FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended......................... JUNE 30, 1997
---------------
[ ] 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 0-26584
-------
FIRST SAVINGS BANK OF WASHINGTON BANCORP, INC.
----------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 91-1691604
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 S. FIRST AVENUE WALLA WALLA, WASHINGTON 99362
--------------------------------------------------------
(Address of principal executive offices and zip code)
(509) 527-3636
---------------
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes [ X ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title of class: As of JULY 31, 1997
--------------- -------------------
COMMON STOCK, $.01 PAR VALUE 10,491,113 SHARES *
* Includes 763,918 shares held by employee stock ownership plan (ESOP)
that have not been released, committed to be released, or allocated
to participant accounts; and 324,345 unvested shares held in trust
for management recognition and development plan (MRP).
FIRST SAVINGS BANK OF WASHINGTON BANCORP, INC. AND SUBSIDIARIES
Table of Contents
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements. The Consolidated Financial Statements of First
Savings Bank of Washington Bancorp, Inc. and Subsidiaries filed as a
part of the report are as follows:
Consolidated Statements of Financial Condition
as of June 30, 1997 and March 31, 1997.................................. 2
Consolidated Statements of Income
for the Quarters ended June 30, 1997 and 1996........................... 3
Consolidated Statements of Changes in Stockholders' Equity
for the Quarters ended June 30, 1997 and 1996...........................4
Consolidated Statements of Cash Flows
for the Quarters ended June 30, 1997 and 1996.......................... 5
Selected Notes to Consolidated Financial Statements...................... 6
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operation
General.................................................................. 9
Recent Developments and Significant Events............................... 9
Comparison of Financial Condition at June 30, 1997 and March 31, 1997.... 9
Comparison of Results of Operations for the Quarters ended June
30, 1997 and 1996...................................................... 10
Asset Quality............................................................13
Liquidity and Capital Resources......................................... 13
Capital Requirements.....................................................14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 15
Item 2. Changes in Securities.......................................... 15
Item 3. Defaults upon Senior Securities................................ 15
Item 4. Submission of Matters to a Vote of Stockholders................ 15
Item 5. Other Information.............................................. 15
Item 6. Exhibits and Reports on Form 8-K............................... 15
SIGNATURES................................................................ 16
EXHIBIT 27- FINANCIAL DATA SCHEDULE........................................17
1
FIRST SAVINGS BANK OF WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)
JUNE 30, 1997 AND MARCH 31, 1997
(UNAUDITED)
ASSETS JUNE 30 March 31
1997 1997
---------- ----------
CASH AND DUE FROM BANKS $ 15,989 $ 24,488
SECURITIES AVAILABLE FOR SALE, cost $297,780 and
$288,142 299,397 287,516
SECURITIES HELD TO MATURITY, fair value $788 and $987 788 987
LOANS RECEIVABLE HELD FOR SALE, fair value $3,224 and
$2,940 3,224 2,940
LOANS RECEIVABLE, net of the allowance for losses of
$6,955 and $6,748 704,836 642,941
ACCRUED INTEREST RECEIVABLE 7,573 6,950
REAL ESTATE HELD FOR SALE, net 1,192 1,057
FEDERAL HOME LOAN BANK STOCK 13,886 12,807
PROPERTY AND EQUIPMENT, net 10,850 10,534
COSTS IN EXCESS OF NET ASSETS ACQUIRED 11,682 11,906
DEFERRED INCOME TAX ASSET 447 1,220
OTHER ASSETS 4,302 4,287
---------- -----------
$ 1,074,166 $ 1,007,633
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS:
Interest bearing $ 513,738 $ 508,258
Non-interest bearing 37,851 36,709
---------- ----------
551,589 544,967
ADVANCES FROM FEDERAL HOME LOAN BANK 279,726 231,515
OTHER BORROWINGS 74,309 62,185
ADVANCES BY BORROWERS FOR TAXES AND INSURANCE 1,890 4,112
ACCRUED EXPENSES AND OTHER LIABILITIES 9,544 11,086
DEFERRED COMPENSATION 3,182 2,814
INCOME TAXES PAYABLE 1,019 2,318
--------- ---------
921,259 858,997
STOCKHOLDERS' EQUITY:
Preferred stock - $0.01 par value, 500,000 shares
authorized, no shares issued -- --
Common stock - $0.01 par value, 25,000,000 shares
authorized, 10,910,625 shares issued:
10,518,682 shares and 10,518,982 shares outstanding
at June 30, 1997 and March 31, 1997, respectively 109 109
Additional paid - in capital 108,020 107,844
Retained earnings 65,108 62,572
Valuation reserve for securities available for sale 1,069 (401)
Treasury stock, at cost: 391,943 shares at June 30,
1997 and 391,643 at March 31, 1997 (6,959) (6,954)
Unearned shares of common stock issued to employee stock
ownership plan trust 763,918 and 775,105 shares
outstanding but restricted at June 30, 1997 and March
31, 1997, respectively (7,639) (7,751)
Shares held in trust for stock-related compensation
plans (6,801) (6,783)
-------- --------
152,907 148,636
---------- ----------
$ 1,074,166 $ 1,007,633
=========== ==========
2
FIRST SAVINGS BANK OF WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED) (IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
Quarters
Ended June 30
1997 1996
------ ------
INTEREST INCOME:
Loans receivable $ 14,922 $ 8,932
Mortgage-backed securities 3,142 3,112
Securities and deposits 1,998 1,741
------ ------
20,062 13,785
INTEREST EXPENSE:
Deposits 6,059 4,627
Federal Home Loan Bank advances 3,691 2,643
Other borrowings 971 296
------ ------
10,721 7,566
------ ------
Net interest income before
provision for loan losses 9,341 6,219
PROVISION FOR LOAN LOSSES 355 513
------ ------
Net interest income 8,986 5,706
OTHER OPERATING INCOME:
Loan servicing fees 198 178
Other fees and service charges 564 164
Gain on sale of loans 202 87
Gain (loss) on sale of securities 1 4
Miscellaneous 18 22
------ ------
Total other operating income 983 455
OTHER OPERATING EXPENSES:
Salary and employee benefits 3,314 1,776
Less capitalized loan origination costs (506) (391)
Occupancy 386 277
Outside computer services 248 198
Real estate operations (1) 17
Advertising 122 50
Deposit insurance 70 214
Amortization of costs in excess
of net assets acquired 224 --
Miscellaneous 1,082 743
------ ------
Total other operating expenses 4,939 2,884
------ ------
Income before provision for income taxes 5,030 3,277
PROVISION FOR INCOME TAXES 1,785 884
------ ------
NET INCOME $ 3,245 $ 2,393
====== ======
Net income per common shares:
Primary $ .34 $ .24
Fully diluted $ .33 $ .24
Cumulative dividends declared per common share: $ .07 $ .05
3
FIRST SAVINGS BANK OF WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED) (IN THOUSANDS)
FOR THE QUARTER ENDED JUNE 30, 1997, AND 1996
Valuation
reserve for Shares held Total
Common Stock Additional securities Unearned ESOP shares Treasury stock in trust stock-
Number of At par paid-in Retained available Number of Carrying Number of Carrying for deferred holders
shares value capital earnings for sale shares value shares value compensation equity
------ ------ ------- -------- -------- ------- ------- ------- ------- ------------ -------
BALANCE, April 1, 1996 10,911 $ 109 $107,370 $ 55,343 $ 774 (833) $(8,331) -- $ -- $ (1,123) $154,142
Net income 2,393 2,393
Change in valuation reserve for
securities available for sale,
net of income taxes (713) (713)
Cash dividends on common stock
(.05/share cumulative) (482) (482)
Purchase of treasury stock (436) (6,430) (6,430)
Release of earned ESOP shares 41 9 89 130
Amortization of compensation related to MRP --
Forfeiture or net change in the number and/or
carrying amount of shares held in trust for
compensation plans (200) (200)
------ ------ ------- -------- -------- ------- ------- ------- ------- ------------ -------
BALANCE, June 30, 1996 10,911 $ 109 $107,411 $ 57,254 $ 61 (824) $(8,242) (436) $(6,430) $ (1,323) $148,840
====== ====== ======= ======== ======== ======= ======= ======= ======= ============ =======
BALANCE, April 1, 1997 10,911 $ 109 $107,844 $ 62,572 $ (401) (775) $(7,751) (392) $(6,954) $ (6,783) $148,636
Net income 3,245 3,245
Change in valuation reserve for
securities available for sale,
net of income taxes 1,470 1,470
Cash dividends on stock
($.07/share cumulative) (709) (709)
Purchase of treasury stock --
Release of earned ESOP shares 176 11 112 288
Amortization of compensation related to MRP 301 301
Forfeiture or net change in number and/or
carrying amount of shares held in
trust for compensation plans (5) (319) (324)
------ ------ ------- -------- -------- ------- ------- ------- ------- ------------ -------
BALANCE, JUNE 30, 1997 10,911 $ 109 $108,020 $ 65,108 $ 1,069 (764) $(7,639) (392) $(6,959) $ (6,801) $152,907
====== ====== ======= ======== ======== ======= ======= ======= ======= ============ =======
4
FIRST SAVINGS BANK OF WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) (IN THOUSANDS)
FOR THE QUARTERS ENDED JUNE 30, 1997 AND 1996
1997 1996
------ ------
OPERATING ACTIVITIES
Net income $ 3,245 $ 2,393
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred taxes -- --
Depreciation 268 138
Loss (gain) on sale of securities (1) (4)
Net amortization of premiums and discounts on investments (15) (463)
Amortization of costs in excess of net assets acquired 224 --
Amortization of MRP liability 301 --
Loss (gain) on sale of loans (202) (87)
Loss (gain) on disposal of real estate held for sale 9 --
Net changes in deferred loan fees, premiums and discounts 252 429
Loss (gain) on disposal of equipment (5) --
Amortization of purchased mortgage servicing rights 17 20
Provision for losses on loans and real estate held for sale 355 574
FHLB stock dividend (246) (187)
Cash provided (used) in operating assets and liabilities:
Loans held for sale (284) 362
Accrued interest receivable (623) 70
Other assets (34) (57)
Deferred compensation 65 55
Accrued expenses and other liabilities (1,543) (1,097)
Income taxes payable (1,299) (1,337)
------ ------
Net cash provided by operating activities 484 809
------ ------
INVESTING ACTIVITIES:
Purchase of securities available for sale (56,400) (192,685)
Principal payments and maturities of securities
available for sale 45,779 200,151
Sales of securities available for sale 999 --
Purchase of securities held to maturity -- --
Principal payments and maturities of securities
held to maturity 199 99
Purchase of FHLB stock (833) (1,151)
Loans originated and closed - net (120,230) (57,335)
Purchase of loans and participating interest in loans (26,982) (17,395)
Sales of loans and participating interest in loans 10,156 5,863
Principal repayments on loans 74,116 38,367
Purchase of property and equipment (588) (45)
Proceeds from sale of property and equipment 9 --
Insurance proceeds on real estate held for sale-net 103 --
Basis of real estate held for sale acquired in
settlement of loans and disposed of during the period 393 125
Funds transferred to deferred compensation plan trusts (19) (19)
------ ------
Net cash used by investing activities (73,298) (24,025)
------ ------
( CONTINUED ON NEXT PAGE )
5
FIRST SAVINGS BANK OF WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) (IN THOUSANDS)
FOR THE QUARTERS ENDED JUNE 30, 1997 AND 1996
(CONTINUED FROM PRIOR PAGE)
1997 1996
------ ------
FINANCING ACTIVITIES
Increase (decrease) in deposits $ 6,622 $ 1,279
Proceeds from FHLB advances 267,230 163,657
Repayment of FHLB advances (219,019) (132,569)
Proceeds from reverse repurchase borrowings 15,545 --
Repayments of reverse repurchase borrowings (21) (113)
Decrease-net in other borrowings (3,400) (895)
Decrease in borrowers' advances for taxes and insurance (2,222) (1,959)
Compensation expense recognized for shares released
for allocation to participants of the ESOP:
Original basis of shares 112 89
Excess of fair value of released shares over basis 176 41
Cash dividend paid (708) (504)
Purchase of treasury stock -- (6,430)
------ ------
Net cash provided by financing activities 64,315 22,596
------ ------
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (8,499) (620)
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD 24,488 9,026
------ ------
CASH AND DUE FROM BANKS, END OF PERIOD $ 15,989 $ 8,406
====== ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 10,820 $ 8,279
Taxes paid $ 3,085 $ 2,220
Non-cash transactions:
Loans, net of discounts, specific loss allowances
and unearned income transferred to real estate owned $ 640 $ 272
Net change in accrued dividends payable $ 1 $ 22
Net change in unrealized gain (loss) in deferred
compensation trust and related liability $ 309 $ 184
Treasury stock forfeited by MRP $ 5 $ --
6
FIRST SAVINGS BANK OF WASHINGTON BANCORP, INC. AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND MARCH 31, 1997
NOTE 1: BASIS OF PRESENTATION
The unaudited consolidated financial statements of First Savings Bank of
Washington Bancorp, Inc. (the Company) included herein reflect all adjustments
which are, in the opinion of management, necessary to present a fair statement
of financial position and the results of operations for the interim periods
presented. All such adjustments are of a normal recurring nature. The
consolidated financial statements include the Company's wholly owned
subsidiaries, First Savings Bank of Washington (FSBW) and Inland Empire Bank
(IEB) (together, the Banks). The balance sheet data at March 31, 1997, is
derived from the Company's audited financial statements. Certain information
and note disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to the rules and regulations of the Securities and Exchange Commission
(SEC). It is suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and notes thereto
included in the Annual Report on Form 10-K for the year ended March 31, 1997,
(File No. 0-26584) of the Company. Certain amounts in the prior period's
financial statements and/or schedules have been reclassified to conform to the
current period's presentation.
NOTE 2: ADDITIONAL INFORMATION REGARDING INTEREST-BEARING DEPOSITS AND
SECURITIES
The following table sets forth additional detail on the Company's
interest-bearing deposits and securities at the dates indicated (at carrying
value) (in thousands):
JUNE 30 March 31
1997 1997
Interest-bearing deposits included
in cash and due from bank $ 801 $ 8,849
--------- -----------
Mortgage-backed securities 185,402 174,375
Other securities-taxable 76,253 76,401
Other securities-tax exempt 34,330 33,969
Other stocks with dividends 4,200 3,758
--------- ----------
Total securities $ 300,185 $ 288,503
--------- ----------
Federal Home Loan Bank Stock 13,886 12,807
--------- ----------
$ 314,872 $ 310,159
========= ==========
The following table provides additional detail on income from deposits and
securities for the periods indicated (in thousands):
Quarters ended
June 30
1997 1996
------ ------
Mortgage-backed securities $ 3,142 $ 3,112
------ ------
Taxable interest and dividends $ 1,233 $ 1,089
Tax-exempt interest 519 465
Federal Home Loan Bank stock-dividends 246 187
------ ------
$ 1,998 $ 1,741
------ ------
$ 5,140 $ 4,853
====== ======
7
NOTE 3: CALCULATION OF WEIGHTED AVERAGE SHARES OUTSTANDING FOR EARNINGS PER
SHARE (EPS) AND CALCULATION OF OUTSTANDING SHARES.
Calculation of Weighted
Average Shares Outstanding
for Earnings Per Share
(in thousands)
Quarters ended
June 30
1997 1996
---------- ----------
Total shares issued 10,911 10,911
Less purchase of treasury stock
including shares allocated to MRP (796) (246)
Less unallocated shares held by the ESOP (769) (830)
Plus MRP and stock option incremental
shares considered outstanding
for primary EPS calculations 318 --
---------- ----------
Primary weighted average shares outstanding 9,664 9,835
Plus MRP and stock option incremental
shares considered outstanding for fully diluted
EPS calculations 55 --
---------- ----------
Fully diluted weighted average shares outstanding 9,719 9,835
========== ==========
Calculation of
Outstanding
Shares at
(in thousands)
JUNE 30 March 31
1997 1997
--------- -----------
Total shares issued 10,911 10,911
Less treasury stock (392) (392)
--------- -----------
Outstanding shares 10,519 10,519
========= ===========
In February 1997, the FASB issued SFAS No. 128, Earnings Per Share. SFAS No.
128 specifies the computation, presentation and disclosure requirements for
earnings per share (EPS) for entities with publicly held common stock or
potential common stock such as options, warrants, convertible securities or
contingent stock agreements if those securities trade in a public market. This
standard specifies computation and presentation requirements for both basic EPS
and, for entities with complex capital structures, diluted EPS. SFAS No. 128 is
effective for reporting periods ending after December 15, 1997 and early
adoption of the standard is not permitted. The following table shows the
Company's proforma, basic and diluted earnings per share, if calculated under
SFAS No. 128.
Quarters ended
June 30
1997 1996
------ ------
Basic earnings per share $ .35 $ .24
Diluted earnings per share $ .34 $ .24
8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
First Savings Bank of Washington Bancorp, Inc. (the Company), a Delaware
corporation, is primarily engaged in the business of planning, directing and
coordinating the business activities of its wholly owned subsidiaries, First
Savings Bank of Washington (FSBW) and Inland Empire Bank (IEB) (together, the
Banks). FSBW is a Washington-chartered savings bank the deposits of which are
insured by the Federal Deposit Insurance Corporation (FDIC) under the Savings
Association Insurance Fund (SAIF). FSBW conducts business from its main office
in Walla Walla, Washington and its 16 branch offices and three loan production
offices located in southeast, central, north central and western Washington.
IEB is an Oregon-chartered commercial bank whose deposits are insured by the
FDIC under the Bank Insurance Fund (BIF). IEB conducts business from its main
office in Hermiston, Oregon and its five branch offices and two loan production
offices located in northeast Oregon.
The operating results of the Company depend primarily on its net interest
income, which is the difference between interest income on interest-earning
assets, consisting of loans and investment securities, and interest expense on
interest-bearing liabilities, composed primarily of savings deposits and
Federal Home Loan Bank (FHLB) advances. Net interest income is primarily a
function of the Company's interest rate spread, which is the difference between
the yield earned on interest-earning assets and the rate paid on interest-
bearing liabilities, as well as a function of the average balance of interest-
earning assets as compared to the average balance of interest-bearing
liabilities. As more fully explained below, the Company's net interest income
significantly increased for the quarter ended June 30, 1997, when compared to
the same the period for the prior year. This increase in net interest income
was largely due to the substantial growth in average asset and liability
balances and the acquisition of IEB on August 1, 1996. The Company's net income
also is affected by provisions for loan losses and the level of its other
income, including deposit service charges, loan origination and servicing fees,
and gains and losses on the sale of loans and securities, as well as its
non-interest operating expenses and income tax provisions. As further explained
below, net income for the quarter also increased reflecting the rise in net
interest income and an increase in other operating income which were somewhat
offset by increases in operating expenses and provision for income taxes.
Operating results for the quarter ended June 30, 1997, were significantly
affected by the acquisition of IEB.
Management's discussion and analysis of results of operations is intended to
assist in understanding the financial condition and results of operations of
the Company. The information contained in this section should be read in
conjunction with the Consolidated Financial Statements and accompanying
Selected Notes to Consolidated Financial Statements.
RECENT DEVELOPMENTS AND SIGNIFICANT EVENTS
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income and
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information. SFAS No. 130 established standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS No. 131 establishes standards of reporting by
publicly-held business enterprises and disclosure of information about
operating segments in annual financial statements to a lesser extent, in
interim financial reports issued to shareholders. SFAS Nos. 130 and 131 are
effective for fiscal years beginning after December 15, 1997. As both SFAS Nos.
130 and 131 deal with financial statement disclosure matters, the Company does
not anticipate the adoption of these new standards will have a material impact
on its financial position or results of operations.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30 AND MARCH 31, 1997
Total assets increased $66.5 million, or 6.6%, from $1.008 billion at March 31,
1997, to $1.074 billion at June 30, 1997. The increase generally reflected
growth in net loans receivable and was funded primarily with advances from the
FHLB and other borrowings. This growth represented a continuation of
management's plans to leverage the Company's capital.
Loans receivable (gross loans less loans in process, deferred fees and
discounts, and allowance for loan losses) grew $62.2 million, or 9.6%, from
$645.9 million at March 31,1997, to $708.1 million at June 30, 1997. The
increase in gross loans of $64.5 million from $707.8 million at March 31, 1997,
to $772.3 million at June 30, 1997, consists of $31.5 million of mortgages
secured by commercial and multi-family real estate, $10.4 million of
residential mortgages, $12.5 million of construction and land loans and $10.1
million of non-mortgage loans such as commercial, agriculture and consumer. The
increase in loans was funded primarily by a net increase of $48.2 million, or
20.8 %, in FHLB advances from $231.7 million at March 31, 1997, to $279.7
million on June 30, 1997. Loan growth was also funded by increased deposits,
net income from operations and a decrease in interest-earning cash deposits.
Deposits grew $6.6 million or 1.2%, from $545.0 million at March 31, 1997, to
$551.6 million at June 30, 1997.
9
Securities available for sale and held to maturity increased $11.7 million from
$288.5 million at March 31,1997, to $300.2 million at June 30, 1997. Securities
growth was funded primarily by a net increase of $12.1 million in other
borrowings which are generally securities sold under repurchase agreements.
Federal Home Loan Bank Stock increased $1.1 million as the Company was required
to purchase more stock as a result of its increased use of FHLB advances.
COMPARISON OF OPERATING RESULTS FOR THE QUARTER ENDED JUNE 30, 1997 AND 1996
GENERAL. Net income for the first quarter of fiscal 1998 was $3.2 million, an
increase of $852,000 from the comparable quarter in fiscal 1997. The first
quarter of fiscal 1998 included $728,000 of net income from the operations of
IEB which the Company acquired on August 1, 1996.
The Company's improved operating results reflect the significant growth of
assets and liabilities. Compared to year ago levels, total assets increased 41%
to $1.07 billion at June 30, 1997, total loans rose 59% to $708.1 million and
total deposits climbed 47% to $551.6 million. The substantial increase in these
balances from June 30, 1996, as compared to the same period in 1997 resulted
from the continued deployment and leveraging of the $98.6 million in net
proceeds raised in the Company's conversion from mutual to stock ownership on
October 31, 1995. This growth helped to increase the Company's return on
average equity from 6.34% for the quarter ended June 30, 1996, to 8.66% for the
quarter ended June 30, 1997.
INTEREST INCOME. Interest income for the quarter ended June 30, 1997, was $20.1
million compared to $13.8 million for the quarter ended June 30, 1996, an
increase of $6.3 million, or 45.5%. The increase in interest income was a
result of a $257.2 million or 35.3% growth in average balances of interest-
earning assets combined with a 58 basis point increase in the average yield on
those assets, which rose from 7.58% in the quarter ended June 1996, to 8.16% in
June 1997. Average loans receivable for the first quarter of fiscal 1998
increased by $244.9 million, or 56.7%, when compared to the same quarter in
fiscal 1997. Interest income on loans increased by $6.0 million or 67.1%,
compared to the same quarter a year earlier reflecting the impact of the
increase in average loan balances and a 55 basis point increase in the yield on
those balances primarily resulting from the inclusion of higher yielding loans
held by IEB. The average balance of mortgage-backed and investment securities
and FHLB stock for the first quarter of fiscal 1998 increased by $12.3 million
compared to the same quarter in fiscal 1997, and the yield on those balances
increased 11 basis points. Interest and dividend income from those investments
rose by $287,000 for the June 1997, quarter compared to June 1996.
INTEREST EXPENSE. Interest expense for the quarter ended June 30, 1997, was
$10.7 million compared to $7.6 million for the comparable period in 1996, an
increase of $3.2 million, or 41.7%. The increase in interest expense was due to
the $278.3 million growth in average interest-bearing liabilities. The increase
in average interest-bearing liabilities in the quarter ended June 1997, was
largely due to a $105.6 million increase in the average balance of FHLB
advances and other borrowings combined with a $172.7 million growth in average
deposits derived primarily from the acquisition of IEB. Average FHLB advances
totaled $248.0 million during the quarter ended June 30, 1997, as compared to
$190.8 million during the quarter ended June 30,1996, resulting in a $1.0
million increase in related interest expense. The average rate paid on those
advances increased from 5.56% for the quarter ended June 1996 to 5.97% for the
comparable period in 1997 adding to the increase in interest expense. Other
borrowings consist of retail repurchase agreements with customers and
repurchase agreements with investment banking firms secured by certain
investment securities. The average balance for other borrowings increased $48.4
million from $19.3 million for the quarter ended June 30, 1996, to $67.7
million for the same period in 1997, and the related interest expense increased
$675,000, from $296,000 to $971,000 for the respective periods. The majority of
this growth in other borrowings reflects an increase in repurchase agreements
with investment banking firms which totaled $58.9 million at June 30, 1997.
Average deposit balances increased from $372.2 million for the quarter ended
June 1996, to $545.0 million for the comparable period in 1997 while, at the
same time, the average rate paid on deposit balances decreased 53 basis points.
The decline in the rate paid on deposits primarily reflects the acquisition of
IEB's $32.1 million of non-interest-bearing deposits as well as generally lower
rates paid by IEB on certificates of deposit. Deposit interest expense
increased $1.4 million for the quarter ended June 30, 1997.
10
The following tables provide additional comparative data on the Company's
operating performance (in thousands):
Quarters
ended June 30
AVERAGE BALANCES
1997 1996
------ ------
Investment securities and deposits $ 114,055 $ 106,525
Mortgage-backed obligations 182,451 181,169
Loans 676,891 432,035
FHLB stock 13,142 9,649
------ ------
Total average interest-earning asset 986,539 729,378
Non-interest-earning assets 39,592 16,620
------ ------
Total average assets $ 1,026,131 $ 745,998
========= =======
Deposits $ 544,974 $ 372,236
Advances from FHLB 247,950 190,790
Other borrowings 67,663 19,273
------ ------
Total average interest-bearing liabilities 860,587 582,299
Non-interest-bearing liabilities 15,228 12,213
------ ------
Total average liabilities 875,815 594,512
Equity 150,316 151,486
------ ------
Total average liabilities and equity $1,026,131 $ 745,998
========= =======
INTEREST RATE YIELD/EXPENSE [RATES ARE ANNUALIZED]
Interest Rate Yield:
Investment securities and deposits 6.16% 5.85%
Mortgage-backed obligations 6.91% 6.89%
Loans 8.84% 8.29%
FHLB stock 7.51% 7.77%
------ ------
Total interest rate yield on interest-earning assets 8.16% 7.58%
Interest Rate Expense:
Deposits 4.46% 4.99%
Advances from FHLB 5.97% 5.56%
Other borrowings 5.76% 6.16%
Total interest rate expense on interest- ------ ------
bearing liabilities 5.00% 5.21%
Interest spread 3.16% 2.37%
===== =====
Net interest margin on interest earning assets 3.80% 3.42%
ADDITIONAL KEY FINANCIAL RATIOS [RATIOS ARE ANNUALIZED]
Return on average assets 1.27% 1.29%
Return on average equity 8.66% 6.34%
Average equity / average assets 14.65% 20.31%
Average interest-earning assets / interest-
bearing liabilities 114.64% 125.26%
Non-interest [other operating] expenses /
average assets 1.93% 1.55%
Efficiency ratio
[non-interest (other operating) expenses/revenues] 47.84% 43.21%
11
PROVISION FOR LOAN LOSSES. During the quarter ended June 30, 1997, the
provision for loan losses was $355,000, compared to $513,000 for the quarter
ended June 30, 1996, a decrease of $158,000. The decrease in the provision for
loan losses reflects management's current estimate of a reduction of the
inherent risk in the Company's loan portfolio due to continuing favorable
actual loss experience and the strength and anticipated growth in the Northwest
economy. The allowance for loan losses net of charge-offs (recoveries),
increased by $207,000, to $7.0 million at June 30, 1997, compared to $6.8
million at March 31, 1997. The allowance for losses on loans is maintained at a
level sufficient to provide for estimated losses based on evaluating known and
inherent risks in the loan portfolio and upon management's continuing analysis
of the factors underlying the quality of the loan portfolio. These factors
include changes in the size and composition of the loan portfolio, actual loan
loss experience, current and anticipated economic conditions, detailed analysis
of individual loans for which full collectibility may not be assured, and
determination of the existence and realizable value of the collateral and
guarantees securing the loans. Additions to these allowances are charged to
earnings. Provisions for losses that are related to specific assets are usually
applied as a reduction of the carrying value of the assets and charged
immediately against the income of the period. The reserve is based upon factors
and trends identified by management at the time financial statements are
prepared. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Banks allowance for loan
losses. Such agencies may require the Banks to provide additions to the
allowance based upon judgments different from management. Although management
uses the best information available, future adjustments to the allowance may be
necessary due to economic, operating, regulatory and other conditions beyond
the Banks' control.
The following tables are provided to disclose additional detail on the
Company's loans and allowance for loan losses (in thousands):
JUNE 30 March 31
1997 1997
------ ------
Loans [ including loans held for sale]:
Gross principal $ 772,269 $ 707,816
Less loans in process 54,227 52,412
Less deferred fees and discounts 3,027 2,775
Less allowance for loan losses 6,955 6,748
------ ------
Total net loans at end of period $ 708,060 $ 645,881
======= =======
Allowance for loan losses as a percentage of
gross principal of loans outstanding 0.90% 0.95%
Quarters ended
June 30
1997 1996
------ ------
Change in allowance for loan losses:
Balance at beginning of the period $ 6,748 $ 4,051
Provision for loan losses 355 513
Recoveries 7 0
Charge-offs (155) (130)
------ ------
Balance at end of the period $ 6,955 $ 4,434
====== ======
Charge-offs as a percentage of average
net book value of loans outstanding for the period. 0.02% 0.03%
OTHER OPERATING INCOME. Other operating income increased $528,000 from $455,000
for the quarter ended June 30, 1996, to $983,000 for the quarter ended June 30,
1997. The increase resulted primarily from a $400,000 increase in other fees
and service charges due largely to IEB operations earning higher fees as a
commercial bank, although fee income also increased at FSBW reflecting deposit
growth and pricing adjustments. In addition there was a $112,000 increase in
net gains on securities and loans sold in the quarter ended June 30, 1997, as
compared to the same period in 1996. This increase primarily reflects the
inclusion of the IEB's residential mortgage operations which increased the
volume of loans sold in the secondary market over the comparable period in the
prior year.
12
OTHER OPERATING EXPENSES. Other operating expenses increased $2.0 million from
$2.9 million for the quarter ended June 30, 1996, to $4.9 million for the
quarter ended June 30, 1997. The increase in non-interest operating expense in
1997 was primarily due to the addition of $1.6 million of IEB operating
expenses. Included in the Company's and IEB's operating expenses for the
quarter ended June 30, 1997, was $224,000 for amortization of costs in excess
of net assets acquired resulting from the purchase of IEB. The increase also
reflects growth of the Company including increased personnel costs and
increases in legal, accounting and insurance costs relating to operating as a
public company. The cost of deposit insurance declined despite a significant
increase in deposits as a result of reduced premium levels subsequent to the
special SAIF assessment incurred in September 1996.
INCOME TAXES. Income tax expense was $1.8 million for the quarter ended June
30, 1997, compared to $884,000 for the comparable quarter in 1996. The increase
in the provision for income taxes reflects the higher level of income being
taxed at higher effective rates due to the phase out of the 34% surtax
exemption; the net effect of IEB paying Oregon state income taxes and that the
expense from amortization of costs in excess of net assets in purchasing IEB is
not deductible for tax purposes. The Company's effective tax rates for the
quarters ended June 30, 1997 and 1996, were 35% and 27%, respectively.
ASSET QUALITY
The following tables are provided to disclose additional details on asset
quality (in thousands):
JUNE 30 March 31
1997 1997
------- --------
Non-performing assets at end of the period:
Non-performing loans:
Delinquent loans on non-accrual status $ 1,523 $ 2,082
Delinquent loans on accrual status 141 30
------- --------
Total non-performing loans 1,664 2,112
REO 1,192 1,057
------- --------
Total non-performing assets at end of the period $ 2,856 $ 3,169
======= ========
Non-performing loans as a percentage of total
net loans at end of the period 0.24% 0.33%
Ratio of allowance for loan losses to non-performing
loans at end of the period 418% 320%
Non-performing assets as a percentage of total
assets at end of the period. 0.27% 0.31%
Troubled debt restructuring [TDR's] at end of the period $ 373 $ 238
------- --------
Troubled debt restructuring as a percentage of:
Total gross principal of loans outstanding at end
of the period 0.05% 0.03%
Total assets at end of the period 0.03% 0.02%
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, FHLB advances, proceeds
from loan principal and interest payments and sales of loans, and the maturity
of, and interest income on mortgage-backed and investment securities. While
maturities and scheduled amortization of loans and mortgage-backed and
investment securities are a predictable source of funds, deposit flows and
mortgage prepayments are greatly influenced by market interest rates, general
economic conditions and competition.
The primary investing activity of the Company is the origination and purchase
of mortgage, consumer, and commercial loans through its subsidiary Banks, IEB
and FSBW. During the quarter ended June 30, 1997, the Banks closed or purchased
loans in the amount of $147.2 million. This activity was funded primarily by
principal repayments on loans and securities, sales of loans, increases in FHLB
advances, and deposit growth. For the quarter ended June 30, 1997, principal
repayments on loans totaled $74.1 million and the Banks' proceeds from the sale
of mortgage loans totaled $10.2 million. FHLB advances and other borrowings
increased $48.2 million and $12.1 million, respectively, for the same period,
and net deposit growth was $6.6 million.
13
The Banks must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to support loan growth and deposit
withdrawals, to satisfy financial commitments and to take advantage of
investment opportunities. At June 30, 1997, the Banks had undisbursed loans in
process totaling $54.2 million. The Banks generally maintain sufficient cash
and readily marketable securities to meet short term liquidity needs. FSBW also
maintains a credit facility with the FHLB of Seattle, which provides for
advances which in aggregate may equal up to 40% of FSBW's total assets, which
as of June 30, 1997, would give FSBW a total credit line of $351.5 million.
Advances under this credit facility totaled $277.2 million, or 31.6% of FSBW's
assets at June 30, 1997. IEB also maintains credit facilities with various
financial institutions that would allow it to borrow up to $6.4 million.
At June 30, 1997, savings certificates amounted to $340.9 million, or 62%, of
the Banks' total deposits, including $191.3 million which were scheduled to
mature within one year. Historically, the Banks have been able to retain a
significant amount of their deposits as they mature. Management believes it has
adequate ability to fund all loan commitments by using deposits, FHLB of
Seattle advances and the sale of mortgage loans or securities, and that it can
adjust the offering rates of savings certificates to retain deposits in
changing interest rate environments.
CAPITAL REQUIREMENTS
Federally-insured state-chartered banks are required to maintain minimum levels
of regulatory capital. Under current FDIC regulations, insured state-chartered
banks generally must maintain (i) a ratio of Tier 1 leverage capital to total
assets of at least 3.0% (4.0% to 5.0% for all but the most highly rated banks),
(ii) a ratio of Tier 1 capital to risk weighted assets of at least 4.0% and
(iii) a ratio of total capital to risk weighted assets of at least 8.0%. At
June 30, 1997, the Company's banking subsidiaries exceeded all current
regulatory capital requirements to be classified as well capitalized
institutions, the highest regulatory standard. In order to be categorized as a
well capitalized institution, the FDIC requires banks it regulates to maintain
a leverage ratio, defined as Tier 1 capital divided by total regulatory assets,
of at least 5.00%; Tier 1 (or core) capital of at least 6.00% of risk-weighted
assets; and total capital of at least 10.00% of risk-weighted assets.
The Company, as a bank holding company, is regulated by the Federal Reserve
Board (FRB). The FRB has established capital requirements for bank holding
companies that generally parallel the capital requirements of the FDIC for
banks with $150 million or more in total consolidated assets. The Company's
total regulatory capital must equal 8% of risk-weighted assets and one half of
the 8% (4%) must consist of Tier 1 (core) capital.
The actual regulatory capital ratios calculated for the Company along with the
minimum capital amounts and ratios for capital adequacy purposes were as
follows (dollars in thousands):
Minimum
for capital
adequacy
Actual purposes
Amount Ratio Amount Ratio
------ ----- ------ -----
JUNE 30, 1997:
The Company-consolidated
Total capital to risk-weighted assets $140,050 24.77% $47,510 8.00%
Tier 1 capital to risk-weighted assets 140,022 23.59 23,755 4.00
Tier 1 leverage capital to average assets 147,077 13.65 41,052 4.00
14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company or its subsidiaries are engaged in legal
proceedings in the ordinary course of business, none of which is considered to
have a material impact on the Company's financial position or results of
operations.
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 27 - Financial data schedule - see page 17
Report (s) on Form 8-K filed during the quarter ended June 30, 1997, are as
follows:
Date Filed Purpose
---------- -------
Not Applicable
15
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.
First Savings Bank of Washington
Bancorp, Inc.
August 11, 1997 /s/ Gary Sirmon
-----------------
Gary Sirmon
President and Chief Executive Officer
August 11, 1997 /s/ D. Allan Roth
------------------
D. Allan Roth
Secretary and Treasurer
16
EXHIBIT 27
FINANCIAL DATA SCHEDULE (IN THOUSANDS EXCEPT PER SHARE DATA)
This schedule contains summary financial information extracted from the
consolidated financial statements of First Savings Bank of Washington Bancorp,
Inc. for the quarter ended June 30, 1997 and is qualified in its entirety by
reference to such financial statements.
Financial Data
as of or
for the quarter
Item Number ended June 30, 1997 Item
Description
- ------------- -------------------
- ----------------
9-03 (1) $ 15,989............ Cash and
Due from Banks
9-03 (2) 801................Interest-bearing deposits
9-03 (3) -0-...............Federal funds sold -
purchased
9-03 (4) ................-0- Trading
account assets
9-03 (6) 299,397................Investment and mortgage
backed securities held for sale
9-03 (6) 788................Investment and mortgage
backed securities held to
maturity - carrying
value
9-03 (6) 788................Investment and mortgage
backed securities held to
maturity - market value
9-03 (7) 708,060................Loans
9-03 (7) (2) 6,955................Allowance for loan losses
9-03 (11) 1,074,166................Total assets
9-03 (12) 551,589................Deposits
9-03 (13) 74,309................Short-term borrowings
9-03 (15) 15,635................Other liabilities
9-03 (16) 279,726................Long-term debt
9-03 (19) -0-...............Preferred stock - mandatory
redemption
9-03 (20) -0-...............Preferred stock - no
mandatory redemption
9-03 (21) 109................Common stocks
9-03 (22) 152,798................Other stockholders' equity
9-03 (23) 1,074,166................Total liabilities and
stockholders' equity
9-04 (1) 14,922................Interest and fees on loans
9-04 (2) 5,056................Interest and dividends on
investments
9-04 (4) 84................Other interest income
9-04 (5) 20,062................Total interest income
9-04 (6) 6,059................Interest on deposits
9-04 (9) 10,721................Total interest expense
9-04 (10) 9,341................Net interest income
9-04 (11) 355................Provision for loan losses
9-04 (13) (h) 1................Investment securities
gains/(losses)
9-04 (14) 4,939................Other expenses
9-04 (15) 5,030................Income/loss before income
tax
9-04 (17) 3,245................Income/loss before
extraordinary items
9-04 (18) -0-...............Extraordinary items, less
tax
9-04 (19) -0-...............Cumulative change in
accounting principles
9-04 (20) $ 3,245................Net income or loss
9-04 (21) $ 0.34
Earnings per share - primary
9-04 (21) $ 0.33........... Earnings per
share - fully diluted
I.B. 5 3.80%.............Net yield - interest
earnings
- - actual
III.C.1. (a) $ 1,523........... Loans on
non-accrual
III.C.1. (b) 141................Accruing loans past due 90
days or more
III.C.1. (c) 373................Troubled debt restructuring
III.C.2 -0-...............Potential problem loans
IV.A.1 6,748................Allowance for loan loss -
beginning of period
IV.A.2 155................Total charge offs
IV.A.3 7................Total recoveries
IV.A.4 6,955................Allowance for loan loss -
end
of period
IV.B. 1 3,237................Loan loss allowance
allocated
to domestic loans
IV.B.2 -0-...............Loan loss allowance
allocated
to foreign loans
IV.B.3 $ 3,718..........Loan loss allowance -
unallocated