1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): February 28, 2001 GLACIER BANCORP, INC. (Exact name of registrant as specified in its charter) DELAWARE (State or other jurisdiction of incorporation) 000-18911 81-0519541 ------------------------ ------------------ (Commission File Number) IRS Employer Identification No. 49 Commons Loop Kalispell, MT 59901 (Address of principal executive offices) (zip code) Registrant's telephone number, including area code: 406-756-4200
2 ITEM 7 - FINANCIAL STATEMENTS AND EXHIBITS (a) Financial statements -- Consolidated balance sheets of WesterFed Financial Corporation and Subsidiaries as of December 31, 2000 and 1999 and the related consolidated statements of income, stockholders' equity and comprehensive income, and cash flows for the year ended December 31, 2000, the six months ended December 31,1999 and the years ended June 30, 1999 and 1998. (b) Pro forma financial information -- Unaudited Combined Condensed Pro Forma Statement of Financial Condition as of December 31, 2000 and Unaudited Combined Condensed Pro Forma Statement of Operations for the year ended December 31, 2000. (c) Exhibits: (23) Consent of KPMG LLP, independent auditors for WesterFed Financial Corporation (99) Press Release issued by Glacier Bancorp, Inc. and WesterFed Financial Corporation, dated March 1, 2001 * * Previously Filed 2
3 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Dated: May 3, 2001 GLACIER BANCORP, INC. By: /s/ Michael J. Blodnick ----------------------------------- Michael J. Blodnick President and Chief Executive Officer 3
4 ITEM 7(a) WESTERFED FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Financial Statements December 31, 2000 (With Independent Auditors' Report Thereon)
5 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, 2000 and 1999, and the related consolidated statements of income, stockholders' equity and comprehensive income, and cash flows for the year ended December 31, 2000, the six months ended December 31, 1999 and the years ended June 30, 1999 and 1998. 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 auditing standards generally accepted in the United States of America. 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, 2000 and 1999, and the results of their operations and their cash flows for the year ended December 31, 2000, the six months ended December 31, 1999 and the years ended June 30, 1999 and 1998 in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Billings, Montana February 23, 2001
6 WesterFed Financial Corporation and Subsidiaries CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share and per share data) December 31, December 31, 2000 1999 ------------ ------------ ASSETS Cash and due from banks .................................................................... $ 17,400 20,233 Interest-bearing bank deposits ............................................................. 2,545 5,910 ----------- ---------- Cash and cash equivalents ................................................... 19,945 26,143 Interest-bearing deposits .................................................................. 100 100 Investment securities available-for-sale (includes securities pledged to creditors with the right to sell or repledge of $1,207 and $0 at December 31, 2000 and 1999, respectively) ...................................................................... 140,945 187,488 Investment securities, at amortized cost (estimated fair value of $71,204 and $87,121 at December 31, 2000 and 1999, respectively; includes securities pledged to creditors with the right to sell or repledge of $16,602 and $0 at December 31, 2000 and 1999, respectively) .......................................... 69,665 86,877 Loans available-for-sale ................................................................... 3,041 4,470 Loans receivable, net ...................................................................... 623,131 616,281 Interest receivable ........................................................................ 6,629 7,492 Stock in Federal Home Loan Bank of Seattle, at cost ........................................ 13,062 15,154 Premises and equipment, net ................................................................ 25,110 27,477 Core deposit intangible .................................................................... 2,821 3,401 Goodwill ................................................................................... 14,097 14,763 Cash surrender value of life insurance policies ............................................ 8,562 8,164 Other assets ............................................................................... 2,069 3,075 ----------- ---------- $ 929,177 1,000,885 =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits ................................................................................... $ 606,100 658,404 Repurchase agreements ...................................................................... 9,032 7,731 Borrowed funds ............................................................................. 198,571 227,078 Advances from borrowers for taxes and insurance ............................................ 2,863 3,296 Income taxes -- current and deferred ....................................................... 1,376 597 Accrued interest payable ................................................................... 8,293 6,476 Accrued expenses and other liabilities ..................................................... 8,720 7,778 ----------- ---------- Total liabilities ........................................................... 834,955 911,360 ----------- ---------- Stockholders' equity: Preferred stock, $.01 par value, 5,000,000 shares authorized; none outstanding ............................................................ -- -- Common stock, $.01 par value, 10,000,000 shares authorized; 5,989,145 shares issued, 4,116,373 outstanding at December 31, 2000; 5,904,661 shares issued, 4,351,404 outstanding at December 31, 1999 ......... 57 56 Paid-in capital .................................................................... 71,115 70,040 Common stock acquired by ESOP/RRP .................................................. (1,825) (2,090) Treasury stock, at cost; 1,872,772 and 1,553,257 at December 31, 2000 and 1999, respectively .......................................................... (33,537) (28,974) Accumulated other comprehensive income (loss) ...................................... 170 (2,930) Retained earnings .................................................................. 58,242 53,423 ----------- ---------- Total stockholders' equity .................................................. 94,222 89,525 ----------- ---------- Commitments and contingencies $ 929,177 1,000,885 =========== ========== Book value per common share outstanding .................................................... $ 22.89 20.57 =========== ========== See accompanying notes to consolidated financial statements.
7 WesterFed Financial Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share data) Year Six Months Ended Ended Year Ended June 30, December 31, December 31, -------------------- 2000 1999 1999 1998 ------------ ------------ ------ ------ Interest income: Loans receivable ............................................... $ 52,714 25,980 53,773 56,261 Investment securities .......................................... 17,326 9,274 16,081 17,256 Interest-bearing deposits ...................................... 175 172 606 675 Other .......................................................... 459 180 338 332 -------- ------ ------ ------ Total interest income ............................ 70,674 35,606 70,798 74,524 -------- ------ ------ ------ Interest expense: NOW and money market demand .................................... 4,118 1,947 3,379 3,321 Savings ........................................................ 1,981 1,097 2,264 2,658 Certificates of deposit ........................................ 20,100 9,398 20,444 21,824 -------- ------ ------ ------ 26,199 12,442 26,087 27,803 Borrowed funds and repurchase agreements ....................... 14,165 6,943 13,157 14,483 -------- ------ ------ ------ Total interest expense ........................... 40,364 19,385 39,244 42,286 -------- ------ ------ ------ Net interest income ..................................... 30,310 16,221 31,554 32,238 Provision for loan losses .............................................. 2,600 880 1,300 840 -------- ------ ------ ------ Net interest income after provision for loan losses ......................................... 27,710 15,341 30,254 31,398 -------- ------ ------ ------ Non-interest income: Loan origination fees on loans sold ............................ 1,720 957 2,633 2,268 Service fees ................................................... 6,017 2,600 4,471 4,486 Net gain on sale of loans and securities available-for-sale .... (699) 290 1,149 1,053 Net gain on sale of branches ................................... 1,878 -- -- -- Other .......................................................... 593 118 1,045 574 -------- ------ ------ ------ Total non-interest income ........................ 9,509 3,965 9,298 8,381 -------- ------ ------ ------ Non-interest expense: Compensation and employee benefits ............................. 11,945 6,156 13,695 13,149 Net occupancy expense of premises .............................. 1,843 781 2,035 2,153 Equipment and furnishings ...................................... 1,777 985 2,313 1,846 Data processing ................................................ 1,648 820 1,627 1,644 Deposit insurance premium ...................................... 129 170 344 358 Intangibles amortization ....................................... 1,245 673 1,443 1,391 Marketing and advertising ...................................... 662 475 616 789 Other .......................................................... 5,268 2,788 6,153 6,429 -------- ------ ------ ------ Total non-interest expense ....................... 24,517 12,848 28,226 27,759 -------- ------ ------ ------ Income before income taxes ....................... 12,702 6,458 11,326 12,020 Income taxes ........................................................... 4,883 2,483 4,403 4,760 -------- ------ ------ ------ Net income ....................................... $ 7,819 3,975 6,923 7,260 ======== ====== ====== ====== Net income per common share: Basic .......................................................... $ 1.98 0.93 1.43 1.37 ======== ====== ====== ====== Diluted ........................................................ $ 1.91 0.89 1.37 1.29 ======== ====== ====== ====== See accompanying notes to consolidated financial statements.
8 WesterFed Financial Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (Dollars in thousands, except per share data) Accumulated other Common Paid-in ESOP/ Treasury comprehensive Retained stock capital RRP stock income (loss) earnings Total ------ ------- ------ -------- ------------- -------- -------- 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 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
9 WesterFed Financial Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME, CONCLUDED (Dollars in thousands, except per share data) Accumulated other Common Paid-in ESOP/ Treasury comprehensive Retained stock capital RRP stock income (loss) earnings Total ------ ------- ------ -------- ------------- ------- ------- Balance at December 31, 1999 .............. $56 70,040 (2,090) (28,974) (2,930) 53,423 89,525 Comprehensive income: Net income for the year ended December 31, 2000 .................... -- -- -- -- -- 7,819 7,819 Unrealized gain on securities available -for-sale, net of reclassification adjustment ........................... -- -- -- -- 3,100 -- 3,100 ------- Total comprehensive income ......... 10,919 Purchase of 319,515 shares of treasury stock, at cost ......................... -- -- -- (4,563) -- -- (4,563) ESOP shares committed to be released ...... -- 163 227 -- -- -- 390 Amortization of RRP ....................... -- -- 38 -- -- -- 38 Common stock options exercised (84,484 shares) ........................ 1 912 -- -- -- -- 913 Cash dividends declared ($0.76 per share) ...................... -- -- -- -- -- (3,000) (3,000) --- ------ ------ ------- ------ ------- ------- Balance at December 31, 2000 .............. $57 71,115 (1,825) (33,537) 170 58,242 94,222 === ====== ====== ======= ====== ======= ======= A summary of the reclassification amounts and related tax effects for other comprehensive income follows: Year Six Months Ended Ended Year Ended June 30, December 31, December 31, -------------------- 2000 1999 1999 1998 ------------ ------------ ------ ---- Disclosure of reclassification amount: Unrealized holding gains (losses) arising during the period, net of income tax expense (benefit) of $1,502, $(742), $(1,032), and $73 for the year ended December 31, 2000, the six months ended December 31, 1999 and the years ended June 30, 1999 and 1998, respectively ............................... $2,439 (1,205) (1,685) 118 Reclassification adjustment for (gains) losses included in net income, net of income tax of $(403), $5, $36 and $37 for the year ended December 31, 2000, the six months ended December 31, 1999 and the years ended June 30, 1999 and 1998, respectively ....................................................... 661 (8) (55) (60) ------ ------ ------ ---- Net unrealized gain (loss) on available-for-sale securities ...................................... $3,100 (1,213) (1,740) 58 ====== ====== ====== ==== See accompanying notes to consolidated financial statements.
10 WesterFed Financial Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) Year Six Months Ended Ended Year Ended June 30, December 31, December 31, --------------------- 2000 1999 1999 1998 ------------ ----------- -------- -------- Net cash provided by operating activities ............... $ 39,197 17,935 39,663 30,735 ----------- -------- -------- -------- Cash flows from investing activities: Decrease (increase) in interest-bearing deposits ................................. -- 1,885 (1,885) 1,900 Purchases of: FHLB stock ............................... -- -- -- (1,129) Investment securities .................... -- -- -- (5,483) Investment securities available-for-sale . (18,738) (40,864) (204,637) (150,269) Proceeds from maturities: Investment securities .................... 3,813 38 7,636 16,316 Investment securities available-for-sale . 3,865 11,600 127,651 70,545 Proceeds from sales of: Investment securities available-for-sale . 50,467 3,314 21,961 19,287 Real estate owned ........................ 215 321 204 -- Principal payments from: Investment securities .................... 13,968 6,151 18,782 15,661 Investment securities available-for-sale . 14,655 8,053 13,729 11,392 Redemption of FHLB stock ................. 3,000 -- -- -- Decrease (increase) in loans receivable, net .... (20,757) 10,532 21,557 (24,516) Proceeds from sales of premises and equipment ................................ 1,057 33 611 1,162 Purchases of premises and equipment ............. (1,621) (317) (1,003) (5,682) Purchase of life insurance policies ............. -- (1,087) -- (285) Disposition of branches, net of cash and net cash equivalents of $190 ......... (35,983) -- -- -- ----------- -------- -------- -------- Net cash provided by (used in) investing activities ....... 13,941 (341) 4,606 (51,101) ----------- -------- -------- -------- Cash flows from financing activities: Net change in deposits .......................... (25,386) 755 (15,212) (21,366) Net change in repurchase agreements ............. 1,301 1,029 469 (1,553) Proceeds from borrowings ........................ 1,052,393 244,100 319,560 344,165 Payments on borrowings .......................... (1,080,920) (261,527) (324,078) (286,719) Net change in advances from borrowers for taxes and insurance ...................... (407) (6) (750) 299 Dividends paid to stockholders .................. (2,667) (1,536) (2,926) (2,729) Proceeds from exercise of options and stock issuances .......................... 913 443 404 557 Payments to acquire treasury stock .............. (4,563) (3,655) (21,858) (379) ----------- -------- -------- -------- Net cash provided by (used in) financing activities ....... (59,336) (20,397) (44,391) 32,275 ----------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents .... (6,198) (2,803) (122) 11,909 Cash and cash equivalents at beginning of period ........ 26,143 28,946 29,068 17,159 ----------- -------- -------- -------- Cash and cash equivalents at end of period .............. $ 19,945 26,143 28,946 29,068 =========== ======== ======== ======== See accompanying notes to consolidated financial statements.
11 WesterFed Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF FINANCIAL STATEMENT PRESENTATION WesterFed Financial Corporation ("WesterFed," and collectively with its subsidiary, the "Company") serves the financial needs of 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 accounting principles generally accepted in the United States of America. 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, 2000, the Company was required to have aggregate reserves with the Federal Reserve Bank of approximately $200. INVESTMENT SECURITIES Investment 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. Investment 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, 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 investment 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.
12 WesterFed Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (Dollars in thousands, except 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 other than beneficial interests in the loan sold. 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. 2
13 WesterFed Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (Dollars in thousands, except 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 $291 and $168 of real estate and other personal property acquired through foreclosure at December 31, 2000 and 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, 2000 and 1999 was $2,498 and $1,832, 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, 2000 and 1999 was $2,787 and $2,207, 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. 3
14 WesterFed Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (Dollars in thousands, except 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 investment 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 December 31, 1999 and June 30, 1999 and 1998 financial statements to conform with the December 31, 2000 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 condensed statements of income present financial data for the six months ended December 31, 2000 and the comparable six month period of the prior year. These statements are for comparative purposes only. Six Months Ended December 31, ----------------------- 2000 1999 ----------- ------- (Unaudited) Interest income ............................................. $ 35,195 35,606 Interest expense ............................................ 20,097 19,385 -------- ------- Net interest income ....................................... 15,098 16,221 Provision for loan losses ................................... (1,700) (880) -------- ------- Net interest income after provision for loan losses ....... 13,398 15,341 4
15 WesterFed Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (Dollars in thousands, except per share data) Six Months Ended December 31, ----------------------- 2000 1999 ----------- ------- (Unaudited) Noninterest income .......................................... $ 4,716 3,965 Noninterest expense ......................................... (11,735) (12,848) -------- ------- Income before income tax expense .......................... 6,379 6,458 Income tax expense .......................................... (2,454) (2,483) -------- ------- Net income ................................................ $ 3,925 3,975 ======== ======= Net income per common share: Basic ..................................................... $ 1.00 0.93 ======== ======= Diluted ................................................... $ 0.97 0.89 ======== ======= (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, 2000, the most recent notification from the OTS categorized the Bank as well capitalized for PCA purposes. 5
16 WesterFed Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (Dollars in thousands, except per share data) The Bank's compliance with capital requirements follows: 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 -------- ------ -------- ------ -------- ------ As of December 31, 2000: Total capital (to risk-weighted assets) ............ $ 80,199 13.50% $ 47,537 8.00% $ 59,421 10.00% Core (Tier 1) capital (to risk-weighted assets) .... 73,925 12.44 23,768 4.00 35,653 6.00 Core (Tier 1) capital (to adjusted assets) ......... 73,925 8.14 36,312 4.00 45,390 5.00 Tangible capital (to tangible assets) .............. 73,925 8.14 13,617 1.50 13,617 1.50 ======== ====== ======== ====== ======== ====== 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 ======== ====== ======== ====== ======== ====== 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, 2000 and 1999: December 31, December 31, 2000 1999 ------------ ------------ Total stockholders' equity .................................................... $ 94,222 89,525 Less: Nonqualifying equity of WesterFed and nonqualifying subsidiaries ...... (2,861) (4,622) Goodwill and other intangibles ........................................ (16,918) (18,164) Nonqualifying mortgage loan servicing ................................. (355) (527) Unrealized (gains) losses on certain securities available-for-sale .... (163) 2,930 -------- -------- Tangible and Core capital ..................................................... 73,925 69,142 Add: Allowance for loan losses ............................................. 7,356 5,161 Unrealized gain on certain available-for-sale equity securities ....... 46 33 Equity investments and other assets ................................... (1,128) -- -------- -------- Risk-based capital ............................................................ $ 80,199 $ 74,336 ======== ======== 6
17 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: December 31, 2000 -------------------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value --------- ---------- ---------- --------- INVESTMENT SECURITIES HELD-TO-MATURITY: Corporate obligations ................................... $ 3,999 2 -- 4,001 Other investments ....................................... 2,088 495 -- 2,583 -------- -------- -------- -------- 6,087 497 -- 6,584 Mortgage-backed securities .............................. 63,578 1,197 (155) 64,620 -------- -------- -------- -------- Total investment securities held-to-maturity ......... $ 69,665 1,694 (155) 71,204 ======== ======== ======== ======== INVESTMENT SECURITIES AVAILABLE-FOR-SALE: Federal agency obligations .............................. $ 39,653 104 (258) 39,499 Corporate obligations ................................... 14,851 99 (74) 14,876 Other ................................................... 3,772 310 -- 4,082 -------- -------- -------- -------- 58,276 513 (332) 58,457 Mortgage-backed securities .............................. 82,395 474 (381) 82,488 -------- -------- -------- -------- Total investment securities available-for-sale ....... $140,671 987 (713) 140,945 ======== ======== ======== ======== December 31, 1999 -------------------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value --------- ---------- ---------- --------- INVESTMENT SECURITIES HELD-TO-MATURITY: Corporate obligations ................................... $ 6,991 7 (17) 6,981 Other investments ....................................... 2,214 -- -- 2,214 -------- -------- -------- -------- 9,205 7 (17) 9,195 Mortgage-backed securities .............................. 77,672 738 (484) 77,926 -------- -------- -------- -------- Total investment securities held-to-maturity ......... $ 86,877 745 (501) 87,121 ======== ======== ======== ======== 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 -------- -------- -------- -------- 108,656 98 (2,542) 106,212 Mortgage-backed securities .............................. 83,563 229 (2,516) 81,276 -------- -------- -------- -------- Total investment securities available-for-sale ....... $192,219 327 (5,058) 187,488 ======== ======== ======== ======== 7
18 WesterFed Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (Dollars in thousands, except per share data) Expected maturities may differ from contractual maturities because issuers may have the right to call or repay obligations at par value without prepayment penalties. The cost and estimated fair value of investment securities at December 31, 2000, by contractual maturity, are shown below: Fair Cost value ------- ------ INVESTMENT SECURITIES HELD-TO-MATURITY Due in: Less than one year ................................... $ 999 1,000 One to five years .................................... 3,199 3,226 Five to ten years .................................... 331 436 After ten years ...................................... 1,558 1,922 ------- ------ $ 6,087 6,584 ======= ====== INVESTMENT SECURITIES AVAILABLE-FOR-SALE Due in: Less than one year ................................... $ 9,256 9,245 One to five years .................................... 41,024 40,962 Five to ten years .................................... 2,649 2,660 After ten years ...................................... 5,344 5,484 Other ................................................ 3 106 ------- ------ $58,276 58,457 ======= ====== Gross proceeds from sales of investment securities available-for-sale for the year ended December 31, 2000, the six months ended December 31, 1999 and for the years ended June 30, 1999 and 1998 were $50,467, $3,314, $21,961, and $19,287, respectively. These sales resulted in gross gains of $18, $13, $89 and $108 for the year ended December 31, 2000, the six months ended December 31, 1999 and for the years ended June 30, 1999 and 1998, respectively, and gross losses of $1,082, $0, $0 and $11 for the year ended December 31, 2000, the six months ended December 31, 1999 and for the years ended June 30, 1999 and 1998, 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. 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 14 years at December 31, 2000. Mortgaged backed securities with amortized cost of $35,537 and $38,621 at December 31, 2000 and 1999, respectively, were pledged to secure public deposits and securities sold under repurchase agreements. The approximate market value of securities pledged at December 31, 2000 and 1999 was $36,016 and $38,597, respectively. All pledged securities are held in a custody account by a third party. 8
19 WesterFed Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (Dollars in thousands, except per share data) (5) LOANS RECEIVABLE A summary of loans receivable follows: December 31, December 31, 2000 1999 ------------ ------------ Loans secured by real estate: 1-4 residential units .............................. $ 234,803 259,570 5 or more residential units ........................ 30,356 35,563 Construction ....................................... 34,605 18,775 Commercial ......................................... 95,183 78,833 Agriculture ........................................ 14,701 11,625 Other nonresidential ............................... 11,075 8,348 FHA insured or VA guaranteed ....................... 5,350 6,781 --------- --------- Total real estate loans ..................... 426,073 419,495 Less: Net deferred loan origination fees ................. (919) (1,145) Undisbursed loan funds ............................. (5,005) (5,240) Purchased discounts ................................ (646) (852) Allowance for loan losses .......................... (1,735) (2,353) --------- --------- Net real estate loans ....................... 417,768 409,905 Other loans: Commercial (Non real estate) ....................... 59,244 45,361 Agriculture (Non real estate) ...................... 21,195 22,825 Loans to depositors, secured by deposits ........... 1,183 1,387 Indirect consumer loans ............................ 32,017 54,418 Other consumer loans -- real estate secured ........ 35,381 36,153 Other consumer loans ............................... 65,005 53,510 Allowance for loan losses .......................... (5,621) (2,808) --------- --------- Net other loans ............................. 208,404 210,846 --------- --------- Net loans .................................................. 626,172 620,751 Less loans available-for-sale .............................. (3,041) (4,470) --------- --------- Loans receivable, net ...................................... 623,131 $ 616,281 ========= ========= A summary of nonperforming loans follows: December 31, June 30, ---------------- ---------------- 2000 1999 1999 1998 ------ ------ ------ ------ Nonaccrual loans ........................... $4,021 2,893 3,049 3,989 Loans 90 days or more delinquent and still accruing ................. -- 60 775 626 ------ ------ ------ ------ Total nonperforming loans .......... $4,021 2,953 3,824 4,615 ====== ====== ====== ====== Contractual interest due ................... $ 292 193 223 271 ====== ====== ====== ====== 9
20 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 year ended December 31, 2000 and the six months ended December 31, 1999 and for the years ended June 30, 1999 and 1998 was insignificant. At December 31, 2000, there were no commitments to lend additional funds to borrowers whose loans are classified as nonperforming. Impaired loans at December 31, 2000 and 1999 are $3,312 and $2,385, respectively, of which no impairment allowance was deemed necessary. The average recorded investment in impaired loans for the year ended December 31, 2000 and the six months ended December 31, 1999 and for the years ended June 30, 1999 and 1998 was approximately $2,849, $2,111, $2,161 and $1,715, respectively. Interest income recognized on impaired loans for the year ended December 31, 2000 and the six months ended December 31, 1999 and for the years ended June 30, 1999 and 1998 was not significant. An analysis of the allowance for loan losses follows: Year Six Months Ended Ended Year Ended June 30, December 31, December 31, ---------------------- 2000 1999 1999 1998 ------------ ------------ ------ ------ Balance at beginning of period ............. $ 5,161 5,079 4,907 4,651 Provision charged to operations ............ 2,600 880 1,300 840 Charge-offs ................................ (745) (986) (1,228) (637) Recoveries ................................. 340 188 100 53 ------- ------ ------ ------ Balance at end of period ................... $ 7,356 5,161 5,079 4,907 ======= ====== ====== ====== Mortgage loans serviced for others are not included in the accompanying consolidated financial statements. The unpaid balances of these loans were approximately $212,700, $219,800, $223,400 and $260,300 at December 31, 2000 and 1999 and June 30, 1999 and 1998, respectively. Mortgage servicing rights are included in other assets and an analysis of activity follows: Year Six Months Ended Ended Year Ended June 30, December 31, December 31, ---------------------- 2000 1999 1999 1998 ------------ ------------ ------ ------ Balance at beginning of period ............. $ 527 602 1,062 1,239 Additions .................................. 24 15 23 37 Amortization ............................... (196) (90) (213) (214) Provision for impairment ................... -- -- (270) -- ----- ---- ------ ------ Balance at end of period ................... $ 355 527 602 1,062 ===== ==== ====== ====== At December 31, 2000, the fair value of all mortgage servicing rights was approximately $3,344. The fair value was obtained from the Office of Thrift Supervision Risk Management Division. 10
21 WesterFed Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Dollars in thousands, except per share data) (6) INTEREST RECEIVABLE A summary of interest receivable follows: December 31, December 31, 2000 1999 ------------ ------------ Loans ................................................. $4,662 4,445 Investment securities ................................. 1,967 3,044 Interest-bearing deposits ............................. -- 3 ------ ----- $6,629 7,492 ====== ===== (7) PREMISES AND EQUIPMENT Premises and equipment is summarized as follows: December 31, December 31, 2000 1999 ------------ ------------ Land ................................................ $ 5,567 5,822 Office buildings and leasehold improvements ......... 25,759 26,847 Furniture, fixtures and equipment ................... 10,580 10,814 -------- ------- 41,906 43,483 Less accumulated depreciation and amortization ...... (16,796) (16,006) -------- ------- $ 25,110 27,477 ======== ======= (8) DEPOSITS Deposits are summarized as follows: December 31, December 31, 2000 1999 ------------ ------------ Certificates of deposit ....................... $335,582 371,486 Savings accounts .............................. 71,769 87,206 Money market accounts ......................... 78,162 78,482 NOW accounts .................................. 78,290 82,506 -------- ------- Total interest-bearing ................ 563,803 619,680 Noninterest-bearing demand .................... 42,297 38,724 -------- ------- $606,100 658,404 ======== ======= 11
22 WesterFed Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Dollars in thousands, except per share data) Certificates of deposit at December 31, 2000 mature as follows: Less One to Two to Three Four to than two three to four five There- one year years years years years after Total --------- ------ ------ ------- -------- ------ ------- 2.00% to 3.99%.............................. $ 1,835 53 5 1 -- -- 1,894 4.00% to 4.99%.............................. 9,579 1,538 151 252 -- -- 11,520 5.00% to 5.99%.............................. 52,399 8,073 2,998 1,707 426 22 65,625 6.00% to 6.99%.............................. 177,638 13,829 6,248 237 3,374 -- 201,326 7.00% to 8.99%.............................. 5,926 381 241 10 65 -- 6,623 --------- ------ ------ ----- ----- ---- ------- 247,377 23,874 9,643 2,207 3,865 22 286,988 Jumbo ($100,000 or more).................... 43,591 2,508 2,028 245 222 -- 48,594 --------- ------ ------ ----- ----- ---- ------- Total certificates of deposit....... $ 290,968 26,382 1,671 2,452 4,087 22 335,582 ========= ====== ====== ===== ===== ==== ======= (9) REPURCHASE AGREEMENTS Repurchase agreements generally mature on the next banking day. The securities underlying agreements to repurchase are for the same securities originally sold and are held in a custody account by a third party. For the years ended December 31, 2000 and 1999, securities sold under agreements to repurchase averaged approximately $7,347 and $7,995, respectively. The maximum outstanding at any month end during the years ended December 31, 2000 and 1999 was approximately $10,146 and $9,568, respectively. Interest rates at December 31, 2000 and 1999 were 5.44% and 4.92%, respectively. (10) BORROWED FUNDS Advances from the FHLB and other borrowings are summarized as follows: December 31, December 31, 2000 1999 ------------ ------------ Advances from FHLB ........................... $198,404 226,769 8.5% contract payable ........................ 167 186 Collateralized mortgage obligations .......... -- 123 -------- -------- $198,571 227,078 ======== ======== Advances from FHLB bear interest at rates from 4.77% to 8.11% (weighted average rate of 6.30% at December 31, 2000). Principal requirements are presented at the earlier of call or maturity date as follows: Years ending December 31, ------------------------- 2001............................................. $125,430 2002............................................. 45,746 2003............................................. 9,895 2004............................................. 6,307 2005............................................. 2,234 Thereafter....................................... 8,792 -------- $198,404 ======== 12
23 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 $13,062 and $15,154 at December 31, 2000 and 1999, respectively, and a blanket assignment of the Bank's unpledged, qualifying mortgage loans 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 $99,461. There was $800 outstanding at December 31, 2000. There were no amounts outstanding under the program as of December 31, 1999. (11) INCOME TAXES A summary of the provision for income taxes follows: Year Six Months Ended Ended Year Ended June 30, December 31, December 31, ------------------- 2000 1999 1999 1998 ------------ ------------ ----- ----- Federal: Current ............. $ 5,027 2,034 3,469 3,582 Deferred ............ (1,025) 2 141 315 ------- ------ ----- ----- 4,002 2,036 3,610 3,897 ------- ------ ----- ----- State: Current ............. 1,056 426 762 753 Deferred ............ (175) 21 31 110 ------- ------ ----- ----- 881 447 793 863 ------- ------ ----- ----- $ 4,883 2,483 4,403 4,760 ======= ====== ===== ===== The effective tax rates for the year ended December 31, 2000, the six months ended December 31, 1999 and for the years ended June 30, 1999 and 1998 are 38.4%, 38.4%, 38.9% and 39.6%, respectively. A reconciliation between income tax expense and the amount computed by multiplying the applicable statutory federal income tax rate of 34% follows: Year Six Months Ended Ended Year Ended June 30, December 31, December 31, ---------------------- 2000 1999 1999 1998 ------------ ------------ ------ ------ Computed "expected" Federal tax expense .................... $ 4,319 2,196 3,851 4,086 Earnings and payout on life insurance policies ............. (131) (56) (147) (99) State income taxes, net of Federal income tax benefit ...... 581 295 523 567 Goodwill amortization ...................................... 226 113 226 215 Low income housing credit .................................. (77) (75) (75) (77) Other ...................................................... (35) 10 25 68 ------- ----- ----- ----- $ 4,883 2,483 4,403 4,760 ======= ===== ===== ===== 13
24 WesterFed Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Dollars in thousands, except per share data) The tax effects of temporary differences that give rise to deferred tax assets and liabilities are as follows: December 31, December 31, 2000 1999 ------------ ------------ DEFERRED TAX ASSETS: Loans, principally allowance for loan losses ................................... $2,829 1,985 Employee benefits, principally deferred compensation and accrued vacation ...... 1,328 1,194 Purchased excess tax bases ..................................................... 988 1,106 Loans, principally differences in bases ........................................ 249 328 Investment securities, principally differences in bases ........................ 525 633 Market value adjustment of investment securities available-for-sale ............ -- 1,801 ------ ----- Gross deferred income tax assets ................................. 5,919 7,047 ------ ----- DEFERRED TAX LIABILITIES: FHLB stock dividends ........................................................... 3,964 3,614 Fixed assets, principally difference in bases and depreciation ................. 1,331 1,576 Core deposit intangible ........................................................ 1,085 1,308 Deferred loan fees and origination costs ....................................... 288 340 Market value adjustment of investment securities available-for-sale ............ 104 -- Life insurance contract income ................................................. 52 49 Loans, due primarily to tax bad debt reserves in excess of base year amount .... 80 284 Loan servicing premium ......................................................... 62 104 Other .......................................................................... 216 330 ------ ----- Gross deferred income tax liabilities ............................ 7,182 7,605 ------ ----- Net deferred income tax liability ..................................... $1,263 558 ====== ===== 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, 2000, management believes it is more likely than not that the Company will realize the benefits of these deductible differences. (12) COMMITMENTS AND CONTINGENCIES The Company leases certain land, premises and equipment from third parties under operating leases. Total rental expense for the year ended December 31, 2000, the six months ended December 31, 1999 and for the years ended June 30, 1999 and 1998 was $186, $97, $198 and $197, 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, 2000 are as follows: Years ended December 31, Amount ------------------------ ------- 2001 $ 150 2002 137 2003 137 2004 137 2005 137 Thereafter 1,167 ------- Total minimum future rental expense $ 1,865 ======= 14
25 WesterFed Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Dollars in thousands, except per share data) The Company is the lessor of office space in certain of its branch office buildings under operating leases expiring in future years. Management expects as operating leases expire in the normal course of business, they will be renewed or replaced by leases on other properties at current market rental rates at the time of renewal. Approximate minimum future rentals to be received under non-cancelable leases subsequent to December 31, 2000 are as follows: Years ended December 31, Amount ------------------------ ------ 2001 $ 648 2002 215 2003 110 2004 71 ------ Total minimum future rental income $1,044 ====== 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. During the year ended December 31, 2000, the Company repurchased 319,500 shares under this plan. (13) EMPLOYEE BENEFIT PLANS EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) Effective July 1, 1993 the Board of Directors approved the adoption of an ESOP covering substantially all employees. The ESOP purchased 354,933 shares of WesterFed's common stock for $10 per share in connection with the conversion to stock ownership. The ESOP borrowed $3,549 from WesterFed to fund the purchase, evidenced by a note receivable recorded by WesterFed, secured by the common stock purchased by the ESOP. The terms of the note require quarterly principal payments from the ESOP of approximately $57, bearing interest at 7.26%, maturing December 2008. Contributions of cash or common stock are made from 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 $305, $150, $372 and $580 for the years ended December 31, 2000, the six months ended December 31, 1999 and the years ended June 30, 1999 and 1998, respectively. The ESOP shares were as follows: December 31, December 31, 2000 1999 ------------ ------------ Allocated shares ....................................... 202,925 179,128 Unallocated shares ..................................... 152,008 175,805 -------- -------- Original ESOP common shares ........................ 354,933 354,933 Shares distributed to participants ..................... (49,198) (31,718) -------- -------- Common shares held by ESOP ............................. 305,735 323,215 ======== ======== At December 31, 2000, the fair value of the unallocated shares was approximately $3,306,000. 15
26 WesterFed Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Dollars in thousands, except per share data) 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 of the related stock 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). The Company has granted Incentive Awards in the form of stock options during the year ended December 31, 2000, the six months ended December 31, 1999 and the year ended June 30, 1999 which allow holders to acquire 50,000, 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 year ended December 31, 2000, 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 $38, $13, $77 and $188 has been recorded for the year ended December 31, 2000, the six months ended December 31, 1999 and for the years ended June 30, 1999 and 1998, respectively. The following table reflects option activity for both the Stock Option Plan and Incentive Plan: Common Weighted Average Shares Exercise Price ------- ---------------- Year ending June 30, 1998: Options outstanding, beginning of period .... 572,804 $11.25 Granted ..................................... -- -- Exercised ................................... (37,978) 14.67 ------- Outstanding, end of period .................. 534,826 11.34 ======= Exercisable, end of period .................. 533,340 11.34 ======= 16
27 WesterFed Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Dollars in thousands, except per share data) Common Weighted Average Shares Exercise Price ------- ---------------- 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 ======= 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 ======= Year ending December 31, 2000: Granted ................................. 50,000 15.70 Exercised ............................... (84,484) 10.81 Expired/forfeited ....................... (4,971) 10.76 ------- Outstanding, end of period .............. 532,039 13.35 ======= Exercisable, end of period .............. 441,364 12.54 ======= Information regarding options outstanding and exercisable at December 31, 2000 follows: Options Outstanding Options Exercisable ------------------------------------------- -------------------------- Weighted Weighted average Weighted Range of Common average remain Common average exercise price shares exercise price life in yrs. shares exercise price --------------- ------ -------------- ------------ ------ -------------- $ 3.65 -- 6.54 2,047 $ 6.33 1.8 2,047 $6.33 10.00 -- 12.72 300,823 10.23 3.1 300,823 10.23 16.16 -- 21.50 229,169 17.50 8.0 138,494 17.66 ------- ------- 532,039 13.35 5.2 441,364 12.54 ======= ======= 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: Year Six Months Ended Ended Year Ended June 30, December 31, December 31, ------------------- 2000 1999 1999 1998 ----------- ------------ ----- ----- Net income, as reported .................... $7,819 3,975 6,923 7,260 ====== ===== ===== ===== Net income, pro forma ...................... $7,532 3,929 6,865 7,228 ====== ===== ===== ===== 17
28 WesterFed Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Dollars in thousands, except per share data) Year Six Months Ended Ended Year Ended June 30, December 31, December 31, ----------------------- 2000 1999 1999 1998 ------------ ------------ ------ ------ Income per common share: As reported: Basic .......................... $ 1.98 0.93 1.43 1.37 ====== ====== ====== ====== Diluted ........................ $ 1.91 0.89 1.37 1.29 ====== ====== ====== ====== Pro forma: Basic .......................... $ 1.90 0.92 1.42 1.36 ====== ====== ====== ====== Diluted ........................ $ 1.84 0.88 1.35 1.29 ====== ====== ====== ====== The fair value of the options granted was estimated using the Black-Scholes model with the following assumptions: for the year ended December 31, 2000; dividend yield of 3.3%; expected life of 1.5 years; volatility of 26%; and a risk-free interest rate of 5.1%; 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%. No options were granted during the year ended June 30, 1998. The average fair value of options granted for the year ended December 31, 2000, the six months ended December 31, 1999 and for the year ended June 30, 1999 was $6.50, $3.81 and $4.40, 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 $10, $16, $33 and $20 for the year ended December 31, 2000, the six months ended December 31, 1999 and for the years ended June 30, 1999 and 1998, respectively. On January 1, 2001, the Company terminated its participation in this plan. There was no significant gain or loss upon termination. 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 $404, $109, $154 and $346 for the year ended December 31, 2000, the six months ended December 31, 1999 and the years ended June 30, 1999 and 1998, 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 year ended December 31, 2000, the six months ended December 31, 1999 and for the years ended June 30, 1999 and 1998 totaled approximately $175, $89, $166 and $184, 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. 18
29 WesterFed Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Dollars in thousands, except per share data) (14) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and interest rate cap agreements. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of amounts recognized in the consolidated balance sheets. The contract or notional amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments. 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, December 31, 2000 1999 ------------ ------------ Fixed rate ................................. $ 2,100 2,435 Variable rate .............................. 9,762 6,559 ------- ----- $11,862 8,994 ======= ===== 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. COMMITMENTS TO SELL LOANS At December 31, 2000, the Company had commitments to sell $3,081 of loans. These loans are recorded at fair value and are classified as held for sale on the accompanying consolidated balance sheet. INTEREST RATE CAP At December 31, 1999, the Company had 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. At December 31, 2000, there were no outstanding interest rate cap agreements. 19
30 WesterFed Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Dollars in thousands, except per share data) (15) RECENT ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED In June 2000, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 138, "Accounting for Derivative Instruments and Hedging Activities," an amendment to SFAS No. 133. SFAS No. 133 and SFAS No. 138 establish 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. These standards require that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. As of December 31, 2000, the Company was not engaged in hedging activities nor did it hold any derivative instruments that will require adjustments to carrying values under SFAS No. 133 and SFAS No. 138. The Company adopted the standards on January 1, 2001. (16) RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES The reconciliation of net income to net cash provided by operating activities follows: Year Six Months Ended Ended Year Ended June 30, December 31, December 31, ---------------------- 2000 1999 1999 1998 ------------ ------------ -------- -------- Net income ............................................................. $ 7,819 3,975 6,923 7,260 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of: Deferred loan origination fees ................................... (337) (186) (470) (440) Premiums and discounts on securities, loans and borrowings ....... (520) (260) (632) (900) RRP deferred compensation .......................................... 38 13 77 188 ESOP shares committed to be released ............................... 390 205 472 652 Provision for loan losses .......................................... 2,600 880 1,300 840 Net (gain) loss on sales of: Investment securities available-for-sale ......................... 1,064 (13) (89) (97) Loans ............................................................ (365) (277) (1,060) (956) Real estate owned ................................................ 43 26 (13) -- Premises and equipment ........................................... (242) (12) (276) (17) Branches ......................................................... (1,878) -- -- -- Depreciation and amortization of premises and equipment ............ 2,112 1,088 2,488 2,147 Goodwill and core deposit amortization ............................. 1,246 673 1,443 1,391 FHLB stock dividends ............................................... (908) (539) (1,055) (975) Origination of loans available-for-sale ............................ (51,354) (41,609) (105,129) (96,520) Proceeds from sales of loans available-for-sale .................... 53,150 41,156 109,370 94,254 Decrease (increase) in interest receivable ......................... 762 143 143 (821) Interest expense credited to deposit accounts ...................... 23,590 12,100 24,320 26,938 Changes in other assets and liabilities ............................ 1,987 572 1,851 (2,209) -------- -------- -------- -------- Net cash provided by operating activities ....................... $ 39,197 17,935 39,663 30,735 ======== ======== ======== ======== 20
31 WesterFed Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Dollars in thousands, except per share data) (17) NON-CASH INVESTING AND FINANCING ACTIVITIES On December 19, 2000, the Company declared a dividend of approximately $1,030 which is recorded in accrued expenses and other liabilities at December 31, 2000. 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. Real estate owned acquired through foreclosures of loans receivable was approximately $341, $227, $559 and $546 for the year ended December 31, 2000, the six months ended December 31, 1999 and for the years ended June 30, 1999 and 1998, respectively. Treasury stock of approximately $1 and $2 was recorded due to forfeitures of unearned RRP shares for the year ended June 30, 1998. 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. (18) FAIR VALUE OF FINANCIAL INSTRUMENTS The following fair value estimates, methods and assumptions were used to measure the fair value of each class of financial instrument for which it is practical to estimate that value. For cash and short-term investments, the carrying amount was considered to be a reasonable estimate of fair value. For investment 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, 2000 and 1999. The fair value of demand deposits, savings deposits and money market accounts were the amounts payable on demand at December 31, 2000 and 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. 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. 21
32 WesterFed Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Dollars in thousands, except per share data) The estimated fair values of financial instruments are as follows: December 31, 2000 December 31, 1999 --------------------- --------------------- Carrying Fair Carrying Fair value value value value -------- -------- -------- -------- Financial assets: Cash and cash equivalents ..................... $ 19,945 19,945 26,143 26,143 Interest-bearing deposits ..................... 100 100 100 100 Investment securities available-for-sale ...... 140,945 140,945 187,488 187,488 Investment securities ......................... 69,665 71,204 86,877 87,121 Loans available-for-sale ...................... 3,041 3,041 4,470 4,470 Loans, net .................................... 623,131 618,063 616,281 602,658 Stock in FHLB of Seattle ...................... 13,062 13,062 15,154 15,154 Financial liabilities: Deposits ...................................... $606,100 606,483 658,404 656,813 Repurchase agreements ......................... 9,032 9,032 7,731 7,731 Borrowed funds ................................ 198,571 199,233 227,078 224,663 Off-balance-sheet items: Interest rate cap agreements: notional amount of $0 and $5,000 ............ -- -- 4 ======== ======== ======== ======== 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. 22
33 WesterFed Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Dollars in thousands, except per share data) (19) WESTERFED INFORMATION The summarized condensed financial information for WesterFed Financial Corporation is presented below: CONDENSED BALANCE SHEETS December 31, December 31, 2000 1999 ------------ ------------ Assets: Cash and cash equivalents .............................. $ 450 268 Interest-bearing and due from banks deposits ........... 445 2,096 Investment securities available-for-sale ............... 1,566 1,636 Other assets ........................................... 54 47 Investment in subsidiaries ............................. 92,778 86,335 -------- ------- Total assets ............................. $ 95,293 90,382 ======== ======= Liabilities and Stockholders' Equity: Other liabilities ...................................... $ 1,071 857 Stockholders' Equity: Common stock .................................... 57 56 Additional paid-in capital ...................... 71,115 70,040 Common stock acquired by ESOP/RRP ............... (1,825) (2,090) Treasury stock at cost .......................... (33,537) (28,974) Accumulated other comprehensive income (loss) ... 170 (2,930) Retained earnings ............................... 58,242 53,423 -------- ------- Total stockholders' equity ............... 94,222 89,525 -------- ------- Total liabilities and stockholders' equity ................................. $ 95,293 90,382 ======== ======= CONDENSED STATEMENTS OF INCOME Year Six Months Ended Ended Year Ended June 30, December 31, December 31, -------------------- 2000 1999 1999 1998 ------------ ------------ -------- ------ Dividends from the Bank ........................... $ 4,940 7,000 20,000 5,000 Interest income ................................... 131 39 266 233 Non-interest expense .............................. (660) (234) (653) (677) -------- -------- -------- ------ Income before income taxes ...................... 4,411 6,805 19,613 4,556 Income tax benefit ................................ 95 70 120 79 -------- -------- -------- ------ Income before undistributed earnings of subsidiaries ............................... 4,506 6,875 19,733 4,635 Undistributed (distributions in excess of) earnings of subsidiaries ........................ 3,313 (2,900) (12,810) 2,625 -------- -------- -------- ------ Net income ...................................... $ 7,819 3,975 6,923 7,260 ======== ======== ======== ====== 23
34 WesterFed Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Dollars in thousands, except per share data) Year Six Months Ended Ended Year Ended June 30, December 31, December 31, ---------------------- CONDENSED STATEMENTS OF CASH FLOWS 2000 1999 1999 1998 ------------ ------------ -------- -------- Operating Activities: Net income for the period .................................... $ 7,819 3,975 6,923 7,260 Adjustments to reconcile net income to net cash provided by operating activities: Distributions in excess of (equity in undistributed) earnings of subsidiaries ................ (3,313) 2,900 12,810 (2,625) Amortization of premiums on investment securities available-for-sale .......................... 9 (14) (223) (182) ESOP shares committed to be released ..................... 392 205 472 652 Net change in other assets and liabilities ............... (164) 89 213 (686) ------- ------- -------- -------- Net cash provided by operating activities .............. 4,743 7,155 20,195 4,419 ------- ------- -------- -------- Investing Activities: Decrease (increase) in interest-bearing deposits ............. 1,651 (1,713) 19 561 Purchase of investment securities ............................ (987) (2,542) (37,985) (23,766) Proceeds from maturities of investment securities ............ 1,093 2,000 42,250 21,350 ------- ------- -------- -------- Net cash provided by (used in) investing activities ...... 1,757 (2,255) 4,284 (1,855) ------- ------- -------- -------- Financing Activities: Dividends paid to stockholders ............................... (2,668) (1,536) (2,926) (2,729) Proceeds from exercise of stock options and stock issuances .. 913 443 404 557 Purchase of treasury stock ................................... (4,563) (3,655) (21,858) (379) ------- ------- -------- -------- Net cash used in financing activities .................... (6,318) (4,748) (24,380) (2,551) ------- ------- -------- -------- Increase in cash and cash equivalents .......................... 182 152 99 13 Cash and cash equivalents at beginning of period ............... 268 116 17 4 ------- ------- -------- -------- Cash and cash equivalents at end of period ..................... $ 450 268 116 17 ======= ======= ======== ======== 24
35 WesterFed Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Dollars in thousands, except per share data) (20) CONDENSED QUARTERLY RESULTS OF OPERATIONS - UNAUDITED Year Ended December 31, 2000 --------------------------------------------------------- Fourth Third Second First Quarter Quarter Quarter Quarter -------- -------- -------- -------- Interest income ........................ $ 17,544 17,651 17,819 17,660 Interest expense ....................... 10,018 10,079 10,352 9,915 -------- -------- -------- -------- Net interest income ................. 7,526 7,572 7,467 7,745 Provision for loan losses .............. (1,250)(1) (450) (450) (450) Noninterest income ..................... 1,841 2,875 3,000 1,793 Noninterest expense .................... (5,914) (5,821) (6,718) (6,064) -------- -------- -------- -------- Income before income tax expense .... 2,203 4,176 3,299 3,024 Income tax expense ..................... (845) (1,609) (1,265) (1,164) -------- -------- -------- -------- Net income .......................... $ 1,358 2,567 2,034 1,860 ======== ======== ======== ======== Net income per share: Basic ........................... $ 0.34 0.66 0.52 0.46 ======== ======== ======== ======== Diluted ......................... $ 0.33 0.64 0.51 0.45 ======== ======== ======== ======== (1) During the fourth quarter of 2000, an additional provision for loan losses of $800 was recorded due to the deterioration of a commercial loan relationship and consumer loans. 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 ............................. 1,848 2,117 Noninterest expense ............................ (6,378) (6,470) -------- -------- 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 ................................... $ .47 .46 ======== ======== Diluted ................................. $ .45 .44 ======== ======== 25
36 WesterFed Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Dollars in thousands, except per share data) 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 ======== ======= ======= ======= (21) EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share: Year Six Months Ended Ended Year Ended June 30, December 31, December 31, -------------------------- 2000 1999 1999 1998 ----------- ------------ ---------- ---------- Number of shares on which basic earnings per share is calculated: Average outstanding shares during the fiscal year ............................. 3,958,789 4,291,092 4,830,068 5,317,577 Add: Incremental shares under stock option plans ...................... 137,204 170,269 240,270 296,316 Incremental shares related to RRPs .............................. -- -- 1,225 13,425 ---------- ---------- ---------- ---------- Number of shares on which diluted earnings per share is calculated .............................. 4,095,993 4,461,361 5,071,563 5,627,318 ========== ========== ========== ========== Net income applicable to common stockholders (000's) .......................................... $ 7,819 3,975 6,923 7,260 ========== ========== ========== ========== Basic earnings per share .............................. $ 1.98 0.93 1.43 1.37 ========== ========== ========== ========== Diluted earnings per share ............................ $ 1.91 0.89 1.37 1.29 ========== ========== ========== ========== 26
37 WesterFed Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Dollars in thousands, except per share data) Stock options to purchase 180,669 and 72,169 shares for the six months ended December 31, 1999 and the year ended June 30, 1999, 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 years ended December 31, 2000 and June 30, 1998. (22) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Year Six Month Ended Ended Year Ended June 30, December 31, December 31, ------------------------ 2000 1999 1999 1998 ------------ ------------ ------- ------- Payments during the period for: Interest ....................... $13,799 6,761 12,856 13,900 Income taxes, net .............. 5,937 2,604 3,933 4,080 ======= ======= ======= ======= (23) BRANCH SALE On May 14, 2000, the Company sold the assets and liabilities of six branch locations to Stockman Bank. The Company recognized a net gain of $1,878. The net loans and deposits related to the branch sale were approximately $12.1 million and $50.5 million, respectively. In conjunction with the sale, the Company paid $35,983 to Stockman Bank. (24) SUBSEQUENT EVENT On September 20, 2000, the Company entered into a merger agreement with Glacier Bancorp, Inc. (Glacier). Glacier, a publicly traded multi-bank holding company headquartered in Kalispell, Montana, acquired the Company on February 28, 2001 for a combination of cash and stock in a transaction valued at approximately $95 million (Unaudited). 27
38 ITEM 7(b) UNAUDITED COMBINED CONDENSED PRO FORMA STATEMENT OF FINANCIAL CONDITION AS OF DECEMBER 31, 2000 Glacier Glacier and Bancorp, Inc. (amounts in thousands Glacier Pro forma WesterFed Idaho/Utah after except per share data) Bancorp, Inc. WesterFed Adjustments(1) Combined Branches(1) acquisitions ------------- ----------- -------------- ----------- ----------- ------------- ASSETS Cash on hand and in banks ........ $ 41,456 17,400 -- 58,856 2,480 61,336 Interest bearing cash deposits ... 10,330 2,645 -- 12,975 20,000(e) 32,975 ----------- ----------- ----------- ----------- ----------- ----------- Cash and cash equivalents ...... 51,786 20,045 -- 71,831 22,480 94,311 Investments Investment securities, held-to-maturity ............. -- 69,665 1,539(c) 71,204 -- 71,204 Investment securities, available-for-sale ........... 211,888 140,945 (27,997)(b) 324,836 119,550 444,386 ----------- ----------- ----------- ----------- ----------- ----------- Total Investments ............ 211,888 210,610 (26,458) 396,040 119,550 515,590 Loans receivable ................. 741,360 633,528 (5,929)(c) 1,368,959 37,698 1,406,657 Allowance for losses ............. (7,799) (7,356) -- (15,155) (1,125) (16,280) ----------- ----------- ----------- ----------- ----------- ----------- Total Loans, net ............. 733,561 626,172 (5,929) 1,353,804 36,573 1,390,377 Premises and equipment, net ...... 25,016 25,110 1,654(c) 51,780 6,449 58,229 Real estate and other assets owned .......................... 291 291 -- 582 -- 582 Federal Home Loan Bank of Seattle stock, at cost ......... 16,436 13,062 -- 29,498 -- 29,498 Federal Reserve stock, at cost ... 1,662 -- -- 1,662 -- 1,662 Accrued interest receivable ...... 6,637 6,629 -- 13,266 -- 13,266 Core deposit intangible .......... 1,547 2,821 4,628(c) 8,996 1,514(d) 10,510 Goodwill ......................... 4,946 14,097 (14,097)(c) 24,578 17,402(d) 41,980 19,632(c) Other assets ..................... 2,942 10,340 1,663(c) 14,945 -- 14,945 ----------- ----------- ----------- ----------- ----------- ----------- Total assets ................. $ 1,056,712 929,177 (18,907) 1,966,982 203,968 2,170,950 =========== =========== =========== =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits - non-interest bearing ........................ $ 141,207 45,160 -- 186,367 30,000 216,367 Deposits - interest bearing ...... 579,363 563,803 383(c) 1,143,549 153,518 1,297,067 Advances from Federal Home Loan Bank of Seattle ........... 196,791 198,404 -- 395,195 -- 395,195 Securities sold under agreements to repurchase ....... 24,877 9,032 -- 33,909 -- 33,909 Other borrowed funds ............. 4,652 167 -- 4,819 -- 4,819 Accrued interest payable ......... 4,591 8,293 -- 12,884 450 13,334 Current income taxes ............. 17 113 -- 130 -- 130 Deferred income taxes ............ 578 1,263 (684)(c) 1,157 -- 1,157 Other liabilities ................ 6,185 8,720 4,925(c) 19,830 -- 19,830 Minority interest ................ 338 -- 338 -- 338 ----------- ----------- ----------- ----------- ----------- ----------- Total liabilities ............ 958,599 834,955 4,624 1,798,178 183,968 1,982,146 ----------- ----------- ----------- ----------- ----------- ----------- Trust preferred securities ....... -- -- 15,000(e) 15,000 20,000(e) 35,000 Common stock, $.01 par value per share ...................... 114 57 (57)(a) 160 -- 160 46(b) Paid-in capital .................. 101,828 71,115 (71,115)(a) 157,473 -- 157,473 55,645(b) Common stock acquired by ESOP/RRP .................... -- (1,825) 1,825(a) -- -- -- Treasury stock, at cost .......... -- (33,537) 33,537(a) -- -- -- Retained earnings (deficit) - substantially restricted........ (4,087) 58,242 (58,242)(a) (4,087) -- (4,087) Accumulated other comprehensive income ......................... 258 170 (170)(a) 258 -- 258 ----------- ----------- ----------- ----------- ----------- ----------- Total stockholders' equity ... 98,113 94,222 (38,531) 153,804 -- 153,804 ----------- ----------- ----------- ----------- ----------- ----------- Total liabilities and stockholders' equity ... $ 1,056,712 929,177 (18,907) 1,966,982 203,968 2,170,950 =========== =========== =========== =========== =========== =========== (1) See accompanying notes to unaudited combined condensed pro forma financial statements to which specific references above also refer.
39 UNAUDITED COMBINED CONDENSED PRO FORMA STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000 Glacier Glacier and Bancorp, Inc. (amounts in thousands Glacier Pro forma WesterFed Idaho/Utah after except per share data) Bancorp, Inc. WesterFed Adjustments(1) Combined Branches(1) acquisitions ------------- ----------- -------------- ----------- ----------- ------------- Interest income Loans .......................... $ 63,197 52,714 847(e) 116,758 3,431 120,189 Investments and interest bearing deposits ............. 15,640 17,960 (1,881)(e) 31,411 9,769 41,180 (308)(e) ----------- ----------- ----------- ----------- ----------- ----------- Total interest income .......... 78,837 70,674 (1,341) 148,170 13,200 161,369 Interest expense Deposits ....................... 22,674 26,199 128(e) 49,001 6,601 55,602 Borrowings ..................... 14,683 14,165 28,848 28,848 Trust preferred securities ..... -- -- 1,560(e) 1,560 2,080(e) 3,640 ----------- ----------- ----------- ----------- ----------- ----------- Total interest expense ......... 37,357 40,364 1,688 79,409 8,681 88,090 Net interest income ............ 41,480 30,310 (3,029) 68,760 4,519 73,279 Provision for loan losses ........ 1,864 2,600 -- 4,464 119 4,583 ----------- ----------- ----------- ----------- ----------- ----------- Net interest income after provision for loan losses .... 39,616 27,710 (3,029) 64,296 4,400 68,696 Non-interest income Fees and service charges ....... 9,756 6,017 -- 15,773 1,823 17,596 Net gains on sale of loans .... 2,049 1,720 -- 3,769 -- 3,769 Net gains on sale of investments .................. 51 (699) -- (648) -- (648) Other income ................... 1,438 2,471 (238)(e) 3,671 -- 3,671 ----------- ----------- ----------- ----------- ----------- ----------- Total non-interest income ...... 13,294 9,509 (238) 22,565 1,823 24,388 Non-interest expense Employee compensation and benefits ..................... 16,214 11,945 -- 28,159 1,749 29,908 Occupancy & equipment .......... 4,830 1,843 66(e) 6,739 486 7,225 Other expense .................. 9,680 9,484 -- 19,164 1,193 20,357 Deposit premium amortization ... 199 579 463(e) 1,241 249(e) 1,490 Goodwill amortization .......... 343 666 277(e) 1,286 870(e) 2,156 Minority interest .............. 61 -- -- 61 -- 61 ----------- ----------- ----------- ----------- ----------- ----------- Total non-interest expense ..... 31,327 24,517 806 56,650 4,547 61,197 Earnings before income taxes ..... 21,583 12,702 (4,073) 30,212 1,676 31,886 Federal and state income tax expense ........................ 7,580 4,883 (1,481) 10,982 654 11,636 ----------- ----------- ----------- ----------- ----------- ----------- Net earnings ................... $ 14,003 7,819 (2,593) 19,229 1,022 20,251 =========== =========== =========== =========== =========== =========== Average common shares outstanding - basic ............ 11,440 3,959 15,829 15,829 Average common shares outstanding - diluted .......... 11,544 4,096 16,089 16,089 Basic net earnings per share of common stock ................ $ 1.22 1.98 1.21 1.28 Diluted net earnings per share of common stock ...... $ 1.21 1.91 1.20 1.26 (1) See accompanying notes to unaudited combined condensed pro forma financial statements to which specific references above also refer. 2
40 Notes to Unaudited Combined Condensed Pro Forma Financial Statements NOTE A: BASIS OF PRESENTATION The unaudited combined condensed pro forma statement of financial condition combines the historical consolidated statements of financial condition of Glacier Bancorp, Inc. ("Glacier"), WesterFed Financial Corporation ("WesterFed"), and the anticipated effects of the branch acquisitions in Idaho and Utah from Wells Fargo/First Security Bank of Utah ("Branch Acquisitions") as if the WesterFed and Branch Acquisitions had become effective on December 31, 2000. The unaudited pro forma combined statements of operations for the year ended December 31, 2000, combines the historical consolidated statements of operations of Glacier and WesterFed, and the anticipated effects of the Branch Acquisitions as if the merger of Glacier and WesterFed (the "Merger") and Branch Acquisitions had become effective on January 1, 2000. Certain amounts in the historical financial statements of WesterFed have been reclassified in the unaudited combined condensed pro forma financial statements to conform to Glacier's historical financial statements. The Merger and Branch Acquisition will be accounted for using the purchase method of accounting. Under this method of accounting, assets and liabilities acquired are adjusted to their estimated fair value and combined with the historical book values of the assets and liabilities of Glacier Additionally, WesterFed's Common Stock, additional paid in capital, unrealized gains and losses on securities-available-for-sale, and retained earnings is eliminated. Applicable income tax effects of such adjustments are included as a component of Glacier's net deferred taxes with a corresponding offset to goodwill. The actual revaluation of the net assets acquired is subject to the completion of studies and evaluations by management and will be based on the estimated fair value of the net assets acquired at the Effective Dates of the Merger and Branch Acquisition. Any transactions conducted in the ordinary course of business between Glacier, WesterFed, and Wells Fargo/First Security of Utah would be immaterial and, accordingly, have not been eliminated. Following the Merger and, subject to regulatory approvals, Glacier may merge certain branches of Western Security Bank, a wholly-owned subsidiary of WesterFed, with other Glacier subsidiaries, and may close branches that are considered non-strategic or are located close to other branches of the combined company. The impact of any such merger, or closings is not expected to be material. Glacier also expects to achieve certain operating cost savings as a result of the Merger; however, no pro forma adjustment has been included in the unaudited pro forma combined financial information for the anticipated cost savings. The branches acquired in the Branch Acquisitions will become branches of Mountain West Bank of Coeur d' Alene, Idaho, a wholly-owned subsidiary of Glacier. NOTE B: PURCHASE PRICE OF WESTERFED Total purchase price consideration for accounting purposes is calculated as follows (in thousands, except per share amounts): Acquisition of 4,118,868 shares of WesterFed Common Stock for total consideration of $22.25 per share ............... $91,640 Valuation adjustment for stock option shares .................... 1,348 Estimated direct acquisition costs .............................. 5,700 ------- Total purchase price .......................... $98,688 ======= 3
41 59.3% of the acquisition cost of WesterFed will be paid through the issuance of Glacier Common Stock. The value of those shares was $12.00 which was the average closing price for the three days prior to and subsequent to the announcement of the transaction. Acquisition cost of WesterFed common stock ........................................... $ 91,640 Percentage to be paid through issuance of stock ....................................... 59.3% ---------- Acquisition cost to be paid through the issuance of stock ........... 54,343 Valuation adjustment for stock option shares .......................................... 1,348 ---------- Total acquisition cost to be paid through issuance of stock ......... 55,691 Divided by the assumed value per share of shares issued ............................... $ 12.00 ---------- Total Glacier shares to be issued ..................................................... 4,642,750 ========== The acquisition cost to be paid through the issuance of stock will be recorded as follows: Acquisition cost to be paid through the issuance of common stock ..... $ 55,691 Less par value of common stock issued ................................ (46) -------- Additional paid-in capital ........................................... $ 55,645 ======== The cash consideration is assumed to be funded with the proceeds of trust preferred securities and with the sale of investment securities which are classified as available-for-sale and whose carrying value approximates market value. The total cash consideration is assumed as follows: Acquisition cost of WesterFed common stock ....... $91,640 Percentage to be paid in cash at closing ......... 40.7% ------- Acquisition cost to be paid in cash ...... 37,297 Estimated direct acquisition costs ............... 5,700 ------- Total acquisition costs paid in cash ............. $42,997 ======= NOTE C: ALLOCATION OF PURCHASE PRICE OF WESTERFED Certain matters are still pending that will have an effect on the ultimate allocation of the purchase price. Accordingly, the allocation of the purchase price has not been finalized and the portion of the purchase price allocated to fair value adjustments, identifiable intangibles and goodwill is subject to change. Subject to the foregoing, the purchase price has been allocated as described below (in thousands): WesterFed's net assets at December 31, 2000 ................................. $94,222 Increase (decrease) to WesterFed's net assets as a result of estimated fair value adjustments: Investment securities held-to-maturity .................. $ 1,539 Premises and equipment .................................. 1,654 Loans receivable, net ................................... (5,929) Deposits ................................................ (383) Accrued expenses(1) ..................................... (4,925) Mortgage servicing rights ............................... 1,663 Core deposit intangible ................................. 4,628 -------- $ (1,753) Applicable income tax effects (2) ....................... 684 -------- Net fair value adjustments ................................................ (1,069) Eliminate WesterFed's existing goodwill ................................... (14,097) -------- Estimated fair value of identifiable tangible and intangible net assets ... $ 79,056 Goodwill .................................................................. 19,632 -------- Total purchase price consideration ........................................ $ 98,688 ======== 4
42 (1) Includes $2,733,000 of estimated severance costs under existing WesterFed employment agreements. (2) Estimated marginal tax rate of 39%. NOTE D: BRANCH PURCHASE The acquisition of the Idaho and Utah branches is structured as a purchase of assets and assumption of liabilities. With certain exceptions all of the deposits of the branches, real and personal property at each of the branch locations, vault cash, and loans associated with the deposit accounts will be acquired. The net difference between the assets acquired and liabilities assumed, (estimated to be approximately $126.255 million), and acquisition consideration paid by Mountain West Bank of Coeur d'Alene, will be paid in cash by the selling banks. The amounts shown in the Idaho/Utah Branches column on the unaudited combined condensed pro forma statements were based on information provided by the selling banks and management's estimates of operating results. The acquisition consideration paid is expected to be as follows: Core deposit intangible .............................. $ 1,514 Goodwill ............................................. 17,402 ------- Total acquisition consideration .... $18,916 ======= NOTE E: PRO FORMA ADJUSTMENTS For the unaudited combined condensed pro forma statements of operations, the pro forma adjustments are based on the allocated purchase price of the net assets acquired based on the fair value estimates at December 31, 2000 described above. Investment securities will be adjusted to fair value based on current securities yields and the fair value adjustment will be amortized to interest income as a yield adjustment using the level yield method over the average estimated life of the securities, currently estimated to be five years. Loans receivable will be adjusted to fair value based on current loan interest rates and the fair value adjustment will be amortized to interest income as a yield adjustment using the level yield method over the average estimated life of the underlying loans receivable, currently estimated to be seven years. Premises and equipment will be adjusted to fair value based on current market value evaluations and the new basis will be depreciated on a straight line basis over the remaining estimated economic life of the related assets, currently estimated at 25 years. Mortgage servicing rights will be adjusted to fair value based on current market evaluations and the fair market value adjustment will be amortized on a straight line basis over the weighted average maturity of the associated loans, currently estimated to be 7 years. Interest-bearing time deposits will be adjusted to fair value based on current time deposit interest rates and the fair value adjustment will be amortized into interest expense using the interest method over the estimated duration of the related deposit, currently estimated to be three years. Borrowed funds will be paid off prior to the close of the acquisition; therefore, no fair value adjustments have been made. For purposes of calculating pro forma adjustments, straight-line amortization has been used as any differences between the interest method and the straight-line method would not be significant. Core deposit intangible will be amortized over the expected economic life which is assumed to be ten years. It is anticipated that the amortization amount will be larger in the earlier years of the amortization period. Goodwill will be amortized over a twenty year period on a straight-line basis. 5
43 Securities sold to fund the acquisition's cash consideration is estimated to be $28 million with an assumed interest rate of 6.72%. In addition to the sale of securities, funding of the transactions will be obtained from proceeds of $35 million trust preferred securities to be issued by Glacier with an interest rate of 9.4%. The amortization of origination costs over a five year call period will result in an effective interest cost of approximately 10.4%. Pro forma combined weighted average shares outstanding is based on the number of shares assumed to be issued to WesterFed stockholders of 4,799,167 as described above combined with the actual weighted average shares outstanding for Glacier for the respective periods. No options to acquire WesterFed common stock are assumed to be outstanding after the Effective Date of the Merger. The incremental effect on pro forma combined net earnings of the WesterFed purchase accounting adjustments for the year ended December 31, 2000 is estimated to be an after-tax increase in expense as follows, using an estimated marginal tax rate of 39%: 6
44 Amortization Quarterly Annual (Dollars in thousands) Adjustment Period in Amortization Amortization Amount Years Amount Amount ---------- ------------ ------------ ------------ Fair value adjustments: Investment securities ........... $ 1,539 5 $ 77 $ 308 Loans receivable ................ (5,929) 7 (212) (847) Premises and equipment .......... 1,654 25 17 66 Deposits ........................ (383) 3 (32) (128) Accrued expenses ................ (4,925) -- Mortgage servicing rights ....... 1,663 7 59 238 Core deposit intangible ......... 4,628 10 116 463 Goodwill ........................ 5,535 20 69 277 ------- ------- ------- ------- Total adjustments ..................... $ 3,782 94 376 ======= Income taxes .................... 10 39 ------- ------- Incremental decrease on pro forma combined net earnings . $ 84 338 ======= ======= (Dollars in thousands) Estimated amortization for the year ended December 31, 2001 2002 2003 2004 2005 ------- ------- ------- ------- ------- Fair value adjustments: Investment securities ........... $ 308 $ 308 $ 308 $ 308 $ 308 Loans receivable ................ (847) (847) (847) (847) (847) Premises and equipment .......... 66 66 66 66 66 Deposits ........................ (128) (128) (128) -- -- Accrued expenses ................ Mortgage servicing rights ....... 238 238 238 238 238 Core deposit intangible ......... 1,418 1,169 934 748 603 Goodwill ........................ 277 277 277 277 277 ------- ------- ------- ------- ------- Total adjustments ..................... 1,331 1,083 848 789 644 Income taxes .................... 411 825 728 200 143 ------- ------- ------- ------- ------- Incremental decrease on pro forma combined net earnings . 920 258 120 589 501 ======= ======= ======= ======= ======= NOTE (F) PRO FORMA INCOME PER SHARE Pro forma combined weighted average shares outstanding is based on the number of shares assumed to be issued to WesterFed shareholders as described above combined with the actual weighted average shares outstanding for Glacier for the respective periods. 7
1 Exhibit 23 Independent Auditors' Consent The Board of Directors WesterFed Financial Corporation: We consent to the inclusion of our report dated February 23, 2001, with respect to the consolidated balance sheets of WesterFed Financial Corporation and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, stockholders' equity and comprehensive income, and cash flows for the year ended December 31, 2000, the six months ended December 31, 1999 and the years ended June 30, 1999 and 1998, which report appears in the Form 8-K/A of Glacier Bancorp, Inc. filed on May 3, 2001. /s/ KPMG LLP Billings, Montana May 2, 2001