10-Q 1 wf10qjune.txt UNITED STATES SECURITY AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 X For the quarter ended June 30, 2000 -------------- OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 -------------- For the transition period from _______________ to _______________ Commission file number 0-22772 WESTERFED FINANCIAL CORPORATION (Exact name of registrant as specified in this charter) DELAWARE 81-0487794 ---------------------------------------- ------------------------------------- (State or other jurisdiction of (IRS Employer ID #) incorporation or organization 110 East Broadway, Missoula, Montana 59802 ---------------------------------------- ------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, 406-721-5254 Including area code ------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subjected to such filing requirements for the past 90 days. Yes X NO ----------- ------------ The number of shares outstanding of each of the Issuer's Classes of Common Stock, as of the latest date is: Class: Common Stock, Par Value $0.01 per share; Outstanding at July 31, 2000 4,051,724 shares (including restricted shares) - 1 - TABLE OF CONTENTS PART I -- FINANCIAL INFORMATION Page ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets - June 30, 2000 and December 31, 1999.....- 3 - Consolidated Statements of Income - Three and Six Month Periods Ended June 30, 2000 and June 30, 1999 .................................- 4 - Consolidated Statements of Comprehensive Income for Three and Six Month Periods Ended June 30, 2000 and June 30, 1999 ..................................- 5 - Consolidated Statement of Stockholders' Equity for the Six Month Periods Ended June 30, 2000 ...................- 6 - Consolidated Statements of Cash Flows for the Six Month Period Ended June 30, 2000 and June 30, 1999 .................................- 7 - Notes to Consolidated Financial Statements 1. Basis of Presentation........................................- 8 - 2. Cash Equivalents.............................................- 8 - 3. Computation of Earnings per Share............................- 8 - 4. Dividends Declared...........................................- 8 - 5. A Comparison of the Amortized Cost and Estimated Fair Value of Investment Securities and Mortgage-backed Securities ...............- 9 - A Comparison of the Amortized Cost and Estimated Fair Value of Investment Securities by Contractual Maturities....................- 10 - ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 1. Forward Looking Statements..................................- 11 - 2. Changes in Financial Condition. Comparison of the Six Month Period from December 31, 1999 to June 30, 2000 ................- 11 - 3. Comparison of Operating Results for the Three Month Period Ended June 30, 2000 and June 30, 1999.........................- 14 - 4. Comparison of Operating Results for the Six Month Period Ended June 30, 2000 and June 30, 1999.........................- 18 - ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.......- 24 - PART II -- OTHER INFORMATION Item 1 Legal Proceedings...........................................- 25 - Item 2 Change In Securities........................................- 25 - Item 3 Defaults Upon Senior Securities.............................- 25 - Item 4 Submission Of Matters To Vote Of Security Holders...........- 25 - Item 5 Other Information...........................................- 25 - Item 6 Exhibits And Reports On Form 8-K............................- 25 - SIGNATURES................................................................- 26 - - 2 - ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets - June 30, 2000 and December 31, 1999. (Dollars in thousands, except share and per share data) June 30, December 31, 2000 1999 -------- ---------- ASSETS Cash and due from banks $ 22,228 $ 20,233 Interest-bearing due from banks 1,506 5,910 -------- ---------- Cash and cash equivalents 23,734 26,143 Interest-bearing deposits 100 100 Investment securities available-for-sale 149,119 187,488 Investment securities, at amortized cost (estimated market value of $80,648 at June 30, 2000 and $87,121 at December 31, 1999) 80,326 86,877 Stock in Federal Home Loan Bank of Seattle, at cost 12,645 15,154 Loans available-for-sale 4,756 4,470 Loans receivable, net 614,163 616,281 Interest receivable 6,946 7,492 Premises and equipment, net 25,402 27,477 Core deposit intangible 3,101 3,401 Goodwill 14,430 14,763 Cash surrender value of life insurance policies 8,369 8,164 Other assets 2,572 3,075 -------- ---------- Total assets $945,663 $1,000,885 ======== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits $606,623 $ 658,404 Repurchase agreements 5,631 7,731 Borrowed funds 224,501 227,078 Advances from borrowers for taxes and insurance 3,614 3,296 Income taxes 959 597 Accrued interest payable 6,792 6,476 Accrued expenses and other liabilities 8,949 7,778 -------- ---------- Total liabilities 857,069 911,360 -------- ---------- Stockholders' Equity: Preferred stock, $.01 par value, 5,000,000 shares authorized; None outstanding -- -- Common stock, $.01 par value, 10,000,000 shares authorized; 4,084,842 shares outstanding at June 30, 2000 and 4,351,404 outstanding at December 31, 1999 57 56 Paid-in capital 70,264 70,040 Common stock acquired by ESOP/RRP (1,959) (2,090) Treasury stock, at cost (33,001) (28,974) Accumulated other comprehensive loss (2,769) (2,930) Retained earnings 56,002 53,423 -------- ---------- Total stockholders' equity 88,594 89,525 -------- ---------- Total liabilities and stockholders' equity $945,663 $1,000,885 ======== ========== Book value per common share outstanding $ 21.69 $ 20.57 ======== ========== Tangible book value per common share outstanding $ 17.22 $ 16.40 ======== ========== See accompanying notes to consolidated financial statements. - 3 - Consolidated Statements of Income - Three and Six Month Period Ended June 30, 2000 and June 30, 1999. (Dollars in thousands, except share and per share data)

See accompanying notes to consolidated financial statements. - 4 - Consolidated Statements of Comprehensive Income - Three and Six Month Periods Ended June 30, 2000 and June 30, 1999. Three Months Six Months Ended Ended June 30, June 30, -------------- -------------- 2000 1999 2000 1999 ------ ------ ------ ------ Net income $2,034 $1,756 $3,894 $3,340 ------ ------ ------ ------ Other comprehensive income (loss): Unrealized gains (losses) on investment securities: Realized and unrealized holding gains (losses) arising during the period 96 (2,270) (815) (2,821) Add: reclassification adjustment for (gains) losses included in net income 1,078 (64) 1,075 (89) ------ ------ ------ ------ Other comprehensive loss, before tax 1,174 (2,334) 260 (2,910) Income tax benefit (expense) related to items of other comprehensive income (446) 887 (99) 1,106 ------ ------ ------ ------ Other comprehensive income (loss), after tax 728 (1,447) 161 (1,804) ====== ====== ====== ====== Comprehensive income $2,762 $ 309 $4,055 $1,536 ====== ====== ====== ====== See accompanying notes to consolidated financial statements. - 5 - Consolidated Statement of Stockholders' Equity for the Six Month Period Ended June 30, 2000. (Dollars in thousands, except share and per share data)

See accompanying notes to consolidated financial statements. - 6 - Consolidated Statements of Cash Flows for the Six Month Period Ended June 30, 2000 and June 30, 1999. (Dollars in thousands) Six Months Ended June 30, --------------------- 2000 1999 -------- --------- Net cash provided by operating activities $ 20,285 $ 22,356 -------- --------- Cash flows from investing activities: Purchases of: Investment securities available-for-sale (18,558) (133,157) Proceeds from maturities of: Investment securities 90 3,000 Investment securities available-for-sale - 34,455 Proceeds from sales of: Investment securities 3,000 - Investment securities available-for-sale 49,160 21,962 Principal payments from: Investment securities 3,567 8,430 Investment securities available-for-sale 6,942 6,118 Redemption of FHLB stock 3,000 - Net change in loans receivable (10,994) 2,611 Net change in interest-bearing deposits - (100) Purchases of premises and equipment (899) (197) Proceeds from sale of premises and equipment 1,018 600 Proceeds from sale of real estate owned 266 204 Disposition of branches, net of cash and cash equivalents of $1,605 (35,983) - -------- --------- Net cash provided (used) by investing activities 609 (56,074) -------- --------- Cash flows from financing activities: Net change in deposits excluding interest credited (13,775) (18,179) Net change in repurchase agreements (2,100) (509) Proceeds from borrowings 732,762 220,560 Payments on borrowings (735,360) (177,961) Net change in advances from borrowers for taxes and insurance 345 94 Proceeds from exercise of options 167 302 Payments to acquire treasury stock (4,027) (54) Dividends paid to stockholders (1,315) (1,223) -------- --------- Net cash provided (used) by financing activities (23,303) 23,030 -------- --------- Net decrease in cash and cash equivalents (2,409) (10,688) Cash and cash equivalents at beginning of period 26,143 39,634 -------- --------- Cash and cash equivalents at end of period $ 23,734 $ 28,946 ======== ========= Supplemental disclosure of cash flow information: Payments during the period for: Interest $ 7,272 $ 6,137 Income taxes, net 2,145 1,608 ======== ========= See accompanying notes to consolidated financial statements Noncash investing and financing activities - In conjunction with the sale of branches during the six months ended June 30, 2000, the Company disposed of assets with a book value of $13.4 million and liabilities with a book value of $51.3 million. The Company transferred loans of $298 and $265 to other real estate owned during the six-month periods ended June 30, 2000 and 1999, respectively. 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 20, 2000, the Company declared a dividend of approximately $694 which is recorded in accrued expenses and other liabilities at June 30, 2000. - 7 - WESTERFED FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the information contained herein reflects all adjustments necessary to make the results of operations for the interim periods a fair statement of such operations. All such adjustments are of a normal recurring nature. Operating results for the three and six month periods ended June 30, 2000 are not necessarily indicative of the results anticipated for the year ending December 31, 2000. For additional Company information, refer to the consolidated financial statements and footnotes thereto included in WesterFed Financial Corporation's (the "Company") audited annual report for the six months ended December 31, 1999. 2. CASH EQUIVALENTS For purposes of the Consolidated Statements of Cash Flows, the Company considers all cash, daily interest demand deposits, non-interest bearing deposits with banks, and interest bearing deposits having original maturities of three months or less to be cash equivalents. 3. COMPUTATION OF 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 earnings per share plus the incremental amount of potential common stock determined by the treasury stock method. The following table sets forth the computation of basic and diluted earnings per share: (Dollars in thousands, except share and per share data)

Stock options to purchase 180,669 and 72,169 shares as of June 30, 2000 and June 30, 1999 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. 4. DIVIDENDS DECLARED On June 20, 2000 the Board of Directors of the Company declared a quarterly cash dividend of $0.17 per share to stockholders of record on July 6, 2000, payable on July 20, 2000. - 8 - 5. A COMPARISON OF THE AMORTIZED COST AND ESTIMATED FAIR VALUE OF INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES AT THE DATES INDICATED IS AS FOLLOWS:

- 9 - A COMPARISON OF THE AMORTIZED COST AND ESTIMATED FAIR VALUE OF INVESTMENT SECURITIES BY CONTRACTUAL MATURITIES AT JUNE 30, 2000 IS AS FOLLOWS: HELD-TO-MATURITY (Dollars in Thousands) June 30, 2000 ----------------- Amortized Estimated Cost Fair Value ------- ------- Due in one year or less $ 997 $ 992 Due after one year through 5 years 3,240 3,258 Due after 5 years through 10 years 331 408 Due after 10 years 1,557 1,773 ------- ------- $ 6,125 $ 6,431 ------- ------- AVAILABLE-FOR-SALE (Dollars in Thousands) June 30, 2000 ----------------- Amortized Estimated Cost Fair Value ------- ------- Due in one year or less $ 8,560 $ 8,500 Due after one year through 5 years 46,516 45,050 Due after 5 years through 10 years 149 149 Due after 10 years 6,849 6,701 Other $ 93 $ 159 ------- ------- $62,167 $60,559 ------- ------- - 10 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 1. FORWARD LOOKING STATEMENTS When used in this Form 10-Q or future filings made by the Company with the Securities and Exchange Commission, in the Company's press releases or other public shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The Company wishes to caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date made, and to advise readers that various factors including regional and national economic conditions, changes in levels of market interest rates, credit risks of lending activities and competitive and regulatory factors could affect Western Security Bank's (the "Bank") financial performance and could cause the Company's actual results for future periods to differ materially from those anticipated or projected. The Company does not undertake, and specifically disclaims, any obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. 2. CHANGES IN FINANCIAL CONDITION. COMPARISON OF THE SIX MONTH PERIOD FROM DECEMBER 31, 1999 TO JUNE 30, 2000. General - Total assets decreased $55.3 million to $945.7 million at June 30, 2000 from $1.001 billion at December 31, 1999. The decrease in assets was primarily the result of decreases in loans receivable and loans available-for-sale of $1.9 million, and decreases in investment securities, Federal Home Loan Bank of Seattle (FHLB) stock and all other interest earning assets of $51.6 million. Total deposits decreased $51.8 million while repurchase agreements and borrowed funds decreased $4.7 million and stockholders' equity decreased $931,000. In May 2000, the Bank completed the sale of six branches in eastern Montana that resulted in the sale of $50.5 million of deposits and $12.2 million of loans with a resulting net gain on sale of branches of $1.9 million. Loans Receivable and Loans Available-for-Sale - Loans receivable and loans available-for-sale decreased $1.9 million to $618.9 million at June 30, 2000 from $620.8 million at December 31, 1999. The $1.9 million decrease in loans was primarily comprised of decreases in residential loans of $5.0 million and consumer dealer finance loans of $14.2 million, while other consumer related loans increased $5.5 million and commercial and agriculture loans increased $12.4 million. The decrease in loans receivable was primarily the result of principal repayments of $118.0 million and the sale of loans available-for-sale of $23.2 million, partially offset by loan originations of $139.8 million. Because of the interest rate risk incurred with long term lending associated with fixed-rate one-to four family loans (usually thirty year), the Bank currently sells a substantial portion of the thirty year loans and reinvests the proceeds in stock repurchases, debt reduction and other types of loans and investments. Investment Securities, FHLB Stock and Other Interest Earning Assets - Investment securities, FHLB stock and other interest earning assets decreased $51.6 million to $252.1 million at June 30, 2000 from $303.7 million at December 31, 1999. The $51.6 million decrease was primarily the result of the sale of $47.6 million of investment securities available-for-sale. Proceeds from - 11 - investment sales were used to pay down FHLB advances that funded the sale of Bank branches during the quarter ended June 30, 2000. Goodwill and Core Deposit Intangible - Goodwill is being amortized over 25 years, or approximately $666,000 per year. The core deposit intangible is amortized on an accelerated basis over its estimated economic life of seven years, or approximately $299,700 for the six months ending June 30, 2000. From time to time, the Bank, the regulated thrift institution subsidiary of the Company, may, in order to reduce interest rate risk, purchase financial instruments that lock in a spread between interest-earning assets and interest-bearing liabilities. While these types of financial instruments limit risk, they also reduce the Bank's ability to maximize profits during periods of favorable interest rate trends. The Bank may be a party to financial instruments with off-balance-sheet risk in the normal course of business to reduce its own exposure to fluctuations in interest rates. These financial instruments may include interest rate cap and interest rate swap agreements. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of amounts recognized in the consolidated balance sheets. The contract or notional amounts of these instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. For interest rate cap and interest rate swap agreements, the contract or notional amounts do not represent exposure to credit loss. The Bank controls the credit risk of those instruments through credit approval, limits and monitoring procedures. Interest Rate Caps - Interest rate caps entitle the Bank to receive various interest payments in exchange for payment of a premium, provided the three-month LIBOR exceeds an agreed upon interest rate. Transaction fees paid in connection with interest rate cap agreements are amortized to interest expense as an adjustment of the interest cost of liabilities. Because the Bank receives various interest payments if the three-month LIBOR exceeds the agreed upon interest rate, the Bank is generally at risk to the extent of the unamortized premium paid if the six-month LIBOR does not exceed the agreed upon interest rate. At June 30, 2000, the amount of the unamortized premiums paid related to the interest rate cap transactions was $1,900. Interest rate cap agreements are used to manage interest rate risk by synthetically extending the life of interest-bearing liabilities. The following summarizes interest rate cap agreements outstanding at June 30, 2000: Notional principal Agreement Amount Termination Cap Rate ------------------------ --------------------- ---------------- $5,000 July, 2000 6.0% The counter party to the interest rate cap agreement is Merrill Lynch. The agreement is not collateralized. Interest Rate Swaps - At June 30, 2000 the Bank did not have any interest rate swap agreements in place. At June 30, 2000 the Bank had no structured notes. - 12 - Deposits - Deposits decreased $51.8 million to $606.6 million at June 30, 2000 from $658.4 million at December 31, 1999, primarily as a result of the sale of $50.5 million of deposits related to the sale of six branches. Borrowed Funds and Repurchase Agreements - Borrowed funds and repurchase agreements decreased $4.7 million to $230.1 million at June 30, 2000 from $234.8 million at December 31, 1999. There were new borrowings of $732.8 million with maturities of less than one year. The increase in new borrowings was offset by principal repayments and maturities of $737.5 million. The majority of the borrowing activity has been for periods of less than sixty days to enable the Bank to borrow at the lowest cost possible to fund loan demand. Stockholders' Equity - Stockholders' equity decreased $931,000 to $88.6 million at June 30, 2000 from $89.5 million at December 31, 1999. This decrease was due to the repurchase of 283,000 shares of common stock at an average price of $14.23 per share for a total of $4.0 million. This decrease was partially offset by increases in equity resulting from net income for the six month period of $3.9 million, $189,000 related to contributions to the Employee Stock Ownership Plan and shares earned and issued under the Recognition and Retention Plan, and the issuance of 16,400 new common shares with a recorded value of $167,000 related to exercised stock options. Stockholders- equity was also reduced $1.3 million for dividends declared during the six month period. Stockholders' equity increased $161,000 related to the change in unrealized losses associated with assets classified as available-for-sale being adjusted to market value in accordance with Statement of Financial Accounting Standards No. 115. - 13 - 3. COMPARISON OF OPERATING RESULTS FOR THE THREE MONTH PERIOD ENDED JUNE 30, 2000 AND JUNE 30, 1999. RESULTS OF OPERATIONS

- 14 - Net Interest Income Analysis -- The following table presents for the periods indicated the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. No tax equivalent adjustments were made. Non-accruing loans have been included in the table as loans carrying a zero yield.

- 15 - General - Net income increased $278,000, or 15.8%, to $2.0 million for the quarter ended June 30, 2000 as compared to $1.8 million for the same period last year. Net interest income before provision for loan losses decreased $558,000 and the provision for loan losses increased $5,000. Non-interest income increased $506,000 and non-interest expense decreased $550,000. Income tax expense increased $215,000. There was approximately an $800,000 net increase to non-interest income related to $1.9 million gain on the sale of branches and $1.1 million in losses on the sale of investment securities available-for-sale, both non-recurring, during the quarter ended June 30, 2000. The net interest margin (net interest income divided by average interest-earning assets) decreased to 3.27% during the quarter ended June 30, 2000 from 3.46% during the same period last year. The interest rate spread decreased to 3.06% at June 30, 2000 as compared to 3.28% at June 30, 1999. Interest Income - Interest income increased $351,000 to $17.8 million for the three month period ended June 30, 2000 from $17.5 million for the same period last year. The increase was the result of an increase in the average yield on average interest earning assets to 7.81% during the quarter ended June 30, 2000 from 7.54% during the same period last year, partially offset by a decrease in the average balance of interest earning assets of $14.0 million to $912.9 million during the three month ended June 30, 2000 from $926.9 million during the same period last year. Interest earned on loans receivable decreased $106,000 due primarily to a $14.3 million decrease in the average balance of loans receivable to $625.5 million during the three month period ended June 30, 2000 from $639.8 million for the same period last year. The average yield on loans receivable increased to 8.32% during the three month period ended June 30, 2000 from 8.20% during the same period last year. Interest earned on investment securities, FHLB stock and other interest earning assets increased $457,000. The average balance of these securities increased $152,000 to $287.3 million during the three month ended June 30, 2000 from $287.2 million during the same period last year. The average yield increased to 6.70% during the quarter ended June 30, 2000 from 6.06% during the same period last year. Interest Expense - Total interest expense increased $909,000 to $10.4 million for the three month period ended June 30, 2000 from $9.4 million for the same period last year. Interest expense on deposits increased $354,000 due to an increase in interest rates paid on deposits during the quarter ended June 30, 2000 as compared to the same period last year. The average balance of deposits decreased $18.9 million to $624.6 million during the three month period ended June 30, 2000 from $643.5 million during the same period last year. The average rate paid increased to 4.17% during the three month ended June 30, 2000 from 3.83% during the same period last year. Interest expense on borrowed funds increased $555,000 due to an increase in the average rate paid on borrowed funds to 6.23% during the quarter ended June 30, 2000 from 5.41% during the same period last year. The average balance of borrowed funds increased $4.0 million to $246.6 million for the three month period ended June 30, 2000 from $242.6 million during the same period last year. Provisions for Loan Losses - The provision for loan losses increased $5,000 to $450,000 for the three month period ended June 30, 2000 as compared to a $445,000 provision for the same period last year. The increased provision for loan losses is primarily related to charge-offs in consumer loans and management's goal to change the composition of the loan portfolio by reducing the amount of fixed-rate long term residential loans held in portfolio while attempting to increase the amount of consumer and commercial loans held in portfolio, which have inherently greater credit risk than residential loans. - 16 - The provision for loan losses is determined by management as the amount to be added to the allowance for loan losses after net charge-offs have been deducted to bring the allowance to a level which is considered adequate to absorb losses inherent in the loan portfolio in accordance with generally accepted accounting principles. At June 30, 2000 the Company had $2.9 million of non-performing assets (representing 0.31% of total assets) as compared to $3.1 million at December 31, 1999 (representing 0.31% of total assets) and $2.7 million at March 31, 2000 (representing 0.27% of total assets). At June 30, 2000 the Company had an allowance for loan losses to non-performing assets of 196.9% as compared to 165.4% at December 31, 1999 and 201.9% at March 31, 2000. Management-s evaluation of the adequacy of its loan loss reserves, the quality and composition of the loan portfolio and economic conditions in Montana resulted in the $450,000 provision for loan losses for the quarter. Future additions to the Company's allowance for loan losses and any change in the related ratio of the allowance for loan losses to non-performing loans are dependent upon the performance and composition of the Company's loan portfolio, the economy, inflation, changes in real estate values and interest rates and the view of the regulatory authorities toward adequate reserve levels. For additional information, see "Non-Performing Assets." Total non-interest income increased $506,000 to $3.0 million during the quarter ended June 30, 2000 from $2.5 million during the same period last year. There was approximately an $800,000 net increase to non-interest income related to $1.9 million gain on the sale of branches and $1.1 million in losses on the sale of investment securities available-for-sale, both non-recurring, during the quarter ended June 30, 2000. Non-interest income for the quarter ended June 30, 1999 included $314,000 from the sale of the Bank's credit card program, life insurance proceeds and the sale of a building, reduced by the write down of purchased servicing values. Loan origination income decreased $368,000 while service fees increased $327,000 for the quarter ended June 30, 2000 as compared to the same period last year. The decrease in loan origination income was the result of continued interest rate increases during the current year as compared to a mostly declining, or stable interest rate environment during the same period last year. The increase in interest rates resulted in lower volumes of refinance activity on residential loans during the quarter ended June 30, 2000 as compared to the same period last year. Non-interest expenses decreased $550,000, or 7.6%, to $6.7 million for the quarter ended June 30, 2000, down from $7.3 million for the same period last year. Included in non-interest expense for the quarter ended June 30, 2000 were $687,000 of additional expenses of which $250,000 were related to compensation and employee benefits, $269,000 related to net occupancy expense of premises, $58,000 related to equipment and furnishings,, and $110,000 of other expenses. Included in non-interest expense for the quarter ended June 30, 1999 was $575,000 related to payment of retirement incentives and other non-recurring expenses. Income Taxes - Income tax expense increased $215,000 due to the $493,000 increase in income before income taxes. - 17 - 4. COMPARISON OF OPERATING RESULTS FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2000 AND JUNE 30, 1999. RESULTS OF OPERATIONS

- 18 - Net Interest Income Analysis -- The following table presents for the periods indicated the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. No tax equivalent adjustments were made. Non-accruing loans have been included in the table as loans carrying a zero yield.

- 19 - General - Net income increased $554,000, or 16.6%, to $3.9 million for the six month period ended June 30, 2000 as compared to $3.3 million for the same period last year. Net interest income before provision for loan losses decreased $524,000 and the provision for loan losses increased $110,000. Non-interest income increased $374,000 and non-interest expense decreased $1.3 million. Income tax expense increased $501,000. There was approximately an $800,000 net increase to non-interest income related to $1.9 million gain on the sale of branches and $1.1 million in losses on the sale of investment securities available-for-sale, both non-recurring, during the six month period ended June 30, 2000. The net interest margin (net interest income divided by average interest-earning assets) decreased to 3.31% during the six month period ended June 30, 2000 from 3.42% during the same period last year. The interest rate spread decreased to 3.10% at June 30, 2000 as compared to 3.22% at June 30, 1999. Interest Income - Interest income increased $929,000 to $35.5 million for the six month period ended June 30, 2000 from $34.6 million for the same period last year. The increase was the result of an increase in the average yield on average interest earning assets to 7.72% during the six month period ended June 30, 2000 from 7.52% during the same period last year, as well as an increase in the average balance of interest earning assets of $703,000 to $919.7 million during the six month period ended June 30, 2000 from $919.0 million during the same period last year. Interest earned on loans receivable decreased $278,000 due primarily to a $12.7 million decrease in the average balance of loans receivable to $624.1 million during the six month period ended June 30, 2000 from $636.8 million for the same period last year. The average yield on loans receivable increased to 8.28% during the six month period ended June 30, 2000 from 8.20% during the same period last year. Interest earned on investment securities, FHLB stock and other interest earning assets increased $1.2 million primarily due to an increase in the average balance of these securities of $13.4 million to $295.6 million during the six month period ended June 30, 2000 from $282.2 million during the same period last year. The average yield increased to 6.53% during the six month period ended June 30, 2000 from 5.99% during the same period last year. Interest Expense - Total interest expense increased $1.5 million to $20.3 million for the six month period ended June 30, 2000 from $18.8 million for the same period last year. Interest expense on deposits increased $500,000 due to an increase in interest rates paid on deposits during the six month period ended June 30, 2000 as compared to the same period last year. The average balance of deposits decreased $4.8 million to $638.6 million during the six month period ended June 30, 2000 from $643.4 million during the same period last year. The average rate paid increased to 4.07% during the six month ended June 30, 2000 from 3.89% during the same period last year. Interest expense on borrowed funds increased $953,000 due to an increase in the average rate paid on borrowed funds to 6.06% during the six month period ended June 30, 2000 from 5.44% during the same period last year. The average balance of borrowed funds increased $7.5 million to $239.7 million for the six month period ended June 30, 2000 from $232.2 million during the same period last year. Provisions for Loan Losses - The provision for loan losses increased $110,000 to $900,000 for the six month period ended June 30, 2000 as compared to a $790,000 provision for the same period last year. Non-interest income increased $374,000 to $4.8 million during the six-month period ended June 30, 2000 from $4.4 million during the same period last year. The $374,000 increase resulted primarily from the non-recurring $800,000 net gain on sale of branches and net loss on sale of investment - 20 - securities and a $444,000 increase in service fees, partially offset by a $652,000 decrease in loan origination income. The increasing interest rate environment that existed during the six month period ended June 30, 2000 as compared to the lower interest rate environment during the same period last year resulted in reduced loan refinance activity. Loans sold decreased to $23.2 million during the six-month period ended June 30, 2000 as compared to $38.5 million during the same period last year. Seasonal fluctuations in loan volume and a decline in loan volume due to increased interest rates could continue to adversely affect origination fees and gains on sale of loans available-for-sale. Non-interest expense decreased $1.3 million, or 9.2%, to $12.8 million during the six month period ended June 30, 2000 from $14.1 million during the same period last year. Compensation and employee benefits decreased $895,000 and other operating expenses decreased $404,000. Compensation and employee benefits for the six month period ended June 30, 1999 included $575,000 related to payment of early retirement incentives and other compensation not incurred during the six month period ended June 30, 2000. Income Taxes - Income tax expense increased $501,000 due to the $1.1 million increase in income before income taxes and non-taxable life insurance proceeds of $138,000 included in the six-months ended June 30, 1999. - 21 - Loan Quality -- The following table sets forth the amounts and categories of non-performing assets in the Company's loan portfolio. At June 30, 2000 and December 31, 1999 the Company did not have any loans termed troubled debt restructuring which involved forgiving a portion of interest or principal on any loans or making loans at a rate materially less than market rates. Foreclosed assets include assets acquired in settlement of loans, and are recorded at the lower of the related loan balance, less any specific allowance for loss, or fair value at the date of foreclosure less estimated disposal costs. June 30, December 31, 2000 1999 ------ ------ (In Thousands) Non-accruing loans: Real Estate: One-to-four family $ 549 $ 549 Multi-family - - Commercial 145 348 Construction 178 324 Agricultural (non real estate) 1,128 1,113 Commercial (non real estate) 41 51 Consumer 556 508 ------ ------ Total 2,597 2,893 ------ ------ Accruing loans delinquent 90 days or more: Real Estate: One-to-four family - 40 Multi-family - - Commercial - - Construction - - Agriculture (non-real estate) - - Commercial (non-real estate) - - Consumer 17 20 ------ ------ Total 17 60 ------ ------ Foreclosed Assets: Real Estate: One-to-four family 202 94 Multi-family - - Commercial - - Land - 26 Consumer 120 48 ------ ------ Total 322 168 ------ ------ Total non-performing assets $2,936 $3,121 ====== ====== Total as a percentage of total assets 0.31% 0.31% ====== ====== Total allowance for loan losses to non-performing loans (exclusive of foreclosed assets) 221.12% 174.77% ====== ====== Total allowance for loan losses to total non-performing assets 196.87% 165.36% ====== ====== Non-Performing Assets - Total non-performing assets decreased $185,000 to $2.9 million at June 30, 2000 from $3.1 million at December 31, 1999. The $185,000 decrease in non-performing assets was primarily the result of a $370,000 decrease in non-performing construction, commercial and agriculture loans. Total non-performing assets as a percentage of total assets remained stable to 0.31% at June 30, 2000 as compared to 0.31% at December 31, 1999. The 0.31% is less than the national composite for thrifts non-performing assets as a percentage of assets of 0.61% at March 31, 2000, which is the latest available information as reported by the Office of Thrift Supervision. In addition to the non-performing loans and foreclosed assets set forth in the preceding table, as of June 30, 2000, there were no other loans identified by the Company with respect to which information known about the possible credit problems of the borrowers or of the cash flows of the security properties have caused management to have some concerns as to the ability of the borrowers to comply with present loan repayment terms and which may result in the future inclusion of such items in the non-performing asset categories. - 22 - At June 30, 2000 there were no other impaired loans. The following table sets forth an analysis of the Bank's allowance for loan losses.

- 23 - Regulatory Capital -- At June 30, 2000 the Bank met all applicable regulatory capital requirements, including the fully phased-in risk based capital requirements. The following table provides information on a bank only basis indicating the extent to which the Bank exceeds the minimum capital requirements under federal regulations as of June 30, 2000.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Management believes there has been no material change in interest rate risk since December 31, 1999. For additional information, see Management's Discussion and Analysis of Financial Condition and Results of Operations included herein in Item 2 and refer to the Interest Rate Risk Management discussion included in WesterFed Financial Corporation's Annual Report for the six months ended December 31, 1999. The Office of Thrift Supervision ("OTS") has established guidelines for determining the level of interest rate risk for an OTS regulated institution and has developed an interagency uniform ratings system establishing several levels of interest rate risk: "minimal", "moderate", "significant," "high" and "imminent threat." Based on a 200 basis point increase in interest rates the Bank's post-shock 6.54% NPV ratio, representing a 189 basis point change from 8.43% pre-shock NPV ratio, indicates a risk rating of "minimal" for the Bank at March 31, 2000, which is the latest available information as reported by the OTS. - 24 - PART II -- OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS Neither the registrant or its subsidiaries are part to any legal proceedings, other than routine litigation arising in the normal course of its business. While the ultimate outcome of these various legal proceedings cannot be predicted with certainty, it is the opinion of management that the resolution of these legal actions should not have a material effect on the Company's consolidated financial position, results of operations or liquidity. ITEM 2 CHANGE IN SECURITIES - None ITEM 3 DEFAULTS UPON SENIOR SECURITIES - None ITEM 4 SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS - None ITEM 5 OTHER INFORMATION - None ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K A. Form 8-K The registrant filed a current report on Form 8-K on August 8, 2000 to report a dividend declaration of $0.17 per share. The registrant filed a current report on Form 8-K on August 8, 2000 to report the quarterly earnings release. - 25 - 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 thereunto duly authorized: WESTERFED FINANCIAL CORPORATION Date: August 14, 2000 /s/ Lyle R. Grimes -------------------- ------------------------------------- Lyle R. Grimes Chairman of the Board Date: August 14, 2000 /s/ Ralph K. Holliday -------------------- ------------------------------------- Ralph K. Holliday President/ Chief Executive Officer Date: August 14, 2000 /s/ James A. Salisbury -------------------- ------------------------------------- James A. Salisbury Treasurer and Chief Financial Officer (Principal Finance and Accounting Officer) - 26 -

WESTERFED FINANCIAL CORP 10-Q