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.................... SEPTEMBER 30, 1999
--------------------
[ ] 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 WASHINGTON BANCORP, INC.
------------------------------
(Exact name of registrant as specified in its charter)
Washington 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 October 31, 1999
--------------- ----------------------
Common stock, $.01 par value 11,322,907 shares *
* Includes 745,918 shares held by employee stock ownership plan
(ESOP) that have not been released, committed to be released, or
allocated to participant accounts.
FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES
Table of Contents
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements. The Consolidated Financial Statements of First
Washington Bancorp, Inc. and Subsidiaries filed as a part of the report are as
follows:
Consolidated Statements of Financial Condition
as of September 30, 1999 and March 31, 1999........................... 2
Consolidated Statements of Income
for the Quarters and Six Months Ended September 30, 1999 and 1998..... 3
Consolidated Statements of Comprehensive Income for the
Quarters and Six Months ended September 30, 1999 and 1998............. 4
Consolidated Statements of Changes in Stockholders' Equity
for the Six Months Ended September 30, 1999 and 1998.................. 5
Consolidated Statements of Cash Flows
for the Six Months Ended September 30, 1999 and 1998.................. 7
Selected Notes to Consolidated Financial Statements................... 9
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operation
General............................................................... 14
Recent Developments and Significant Events............................ 14
Comparison of Financial Condition at September 30, 1999 and March
31, 1999.............................................................. 16
Comparison of Results of Operations for the Quarters and Six
Months Ended September 30, 1999 and 1998............................. 16
Asset Quality......................................................... 22
Market Risk and Asset/Liability Management............................ 23
Liquidity and Capital Resources....................................... 26
Capital Requirements.................................................. 27
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................. 28
Item 2. Changes in Securities......................................... 28
Item 3. Defaults upon Senior Securities............................... 28
Item 4. Submission of Matters to a Vote of Stockholders............... 28
Item 5. Other Information............................................. 28
Item 6. Exhibits and Reports on Form 8-K.............................. 28
SIGNATURES............................................................... 29
1
FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands, except shares)
September 30, 1999 and March 31, 1999
(Unaudited)
September 30 March 31
ASSETS 1999 1999
------------ -----------
Cash and due from banks $ 46,124 $ 72,503
Securities available for sale, cost $361,044
and $358,540 357,626 362,021
Securities held to maturity, fair value $2,028
and $2,235 1,997 2,155
Federal Home Loan Bank stock 23,985 23,137
Loans receivable:
Held for sale, fair value $21,899 and $11,256 21,899 11,256
Held for portfolio 1,239,546 1,103,674
Allowance for loan losses (13,639) (12,261)
------------ -----------
1,247,806 1,102,669
Accrued interest receivable 11,259 9,898
Real estate held for sale, net 1,415 1,439
Property and equipment, net 16,503 15,960
Costs in excess of net assets acquired (goodwill), net 38,517 34,182
Deferred income tax asset, net 3,638 758
Other assets 5,186 7,178
------------ -----------
$ 1,754,056 $ 1,631,900
============ ===========
LIABILITIES
Deposits:
Non-interest-bearing $ 125,717 $ 97,062
Interest-bearing 926,538 853,786
------------ -----------
1,052,255 950,848
Advances from Federal Home Loan Bank 430,945 408,252
Other borrowings 77,391 78,467
Accrued expenses and other liabilities 10,421 7,928
Deferred compensation 1,852 1,691
Deferred income tax liability, net -- --
Income taxes payable 2,280 1,106
------------ -----------
1,575,144 1,448,292
STOCKHOLDERS' EQUITY
Preferred stock - $0.01 par value, 500,000
shares authorized, no shares issued -- --
Common stock - $0.01 par value, 27,500,000
shares authorized, 12,001,562 shares issued: *
11,322,907 shares and 11,647,615 shares
outstanding * at September 30, 1999 and
March 31, 1999, respectively. 124,290 130,770
Retained earnings 65,555 59,958
Accumulated other comprehensive income:
Unrealized gain (loss) on securities available
for sale (2,161) 2,296
Unearned shares of common stock issued to
Employee Stock Ownership Plan (ESOP) trust:
745,918 and 745,918 restricted shares outstanding *
at September 30, 1999 and March 31, 1999,
respectively, at cost (6,781) (6,781)
Carrying value of shares held in trust for stock
related compensation plans (4,264) (4,785)
Liability for common stock issued to deferred,
stock related, compensation plan 2,273 2,150
------------ -----------
(1,991) (2,635)
------------ -----------
178,912 183,608
------------ -----------
$ 1,754,056 $ 1,631,900
============ ============
*Adjusted for stock dividend: see Note 2.
See notes to consolidated financial statements
2
FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (in thousands except for per share amounts)
Quarters Ended Six Months Ended
September 30 September 30
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
INTEREST INCOME:
Loans receivable $ 27,244 $ 22,063 $ 53,372 $ 42,940
Mortgage-backed securities 4,039 3,423 7,660 6,184
Securities and deposits 2,312 2,190 4,736 4,351
-------- -------- -------- --------
33,595 27,676 65,768 53,475
INTEREST EXPENSE:
Deposits 10,455 8,304 20,503 16,340
Federal Home Loan Bank advances 6,076 5,244 11,942 9,831
Other borrowings 1,078 1,371 2,090 2,688
-------- -------- -------- --------
17,609 14,919 34,535 28,859
-------- -------- -------- --------
Net interest income before
provision for loan losses 15,986 12,757 31,233 24,616
PROVISION FOR LOAN LOSSES 510 703 1,220 1,370
-------- -------- -------- --------
Net interest income 15,476 12,054 30,013 23,246
OTHER OPERATING INCOME:
Loan servicing fees 229 165 487 390
Other fees and service charges 1,147 827 2,233 1,663
Gain on sale of loans 396 628 855 1,151
Gain (loss) on sale of securities -- 2 2 7
Miscellaneous 147 170 203 174
-------- -------- -------- --------
Total other operating income 1,919 1,792 3,780 3,385
OTHER OPERATING EXPENSES:
Salary and employee benefits 6,101 4,410 11,869 8,608
Less capitalized loan
origination costs (738) (643) (1,729) (1,319)
Occupancy and equipment 1,566 1,133 3,116 2,182
Information/computer data
services 582 369 1,135 741
Advertising 124 137 317 271
Deposit insurance 85 89 168 174
Amortization of goodwill 788 569 1,576 1,138
Miscellaneous 2,086 1,423 3,925 2,765
-------- -------- -------- --------
Total other operating
expenses 10,594 7,487 20,377 14,560
-------- -------- -------- --------
Income before provision for
income taxes 6,801 6,359 13,416 12,071
PROVISION FOR INCOME TAXES 2,594 2,392 5,152 4,556
-------- -------- -------- --------
NET INCOME $ 4,207 $ 3,967 $ 8,264 $ 7,515
======== ======== ======== ========
Net income per common share, see
Note 5:
Basic $ .40 $ .38 .79 $ .71
Diluted $ .39 $ .36 .76 $ .68
Cumulative dividends declared per
common share: $ .12 $ .09 .24 $ .17
3
FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited) (in thousands)
Quarters Ended Six Months Ended
September 30 September 30
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
NET INCOME: $ 4,207 $ 3,967 $ 8,264 $ 7,515
OTHER COMPREHENSIVE INCOME (LOSS),
NET OF INCOME TAXES:
Unrealized holding gain (loss)
during the period, net of
deferred income tax (benefit)
of $(1,495) and (497); (2,725) 913 (4,456) 850
and $2440 and $(464),
respectively.
Less adjustment for gains
included in net income,
net of income tax of $0 and
$1; and $1 and $3 -- (1) (1) (4)
respectively -------- -------- -------- --------
Other comprehensive income
(loss) (2,725) 912 (4,457) 846
-------- -------- -------- --------
COMPREHENSIVE INCOME $ 1,482 $ 4,879 $ 3,807 $ 8,361
======== ======== ======== ========
4
FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
For the Six Months Ended September 30, 1999 and 1998
1999 1998
--------- ---------
COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of period $ 130,770 $ 108,994
Acquisition of Towne Bank:
Issuance of stock-fair market value in
excess of basis -- 1,261
Assumption of options -- 2,018
Release of earned ESOP shares -- 174
Recognition of tax benefit due to vesting of
MRP shares 188 276
Issuance of Shares to MRP 52 --
Repurchase of forfeited shares from MRP (5) --
Net proceeds (cost) of treasury stock reissued
for exercised stock options 64 (318)
Purchase and retirement of treasury stock
subsequent to reincorporation (6,779) --
Record 10% stock dividend, see Note 2 -- 24,371
Retirement of treasury shares resulting from
reincorporation in state of Washington, see Note 1 -- (11,116)
--------- ---------
Balance, end of period 124,290 125,660
RETAINED EARNINGS:
Balance, beginning of period 59,958 72,962
Net income 8,264 7,515
Record 10% stock dividend (24,371)
Cash dividends (2,667) (1,805)
--------- ---------
Balance, end of period 65,555 54,301
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Balance, beginning of period 2,296 2,680
Other comprehensive income (loss), net of
related income taxes (4,457) 846
--------- ---------
Balance, end of period (2,161) 3,526
TREASURY STOCK, SEE NOTE 1:
Balance, beginning of period -- (20,979)
Basis of stock reissued in acquisition of
Towne Bank -- 17,206
Purchases of treasury stock -- (7,340)
Purchases of treasury stock for exercised stock
options -- (409)
Reissuance of treasury stock for MRP
and/or exercised stock options -- 409
Repurchase of forfeited shares from MRP -- (3)
Retirement of treasury shares resulting from
reincorporation in state of Washington, see
Note 1 -- 11,116
--------- ---------
Balance, end of period -- --
UNEARNED, RESTRICTED ESOP SHARES AT COST:
Balance, beginning of period (6,781) (7,163)
Release of earned ESOP shares -- 117
--------- ---------
Balance, end of period (6,781) (7,046)
CARRYING VALUE OF SHARES HELD IN TRUST FOR
STOCK-RELATED COMPENSATION PLANS:
Balance, beginning of period (2,635) (6,310)
Cumulative effect of change in accounting for
Rabbi Trust, see Note 2 1,354
Net change in number and/or valuation of
shares held in trust (47) 3
Amortization of compensation related to MRP 691 564
--------- ---------
Balance, end of period (1,991) (4,389)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY $ 178,912 $ 172,052
========= =========
5
FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(continued) (in thousands)
For the Six Months Ended September 30, 1999 and 1998
1999 1998
--------- ---------
COMMON STOCK , SHARES ISSUED:
Number of shares, beginning of period 12,002 12,002
--------- ---------
Number of shares, end of period 12,002 12,002
--------- ---------
LESS TREASURY STOCK RETIRED/REPURCHASED:
Number of shares, beginning of period (354) (1,053)
Purchase of treasury stock (335) (323)
Purchase of treasury stock used for exercised
stock options -- (18)
Reissuance of treasury stock to deferred
compensation plan and/or exercised stock options 10 18
Shares reissued in acquisition of Towne Bank -- 853
Repurchase of shares forfeited from MRP -- --
--------- ---------
Number of shares retired/repurchased, end of
period (679) (523)
--------- ---------
Shares issued and outstanding, end of period 11,323 11,479
========= =========
UNEARNED, RESTRICTED ESOP SHARES:
Number of shares, beginning of period (746) (788)
Release of earned shares -- 13
--------- ---------
Number of shares, end of period (746) (775)
========= =========
6
FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (in thousands)
For the Six Months Ended September 30, 1999 and 1998
1999 1998
--------- ---------
OPERATING ACTIVITIES
Net income $ 8,264 $ 7,515
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred taxes (202) (109)
Depreciation 1,236 810
Loss (gain) on sale of securities (2) (7)
Net amortization of premiums and discounts on
investments 288 468
Amortization of costs in excess of net assets
acquired 1576 1,138
Amortization of MRP compensation liability 691 564
Loss (gain) on sale of loans (742) (745)
Net changes in deferred loan fees, premiums
and discounts 1,158 212
Loss (gain) on disposal of real estate held
for sale (12) 4
Loss (gain) on disposal of property and equipment (6) (97)
Capitalization of mortgage servicing rights
from sale of mortgages with servicing retained (113) (406)
Amortization of mortgage servicing rights 156 121
Provision for losses on loans and real estate
held for sale 1,220 1,370
FHLB stock dividend (848) (693)
Cash provided (used) in operating assets and
liabilities:
Loans held for sale (10,643) 1,922
Accrued interest receivable (981) (1,431)
Other assets 1,948 (704)
Deferred compensation 253 130
Accrued expenses and other liabilities 2,391 1,186
Income taxes payable 1,233 (1,031)
--------- ---------
Net cash provided (used) by operating
activities 6,865 10,217
--------- ---------
INVESTING ACTIVITIES:
Purchase of securities available for sale (40,493) (218,149)
Principal payments and maturities of securities
available for sale 44,236 184,457
Proceeds from sales of securities available
for sale 5,798 2,206
Purchase of securities held to maturity -- --
Principal payments and maturities of securities
held to maturity 162 261
Purchase of FHLB stock -- (3,004)
Loans originated and closed - net (518,226) (320,361)
Purchase of loans and participating interest
in loans (8,759) (56,691)
Proceeds from sales of loans and participating
interest in loans 74,787 71,091
Principal repayments on loans 341,475 211,746
Purchase of property and equipment (1,336) (1,368)
Proceeds from sale of property and equipment 9 374
Additional capitalized costs of real estate
held for sale net of insurance proceeds (150) --
Basis of real estate held for sale acquired in
settlement of loans and disposed of during the
period 1,731 1,327
Funds transferred to deferred compensation plan
trusts (93) (41)
Acquisitions, net cash (used) acquired (5,343) 9,328
--------- ---------
Net cash used by investing activities (106,202) (118,824)
--------- ---------
(Continued on next page)
7
FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (in thousands)
For the Six Months Ended September 30, 1999 and 1998
(Continued from prior page)
1999 1998
--------- ---------
FINANCING ACTIVITIES
Increase (decrease) in deposits $ 60,762 $ 43,789
Proceeds from FHLB advances 279,900 187,554
Repayment of FHLB advances (257,207) (106,243)
Proceeds from reverse repurchase borrowings 4,500 --
Repayments of reverse repurchase borrowings (9,716) (9,532)
Decrease-net in other borrowings 4,140 9,814
Compensation expense recognized for shares
released for allocation to participants of
the ESOP:
Original basis of shares -- 117
Excess of fair value of released shares
over basis -- 174
Cash dividends paid (2,706) (1,673)
Net (cost) proceeds of exercised stock options 64 (317)
Purchase of treasury stock (6,779) (7,340)
--------- ---------
Net cash provided by financing activities 72,958 116,343
--------- ---------
NET INCREASE (DECREASE) IN CASH AND DUE
FROM BANKS (26,379) 7,736
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD 72,503 42,529
--------- ---------
CASH AND DUE FROM BANKS, END OF PERIOD $ 46,124 $ 50,265
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 34,811 $ 28,429
Taxes paid $ 4,038 $ 5,847
Non-cash transactions:
Loans, net of discounts, specific loss
allowances and unearned income transferred
to real estate owned $ 1,545 $ 1,967
Net change in accrued dividends payable $ 39 $ 132
Net change in unrealized gain (loss) in deferred
compensation trust and related liability $ 4 $ 1,392
Treasury stock forfeited by MRP $ 5 $ 3
Treasury stock issued to MRP $ 52 $ --
Fair value of stock issued and options assumed
in connection with acquisitions $ -- $ 20,484
Recognize tax benefit of vested MRP shares $ 188 $ 276
Non-cash portion of 10% stock dividend $ -- $ 24,371
8
FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 and 1998 and March 31, 1999
Note 1: Basis of Presentation and Reincorporation
Basis of Presentation:
- ---------------------
The unaudited consolidated financial statements of FWWB included herein
reflect all adjustments which are, in the opinion of management, necessary to
present fairly the 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 FWWB's
wholly owned subsidiaries, First Savings Bank of Washington (FSBW), Inland
Empire Bank (IEB) and Towne Bank (TB) (together, the Banks). The balance sheet
data at March 31, 1999, is derived from FWWB's audited financial statements.
Certain information and note disclosures normally included in financial
statements 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 FWWB's Annual Report on
Form 10-K for the year ended March 31, 1999 (File No. 0-26584).
Certain amounts in the prior periods' financial statements and/or schedules
have been reclassified to conform to the current period's presentation. These
reclassifications affected certain ratios for the prior periods. The effect of
such reclassifications is immaterial.
Reincorporation:
- ---------------
The stockholders of First Savings Bank of Washington Bancorp, Inc., a Delaware
corporation and herein referred to as "FSBWB," approved the reincorporation of
FSBWB from Delaware to Washington on July 24, 1998. The purpose of the
reincorporation was to save higher costs incurred as a result of being a
Delaware corporation. The reincorporation was effected July 24, 1998 by
merging FSBWB into a wholly-owned subsidiary which had been recently formed
solely for the purpose of effecting the reincorporation. The surviving
corporation is known as First Washington Bancorp, Inc., a Washington
corporation, and is hereafter referred to as "FWWB" or "the Company." Upon
consummation of the merger, each share of Common Stock of FSBWB, par value
$.01 per share, was automatically converted into one share of Common Stock of
FWWB, par value $.01 per share.
The merger was consummated under the terms and conditions of a Plan of Merger
pursuant to which FSBWB ceased to exist as a Delaware corporation, the
stockholders of FSBWB became shareholders of FWWB, FWWB succeeded to all the
assets, liabilities, subsidiaries and other properties of FSBWB to the full
extent provided by law, and the rights of the shareholders and internal
affairs of FWWB are to be governed by the articles of incorporation and bylaws
of FWWB and the Washington Business Corporation Act, as amended. As a result
of the merger, FWWB has the same recorded basis, business, management, benefit
plans, location, assets, liabilities and net worth as did FSBWB. However,
because the State of Washington treats all treasury stock as retired upon
purchase, all purchases of treasury stock reduce stock issued and the cost of
treasury stock acquired is charged to par value and paid-in capital.
Note 2: Recent Developments
Acquisition of Seaport Citizens Bank:
- ------------------------------------
On April 1, 1999, FWWB and FSBW completed the acquisition of Seaport Citizens
Bank (SCB). FSBW paid $10.1 million in cash for all the outstanding common
shares of SCB, which was headquartered in Lewiston, Idaho. As a result of the
merger of SCB into FSBW, SCB became a division of FSBW. The acquisition was
accounted for as a purchase in the current period and resulted in the
recording of $5.9 million of costs in excess of the fair value of SCB's net
assets acquired (goodwill). Goodwill assets are being amortized over a 14-year
period and resulted in a current charge to earnings of $107,200 per quarter,
beginning in the first quarter of the current period, or $429,000 per year.
Founded in 1979, SCB was a commercial bank which had, before recording of
goodwill, approximately $45 million in total assets, $41 million in deposits,
$27 million in loans, and $4.1 million in shareholders' equity at March 31,
1999. SCB operated two full service branches in Lewiston, Idaho.
9
Change in Fiscal End:
- --------------------
On May 21, 1999 the Company announced its decision to change its fiscal year
end from March 31 to December 31 beginning with the current period which will
end on December 31, 1999.
Consolidation of Banking Operations:
- -----------------------------------
On July 22, 1999 the Company announced its plans to combine its three separate
banking subsidiaries into a single community banking franchise. The
combination is designed to strengthen the company's commitment to community
banking by more effectively sharing the resources of the existing
subsidiaries, improving operating efficiency and developing a broader regional
brand identify. The consolidation will be done in stages. The first phase,
which is expected to be completed by January 1, 2000, will include the merger
of Towne Bank and First Savings Bank of Washington and the selection of a
single name and charter to be used by Towne Bank, First Savings Bank, Whatcom
State Bank and Seaport Citizens Bank. Final integration of all data processing
into a common system and the merger of Inland Empire Bank are scheduled for
completion by December 31, 2000.
Note 3: Business Segments
The Company presently is managed by legal entity or Bank, not by lines of
business. Each Bank is managed by its executive management team that is
responsible for its own lending, deposit operations, information systems and
administration. Marketing support, sales training assistance, credit card
administration and human resources services are provided from a central source
at FSBW, and costs are allocated to the individual Banks using appropriate
methods based on usage. In addition, corporate overhead and centralized
administrative costs are allocated to each Bank.
FSBW is a community oriented savings bank which has traditionally offered a
wide variety of deposit products to its retail customers while concentrating
its lending activities on real estate loans. Lending activities have been
focused primarily on the origination of loans secured by one- to four-family
residential dwellings, including an emphasis on loans for construction of
residential dwellings. To a lesser extent, lending activities also have
included the origination of multi-family, commercial real estate and consumer
loans. More recently, FSBW has begun making non-mortgage commercial and
agribusiness loans to small businesses and farmers and has expanded its
consumer lending activities. FSBW's primary business is originating loans for
portfolio in its primary market area, which consists of southeast, central,
north central, and western Washington state and providing deposit services to
customers in the areas of eastern Washington and western Idaho where it has
full service branch offices. FSBW's wholly owned subsidiary, Northwest
Financial Corporation, provides trustee services for FSBW, is engaged in real
estate sales and receives commissions from the sale of annuities.
IEB is a community oriented commercial bank chartered in the State of Oregon
which historically has offered a wide variety of deposits and loan products to
its consumer and commercial customers. Lending activities have included
origination of consumer, commercial, agribusiness and real estate loans. IEB
also has engaged in mortgage banking activity with respect to residential
lending within its local markets, originating loans for sale generally on a
servicing released basis. IEB operates a division, Inland Financial Services,
which offers insurance and brokerage services to its customers.
TB is a community oriented commercial bank chartered in the State of
Washington. TB's lending activities consist of granting commercial loans,
including commercial real estate, land development and construction loans, and
consumer loans to customers throughout King and Snohomish counties in western
Washington. TB is a "Preferred Lender" with the Small Business Administration
(SBA) and generates SBA guaranteed loans for portfolio and for resale.
The performance of each Bank is reviewed by the Company's executive
management team and the Board of Directors on a monthly basis.
10
Financial highlights by legal entity were as follows:
Quarter Ended September 30, 1999
--------------------------------------------------------
(dollars in thousands)
Condensed Income
Statement
FSBW IEB TB Other* Total
---------- -------- --------- -------- ----------
Net interest income
(loss) $ 9,862 $ 2,766 $ 3,319 $ 39 $ 15,986
Provision for loan
losses (200) (45) (265) -- (510)
Other income 1,059 547 324 (11) 1,919
Other expenses (6,055) (1,789) (2,232) (518) (10,594)
---------- -------- --------- -------- ----------
Income (loss) before
income taxes 4,666 1,479 1,146 (490) 6,801
Income taxes (benefit) 1,575 662 531 (174) 2,594
---------- -------- --------- -------- ----------
Net income (loss) $ 3,091 $ 817 $ 615 $ (316) $ 4,207
========== ======== ========= ======== ==========
September 30, 1999
--------------------------------------------------------
Total Assets $ 1,265,337 $217,233 $ 273,280 $ (1,794) $1,754,056
========== ======== ========= ======== ==========
Quarter Ended September 30, 1998
--------------------------------------------------------
(dollars in thousands)
Condensed Income
Statement
FSBW IEB TB Other* Total
---------- -------- --------- -------- ----------
Net interest income
(loss) $ 7,285 $ 2,559 $ 2,605 $ 308 $ 12,757
Provision for loan
losses (489) (64) (150) -- (703)
Other income 820 742 229 1 1,792
Other expenses (3,672) (1,677) (1,738) (400) (7,487)
---------- -------- --------- -------- ----------
Income (loss) before
income taxes 3,944 1,560 946 (91) 6,359
Income taxes (benefit) 1,291 680 452 (31) 2,392
---------- -------- --------- -------- ----------
Net income (loss) $ 2,653 $ 880 $ 494 $ (60) $ 3,967
========== ======== ========= ======== ==========
September 30, 1998
--------------------------------------------------------
Total Assets $ 1,051,629 $194,556 $ 185,790 $ 4,743 $1,436,718
========== ======== ========= ======== ==========
* Includes intercompany eliminations and holding company amounts.
11
Six Months Ended September 30, 1999
--------------------------------------------------------
(dollars in thousands)
Condensed Income
Statement
FSBW IEB TB Other* Total
---------- -------- --------- -------- ----------
Net interest income
(loss) $ 7,285 $ 2,559 $ 2,605 $ 308 $ 12,757
Net interest income
(loss) $ 19,167 $ 5,461 $ 6,538 $ 67 $ 31,233
Provision for loan
losses (500) (90) (630) -- (1,220)
Other income 2,101 1,139 568 (28) 3,780
Other expenses (11,557) (3,550) (4,370) (900) (20,377)
---------- -------- --------- -------- ----------
Income (loss)
before income
taxes 9,211 2,960 2,106 (861) 13,416
Income taxes (benefit) 3,134 1,336 986 (304) 5,152
---------- -------- --------- -------- ----------
Net income (loss) $ 6,077 $ 1,624 $ 1,120 $ (557) $ 8,264
========== ======== ========= ======== ==========
Six Months Ended September 30, 1998
--------------------------------------------------------
(dollars in thousands)
Condensed Income
Statement
FSBW IEB TB Other* Total
---------- -------- --------- -------- ----------
Net interest income
(loss) $ 7,285 $ 2,559 $ 2,605 $ 308 $ 12,757
Net interest income
(loss) $ 14,056 $ 4,980 $ 4,929 $ 651 $ 24,616
Provision for loan
losses (972) (108) (290) -- (1,370)
Other income 1,645 1,315 425 -- 3,385
Other expenses (7,081) (3,290) (3,386) (803) (14,560)
---------- -------- --------- -------- ----------
Income (loss) before
income taxes 7,648 2,897 1,678 (152) 12,071
Income taxes (benefit) 2,502 1,281 821 (48) 4,556
---------- -------- --------- -------- ----------
Net income (loss) $ 5,146 $ 1,616 $ 857 $ (104) $ 7,515
========== ======== ========= ======== ==========
* Includes intercompany eliminations and holding company amounts.
12
NOTE 4: Additional Information Regarding Interest-Bearing Deposits and
Securities
The following table sets forth additional detail on FWWB's interest-bearing
deposits and securities at the dates indicated (at carrying value) (in
thousands):
September 30 March 31
1999 1999
------------ ---------
Interest-bearing deposits included
in cash and due from banks $ 2,044 $ 21,377
--------- ---------
Mortgage-backed securities 238,562 242,799
Other securities-taxable 82,790 83,686
Other securities-tax exempt 34,151 34,250
Other stocks with dividends 4,120 3,441
--------- ---------
Total securities 359,623 364,176
Federal Home Loan Bank (FHLB) stock 23,985 23,137
--------- ---------
$ 385,652 $ 408,690
========= =========
The following table provides additional detail on income from deposits and
securities for the periods indicated (in thousands):
Quarters Ended Six Months Ended
September 30 September 30
------------------ -------------------
1999 1998 1999 1998
------- ------- -------- --------
Mortgage-backed securities $ 4,039 $ 3,423 $ 7,660 $ 6,184
------- ------- -------- -------
Taxable interest and dividends 1,378 1,364 2,846 2,692
Tax-exempt interest 504 466 1,042 966
Federal Home Loan Bank stock-
dividends 430 360 848 693
------- ------- -------- --------
2,312 2,190 4,736 4,351
------- ------- -------- --------
$ 6,351 $ 5,613 $ 12,396 $ 10,535
======= ======= ======== ========
13
NOTE 5: 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 Six Months Ended
September 30 September 30
-------------------------------------
1999 1998 1999 1998
------- ------- ------- -------
Total shares originally issued 12,002 12,002 12,002 12,002
Less retired shares and treasury
stock plus unvested shares
allocated to MRP (865) (713) (792) (664)
Less unallocated shares held by
the ESOP (747) (779) (747) (783)
------- ------- ------- -------
Basic weighted average shares
outstanding 10,390 10,510 10,463 10,555
Plus unvested MRP and stock option
incremental shares considered
outstanding for diluted EPS
calculations 310 516 384 498
------- ------- ------- -------
Diluted weighted average shares
outstanding 10,700 11,026 10,847 11,053
======= ======= ======= =======
Calculation of
Outstanding Shares at
---------------------
(in thousands)
September 30 March 31
1999 1999
------- -------
Total shares issued 12,002 12,002
Less retired shares and
treasury stock (679) (354)
------- -------
Outstanding shares issued 11,323 11,648
======= =======
14
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Special Note Regarding Forward-Looking Statements
Management's Discussion and Analysis (MD&A) and other portions of this report
contain certain "forward-looking statements" concerning the future operations
of First Washington Bancorp, Inc. Management desires to take advantage of the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995 and is including this statement for the express purpose of availing the
Company of the protections of such safe harbor with respect to all "forward-
looking statements" contained in our Form 10-Q. Management's ability to
predict results or the effect of future plans or strategies is inherently
uncertain. Factors which could affect actual results include interest rate
trends, the general economic climate in the Company's market area and the
country as a whole, the ability of the Company to control costs and expenses,
the ability of the company to efficiently incorporate acquisitions into its
operations, the ability of the Company to successfully address Year 2000 (Y2K)
issues, competitive products and pricing, loan delinquency rates, and changes
in federal and state regulations. These factors should be considered in
evaluating the "forward-looking statements," and undue reliance should not be
placed on such statements.
General
First Washington Bancorp, Inc. (the Company or FWWB), a Washington
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), Inland Empire Bank (IEB) and Towne Bank
(TB) (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 23 branch
offices and four loan production offices located in southeast, central, north
central and western Washington. Effective January 1, 1999, FWWB completed the
acquisition of Whatcom State Bancorp whose wholly-owned subsidiary, Whatcom
State Bank (WSB), was merged with FSBW and operates as Whatcom State Bank, a
Division of First Savings Bank of Washington. WSB, which is based in
Bellingham, operates five full service branches and a loan office in northwest
Washington. Effective April 1, 1999 FSBW completed the acquisition of Seaport
Citizens Bank (SCB). SCB was merged with FSBW and its two branches in
Lewiston, Idaho, together with FSBW's Clarkston, Washington branch operate as
a division of FSBW. 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 six branch offices
and two loan production offices located in northeast Oregon. TB is a
Washington-chartered commercial bank whose deposits are insured by the FDIC
under BIF. TB conducts business from seven full service branches in the
Seattle, Washington, metropolitan area.
The operating results of FWWB 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 FWWB'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, FWWB's net interest income
significantly increased for the current quarter ended September 30, 1999, when
compared to the same period for the prior year. This increase in net interest
income was largely due to the substantial growth in average asset and
liability balances from the acquisition of WSB and SCB on January 1, 1999 and
April 1, 1999, respectively, although significant asset and liability growth
also occurred at IEB and TB. The increase in net interest income also reflects
expansion of the interest rate spread and net interest margin resulting from
changes in the mix of assets and liabilities and changes in the levels of
various market interest rates. FWWB'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.
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
Recent Developments
See Note 2 to Financial Statements
15
Year 2000 Compliance
The "Year 2000" (Y2K) issue is the result of older computer programs being
written using two digits rather than four to define the applicable year. A
computer program that has date sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruption of operations, including, among
other things, a temporary inability to process transactions, send statements,
or engage in similar normal business activities.
Based on an assessment of computer hardware, software and other equipment
operated by FWWB and its subsidiary Banks, FWWB presently believes that all
equipment and programs are Y2K compliant. A program for addressing the Y2K
issue through awareness, assessment, renovation and testing has been developed
and implemented. The testing phase has been completed on all internal
operations and mission critical outside vendors. The results of the testing
disclosed only insignificant items that needed to be resolved, all of which
have since been corrected. The program also provided for awareness and
assessment of customer Y2K issues which is ongoing. The Banks have adopted
business contingency plans for the computer systems and facilities that they
have determined to be most critical. These plans conform to guidance from
the Federal Financial Institutions Examinations Council (FFIEC) on business
contingency planning for Year 2000 readiness. Contingency plans include, among
other actions, manual workarounds and identification of resource
requirements and alternative solutions for resuming critical business
processes in the event of a Year 2000-related failure.
The three Bank subsidiaries have budgeted approximately $988,000, including
$638,000 to cover soft and hard costs such as upgrading ATMs, contacting and
monitoring vendors, contacting customers, providing information regarding
preparations and testing the systems identified as critical and non-critical,
and $350,000 for unidentified contingencies. FWWB and its Bank subsidiaries
have incurred and expensed approximately $500,000 of Y2K-related costs in the
15 month period ended September 30, 1999. Costs incurred and expensed in prior
fiscal years were not significant.
FWWB and its subsidiary Banks are continuing to contact and monitor all
significant suppliers to determine the extent to which they are vulnerable to
those third parties' failures to remedy their own Y2K impact issues. Third
party responses have indicated satisfactory progress in addressing any needs
for equipment or software renovation. The Banks are contacting their large
loan and deposit customers to build Y2K awareness and encourage early
development of contingency plans and solutions in an effort to prevent
potential business disruption due to Y2K processing failures. Loan and deposit
customers are being updated regularly about the Banks' preparations and
information is being provided to create a much greater awareness of the issue
with some ideas about how to assess and prepare for their own Y2K
vulnerability.
There can be no guarantee that the systems of other companies on which the
Banks' systems rely will be fully functional, or timely converted, or that a
failure to convert by another company, or a conversion that is incompatible
with the Banks' systems would not have a material adverse effect on the Banks.
However, the Banks have tested for the Y2K preparedness of all internal
functions and external functions provided by third parties whenever possible
and do not expect to experience any significant failures. In addition,
contingency or alternate sources of support have been identified for each
critical function and many non-critical functions. In the event that the
Banks' data processing providers' systems prove not to be Y2K compliant and
FWWB is not able to switch to an alternative provider or an in-house system in
a timely manner, resulting computer malfunctions could interrupt the
operations of the Banks and have a significant adverse effect on FWWB's
financial condition and results of operations.
Comparison of Financial Condition at September 30, 1999 and March 31, 1999
Total assets increased $122.0 million, or 7.5%, from $1.632 billion at March
31, 1999, to $1.754 billion at September 30, 1999. A large portion of the
increase, $51.0 million, was from the acquisition of Seaport Citizens Bank
including $5.9 million of goodwill resulting from the use of purchase
accounting. The remaining growth of $71.0 million was spread among all three
subsidiary Banks and was funded primarily with deposit growth and advances
from the FHLB. This growth represented a continuation of management's plans to
further leverage FWWB's capital and reflects the solid economic conditions in
the markets where FWWB operates.
16
Loans receivable (gross loans less loans in process, deferred fees and
discounts, and allowance for loan losses) grew $145.0 million, or 13.2%, from
$1.103 billion at March 31, 1999, to $1.248 billion at September 30, 1999. The
increase in gross loans of $163.0 million from $1.191 billion at March 31,
1999, to $1.354 billion at September 30, 1999, consists of $27.8 million of
residential mortgages, $59.7 million of mortgages secured by commercial and
multi-family real estate, $22.3 million of construction and land loans and
$53.2 million of non-mortgage loans such as commercial, agricultural and
consumer loans. These balances reflect the acquisition of SCB on April 1,
1999, which provided $27.4 million of gross loans consisting of $5.7 million
of commercial and multi-family mortgages, $1.6 million of construction and
land loans, $3.6 million of residential mortgages and $16.5 million of
commercial and consumer loans. The majority of the increase in loans was
funded by a net increase of $124.1 million in deposits and FHLB advances.
Asset growth was also funded by net income from operations. Deposits grew
$101.2 million, or 10.7%, from $950.8 million at March 31, 1999, to $1.052
billion at September 30, 1999. The SCB acquisition provided $41.0 million of
deposits. FHLB advances increased $22.7 million from $408.3 at March 31, 1999,
to $430.9 million at September 30, 1999. Other borrowings, primarily reverse
repurchase agreements with securities dealers, decreased $1.1 million, from
$78.5 million at March 31, 1999, to $77.4 million at September 30, 1999.
Securities available for sale and held to maturity decreased $4.6 million, or
1.3%, from $364.2 million at March 31, 1999, to $359.6 million at September
30, 1999. Federal Home Loan Bank Stock increased $848,000 as FWWB was required
to purchase more stock as a result of its increased use of FHLB advances. Real
estate held for sale decreased $24,000.
Comparison of Operating Results for the Quarters and Six Months Ended
September 30, 1999 and 1998
General. Net income for the second quarter of the current period was $4.2
million, an increase of $240,000 from the comparable quarter ended September
30, 1998. Net income for the first six months of the current period was $8.3
million, an increase of $749,000 from the comparable period in fiscal 1999.
FWWB's improved operating results reflect the significant growth of assets and
liabilities as well as improvements in net interest margin and non-interest
revenues which were offset somewhat by increased operating expenses. Compared
to year ago levels, total assets increased 22.1% to $1.75 billion at September
30, 1999, total loans rose 28.6% to $1.354 billion, deposits grew 34.9% to
$1.052 billion and borrowings increased 7.5% to $508.3 million. Net interest
margin improved reflecting the acquisitions of WSB and SCB and continuing
changes in the asset and liability mix.
Interest Income. Interest income for the quarter ended September 30, 1999, was
$33.6 million compared to $27.7 million for the quarter ended September 30,
1998, an increase of $5.9 million, or 21.4%. The increase in interest income
was a result of a $316.7 million, or 24.3%, growth in the average balance of
interest-earning assets combined with a 19 basis point decrease in the average
yield on those assets, which fell from 8.41% in the quarter ended September
1998, to 8.22% in September 1999. Average loans receivable for the second
quarter of the current period increased by $279.5 million, or 29.4%, when
compared to the same quarter in fiscal 1999. The increase in average loan
balances reflects the acquisitions of WSB and SCB which added $80.3 million
and $27.4 million of loans on the respective acquisition dates of January 1,
1999 and April 1, 1999. Interest income on loans increased by $5.2 million, or
23.5%, compared to the same quarter a year earlier, reflecting the impact of
the increase in average loan balances and a 42 basis point decrease in the
yield on those balances. A portion of the decreased yield on the loan
portfolio is attributable to the decline in the prime rate of interest which
averaged 8.11% for the most recent quarter compared to 8.50% for the same
period a year earlier. Lower market yields in recent quarters also resulted in
a significant amount of prepayment activity with higher yielding loans being
refinanced into lower rates adding to the decline in loan yields for the
quarter ended September 30, 1999. Average loans receivable represented 75.8%
of average earning assets for the quarter ended September 30, 1999, compared
to 72.8% for the same period a year earlier. The combined average balance of
mortgage-backed and investment securities and FHLB stock for the second
quarter of the current period increased $37.2 million compared to the second
quarter of fiscal 1999, and interest and dividend income from those
investments increased by $738,000 for the September 1999 quarter compared to
September 1998. The increase of interest income on this portfolio largely
reflects that, while the average balance of mortgage-backed obligations
increased by $29.0 million over the same quarter a year earlier, the yield on
those securities increased 25 basis points. The increase in the yield on this
portfolio primarily reflects an increase in certain market rates which
resulted in increased yields on many adjustable rate securities which comprise
a large portion of this portfolio as well as some changes in the mix of
securities. In addition, declining market rates during the September 30, 1998
quarter led to accelerated amortization of net premiums as a result of
increased prepayments on the mortgage loans underlying the mortgage backed
securities adversely affecting the yield reported for that period. Average
balances for other investment securities and deposits increased $3.7 million,
and the yield on those balances increased 2 basis points also reflecting
rising market rates. Holdings of FHLB stock (excluding the SCB and WSB
acquisitions) increased commensurate with the growth in FHLB advances and the
yield on that stock decreased 28 basis points.
17
Interest income for the six months ended September 30, 1999 increased $12.3
million, or 23.0%, from the comparable period in fiscal 1999. Interest income
from loans increased $10.4 million, or 24.3%, from the comparable period in
fiscal 1999. The majority of the increase from loan interest income reflected
the impact of a $275.1 million growth in average loans receivable balances
offset by a 38 basis point decrease in the yield on the loan balances.
Interest income from mortgage-backed and investment securities and FHLB stock
for the six months ended September 30, 1999, increased $1.9 million, from
$10.5 million in fiscal 1999, to $12.4 million in the current period,
reflecting a $48.4 million increase in average balances and a 17 basis point
decrease in yield. The yield on average earning assets decreased from 8.39%
for the six months ended September 30, 1998, to 8.22% for the six months ended
September 30, 1999.
Interest Expense. Interest expense for the quarter ended September 30, 1999,
was $17.6 million compared to $14.9 million for the comparable period in 1998,
an increase of $2.7 million, or 18.0%. The increase in interest expense was
due to the $333.5 million growth in average interest-bearing liabilities. The
increase in average interest-bearing liabilities in the quarter ended
September 30, 1999 was largely due to a $275.2 million increase in the average
balance of deposits combined with a $58.3 million growth in average FHLB
advances and other borrowings. The increased average deposit balances reflect
the acquisitions of WSB and SCB which added $84.8 million and $40.6 million of
deposits on the respective acquisition dates of January 1, 1999 and April 1,
1999. These increased balances resulted in a $2..2 million increase in deposit
related interest expense, despite a 34 basis point decline in the average rate
paid during the period. The average rate on deposits decreased from 4.35% for
the quarter ended September 30, 1998, to 4.01% for the quarter ended September
30, 1999, reflecting the $32.4 million growth in non-interest bearing
deposits, of which $21.2 million is from acquisitions. The maturity and
subsequent rollover of certain time certificates of deposit issued in periods
of higher market interest rates also contributed to the decline in the cost of
deposits for the most recent quarter. Average FHLB advances totaled $421.6
million during the quarter ended September 30, 1999, as compared to $347.2
million during the quarter ended September 30, 1998, resulting in an $832,000
increase in related interest expense. The average rate paid on those advances
decreased from 5.99% for the quarter ended September 30, 1998, to 5.72% for
the comparable period in 1999. 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 decreased $16.2 million from $94.4 million for the quarter ended
September 30, 1998, to $78.2 million for the same period in 1999, and the
related interest expense decreased $293,000, from $1.37 million to $1.08
million for the respective periods. The cost of other borrowings decreased 29
basis points from 5.76% for the quarter ended September 30, 1998 to 5.47% for
the September 1999 quarter. The cost of total interest-bearing liabilities
declined 37 basis points from 4.93% for the three months ended September 30,
1998 to 4.56% for the three months ended September 30, 1999.
A comparison of total interest expense for the six months ended September 30,
1999, shows an increase of $5.7 million, or 19.7%, from the comparable period
in September 1998. The increase in interest expense reflects an increase in
average deposits of $265.4 million combined with a $73.3 million increase in
FHLB advances and other borrowings. The effect on interest expense of the
$338.7 million increase in average interest-bearing liabilities was reduced by
a 36 basis point decrease in the interest rate paid on those liabilities.
18
The following tables provide additional comparative data on the Company's
operating performance:
Quarters Ended Six Months Ended
Average Balances September 30 September 30
---------------- ---------------- ------------------
(in thousands) 1999 1998 1999 1998
---- ---- ---- ----
Investment securities and
deposits $ 121,974 $ 118,315 $ 126,731 $ 119,634
Mortgage-backed obligations 246,395 217,417 242,244 206,187
Loans 1,230,450 950,957 1,203,038 927,977
FHLB stock 23,560 18,987 23,351 18,071
---------- ---------- ---------- ----------
Total average interest-
earning asset 1,622,379 1,305,676 1,595,364 1,271,869
Non-interest-earning assets 100,039 73,677 99,676 74,806
---------- ---------- ---------- ----------
Total average assets $1,722,418 $1,379,353 $1,695,040 $1,346,675
========== ========== ========== ==========
Deposits $1,033,383 $ 758,165 1,011,761 $ 746,323
Advances from FHLB 421,592 347,178 414,649 325,425
Other borrowings 78,211 94,368 77,450 93,394
---------- ---------- ---------- ----------
Total average interest-
bearing liabilities 1,533,186 1,199,711 1,503,860 1,165,142
Non-interest-bearing
liabilities 10,474 9,341 10,639 10,198
---------- ---------- ---------- ----------
Total average liabilities 1,543,660 1,209,052 1,514,499 1,175,340
Equity 178,758 170,301 180,541 171,335
---------- ---------- ---------- ----------
Total average
liabilities and equity $1,722,418 $1,379,353 $1,695,040 $1,346,675
========== ========== ========== ==========
Interest Rate Yield/Expense (rates are annualized)
--------------------------------------------------
Interest Rate Yield:
Investment securities and
deposits 6.12% 6.14% 6.12% 6.10%
Mortgage-backed obligations 6.50% 6.25% 6.31% 5.98%
Loans 8.78% 9.20% 8.85% 9.23%
FHLB stock 7.24% 7.52% 7.24% 7.65%
---------- ---------- ---------- ----------
Total interest rate yield on
interest-earning assets 8.22% 8.41% 8.22% 8.39%
---------- ---------- ---------- ----------
Interest Rate Expense:
Deposits 4.01% 4.35% 4.04% 4.37%
Advances from FHLB 5.72% 5.99% 5.74% 6.03%
Other borrowings 5.47% 5.76% 5.38% 5.74%
---------- ---------- ---------- ----------
Total interest rate
expense on interest-
bearing liabilities 4.56% 4.93% 4.58% 4.94%
---------- ---------- ---------- ----------
Interest spread 3.66% 3.48% 3.64% 3.45%
========== ========== ========== ==========
Net interest margin on
interest earning assets 3.91% 3.88% 3.90% 3.86%
---------- ---------- ---------- ----------
Additional Key Financial Ratios (ratios are annualized)
-------------------------------------------------------
Return on average assets 0.97% 1.14% 0.97% 1.11%
Return on average equity 9.34% 9.24% 9.13% 8.75%
Average equity / average assets 10.38% 12.35% 10.65% 12.72%
Average interest-earning assets/
interest-bearing liabilities 105.82% 108.83% 106.08% 109.16%
Non-interest [other operating]
expenses/average assets
Excluding amortization of costs
in excess of net assets
acquired (goodwill) 2.26% 1.99% 2.21% 1.99%
Including amortization of costs
in excess of net assets
acquired (goodwill) 2.44% 2.15% 2.40% 2.16%
Efficiency ratio [non-interest
(other operating) expenses /
revenues]
Excluding amortization of
costs in excess of net assets
acquired (goodwill) 54.77% 47.55% 53.70% 47.93%
Including amortization of
costs in excess of net
assets acquired (goodwill) 59.17% 51.46% 58.20% 52.00%
19
Provision for Loan Losses. During the quarter ended September 30, 1999, the
provision for loan losses was $510,000, compared to $703,000 for the quarter
ended September 30, 1998, a decrease of $193,000. The decrease in the
provision for losses reflects the amount required to maintain the allowance
for losses at an appropriate level based upon management's evaluation of the
adequacy of general and specific loss reserves as more fully explained in the
following paragraphs. A comparison of the allowance for loan losses at
September 30, 1999 and 1998 shows an increase of $3.2 million from $10.4
million in fiscal 1999 to $13.6 million in the current year. The allowance for
loan losses increased by $1.3 million, to $13.6 million at September 30, 1999,
compared to $12.3 million at March 31, 1999. The allowance for loan losses as
a percentage of net loans (loans receivable excluding allowance for losses)
was 1.08% and 1.10% for the quarters ended September 30, 1999 and March 31,
1999, respectively.
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 allowance for loan loss reserve. 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 adequacy of general and specific reserves is based on management's
continuing evaluation of the pertinent factors underlying the quality of the
loan portfolio, including changes in the size and composition of the loan
portfolio, delinquency rates, actual loan loss experience and current economic
conditions. Large groups of smaller-balance homogeneous loans are collectively
evaluated for impairment. Loans that are collectively evaluated for impairment
by the Banks include residential real estate and consumer loans. Smaller
balance non-homogeneous loans also may be evaluated collectively for
impairment. Larger balance non-homogeneous residential construction and land,
commercial real estate, commercial business loans and unsecured loans are
individually evaluated for impairment. Loans are considered impaired when,
based on current information and events, management determines that it is
probable that the Bank will be unable to collect all amounts due according to
the contractual terms of the loan agreement. Factors involved in determining
impairment include, but are not limited to, the financial condition of the
borrower, value of the underlying collateral and current status of the
economy. Impaired loans are measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate or, as a
practical expedient, at the loan's observable market price or the fair value
of collateral if the loan is collateral dependent. Subsequent changes in the
value of impaired loans shall be included within the provision for loan losses
in the same manner in which impairment initially was recognized or as a
reduction in the provision that would otherwise be reported.
The Company's methodology for assessing the appropriateness of the allowance
consists of several key elements, which include specific allowances, an
allocated formula allowance, and an unallocated allowance. Losses on specific
loans are provided for when the losses are probable and estimable. General
loan loss reserves are established to provide for inherent loan portfolio
risks not specifically provided for. The level of general reserves is based on
analysis of potential exposures existing in the Banks' loan portfolios
including evaluation of historical trends, current market conditions and other
relevant factors identified by management at the time the financial statements
are prepared. The formula allowance is calculated by applying loss factors to
outstanding loans, excluding loans with specific allowances. Loss factors are
based on the Company's historical loss experience adjusted for significant
factors including the experience of other banking organizations that, in
management's judgment, affect the collectibility of the portfolio as of the
evaluation date. The unallocated allowance is based upon management's
evaluation of various factors that are not directly measured in the
determination of the formula and specific allowances. This methodology may
result in losses or recoveries differing significantly from those provided in
the financial statements.
20
The following tables are provided to disclose additional detail on the Banks'
loans and allowance for loan losses (in thousands):
September 30 March 31
1999 1999
------------ ----------
Loans (including loans held for sale):
Secured by real estate
One to four single family dwellings (SFD) $ 435,488 $ 407,673
Commercial and multifamily 384,518 324,858
Construction and land-secured 239,424 217,094
Commercial 182,209 149,943
Agribusiness 53,476 46,800
Consumer, including credit cards 58,704 44,346
------------ ----------
$ 1,353,819 $1,190,714
Less loans in process 87,006 71,638
Less deferred fees and discounts 5,368 4,146
------------ ----------
Net loans outstanding before
allowance for loan losses $ 1,261,445 $1,114,930
Less allowance for loan losses 13,639 12,261
------------ ----------
Total net loans at end of period $ 1,247,806 $1,102,669
============ ==========
Allowance for loan losses as a percentage
of net loans outstanding 1.08% 1.10%
Quarters Ended Six Months Ended
September 30 September 30
---------------- ------------------
1999 1998 1999 1998
---- ---- ---- ----
Balance, beginning of the
year $ 13,305 $ 9,717 $12,261 $ 7,857
Allowances added through
business combinations -- -- 477 1,616
Provision 510 703 1,220 1,370
Recoveries of loans previously
charged off:
Residential real estate -- -- -- --
Commercial/multifamily real
estate -- 38 1 38
Construction/land -- -- -- --
Commercial business 79 68 102 134
Agribusiness -- --
Consumer finance 1 4 2 6
Credit cards 1 2 2 3
-------- ------- ------- -------
81 112 107 181
Loans charged off:
Residential real estate (5) -- (5) (25)
Commercial/multifamily real
estate -- (5) -- (5)
Construction/land (24) -- (24) (13)
Commercial business (184) (44) (318) (447)
Agribusiness -- --
Consumer finance (4) (5) (7) (21)
Credit cards (40) (60) (72) (95)
-------- ------- ------- -------
(257) (114) (426) (606)
-------- ------- ------- -------
Net charge offs (176) (2) (319) (425)
-------- ------- ------- -------
Balance, end of period $ 13,639 $10,418 $13,639 $10,418
======== ======= ======= =======
Net charge-offs as a percentage
of average net book value of
loans outstanding for the
period 0.01% 0.00% 0.03% 0.05%
-------- ------- ------- -------
21
The following is a schedule of the Company's allocation of the allowance for
loan losses:
September 30 March 31
1999 1999
------------ --------
Specific or allocated loss allowances:
Secured by real estate:
One- to four-family real estate loans $ 2,836 $ 2,757
Multifamily and commercial 4,291 3,567
Construction 1,526 1,597
Commercial/agricultural 2,701 2,522
Consumer, credit card and other 1,023 841
------------ --------
Total allocated 12,377 11,284
Unallocated 1,262 977
------------ --------
Total allowance for loan losses $ 13,639 $ 12,261
============ ========
Ratio of allowance for loan losses to
non-performing loans 1.97 1.60
Allowance for loan losses as a percent
of net loans (loans receivable excluding
allowance for losses) 1.08% 1.10%
Other Operating Income. Other operating income increased $127,000 from $1.8
million for the quarter ended September 30, 1998, to $1.9 million for the
quarter ended September 30, 1999. The increase included a $320,000 increase in
other fees and service charges due largely to the addition of WSB and SCB's
operations, combined with increases in fee income at FSBW, IEB and TB
reflecting deposit growth and pricing adjustments. The volume of loan sales
increased from $35.2 million for the quarter ended September 30, 1998, to
$44.5 million for the quarter ended September 30, 1999, however gain on loan
sales decreased from $628,000 for the September 1998 quarter to $396,000 for
the most recent quarter. Gains on loan sales were adversely impacted by the
rising interest rate environment during the September 30, 1999 quarter. Sales
of loans at FSBW were designed to curtail the rate of growth in relatively low
yielding fixed rate residential mortgages during this period to reduce the
Bank's exposure to the risk of rising interest rates.
Other operating income for the six months ended September 30, 1999, increased
$395,000 from the comparable period in 1998. The $570,000 increase in fee
income was due largely to the addition of WSB and SCB's operations in the
current fiscal 1999 period. The $296,000 decrease in gains from the sale of
loans and securities for the six months ended September 30, 1999 also reflects
the rising rate environment during the six months ended September 30, 1999.
Other Operating Expenses. Other operating expenses increased $3.1 million from
$7.5 million for the quarter ended September 30, 1998, to $10.6 million for
the quarter ended September 30, 1999. The increase in expenses was largely due
to the inclusion of WSB and SCB's operating expenses in the second quarter of
the current year that were not present in fiscal 1999. The increase in other
operating expenses was partially offset by a $95,000 increase in capitalized
loan origination costs resulting from an increased volume in loan origination.
In addition to the acquisitions of WSB and SCB, increases in other operating
expenses reflect the overall growth in assets and liabilities, customer
relationships, branch location and complexity of operations as FWWB continues
to expand. Because of the high operating expenses associated with
transitioning FWWB to more of a commercial bank profile, FWWB's efficiency
ratio, excluding the amortization of goodwill, increased to 54.77% for the
second quarter of the current year, from 47.55% for the same period in fiscal
1999. Other operating expenses as a percentage of average assets were 2.44%
(2.26% excluding the amortization of goodwill) for the quarter ended September
30, 1999, compared to 2.15% (1.99% excluding the amortization of goodwill) for
the quarter ended September 30, 1998. Goodwill amortization increased by
$219,000 compared to the same quarter a year earlier as a result of the
acquisitions of WSB and SCB.
22
Other operating expenses for the six months ended September 30, 1999 increased
$5.8 million from $14.6 million for the first six months of fiscal 1999 to
$20.4 million in the current period. As explained earlier, the increase is
largely due to the inclusion of WSB and SCB operating expense for the current
six month period. The balance of the increase reflects the previously noted
overall growth in FWWB's operations.
Income Taxes. Income tax expense was $2.6 million for the quarter ended
September 30, 1999, compared to $2.4 million for the comparable quarter in
1998. The $202,000 increase in the provision for income taxes reflects the
higher level of income and increased expense from the amortization of costs in
excess of net assets acquired in purchases (Goodwill) which is not deductible
for tax purposes. The Company's effective tax rates for the quarters ended
September 30, 1999 and 1998, remained unchanged at 38% for each quarter.
Income tax expense for the six months ended September 30, 1999 increased
$596,000 from $4.6 million for the six months ended September 30, 1998, to
$5.2 million for the comparable period in 1999. The Company's effective tax
rate remained at 38% for the six months ended September 30, 1999, which is the
same rate as the comparable period in 1998.
23
Asset Quality
The following tables are provided to disclose additional details on asset
quality (in thousands):
September 30 March 31
1999 1999
------------ --------
Non-performing assets at end of the period:
Nonaccrual Loans:
One- to four-family real estate loans $ 3,280 $ 3,564
Multifamily real estate 351 351
Commercial real estate 274 --
Construction 848 767
Commercial business 1,187 1,392
Agricultural business 236 47
Consumer, credit card and other 51 17
------------ --------
6,227 6,138
Loans more than 90 days delinquent,
still on accrual:
One- to four-family real estate loans 1 20
Multifamily real estate -- --
Commercial real estate 384 384
Construction -- --
Commercial business 4 --
Agricultural business 291 1,052
Consumer, credit card and other 20 82
------------ --------
700 1,538
------------ --------
Total non-performing loans 6,927 7,676
Real estate owned (REO) 1,723 1,644
------------ --------
Total non-performing assets at the end
of the period $ 8,650 $ 9,320
============ ========
Non-performing loans as a percentage of total
net loans before allowance for loan losses
at end of the period 0.55% 0.69%
Ratio of allowance for loan losses to non-
performing loans at end of the period 197% 160%
Non-performing assets as a percentage of
total assets at end of the period. 0.49% 0.57%
Troubled debt restructuring [TDR's]
at end of the period $ 372 $ 380
------------ --------
Troubled debt restructuring as a percentage of:
Total gross principal of loans outstanding
at end of the period 0.03% 0.03%
Total assets at end of the period 0.02% 0.02%
24
Market Risk and Asset/Liability Management
The financial condition and operation of the Company are influenced
significantly by general economic conditions, including the absolute level of
interest rates as well as changes in interest rates and the slope of the yield
curve. The Company's profitability is dependent to a large extent on its net
interest income, which is the difference between the interest received from
its interest-earning assets and the interest expense incurred on its
interest-bearing liabilities.
The activities of the Company, like all financial institutions, inherently
involve the assumption of interest rate risk. Interest rate risk is the risk
that changes in market interest rates will have an adverse impact on the
institution's earnings and underlying economic value. Interest rate risk is
determined by the maturity and repricing characteristics of an institution's
assets, liabilities, and off-balance-sheet contracts. Interest rate risk is
measured by the variability of financial performance and economic value
resulting from changes in interest rates. Interest rate risk is the primary
market risk impacting the Company's financial performance.
The greatest source of interest rate risk to the Company results from the
mismatch of maturities or repricing intervals for rate sensitive assets,
liabilities and off-balance-sheet contracts. This mismatch or gap is generally
characterized by a substantially shorter maturity structure for
interest-bearing liabilities than interest-earning assets. Additional interest
rate risk results from mismatched repricing indices and formulae (basis risk
and yield curve risk), and product caps and floors and early repayment or
withdrawal provisions (option risk), which may be contractual or market
driven, that are generally more favorable to customers than to the Company.
The principal objectives of asset/liability management are to evaluate the
interest-rate risk exposure of the Company; to determine the level of risk
appropriate given the Company's operating environment, business plan
strategies, performance objectives, capital and liquidity constraints, and
asset and liability allocation alternatives; and to manage the Company's
interest rate risk consistent with regulatory guidelines and approved policies
of the Board of Directors. Through such management the Company seeks to reduce
the vulnerability of its earnings and capital position to changes in the level
of interest rates. The Company's actions in this regard are taken under the
guidance of the Asset/Liability Management Committee, which is comprised of
members of the Company's senior management. The committee closely monitors the
Company's interest sensitivity exposure, asset and liability allocation
decisions, liquidity and capital positions, and local and national economic
conditions and attempts to structure the loan and investment portfolios and
funding sources of the Company to maximize earnings within acceptable risk
tolerances.
The Company's primary monitoring tool for assessing interest rate risk is
asset/liability simulation modeling which is designed to capture the dynamics
of balance sheet, interest rate and spread movements and to quantify
variations in net interest income resulting from those movements under
different rate environments. The sensitivity of net interest income to changes
in the modeled interest rate environments provides a measurement of interest
rate risk. The Company also utilizes market value analysis, which addresses
changes in estimated net market value of equity arising from changes in the
level of interest rates. The net market value of equity is estimated by
separately valuing the Company's assets and liabilities under varying interest
rate environments. The extent to which assets gain or lose value in relation
to the gains or losses of liability values under the various interest rate
assumptions determines the sensitivity of net equity value to changes in
interest rates and provides an additional measure of interest rate risk.
The interest rate sensitivity analysis performed by the Company incorporates
beginning of the period rate, balance and maturity data, using various levels
of aggregation of that data, as well as certain assumptions concerning the
maturity, repricing, amortization and prepayment characteristics of loans and
other interest-earning assets and the repricing and withdrawal of deposits and
other interest-bearing liabilities into an asset/liability computer simulation
model. The Company updates and prepares simulation modeling at least quarterly
for review by senior management and the directors. The Company believes the
data and assumptions are realistic representations of its portfolio and
possible outcomes under the various interest rate scenarios. Nonetheless, the
interest rate sensitivity of the Company's net interest income and net market
value of equity could vary substantially if different assumptions were used or
if actual experience differs from the assumptions used.
25
Sensitivity Analysis
The table of Interest Rate Risk Indicators sets forth, as of September 30,
1999, the estimated changes in the Company's net interest income over a one
year time horizon and the estimated changes in market value of equity based on
the indicated interest rate environments.
Table of Interest Rate Risk Indicators
Estimated Change in
----------------------------------------------
Change (In Basis Points) Net Interest Income
in Interest Rates (1) Next 12 Months Net Market Value
- ------------------------- ------------------- --------------------
(Dollars in thousands)
+400 $ (1,977) (3.1%) $ (80,257) (44.2%)
+300 (1,174) (1.8%) (63,659) (35.1%)
+200 (400) (0.6%) (44,108) (24.3%)
+100 (83) (0.1%) (21,801) (12.0%)
0 0 0 0 0
-100 (1,001) (1.6%) 16,724 9.2%
-200 (3,088) (4.8%) 13,138 7.2%
-300 (5,923) (9.2%) 1,057 0.6%
-400 (9,792) (15.2%) (18,267) (10.1%)
- ------------
(1) Assumes an instantaneous and sustained uniform change in market interest
rates at all maturities.
Another although less reliable monitoring tool for assessing interest rate
risk is "gap analysis." The matching of the repricing characteristics of
assets and liabilities may be analyzed by examining the extent to which such
assets and liabilities are "interest sensitive" and by monitoring an
institution's interest sensitivity "gap." An asset or liability is said to be
interest sensitive within a specific time period if it will mature or reprice
within that time period. The interest rate sensitivity gap is defined as the
difference between the amount of interest-earning assets anticipated, based
upon certain assumptions, to mature or reprice within a specific time period
and the amount of interest-bearing liabilities anticipated to mature or
reprice, based upon certain assumptions, within that same time period. A gap
is considered positive when the amount of interest sensitive assets exceeds
the amount of interest sensitive liabilities. A gap is considered negative
when the amount of interest sensitive liabilities exceeds the amount of
interest sensitive assets. Generally, during a period of rising rates, a
negative gap would tend to adversely affect net interest income while a
positive gap would tend to result in an increase in net interest income.
During a period of falling interest rates, a negative gap would tend to result
in an increase in net interest income while a positive gap would tend to
adversely affect net interest income.
Certain shortcomings are inherent in gap analysis. For example, although
certain assets and liabilities may have similar maturities or periods of
repricing, they may react in different degrees to changes in market rates.
Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market rates, while interest rates on other
types may lag behind changes in market rates. Additionally, certain assets,
such as ARM loans, have features that restrict changes in interest rates on a
short-term basis and over the life of the asset. Further, in the event of a
change in interest rates, prepayment and early withdrawal levels would likely
deviate significantly from those assumed in calculating the table. Finally,
the ability of some borrowers to service their debt may decrease in the event
of a severe interest rate increase.
The table of Interest Sensitivity Gap presents the Company's interest
sensitivity gap between interest-earning assets and interest-bearing
liabilities at September 30, 1999. The table sets forth the amounts of
interest-earning assets and interest-bearing liabilities which are anticipated
by the Company, based upon certain assumptions, to reprice or mature in each
of the future periods shown. At September 30, 1999, total interest-bearing
liabilities maturing or repricing within one year exceeded total interest-
earning assets maturing or repricing in the same time period by $167.1
million, representing a one-year gap to total assets ratio of (9.53%).
26
TABLE OF INTEREST SENSITIVITY GAP
6 Months
As of September 30 Within to One 1-3 3-5 5-10 Over 10
6 Months Year Years Years Years Years Total
-------- ---- ----- ----- ----- ----- -----
(dollars in thousands)
Interest-earning assets(1):
Construction loans $102,446 $ 33,570 $ 1,158 $ 641 $ -- $ -- $ 137,815
Fixed-rate mortgage loans 45,409 32,362 133,993 108,666 164,561 116,559 601,550
Adjustable-rate mortgage
loans 105,314 50,559 46,287 34,319 -- -- 236,479
Fixed-rate mortgage-backed
securities 11,852 11,363 59,012 34,354 21,211 2,522 140,314
Adjustable-rate mortgage-
backed securities 100,675 2,146 -- -- -- -- 102,821
Fixed-rate agriculture/
commercial loans 14,321 6,221 13,667 21,444 11,336 3,481 70,470
Adjustable-rate agriculture/
commercial loans 163,194 -- -- -- -- -- 163,194
Consumer and other loans 16,600 4,038 13,226 11,519 906 10,807 57,096
Investment securities and
interest-bearing deposits 19,569 4,185 20,030 36,282 17,545 50,629 148,240
-------- --------- --------- --------- -------- -------- ----------
Total rate-sensitive assets 579,380 144,444 287,373 247,225 215,559 183,998 1,657,979
-------- --------- --------- --------- -------- -------- ----------
Interest-bearing liabilities(2):
Regular savings and NOW
accounts 20,770 20,770 48,464 48,464 -- -- 138,468
Money market deposit accounts 75,429 45,258 30,172 -- -- -- 150,859
Certificates of deposit 288,579 197,803 113,053 28,416 9,307 54 637,212
FHLB advances 101,950 64,076 106,280 137,290 18,500 2,849 430,945
Other borrowings 67,474 -- -- -- -- -- 67,474
Retail repurchase agreements 6,264 2,584 -- 1,069 -- -- 9,917
-------- --------- --------- --------- -------- -------- ----------
Total rate-sensitive
liabilities 560,466 330,491 297,969 215,239 27,807 2,903 1,434,875
-------- --------- --------- --------- -------- -------- ----------
Excess (deficiency) of interest-
sensitive assets over interest-
sensitive liabilities $ 18,914 $(186,047) $ (10,596) $ 31,986 $187,752 $181,095 $ 223,104
======== ========= ========= ========= ======== ======== ==========
Cumulative excess (deficiency)
of interest-sensitive assets $ 18,914 $(167,133) $(177,729) $(145,743) $ 42,009 $223,104 $ 223,104
======== ========= ========= ========= ======== ======== ==========
Cumulative ratio of interest-
earning assets to interest-
bearing liabilities 103.37% 81.24% 85.05% 89.62% 102.93% 15.55% 115.55%
======== ========= ========= ======== ======== ======== ==========
Interest sensitivity gap to
total assets 1.08% (10.61%) (0.60%) 1.82% 10.70% 10.32% 12.72%
======== ========= ========= ======== ======== ======== ==========
Ratio of cumulative gap to
total assets 1.08% (9.53%) (10.13%) (8.31%) 2.39% 12.72% 12.72%
======== ========= ========= ======== ======== ======== ==========
(footnotes on following page)
27
Footnotes for Table of Interest Sensitivity Gap
- -----------------------------------------------
(1) Adjustable-rate assets are included in the period in which interest rates
are next scheduled to adjust rather than in the period in which they are due
to mature, and fixed-rate assets are included in the periods in which they are
scheduled to be repaid based upon scheduled amortization, in each case
adjusted to take into account estimated prepayments. Mortgage loans and other
loans are not reduced for allowances for loan losses and non-performing
loans. Mortgage loans, mortgage-backed securities, other loans, and investment
securities are not adjusted for deferred fees and unamortized acquisition
premiums and discounts.
(2) Adjustable- and variable-rate liabilities are included in the period in
which interest rates are next scheduled to adjust rather than in the period
they are due to mature. Although the Banks' regular savings, demand, NOW, and
money market deposit accounts are subject to immediate withdrawal, management
considers a substantial amount of such accounts to be core deposits having
significantly longer maturities. For the purpose of the gap analysis, these
accounts have been assigned decay rates to reflect their longer effective
maturities. If all of these accounts had been assumed to be short-term, the
one year cumulative gap of interest-sensitive assets would have been negative
$294.2 million or (16.77%) of total assets. Interest-bearing liabilities for
this table exclude certain non-interest bearing deposits which are included in
the average balance calculations in the earlier Table I, Analysis of Net
Interest Spread.
Liquidity and Capital Resources
FWWB'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 FWWB is the origination and purchase of
mortgage, consumer, and commercial loans through its subsidiary Banks, FSBW,
IEB and TB. During the six months ended September 30, 1999, the Banks
originated $518.2 million of loans and purchased $8.8 million of loans. In
addition, during this six month period, funds were used to purchase $6.8
million of treasury stock and pay out $10.1 million for the acquisition of
SCB. These activities were funded primarily by principal repayments on loans
and securities, sales of loans, increases in FHLB advances, and deposit
growth. For the six months ended September 30, 1999, principal repayments on
loans totaled $341.5 million and the Banks' proceeds from the sale of mortgage
loans totaled $30.3 million. FHLB advances and other borrowings increased
$21.6 million (net of the SCB acquisition) for the same period, and net
deposit growth was $60.8 million (net of the SCB acquisition).
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 September 30, 1999, the Banks had undisbursed
loans in process totaling $87.0 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 45% of FSBW's total
assets which, as of September 30, 1999, would give FSBW a total credit line of
$569.5 million. Advances under this credit facility totaled $417.4 million, or
33.0% of FSBW's assets at September 30, 1999. IEB and TB also maintain credit
facilities with various financial institutions, including the FHLB of Seattle,
that would allow them to borrow up to $22.7 million.
At September 30, 1999, savings certificates amounted to $637.2 million, or
61%, of the Banks' total deposits, including $450.1 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, other borrowings 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.
28
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 September 30, 1999, FWWB'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.
FWWB, 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. FWWB'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 FWWB along with the
minimum capital amounts and ratios for capital adequacy purposes were as
follows (dollars in thousands):
Minimum for capital
Actual Adequacy Purposes
--------------------- ---------------------
Amount Ratio Amount Ratio
September 30, 1999: ------ ----- ------ -----
FWWB-consolidated
Total capital to risk-
weighted assets $156,031 13.23% $94,375 8.00%
Tier 1 capital to risk-
weighted assets 142,393 12.07 47,188 4.00
Tier 1 leverage capital
average assets 142,393 8.46 67,373 4.00
29
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
From time to time FWWB 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 FWWB'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
The Annual meeting of stockholders of the Company (Meeting) was held on July
23, 1999. The results of the vote on the matter presented at the Meeting was
as follows:
1. The following individuals were elected as directors, each for a
three-year term:
Votes for Votes withheld
--------- --------------
Jesse G. Foster 10,352,625 34,829
Dean W. Mitchell 10,351,797 35,657
S. Rick Meikle 10,353,016 34,438
Brent A. Orrico 10,352,636 34,818
The terms of Directors Robert D. Adams, David Casper, Wilber Pribilsky,
Gary Sirmon and Marvin Sundquist continued.
ITEM 5. Other Information
Not Applicable
ITEM 6. Exhibits and Reports on Form 8K
Report (s) on Form 8-K filed during the quarter ended September 30, 1999, are
as follows:
Date Filed Purpose
---------- -------
NONE
30
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 Washington Bancorp, Inc.
November 12, 1999 /s/ Gary Sirmon
-------------------------------------
Gary Sirmon
President and Chief Executive Officer
November 12, 1999 /s/ D. Allan Roth
-------------------------------------
D. Allan Roth
Secretary and Treasurer and Executive
Vice President
31