 527 602 1,062 1,239
======= ======= ====== ======
At December 31, 1999, carrying value approximates fair value.
38
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
(7) INTEREST RECEIVABLE
A summary of interest receivable follows:
December 31, June 30,
1999 1999
--------------- ------------
Loans.............................. $ 4,445 4,736
Mortgage-backed securities......... 884 795
Investment securities.............. 2,160 2,096
Interest-bearing deposits.......... 3 8
---------- -------
$ 7,492 7,635
========== =======
(8) PREMISES AND EQUIPMENT
Premises and equipment is summarized as follows:
December 31, June 30,
1999 1999
--------------- ---------
Land.............................................. $ 5,822 5,822
Office buildings and leasehold improvements....... 26,847 26,609
Furniture, fixtures and equipment................. 10,814 10,887
---------- ---------
43,483 43,318
Less accumulated depreciation and amortization.... (16,006) (15,049)
---------- ---------
$ 27,477 28,269
========== =========
(9) DEPOSITS
Deposits are summarized as follows:
December 31, June 30,
1999 1999
------------- ----------
Certificates of deposit.............. $ 371,486 366,569
Savings accounts..................... 87,206 89,975
Money market accounts................ 78,482 75,398
NOW accounts ....................... 82,506 77,899
---------- ---------
Total interest-bearing.......... 619,680 609,841
Noninterest-bearing demand........... 38,724 35,708
---------- ---------
$ 658,404 645,549
========== =========
39
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Certificates of deposit at December 31, 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> <C>
2.00% to 3.99%............................ $ 3,361 41 33 7 1 - 3,443
4.00% to 4.99%............................ 84,207 11,447 1,798 181 260 - 97,893
5.00% to 5.99%............................ 114,612 33,544 6,127 2,324 1,962 39 158,608
6.00% to 6.99%............................ 42,687 7,122 4,713 1,358 30 - 55,910
7.00% to 8.99%............................ 2,286 - 7 - - - 2,293
---------- ------- ------- ------ ------- ------ ---------
247,153 52,154 12,678 3,870 2,253 39 318,147
Jumbo ($100,000 or more).................. 45,560 5,380 1,188 1,096 115 - 53,339
---------- ------- ------- ------ ------- ------ ---------
Total certificates of deposit........ $ 292,713 57,534 13,866 4,966 2,368 39 371,486
========== ======= ======= ====== ======= ====== =========
</TABLE>
(10) 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 six months ended
December 31, 1999 and for the year ended June 30, 1999, securities sold under
agreements to repurchase averaged approximately $7,995 and $6,568, respectively.
The maximum outstanding at any month end during the six months ended December
31, 1999 and for the year ended June 30, 1999 was approximately $9,568 and
$7,211, respectively. Interest rates at December 31, 1999 and June 30, 1999 were
4.92% and 4.22%, respectively.
(11) BORROWED FUNDS
Advances from the FHLB and other borrowings are summarized as follows:
December 31, June 30,
1999 1999
-------------- -----------
Advances from FHLB........................ $ 226,769 244,048
Collateralized mortgage obligations....... 123 242
8.5% contract payable..................... 186 193
------------ --------
$ 227,078 244,483
============ ========
Advances from FHLB bear interest at rates from 4.62% to 8.11% (weighted average
rate of 5.83% at December 31, 1999). Principal requirements are presented at the
earlier of call or maturity date as follows:
Years ending December 31,
-----------------------------
2000................................ $ 138,410
2001................................ 25,334
2002................................ 39,448
2003................................ 6,324
2004................................ 6,074
Thereafter.......................... 11,179
---------
$ 226,769
=========
40
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Advances from the FHLB are secured by pledges of FHLB stock of $15,154 and
$14,615 at December 31, 1999 and June 30, 1999, 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 $101,715. There were no amounts outstanding under the
program as of December 31, 1999 and June 30, 1999.
(12) OTHER COMPREHENSIVE INCOME
A summary of the reclassification amounts and related tax effects for other
comprehensive income follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended June 30,
December 31, -------------------------
1999 1999 1998 1997
----------------- -------- -------- -------
<S> <C> <C> <C> <C>
Disclosure of reclassification amount:
Unrealized and realized holding
gains (losses) arising during the
period, net of income tax expense
(benefit) of $(742), $(1,032),
$73 and $133 for the six months ended
December 31, 1999 and the years ended
June 30, 1999, 1998 and 1997, respectively..... $ (1,205) (1,685) 118 216
Less reclassification adjustment for
gains included in net income, net
of income tax of $5, $36, $37 and
$16 for the six months ended December
31, 1999 and the years ended
June 30, 1999, 1998 and 1997, respectively.... (8) (55) (60) (25)
-------- ------- ------ ------
Net unrealized gain (loss) on
available-for-sale securities .................... $ (1,213) (1,740) 58 191
======== ======= ====== ======
</TABLE>
(13) INCOME TAXES
A summary of the provision for income taxes follows:
Six Months
Ended Year Ended June 30,
December 31, -------------------------------
1999 1999 1998 1997
-------------- ---------- ---------- ---------
Federal:
Current............... $ 2,034 3,469 3,582 2,095
Deferred.............. 2 141 315 (408)
---------- -------- ------- -------
2,036 3,610 3,897 1,687
---------- -------- ------- -------
State:
Current............... 426 762 753 440
Deferred.............. 21 31 110 (64)
---------- -------- ------- -------
447 793 863 376
---------- -------- ------- -------
$ 2,483 4,403 4,760 2,063
========== ======== ======= =======
41
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
The effective tax rates for the six months ended December 31, 1999 and for the
years ended June 30, 1999, 1998 and 1997 are 38.4%, 38.9%, 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 of 34%
follows:
<TABLE>
<CAPTION>
Six Months
Ended Year Ended June 30,
December 31, ---------------------------
1999 1999 1998 1997
-------------- --------- --------- -------
<S> <C> <C> <C> <C>
Computed "expected" Federal tax expense.............. $ 2,196 3,851 4,086 2,234
Earnings and payout on life insurance policies....... (56) (147) (99) (53)
State income taxes, net of Federal income tax benefit 301 523 567 248
Reversal of deferred taxes - cash surrender value
increases......................................... - - - (397)
Goodwill amortization................................ 113 226 215 68
Low income housing credit............................ (75) (75) (77) (74)
Other ............................................ 4 25 68 37
---------- ------ ------ ------
$ 2,483 4,403 4,760 2,063
========== ====== ====== ======
</TABLE>
The tax effects of temporary differences that give rise to deferred tax assets
and liabilities are as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
---------------- -----------
<S> <C> <C>
Deferred tax assets:
Loans, principally allowance for loan losses................................... $ 1,985 1,954
Purchased excess tax bases..................................................... 1,106 1,165
Loans, principally differences in bases........................................ 328 367
Deposits, principally difference in bases...................................... 11 45
Investment securities, principally differences in bases........................ 633 639
Employee benefits, principally deferred compensation and accrued vacation...... 1,194 1,315
Market value adjustment of investment securities and mortgage-backed securities
available-for-sale......................................................... 1,801 1,054
---------- --------
Gross deferred income tax assets...................................... 7,058 6,539
---------- --------
Deferred tax liabilities:
FHLB stock dividends........................................................... 3,614 3,407
Core deposit intangible........................................................ 1,308 1,438
Deferred loan fees and origination costs....................................... 340 367
Life insurance contract income................................................. 49 48
Loans, due primarily to tax bad debt reserves in excess of base year amount.... 284 488
Loan servicing premium......................................................... 104 125
Fixed assets, principally difference in bases and depreciation................. 1,576 1,572
Other.......................................................................... 341 376
---------- --------
Gross deferred income tax liabilities................................. 7,616 7,821
---------- --------
Net deferred income tax liability..................................... $ 558 1,282
========== ========
</TABLE>
42
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
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 December 31, 1999, management believes it is more likely than not
that the Company will realize the benefits of these deductible differences.
(14) COMMITMENTS AND CONTINGENCIES
The Company leases certain land, premises and equipment from third parties under
operating leases. Total rental expense for the six months ended December 31,
1999 and for the years ended June 30, 1999, 1998 and 1997 was $97, $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 December 31, 1999 are as follows:
Years ended December 31, Amount
--------------------------------------- ----------------
2000 $ 204
2001 141
2002 134
2003 134
2004 134
Thereafter 1,294
--------
Total minimum future rental expense $ 2,041
========
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 December 31, 1999 are as follows:
Years ended December 31, Amount
--------------------------------------- ----------------
2000 $ 764
2001 394
2002 245
2003 150
2004 71
Thereafter -
--------
Total minimum future rental income $ 1,624
========
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.
On February 15, 2000 the Company announced the authorization of a plan to
repurchase up to 7.5% of its outstanding shares in the open market during a
twelve month period depending on market conditions.
43
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
(15) 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. The dividends on the unallocated ESOP
shares are not recorded as dividends in the consolidated statements of
stockholders' equity.
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 $150, $372, $580 and $444 for the six months ended December 31, 1999 and
the years ended June 30, 1999, 1998 and 1997, respectively.
The ESOP shares were as follows:
December 31, June 30,
1999 1999
------------ -----------
Allocated shares......... 179,128 166,774
Unallocated shares....... 175,805 188,159
------- -------
Original ESOP
common shares....... 354,933 354,933
Shares distributed to
participants.......... (31,718) (24,756)
------- -------
Common shares held
by ESOP............... 323,215 330,177
======= =======
At December 31, 1999, the fair value of the unallocated shares was approximately
$2,681.
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 25), 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).
44
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
The Company has granted Incentive Awards in the form of stock options during the
six months ended December 31, 1999 and the year ended June 30, 1999 which allow
holders to acquire 48,500 and 50,000 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 six months ended December 31, 1999 or
the year ended June 30, 1998.
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 $13, $77, $188 and $499 has been recorded for the six
months ended December 31, 1999 and for the years ended June 30, 1999, 1998 and
1997, respectively.
The following table reflects option activity for both the Stock Option Plan and
Incentive Plan:
<TABLE>
<CAPTION>
Common Weighted Average
Shares Exercise Price
--------- ----------------
<S> <C> <C>
Year ending June 30, 1997:
Options outstanding, beginning of period.......................... 419,707 $10.08
Granted in conjunction with acquisition of Security Bancorp....... 94,696 9.27
Granted........................................................... 72,169 20.51
Exercised......................................................... (13,768) 13.36
-------
Outstanding, end of period........................................ 572,804 11.25
=======
Exercisable, end of period........................................ 519,869 10.43
=======
Year ending June 30, 1998:
Granted........................................................... - -
Exercised......................................................... (37,978) 14.67
-------
Outstanding, end of period........................................ 534,826 11.34
=======
Exercisable, end of period........................................ 533,340 11.34
=======
Year ending June 30, 1999:
Granted........................................................... 60,000 16.16
Exercised......................................................... (36,116) 11.19
-------
Outstanding, end of period........................................ 558,710 12.11
=======
Exercisable, end of period........................................ 483,510 11.20
=======
</TABLE>
45
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Common Weighted Average
Shares Exercise Price
-------- -----------------
Six months ending December 31, 1999:
Granted............................ 48,500 $ 16.50
Exercised.......................... (35,716) 12.40
-------
Outstanding, end of period......... 571,494 12.61
=======
Exercisable, end of period......... 447,794 11.30
=======
Information regarding options outstanding and exercisable at December 31, 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 2.6 13,350 $ 5.94
10.00 - 12.72 377,475 10.28 4.1 377,475 10.28
16.16 - 21.50 180,669 17.99 8.6 56,969 19.30
------- -------
571,494 12.61 5.5 447,794 11.30
======= =======
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 would have been as follows:
Six Months
Ended Year Ended June 30,
December 31, ----------------------------
1999 1999 1998 1997
----------- -------- ---------- --------
Net income, as reported... $3,975 6,923 7,260 4,507
====== ===== ===== =====
Net income, pro forma..... $3,929 6,865 7,228 4,367
====== ===== ===== =====
Income per common share:
As reported:
Basic................ $ 0.93 1.43 1.37 1.01
====== ===== ===== =====
Diluted.............. $ 0.89 1.37 1.29 .96
====== ===== ===== =====
Pro forma:
Basic................ $ 0.92 1.42 1.36 .98
====== ===== ===== =====
Diluted.............. $ 0.88 1.35 1.29 .93
====== ===== ===== =====
46
<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 was estimated using the Black-Scholes
model with the following assumptions: for the six months ended December 31,
1999; dividend yield of 2.5%; expected life of 7 years; volatility of 21%; and a
risk-free interest rate of 6.3%; for the year ended June 30, 1999; dividend
yield of 2.6%; expected life of 5 years; volatility of 22%; and a risk-free
interest rate of 5.6%; for the year ended June 30, 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 for the six months ended December 31, 1999 and for
the years ended June 30, 1999 and 1997 was $3.81, $4.40 and $6.91, 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 $16, $33, $20 and $48 for the six
months ended December 31, 1999 and 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 $109, $154, $346
and $86 for the six months ended December 31, 1999 and the years ended June 30,
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 the six months
ended December 31, 1999 and for the years ended June 30, 1999, 1998 and 1997
totaled approximately $89, $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.
(16) 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
47
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
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.
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 are as follows:
December 31, June 30,
1999 1999
---------- -------
Fixed rate............... $ 2,435 4,745
Variable rate............ 6,559 17,840
---------- -------
$ 8,994 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 Cap
At December 31, 1999, the Company ha a $5,000 notional amount interest rate cap
agreement expiring July 2000. The interest rate cap entitles the Company to
receive interest payments in exchange for payment of a transaction fee, provided
the three-month LIBOR exceeds 6%. The transaction fee paid in connection with
the interest rate cap agreement is 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.
(17) 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 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 January 1, 2001.
48
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
(18) RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
The reconciliation of net income to net cash provided by operating activities
follows:
<TABLE>
<CAPTION>
Six Months
Ended Year Ended June 30,
December 31, ------------------------------------------
1999 1999 1998 1997
------------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Net income........................................... $ 3,975 6,923 7,260 4,507
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of:
Deferred loan origination fees......... (186) (470) (440) (439)
Premiums and discounts on securities,
loans and borrowings............... (260) (632) (900) (1,138)
RRP deferred compensation................... 13 77 188 499
ESOP shares committed to be released........ 205 472 652 492
Provision for loan losses................... 880 1,300 840 400
Net (gain) loss on sales of:
Mortgage-backed securities
available-for-sale................. (5) - (29) (57)
Investment securities available-
for-sale........................... (8) (89) (68) 16
Loans.................................. (277) (1,060) (956) (637)
Real estate owned...................... 26 (13) - -
Premises and equipment................. (12) (276) (17) -
Depreciation and amortization of premises
and equipment.......................... 1,088 2,488 2,147 1,208
Goodwill and core deposit amortization...... 673 1,443 1,391 532
Federal Home Loan Bank stock
dividends.............................. (539) (1,055) (975) (712)
Origination of loans available-for-sale..... (41,609) (105,129) (96,520) (54,396)
Proceeds from sales of loans available-
for-sale............................... 41,156 109,370 94,254 55,300
Decrease (increase) in interest
receivable............................. 143 143 (821) (562)
Interest expense credited to deposit
accounts............................... 12,100 24,320 26,938 18,704
Changes in other assets and liabilities..... 572 1,851 (2,209) 388
--------- -------- ------- -------
Net cash provided by operating
activities......................... $ 17,935 39,663 30,735 24,105
========= ======== ======= =======
</TABLE>
49
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
(19) NON-CASH INVESTING AND FINANCING ACTIVITIES
On December 21, 1999, the Company declared a dividend of approximately $697
which is recorded in accrued expenses and other liabilities at December 31,
1999.
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 the year ended June 30, 1997, the Company issued common stock under the
RRP and recorded deferred compensation of approximately $106.
Real estate owned acquired through foreclosures of loans receivable was
approximately $227, $559 and $546 for the six months ended December 31, 1999 and
for the years ended June 30, 1999 and 1998, respectively. No real estate owned
was acquired during the year ended June 30, 1997.
Treasury stock of approximately $1 and $2 was recorded due to forfeitures of
unearned RRP shares for the year ended June 30, 1998 and 1997, respectively.
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.
During the six months ended December 31, 1999, the Company reduced paid-in
capital and recorded a liability in the amount of $67 related to Security
Bancorp shares not tendered for Company shares. Company shares had been provided
in escrow for the exchange, however, will now be paid in cash upon redemption.
In conjunction with the acquisition of Security Bancorp during 1997, the Company
received assets with fair value of $376.4 million and assumed liabilities of
$343.6 million.
(20) 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.
For cash and short-term investments, the carrying amount was considered to be a
reasonable estimate of fair value.
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.
For FHLB stock, the carrying amount was considered to be a reasonable estimate
of fair value.
Fair values were estimated for portfolios of performing and nonperforming loans
with similar financial characteristics. For certain similar 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.
The fair values of commitments to extend credit at fixed rates were not
significant at December 31, 1999 and June 30, 1999.
The fair value of demand deposits, savings deposits and money market accounts
were the amounts payable on demand at December 31, 1999 and June 30, 1999. 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.
50
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
For short-term borrowings, the carrying amount was considered to be a reasonable
estimate of fair value.
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 are as follows:
<TABLE>
<CAPTION>
December 31, 1999 June 30, 1999
---------------------- ----------------------
Carrying Fair Carrying Fair
value value value value
--------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents..................... $ 26,143 26,143 28,946 28,946
Interest-bearing deposits..................... 100 100 1,985 1,985
Investment securities available-for-sale...... 106,212 106,212 103,441 103,441
Investment securities......................... 9,205 9,195 9,235 9,255
Mortgage-backed securities available-for-sale. 81,276 81,276 68,029 68,029
Mortgage-backed securities.................... 77,672 77,926 83,720 85,252
Loans available-for-sale...................... 4,470 4,470 3,740 3,740
Loans, net.................................... 616,281 602,658 627,631 624,583
Stock in FHLB of Seattle...................... 15,154 15,154 14,615 14,615
Financial liabilities:
Deposits...................................... $658,404 656,813 645,549 644,574
Repurchase agreements......................... 7,731 7,731 6,702 6,702
Borrowed funds................................ 227,078 224,663 244,483 243,467
Off-balance-sheet items:
Interest rate cap agreements:
notional amount of $5,000................. - 4 - 9
======== ======== ======== ========
</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.
51
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
(21) WESTERFED INFORMATION
The summarized condensed financial information for WesterFed Financial
Corporation as of and for the six months ended December 31, 1999 and as of and
for the year ended June 30, 1999 are presented below:
Condensed Balance Sheets December 31, June 30,
1999 1999
----------- ----------
Assets:
Cash and cash equivalents........................... $ 268 116
Interest-bearing and due from banks deposits........ 2,096 383
Investment securities available-for-sale............ 1,636 1,099
Other assets........................................ 47 46
Investment in subsidiaries.......................... 86,335 90,426
-------- -------
Total assets............................... $ 90,382 92,070
======== =======
Liabilities and Stockholders' Equity:
Other liabilities................................... $ 857 921
Stockholders' Equity:
Common stock.................................... 44 56
Additional paid-in capital...................... 70,040 69,572
Common stock acquired by ESOP/RRP............... (2,090) (2,216)
Treasury stock at cost.......................... (28,962) (25,319)
Accumulated other comprehensive loss............ (2,930) (1,717)
Retained earnings............................... 53,423 50,773
-------- -------
Total stockholders' equity................. 89,525 91,149
-------- -------
Total liabilities and stockholders' equity. $ 90,382 92,070
======== =======
Six Months
Ended Year Ended June 30,
December 31, ------------------------
Condensed Statements of Income 1999 1999 1998 1997
----------- --------- ------- ------
Dividends from the Bank.................... $ 7,000 20,000 5,000 14,000
Interest income............................ 39 266 233 735
Non-interest expense....................... (234) (653) (677) (428)
------- ------- ------ -------
Income before income taxes............ 6,805 19,613 4,556 14,307
Income tax benefit (expense)............... 70 120 79 (140)
------- ------- ------ -------
Income before undistributed
earnings of subsidiaries............. 6,875 19,733 4,635 14,167
Undistributed (distributions in excess
of) earnings of subsidiaries.......... (2,900) (12,810) 2,625 (9,660)
------- ------- ------ -------
Net income............................ $ 3,975 6,923 7,260 4,507
======= ======= ====== =======
52
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Six Months
Ended Year Ended June 30,
December 31, -------------------------------------------
Condensed Statements of Cash Flows 1999 1999 1998 1997
-------- ------- ------ -------
<S> <C> <C> <C> <C>
Operating Activities:
Net income for the period....................... $ 3,975 6,923 7,260 4,507
Adjustments to reconcile net income to net
cash provided by operating activities:
Distributions in excess of (equity in
undistributed) earnings of subsidiaries 2,900 12,810 (2,625) 9,660
Amortization of premiums on investment
securities available-for-sale...... (14) (223) (182) (298)
ESOP shares committed to be released... 205 472 652 492
Increase in other assets and liabilities, net 89 213 (686) 567
-------- ------- ------ -------
Net cash provided by operating
activities................ 7,155 20,195 4,419 14,928
-------- ------- ------ -------
Investing Activities:
Decrease (increase) in interest-bearing deposits (1,713) 19 561 (189)
Purchase of investment securities............... (2,542) (37,985) (23,766) (20,142)
Principal payments and sales proceeds of
mortgage-backed securities.................. - - - 3,059
Proceeds from maturities of investment securities 2,000 42,250 21,350 30,784
Acquisition of Security Bancorp, including direct
acquisition costs of $794................... - - - (26,789)
Other........................................... - - - 12
-------- ------- ------ -------
Net cash provided by (used in)
investing activities...... (2,255) 4,284 (1,855) (13,265)
-------- ------- ------ -------
Financing Activities:
Dividends paid to stockholders.................. (1,536) (2,926) (2,729) (1,867)
Proceeds from exercise of stock options and stock
issuances................................... 443 404 557 194
Purchase of treasury stock...................... (3,655) (21,858) (379) -
-------- ------- ------ -------
Net cash used in financing activities (4,748) (24,380) (2,551) (1,673)
-------- ------- ------ -------
Increase (decrease) in cash and cash equivalents..... 152 99 13 (10)
Cash and cash equivalents at beginning of period..... 116 17 4 14
-------- ------- ------ -------
Cash and cash equivalents at end of period........... $ 268 116 17 4
======== ======= ====== =======
</TABLE>
53
<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 - UNAUDITED
Six Months Ended
December 31, 1999
-------------------------
Second First
Quarter Quarter
------------ -----------
Interest income................................ $17,861 17,745
Interest expense............................... 9,734 9,651
------- -------
Net interest income................... 8,127 8,094
Provision for loan losses...................... (435) (445)
Noninterest income............................. 1,958 2,169
Noninterest expense............................ (6,488) (6,522)
------- -------
Income before income tax expense...... 3,162 3,296
Income tax expense............................. (1,195) (1,288)
------- -------
Net income............................ $ 1,967 2,008
======= =======
Net income per share:
Basic...................................... $ 0.47 0.46
======= =======
Diluted.................................... $ 0.45 0.44
======= =======
Year Ended June 30, 1999
--------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
-------- ---------- -------- ---------
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
======= ======= ======= =======
54
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Year Ended June 30, 1998
--------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
-------- ---------- -------- ---------
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
======= ======= ======= =======
(23) EARNINGS PER SHARE
The following table sets forth the compilation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Six Months
Ended Year Ended June 30,
December 31, ----------------------------------
1999 1999 1998 1997
------------ ------------ ----------- ---------
<S> <C> <C> <C> <C>
Number of shares on which basic
earnings per share is calculated:
Average outstanding shares
during the fiscal year............... 4,291,092 4,830,068 5,317,577 4,458,079
Add: Incremental shares under stock
option plans.................... 170,269 240,270 296,316 220,259
Incremental shares
related to RRPs................. - 1,225 13,425 25,901
---------- --------- --------- ---------
Number of shares on which diluted
earnings per share is calculated....... 4,461,361 5,071,563 5,627,318 4,704,239
========== ========= ========= =========
Net income applicable to
common stockholders (000's)............. $ 3,975 6,923 7,260 4,507
========== ========= ========= =========
Basic earnings per share................ $ 0.93 1.43 1.37 1.01
========== ========= ========= =========
Diluted earnings per share.............. $ 0.89 1.37 1.29 .96
========== ========= ========= =========
</TABLE>
55
<PAGE>
WesterFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Stock options to purchase 180,669, 72,169 and 57,085 shares at December 31, 1999
and June 30, 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 the year ended June 30,
1998.
(24) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Six Months
Ended Year Ended June 30,
December 31, -----------------------------
1999 1999 1998 1997
------------ --------- -------- ----------
Payments during the period for:
Interest .................... $6,761 12,856 13,900 8,942
Income taxes, net............ 2,604 3,933 4,080 3,014
======= ====== ====== =====
(25) 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 the year ended June 30, 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.
(26) BRANCH SALE
On November 18, 1999, the Company announced that it reached an agreement with
Stockman Financial Corp. to sell the assets and have the liabilities assumed for
six branch locations. The branches are located in Glasgow, Hardin, Malta, Miles
City, Plentywood and Sidney. This transaction is expected to close in April
2000. The divestiture will result in a decrease in total deposits of
approximately $57 million.
56
<PAGE>
General Corporate and Stockholders' Information
CORPORATE HEADQUARTERS
110 E. Broadway
Missoula, MT 59802
(406) 721-5254
INDEPENDENT ACCOUNTANTS
KPMG LLP
Billings, MT
GENERAL COUNSEL
Worden, Thane and Haines, P.C.
Missoula, MT
SPECIAL COUNSEL
Silver, Freedman and Taff, LLP
Washington, D.C.
TRANSFER AGENT, REGISTRAR AND DIVIDEND DISBURSING AGENT
Stockholder inquiries regarding transfer requirements, dividends, lost
certificates and changes of address should be directed to the transfer agent:
Davidson Trust Co.
9 Third Street North, Suite 200
P.O. Box 2309
Great Falls, MT 59403-2309
1-800-634-5526
ANNUAL MEETING
The annual meeting of stockholders will be held on Tuesday, April 25, 2000,
beginning at 9 a.m. at the Southgate Office, 2601 Garfield, Missoula, MT.
FORM 10-K
This report is available to stockholders of record without charge upon written
request to:
Suzanne Loewen
Corporate Secretary
WesterFed Financial Corporation
110 E. Broadway
Missoula, MT 59802
STOCK INFORMATION
WesterFed stock is traded in the over-the-counter market with quotations through
the Nasdaq National Market System under the symbol "WSTR."
At December 31, 1999, there were 1,072 stockholders of record.
At December 31, 1999, there were approximately 2,200 beneficial stockholders.
To request information on dividend reinvestment, please contact:
Suzanne Loewen
WesterFed Financial Corporation
110 E. Broadway
Missoula, MT 59802
Phone: 406-721-5254
57
<PAGE>
General Corporate and Stockholders' Information
Stock Prices Dividends
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***
September 30, 1999 $ 17.813 16.25 .155
December 31, 1999 $ 17.125 14.75 .16
*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
- --------------------------------------------------------------------------------
D. A. Davidson & Co., Incorporated
Friedman Billings Ramsey & Company
Sandler O'Neill & Partners
Pacific Crest Securities
WESTERFED OFFICERS
- --------------------------------------------------------------------------------
Lyle R. Grimes
Chairman
Ralph K. Holliday
President and Chief Executive Officer
James A. Salisbury, CPA
Treasurer and Chief Financial Officer
David W. Jorgenson
Vice President
Suzanne Loewen
Corporate Secretary
Marcia L. Johnson
Assistant Corporate Secretary
WESTERFED DIRECTORS
- --------------------------------------------------------------------------------
Lyle R. Grimes
Chairman
John E. Roemer
Vice Chairman
Ralph K. Holliday
Dr. Marvin P. Reynolds
Dr. Otto G. Klein, Jr.
Robert F. Burke
Laurie C. DeMarois
David W. Jorgenson
William M. Leslie
58
<PAGE>
Directors and Officers
BOARD OF DIRECTORS
- --------------------------------------------------------------------------------
Lyle R. Grimes
Chairman of the Board,
Elected 1983.
John E. Roemer
Vice Chairman
Retired
Roemer Tire Center, Missoula.
Elected 1978.
Ralph K. Holliday
President & Chief Executive Officer,
Elected 1999.
Laurie C. DeMarois
Owner, Garden City Floral, Missoula.
Elected 1996.
Robert F. Burke
Financial Planner
American Express, Missoula.
Elected 1994.
David W. Jorgenson
Executive Vice President
Eastern Region Manager
Western Security Bank, Billings.
Elected 1997.
Dr. Otto G. Klein, Jr.
Ophthalmologist
Rocky Mountain Eye &
Ear Center, Missoula.
Elected 1988.
William M. Leslie
Chairman and President
Quality Concrete Company, Billings.
Elected 1997.
Dr. Marvin P. Reynolds
Dentist, Missoula.
Elected 1969.
Donovan Worden, Jr.
Director Emeritus
Retired
SENIOR MANAGEMENT
- --------------------------------------------------------------------------------
Ralph K. Holliday
President and Chief Executive Officer
David W. Jorgenson
Executive Vice President
Eastern Region Manager
James A. Salisbury, CPA
Treasurer
Executive Vice President/
Chief Financial Officer
Charles E. Eiseman
Sr. Vice President
Western Region Manager
Marcia L. Johnson
Sr. Vice President
Central Operations Manager
Stan R. Hill
Sr. Vice President
Commercial Lending
Scott Sanders
Sr. Vice President
Commercial Real Estate Lending
John Cromwell
Sr. Vice President
Human Resources
Sharon E. Woldstad
Corporate Secretary
Sr. Vice President
Data Center Coordinator
Suzanne Loewen
Vice President
Audit/Compliance/Quality Control
Barry L. Johnston
Sr. Vice President
Credit Administrator
DEPARTMENT HEADS
- --------------------------------------------------------------------------------
Desiree Bagnell, CPA
Controller
Ronald F. Halls
Vice President
Central Processing &Secondary Market
Laura Lustgraaf
Vice President
Deposit Support Services Manager
Nancy Rhoads
Vice President
Loan Servicing Manager
Gary Hewitt
Assistant Vice President
Property Manager and Security Officer
Glenn Nelson
Assistant Vice President
Information Services Department
Debi Turner
Branch Coordinator
Brenda Ratcliff
Sales Coordinator
Sue Hay
Assistant Vice President
Loan Systems Coordinator
59
Exhibit 21
Subsidiaries of Registrant
Percent State of
of Incorporation
Parent Subsidiary Ownership or Organization
- -------------------------- ---------------------- ------------- ----------------
WesterFed Financial Western Security Bank 100% Federal
Corporation
Western Security Bank Monte Mac I 100% Montana
Western Security Bank Western Security 100% Montana
Investment Services
Western Security Bank Service Corporation 100% Montana
of Montana
Western Security Bank COAD Limited Partnership 97% Montana
Exhibit 23
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
March 10, 2000, relating to the consolidated balance sheets of WesterFed
Financial Corporation and subsidiaries as of December 31, 1999 and June 30,
1999, and the related consolidated statements of income, stockholders' equity
and comprehensive income, and cash flows for the six months ended December 31,
1999 and for each of the years in the three-year period ended June 30, 1999,
which report appears in the December 31, 1999 annual report on Form 10-K of
WesterFed Financial Corporation.
KPMG LLP
Billings, Montana
March 28, 2000
<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 DECEMBER 31, 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> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 26,143
<INT-BEARING-DEPOSITS> 100
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 187,488
<INVESTMENTS-CARRYING> 86,877
<INVESTMENTS-MARKET> 87,121
<LOANS> 620,751
<ALLOWANCE> 5,161
<TOTAL-ASSETS> 1,000,885
<DEPOSITS> 658,404
<SHORT-TERM> 138,410
<LIABILITIES-OTHER> 18,147
<LONG-TERM> 88,359
<COMMON> 56
0
0
<OTHER-SE> 89,469
<TOTAL-LIABILITIES-AND-EQUITY> 1,000,885
<INTEREST-LOAN> 25,980
<INTEREST-INVEST> 9,446
<INTEREST-OTHER> 180
<INTEREST-TOTAL> 35,606
<INTEREST-DEPOSIT> 12,442
<INTEREST-EXPENSE> 19,385
<INTEREST-INCOME-NET> 16,221
<LOAN-LOSSES> 880
<SECURITIES-GAINS> 13
<EXPENSE-OTHER> 2,788
<INCOME-PRETAX> 6,458
<INCOME-PRE-EXTRAORDINARY> 3,975
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,975
<EPS-BASIC> 0.93
<EPS-DILUTED> 0.89
<YIELD-ACTUAL> 0
<LOANS-NON> 2,893
<LOANS-PAST> 60
<LOANS-TROUBLED> 168
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,079
<CHARGE-OFFS> 986
<RECOVERIES> 188
<ALLOWANCE-CLOSE> 5,161
<ALLOWANCE-DOMESTIC> 5,161
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<ALLOWANCE-UNALLOCATED> 729
</TABLE>
