As filed with the Securities and Exchange Commission on
July 12, 2001
Registration No. 333-58650
-----------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------------
FORM SB-2/A
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
(AMENDMENT NO. 4)
----------------------
FIRST WASHINGTON FINANCIALCORP
(Exact name of Registrant as Specified in Its Charter)
NEW JERSEY
(State or other jurisdiction of incorporation or organization)
52-2150671
(I.R.S. Employer Identification Number)
US ROUTE 130 & MAIN STREET
WINDSOR, NEW JERSEY 08561
(609) 426-1000
(Address, including zip code, and telephone number, including
area code, of agent for service)
C. HERBERT SCHNEIDER, PRESIDENT
FIRST WASHINGTON FINANCIALCORP
US ROUTE 130 & MAIN STREET
WINDSOR, NEW JERSEY 08561
(609) 426-1000
(Name, address, including zip code and telephone number,
including area codes, of agent for service)
WITH A COPY TO
ROBERT A. SCHWARTZ, ESQ.
WINDELS MARX LANE & MITTENDORF
120 ALBANY STREET PLAZA
NEW BRUNSWICK, NEW JERSEY 08901
(732) 846-7600
Approximate date of commencement of proposed sale to the public: As
soon as practicable after this Registration Statement becomes effective.
If any securities being registered on this form are being offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box
[X]____________________
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering.
[ ]____________________
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.
[ ]____________________
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.
[ ]____________________
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box.
[ ]____________________
FIRST WASHINGTON FINANCIALCORP
Cross Reference Sheet Form SB-2
Items of Form SB-2 Prospectus Caption or Location
- ------------------ ------------------------------
1. Front of Registration Statement
and Outside Front Cover Page
of Prospectus ...................... Facing Page of Registration Statement;
Front Cover Page of Prospectus
2. Inside Front and Outside Back
Cover Pages of Prospectus .......... Inside Front Cover Page; Outside Back
Cover Page; TABLE OF CONTENTS
3. Summary Information and
Risk Factors ....................... OFFERING SUMMARY; RISK FACTORS
4. Use of Proceeds .................... USE OF PROCEEDS
5. Determination of Offering Price .... THE OFFERING - Determination of
Offering Price
6. Dilution ........................... Not Applicable
7. Selling Security Holders ........... Not Applicable
8. Plan of Distribution ............... THE OFFERING - Sale of Common Stock
9. Legal Proceedings .................. THE COMPANY - Legal Proceedings
10. Directors, Executive Officers,
Promoters and Control Persons ...... MANAGEMENT - Board of Directors &
Executive Officers
11. Security Ownership of Certain
Beneficial Owners and Management ... MANAGEMENT - Stock Ownership of
Management and Certain Shareholders
12. Description of Securities .......... DESCRIPTION OF THE COMPANY'S
SECURITIES
13. Interest of Named Experts
and Counsel ........................ Not Applicable
14. Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities .................... Not Applicable
15. Organization Within Last
Five Years ......................... MANAGEMENT - Certain Transactions with
Management
16. Description of Business ............ THE COMPANY
17. Management's Discussion and
Analysis or Plan of Operation ...... MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
18. Description of Property ............ THE COMPANY - Description of Property
19. Certain Relationships and
Related Transactions ............... MANAGEMENT - Certain Transactions
with Management
20. Market for Common Equity and Related
Stockholder Matters ................ OFFERING SUMMARY; DESCRIPTION OF THE
COMPANY'S SECURITIES
21. Executive Compensation ............. MANAGEMENT - Executive Compensation;
Employment Agreements; 1997 Stock
Option Plan; Director Compensation;
1999 Stock Option Plan
22. Financial Statements ............... INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS
23. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure ............... Not Applicable
PROSPECTUS
- ----------
FIRST WASHINGTON FINANCIALCORP
100,000 TO 300,000 SHARES
OF
COMMON STOCK
$15.00 Per Share
We are incorporated under the laws of New Jersey. Our common stock is
traded on the OTC Bulletin Board under the symbol "FWFC". Our subsidiary is
First Washington State Bank, a New Jersey state chartered commercial bank. On
June 28, 2001, the last sale price of our common stock was $20.00.
We are offering for sale a minimum of 100,000 and a maximum of 335,000
shares of our common stock, at a price of $15.00 per share, for a total of $1.5
million to $5.0 million.
Prior to September 15, 2001, shares will be offered only to our
existing shareholders of record as of June 30, 2001. The offering to our
existing shareholders (also referred to as the rights offering) consists of a
nontransferable priority right to purchase shares. Any shares offered and not
sold in the rights offering shall, beginning on September 15, 2001, be made
available for sale to the general public. The subscription period for the
offering of our shares will end on the earlier of (i) our receipt of
subscriptions for 100,000 shares unless we elect to continue to solicit
subscriptions for up to 335,000 shares, or (ii) at 5:00 p.m., New Jersey time,
on October 15, 2001 (unless we extend the subscription period, to a date not
later than December 31, 2001).
We are selling these shares through the efforts of certain of our
officers and directors, without the use of an underwriter or broker. Until we
accept subscriptions, we will hold subscription payments in a
non-interest-bearing account. Payments for subscriptions that are not accepted
will be returned without interest or deduction. The minimum subscription amount
per subscriber is 100 shares.
----------------
THE PURCHASE OF THE COMMON STOCK INVOLVES VARIOUS INVESTMENT RISKS
WHICH YOU SHOULD CONSIDER CAREFULLY BEFORE YOU INVEST. SEE "RISK FACTORS"
BEGINNING ON PAGE 5 OF THIS PROSPECTUS.
Neither the Securities and Exchange Commission nor any state securities
commission has approved the common stock or determined that this prospectus is
accurate or complete. Any representation to the contrary is a criminal offense.
The shares of common stock are not bank deposits and are not secured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
=======================================================================
Price to Public Proceeds to Company (1)
-----------------------------------------------------------------------
Per Share $15.00 $15.00
-----------------------------------------------------------------------
Total (minimum/maximum) $1,500,000/$5,025,000 $1,500,000/$5,025,000
=======================================================================
- -----------
(1) Before deduction of expenses of the offering payable by the company
estimated at $100,000.
The date of this prospectus is ___________, 2001
TABLE OF CONTENTS
-----------------
Page
----
Offering Summary ....................................................... 1
Consolidated Selected Financial and Other Data ......................... 3
Risk Factors ........................................................... 5
Use of Proceeds ........................................................ 9
The Offering ........................................................... 9
Capitalization ......................................................... 11
Market for the Common Stock ............................................ 11
Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................... 13
Recent Accounting Pronouncements ....................................... 33
The Company ............................................................ 34
Supervision and Regulation ............................................. 35
Management ............................................................. 38
Description of the Company's Securities ................................ 43
Transfer Agent ......................................................... 45
Legal Matters .......................................................... 46
Experts ................................................................ 46
Where You Can Find Additional Information .............................. 46
Index to Financial Statements .......................................... F-I
OFFERING SUMMARY
The items in the following summary are described in more detail later
in this prospectus. This summary provides an overview of selected information
and does not contain all of the information you should consider. Therefore, you
should also read the more detailed information set out in this prospectus,
including the consolidated financial statements and notes.
First Washington FinancialCorp
First Washington FinancialCorp is a bank holding company registered
with the Board of Govenors of the Federal Reserve System under the Bank Holding
Company Act of 1956, as amended, incorporated under the laws of New Jersey. We
are the holding company for First Washington State Bank, a New Jersey state
chartered commercial bank. The bank is a full service commercial bank which
provides a wide range of business and consumer financial services. Our target
marketplace includes areas of Mercer, Monmouth and Ocean Counties, New Jersey.
The bank operates through its main office located in Windsor, New Jersey, and
ten branch offices located in Allentown, East Windsor, Freehold, Hamilton
Square, Jackson, Lakewood, West Windsor and Whiting, New Jersey. The bank's
deposits are insured by the Federal Deposit Insurance Corporation up to
applicable limits.
We intend to use the proceeds of this offering as working capital for
general corporate purposes, and to fund our continued expansion. Since December
31, 1996, our assets have grown by $149.6 million, or 107.1%. We have opened six
new offices since 1996, with the last four coming in the past two years. We
believe that through the continued big bank consolidation occurring throughout
New Jersey, opportunities will arise for the bank to expand into communities
underserved by the large, multi-state financial institutions. An expanded
capital base will allow us to take advantage of these opportunities, and grow in
a safe and sound manner. In addition, a larger capital base will permit the bank
to make larger loans, and to better penetrate our market areas.
As of March 31, 2001, we had total assets of $289.3 million, net
loans of $159.4 million, total deposits of $259.9 million and total
shareholders' equity of $19.5 million. See page F-2.
The following is a summary of our financial highlights and strategies:
o Earnings Increases -- We produced net income of $2.2 million in
2000, an increase of 11.2% over net income for 1999, and a
cumulative increase of 34.2% over net income for 1998. In the first
quarter of 2001, we produced net income of $586.4 thousand, an
increase of 10.9% over net income for the same period in 2000.
o Strategic Growth-- It is our strategic plan to continue to grow our
franchise in both asset size and locations at a controlled, but
steady pace. In 2000, we opened two new full service branches, and
increased our asset size by 12.6 %, to $274.3 million. This follows
our progress during 1999, in which we also opened two new branches
and increased our asset size by 17.3% over the previous year. Our
total assets grew by 5.5% in the first quarter of 2001. In the
future, we hope to take advantage of opportunities to acquire new
customers or branch locations. We believe the recent wave of bank
consolidations creates opportunities for us to enhance the value of
our franchise and that our steady asset growth and expansion will
allow us to continue to safely build our franchise value. We believe
these strategies enhance our long-term prospects.
o Community-Based Institution -- Through the continuing trend of bank
consolidations in New Jersey, many locally based community banks
serving Central New Jersey have been acquired by larger, regional
and multi-state institutions. These institutions are generally not
headquartered within the Central New Jersey marketplace. We are
committed to serving our local communities by providing customers
access to senior bank officers and decision-makers.
o Product Line Expansion-- New products and services helped stimulate
our growth during 2000. Deposit growth was enhanced by the expansion
of the "Senior Now Direct Account", which was implemented to provide
senior citizens with an attractive package of convenient banking
services, the introduction of "Physicians Presidential Banking" to
1
cater to the many medical professionals in our market, and the
"Commercial Equity Line of Credit Account", to permit businesses to
use longer term lines of credit. We also introduced our VISA Check
Card and 24 hour telephone banking. In 2001, we plan to make
available "ExecuBanc" to provide on-line banking services, and we
are looking at ways to expand our products beyond traditional
banking products, such as insurance activities and other non-banking
lines of business, to enhance our non-interest income.
Risk Factors
There are certain risks associated with an investment in our common
stock. Before you decide to purchase our common stock, you should read the Risk
Factors section beginning on page 5 of this prospectus.
The Offering
Securities Offered ......... 100,000 to 335,000 shares of common stock, no par
value.
Subscription Price ......... $15.00 per share.
Rights Offering ............ Initially we are offering shares to
existing shareholders of our common stock as of
June 30, 2001 on a priority basis. Each existing
shareholder has a non-transferable priority right
to purchase shares, up to the maximum allowable
number of shares in this offering. The rights
offering will expire on September 14, 2001.
Public Offering ............ Beginning on September 15, 2001, any shares not
sold in the rights offering to existing
shareholders will be offered to the public. The
public offering will expire on October 15, 2001,
unless we extend the offering until a date not
later than December 31, 2001.
Common Stock Outstanding
Prior to the Offering ...... 2,569,371 shares.
Common Stock Outstanding
After the Offering ......... 2,669,371 if 100,000 shares are sold.
2,904,371 if 335,000 shares are sold.
Use of Proceeds ............ The net proceeds of this offering will be used to
provide working capital for general corporate
purposes and to fund our continued growth.
Minimum/Maximum
Subscription ............... The minimum subscription amount per investor is
100 shares. Unless waived by us, no subscriber or
group of subscribers may purchase more than 5% of
the shares of common stock we are offering.
However, existing shareholders may purchase the
amount of shares necessary to ensure that his or
her percentage of ownership of the common stock
after the offering is equal to his or her
ownership percentage prior to the offering, even
if more than 5% of the offering.
Subscriptions by
Management ................. Our directors and executive officers have
indicated an intention to subscribe for in the
aggregate, 70,000 shares of the common stock.
2
Market For Securities ...... The shares are not listed on any exchange or on
the Nasdaq system. The shares are traded on the
over the counter market with quotes available
through the OTC Bulletin Board.
Plan of Distribution ....... Shares are being offered and sold by certain of
our officers and directors. Subscription funds
received by us will be held in a non-interest
bearing account until accepted by us. We may
reject any subscription at our discretion. We may
accept subscriptions all at one time or from
time-to-time at our discretion, and we may accept
or reject subscriptions at our discretion.
Subscriptions not accepted by us will be returned
without interest or deduction.
If the Rights Offering is
Oversubscribed ............. If existing shareholders oversubscribe for shares
in the rights offering, we will accept
subscriptions from each shareholder for the number
of shares subscribed for but reduced by the
percentage of that shareholder's subscription
amount relative to the entire offering amount. For
example, if the rights offering is oversubscribed
by 10%, we will reduce the amount of each
shareholder's subscription that we accept by 10%.
Consolidated Selected Financial and Other Data
You should read the following selected information in conjunction with
our consolidated financial statements and the notes to the consolidated
financial statements, appearing in this prospectus on page F-1. The selected
financial data at or for the periods ended March 31, 2001 and 2000 were derived
from our unaudited financial statements for the respective periods. The selected
financial data at or for the periods ended December 31, 2000, 1999 and 1998 were
derived from our audited consolidated financial statements for the respective
periods.
INCOME STATEMENT DATA
(dollars in thousands, except percentages and per share data)
Three months ended March 31, For the years ended December 31,
----------------------------- -----------------------------------
2001 2000 2000 1999 1998
---- ---- ---- ---- ----
Interest income.................... $ 4,908 $ 4,284 $ 18,420 $15,718 $13,543
Interest expense................... 2,672 2,082 9,515 7,576 6,601
------- ------- -------- ------- -------
Net interest income.............. 2,236 2,202 8,905 8,142 6,942
Provision for loan losses.......... 65 45 255 210 660
Net interest after provision for
loan losses...................... 2,171 2,157 8,650 7,932 6,282
Non-interest income................ 383 337 1,426 1,419 1,863
Non-interest expense............... 1,888 1,913 7,598 7,083 6,216
------- ------- -------- ------- -------
Income before income tax expense .. 666 581 2,478 2,268 1,929
Income tax expense................. 80 52 326 333 325
------- ------- -------- ------- -------
Net income......................... $ 586 $ 529 $ 2,152 $ 1,935 $ 1,604
======= ======= ======== ======= =======
PER SHARE DATA
Three months ended March 31, For the years ended December 31,
---------------------------- --------------------------------
2001 2000 2000 1999 1998
---- ---- ---- ---- ----
Net income - basic....... $0.23 $0.21 $0.84 $0.75 $0.62
Net Income - diluted..... $0.22 $0.20 $0.81 $0.72 $0.60
3
BALANCE SHEET DATA
(dollars in thousands, except percentages and per share data)
At March 31, At December 31,
---------------------- ------------------------------------
2001 2000 2000 1999 1998
---- ---- ---- ---- ----
Total Assets..................................... $289,343 $249,566 $274,275 $243,486 $207,490
Loans, net....................................... 159,384 137,621 152,860 135,368 114,486
Investment securities available-for-sale......... 35,159 38,916 38,776 37,243 31,342
Investment securities-held-to-maturity........... 17,007 6,756 13,958 6,086 5,886
Mortgage-backed securities available-for-sale.... 49,464 43,936 47,556 43,865 35,903
Deposits......................................... 259,853 225,118 246,685 221,374 188,600
Stockholders' equity............................. 19,455 15,319 18,131 14,929 14,353
SELECTED OPERATING RATIOS (1)
(dollars in thousands, except percentages and per share data)
Three months ended March 31, For the years ended December 31,
---------------------------- ---------------------------------
2001 2000 2000 1999 1998
---- ---- ---- ---- ----
Return on average assets................. 0.84% 0.86% 0.84% 0.85% 0.86%
Return on average shareholders' equity... 12.62 13.81 13.36 13.11 11.80
Net interest margin (2).................. 3.69 4.13 4.00 4.14 4.23
Equity to assets......................... 6.65 6.22 6.26 6.48 7.29
SELECTED ASSET QUALITY DATA,
CAPITAL AND ASSET QUALITY RATIOS
(dollars in thousands, except percentages and per share data)
Three months ended March 31, At or for the years ended December 31,
---------------------------- --------------------------------------
2001 2000 2000 1999 1998
---- ---- ---- ---- ----
Leverage ratio............................... 6.83% 6.74% 6.74% 6.56% 7.12%
Non-accrual loans/total loans................ 0.15% NM 0.17% 0.01% 0.01%
Non-performing assets/total assets (including
other real estate owned)................ 0.08% NM 0.10% 0.00% 0.05%
Allowance for loans losses/
total loans............................. 1.12% 1.22% 1.21% 1.19% 1.26%
Allowance for loan losses/non-
performing assets....................... NM NM NM NM NM
Net charge-offs/average total loans.......... 0.08% - 0.02% 0.03% 0.22%
- ---------------
(1) With the exception of end of period ratios, all ratios are based on average
and monthly balances during the indicated periods and are annualized where
appropriate.
(2) The net interest margin is calculated by dividing net interest income by
average interest earning assets.
NM - Not meaningful.
4
RISK FACTORS
You should consider the following risk factors in addition to the other
information in this prospectus before investing in our common stock.
In addition, you should be aware that certain statements in this
prospectus are forward-looking and are identified by the use of forward-looking
words or phrases such as "intended," "will be positioned," "believes,"
"expects," is or are "expected" and "anticipated."
These forward-looking statements are based on our current expectations.
The risk factors set forth below are cautionary statements identifying important
factors that could negatively affect our results or the value of your investment
in our common stock or cause actual results to differ materially from those in
the forward-looking statements.
The lack of liquidity of our common stock may inhibit the sale or value of your
shares.
Our common stock is traded on the over the counter market and listed
with the OTC Bulletin Board. At least one market maker acts as principal in
effecting transactions for our common stock. However, the volume of trading of
our shares has traditionally been very low. Without an active trading market in
our common stock, you may not be able to sell your shares at the price paid in
this offering. Further, if there should be a time when no market maker acts as
principal for effecting transactions in our shares, it may be difficult for you
to sell your shares promptly. We are undertaking this offering without the
assistance of an underwriter or broker/dealer. It is therefore unlikely that
this offering will result in a significant increase in trading volume and
liquidity in our stock.
Our continued growth may negatively affect profitability.
Since December 31, 1998, our asset size has grown 39.4% and we have
added four new branches. Our business plan calls for our continued expansion.
This expansion may detrimentally impact our future profitability in several
ways, including through potential loan losses and the need for future provisions
to the loan loss reserve, and an increase in operating and other non-interest
expenses associated with growth.
Our continued growth and success also depends on the ability of our
officers and key employees to manage our growth effectively, to attract and
retain skilled employees and to expand the capabilities of our management
information systems. Accordingly, there can be no assurance that we will be
successful in managing our expansion and the failure to do so would adversely
affect our financial position.
Defensive measures contained in the Certificate of Incorporation limit the
ability of shareholders to exert control over the Board of Directors. Our Board
may consider issues other than price in evaluating offers.
Our Certificate of Incorporation contains certain provisions which have
been adopted to permit the Board to act in the best interests of all
shareholders in the event of an unsolicited takeover bid. These provisions may
also have significant effects in limiting the ability of our shareholders to
effect an immediate change in the composition of the Board of Directors and to
otherwise exercise their voting power to affect the composition of the board or
to accept an offer which the shareholders may consider to be in their best
interests but which the Board does not accept. In general, these provisions
provide for (i) a classified Board of Directors; (ii) that directors may not be
removed by shareholders without cause; (iii) that the affirmative vote of 66
2/3% of the outstanding shares of common stock are required to approve a merger,
consolidation or sale of substantially all of the company's assets, unless the
proposed transaction is approved by a majority of the Board of Directors; and
(iv) prior notice of any shareholder nominations and proposals. In addition, our
Certificate of Incorporation provides that when the Board of Directors evaluates
a tender or exchange offer for our securities, a proposal to merge or
consolidate with another entity, or a proposal to have all or substantially all
of our property and assets acquired by another entity, the Board may, as
permitted by New Jersey law, give due consideration to all facts that it deems
relevant in evaluating what is in the best interests of the company, the bank
and the shareholders.
5
We are dependent upon commercial real estate values.
Our loan portfolio includes a large and growing percentage of loans
secured by commercial real estate. At March 31, 2001, a majority of our loans
were secured by commercial real estate. A decrease in commercial real estate
values in our market area, or a decrease in market activity for commercial real
estate properties may negatively impact our borrower's abilities to repay their
loans and our ability to collect amounts owed to us if we are required to
realize upon this collateral.
The offering price of our securities has been determined by our Board of
Directors.
The offering price of our shares in this offering is not based
primarily upon the market price of the stock, but rather by the company's own
valuation of its shares. Therefore, an investor who purchases shares in this
offering and later wishes to sell those shares may not receive a price equal to
the offering price.
We have not historically paid cash dividends.
We have not historically paid cash dividends on our common stock.
Rather, we have retained our earnings to augment our shareholders' equity and
provide capital for future growth. Although the Board will review our dividend
policy on an ongoing basis, we currently do not intend to pay cash dividends for
the foreseeable future. The common stock should not be purchased by persons who
need or desire dividend income from their investment.
Future offerings of our securities may dilute your ownership interest and the
book value of your shares.
Our determination of the amount of capital which we are seeking to
raise in this offering was based, in part, on our historic growth. If, however,
the capital raised in this offering is not enough to fund our future growth, we
may sell additional shares of our stock in future offerings to raise additional
capital. The sale of additional shares of our stock in the future may have the
effect of diluting your voting interest and, depending upon the price we receive
for such shares, diluting the book value of your shares.
Our results of operation depend upon the performance of our investment
portfolio.
For the year ended December 31, 2000, investment securities including
mortgage-backed securities, made up 36.6% of our total assets. Income on
investment securities made up 28.8% of our interest income in 2000. Our loan to
deposit ratio is 62.7%. The return on our investment securities is affected by
many factors, including the national economy and interest rates. Therefore,
changes in the national economy or a dramatic shift in interest rates could
adversely affect our net income.
Changes in local economic conditions could adversely affect our loan portfolio.
Our success depends to a certain extent upon the general economic
conditions of the local markets that we serve. Unlike larger banks that are more
geographically diversified, we provide banking and financial services primarily
to customers in Mercer, Monmouth and Ocean Counties, New Jersey, the counties in
which we have branches. Therefore, any decline in the economy of New Jersey or
these particular areas could have an adverse impact on us.
Our loans, the ability of borrowers to repay these loans and the value
of collateral securing these loans are impacted by economic conditions. Our
financial results, the credit quality of our existing loan portfolio, and the
ability to generate new loans with acceptable yield and credit characteristics
may be adversely affected by changes in prevailing economic conditions,
including declines in real estate values, changes in interest rates, adverse
employment conditions and the monetary and fiscal policies of the federal
government. Although economic conditions in our primary market areas are strong
and have aided our recent growth, we cannot assure you that these conditions
will continue to prevail. We cannot assure you that positive trends or
developments discussed in this prospectus will continue or that negative trends
or developments will not have a significant adverse effect on us.
6
The company is dependent on the bank as a source for dividends on the common
stock.
First Washington FinancialCorp is a legal entity separate and distinct from
the bank. The company has no material assets other than its ownership of the
bank. Earnings of the company are wholly dependent on the earnings of the bank,
as the company has engaged in no significant operations of its own. Accordingly,
the earnings of the company, and its ability to pay dividends on the common
stock, are dependent on the receipt by the company of earnings of the bank in
the form of dividends. Any restriction on the ability of the bank to pay
dividends could significantly and adversely affect the ability of the company to
pay dividends with respect to the common stock. The bank's ability to pay
dividends or make other capital distributions to the company is governed by
regulations imposed by the New Jersey Department of Banking and Insurance, the
Federal Reserve and the Federal Deposit Insurance Corporation, the bank's
primary regulators.
The following risk factors apply to an investment in commercial banks generally,
as well as to our operations:
We may be subject to higher operating costs as a result of government
regulation.
We are subject to extensive federal and state legislation, regulation and
supervision which is intended primarily to protect depositors and the Federal
Deposit Insurance Corporation's Bank Insurance Fund, rather than investors.
Legislative and regulatory changes may increase our cost of doing business or
otherwise adversely affect us and create competitive advantages for non-bank
competitors.
There is a risk that we may not be repaid in a timely manner, or at all, for
loans we make.
The risk of nonpayment (or deferred or delayed payment) of loans is inherent
in commercial banking. Such nonpayment (or delayed or deferred payment) of loans
to the bank, if they occur, may have a material adverse effect on our earnings
and overall financial condition. Additionally, in compliance with applicable
banking laws and regulations, the bank maintains an allowance for loan losses
created through charges against earnings. As of December 31, 2000, the bank's
allowance for loan losses was $1.9 million. The bank's marketing focus on
individuals and on small to medium-size businesses may result in the assumption
by the bank of certain lending risks that are different from or greater than
those which would apply to loans made to larger companies. We seek to minimize
our credit risk exposure through credit controls which include evaluation of
potential borrowers, available collateral, liquidity and cash flow. However,
there can be no assurance that such procedures will actually reduce loan losses.
The laws that regulate our operations are designed for the protection of
depositors and the public, but not our shareholders.
The federal and state laws and regulations applicable to our operations give
regulatory authorities extensive discretion in connection with their supervisory
and enforcement responsibilities, and generally have been promulgated to protect
depositors and the deposit insurance funds and not for the purpose of protecting
shareholders. These laws and regulations can materially affect our future
business. Laws and regulations now affecting us may be changed at any time, and
the interpretation of such laws and regulations by bank regulatory authorities
is also subject to change. We can give no assurance that future changes in laws
and regulations or changes in their interpretation will not adversely affect our
business.
The potential impact of changes in monetary policy and interest rates may
negatively affect our operations.
Our operating results may be significantly affected (favorably or
unfavorably) by market rates of interest which, in turn, are affected by
prevailing economic conditions, by the fiscal and monetary policies of the
United States government and by the policies of various regulatory agencies. Our
earnings will depend primarily upon our interest rate spread (i.e., the
difference between income earned on our loans and investments and the interest
paid on our deposits and borrowings). Like many financial institutions, we may
be subject to the risk of fluctuations in interest rates, which, if significant,
may have a material adverse effect on our operations.
7
We cannot predict how changes in technology will impact our business.
The financial services market, including banking services, is
increasingly affected by advances in technology, including developments in:
o telecommunications;
o data processing;
o automation;
o internet-based banking;
o telephone banking; and
o debit cards and so-called "smart cards."
Our ability to compete successfully in the future will depend, to a
certain extent, on whether we can anticipate and respond to technological
changes. We have recently introduced telephone banking, debit card services, and
a PC-based banking service. The successful operation and further development of
these and other new technologies will likely require additional capital
investments in the future. We cannot assure you that we will have sufficient
resources or access to the necessary proprietary technology to remain
competitive in the future.
We are in competition with many other banks, including larger commercial banks
which have greater resources than us.
The banking industry within the State of New Jersey is highly
competitive. The bank's principal market area is served by branch offices of
large commercial banks and thrift institutions. We also face competition from
other companies which provide financial services, including consumer loan
companies, credit unions, mortgage brokers, insurance companies, securities
brokerage firms, money market mutual funds, internet banks and private lenders.
In addition, in November of 1999, the Gramm-Leach-Bliley Financial Modernization
Act of 1999 was passed into law. Among other things, the Act permits insurance
companies and securities firms to acquire or form financial institutions,
thereby further increasing the competition we face. A number of our competitors
have substantially greater resources to expend upon advertising and marketing
than we do, and their substantially greater capitalization enables them to make
much larger loans. Our success depends a great deal upon our judgment that large
and mid-size financial institutions do not adequately serve individuals and
small businesses in our principal market area and on our ability to compete
favorably for such customers. In addition to competition from larger
institutions, we also face competition for individuals and small businesses from
recently formed banks seeking to compete as "home town" institutions. Most of
these new institutions have focused their marketing efforts on the smaller end
of the small business market we serve.
Our allowance for loan losses may not be adequate to cover actual losses.
Like all financial institutions, we maintain an allowance for loan
losses to provide for loan defaults and nonperformance. We believe that our
allowance for loan losses is adequate to cover losses inherent in the loan
portfolio. However, our allowance for loan losses may not be adequate to cover
actual losses, and future provisions for loan losses could materially and
adversely affect results of our operations.
Risks within the loan portfolio are analyzed on a continuous basis by
management, by independent internal and external loan review functions and by
the audit committee. A risk system, consisting of multiple grading categories,
is utilized as an analytical tool to assess risk and the appropriate level of
loss reserves. Along with the risk system, management further evaluates risk
characteristics of the loan portfolio under current and anticipated economic
conditions and considers such factors as the financial condition of the
borrowers, past and expected loan loss experience, and other factors management
feels deserve recognition in establishing an adequate reserve. This risk
assessment process is performed at least quarterly, and, as adjustments become
necessary, they are realized in the periods in which they become known. The
amount of future losses is susceptible to changes in economic, operating and
other conditions, including changes in interest rates, that may be beyond our
control, and these losses may exceed current estimates. State and federal
regulatory agencies, as an integral part of their examination process, review
our loans and allowance for loan losses. Although we believe that our allowance
for loan losses is adequate to cover anticipated losses, we cannot assure you
that we will not further increase the allowance for loan losses or that
regulators will not require us to increase this allowance. The need to take
additional provisions could adversely affect our earnings.
8
USE OF PROCEEDS
We estimate the net proceeds of this offering to be $1.4 million,
(after deducting offering expenses of $100,000) if we sell 100,000 shares, and
$4.9 million (after deducting offering expenses) if we sell 335,000 shares.
These proceeds will be used as working capital for general corporate purposes
and to fund our future growth while maintaining our capital at an acceptable
level. In addition, a larger capital base will permit the bank to make larger
loans, and to better penetrate our market areas.
THE OFFERING
General
We are offering a minimum of 100,000 and a maximum of 335,000 shares of
our common stock at a price of $15.00 per share, for a total of between $1.5
million and $5.0 million. Offering expenses are estimated to be $100 thousand.
The minimum number of shares required for a purchaser to participate in this
offering is 100 shares. The maximum purchase for any investor or group of
investors is 5% of the shares of common stock we are offering, unless we, in our
sole discretion, accept a subscription for a greater number of shares. In
addition, we will accept subscriptions from our existing shareholders for an
amount in excess of 5% of the shares being offered in order to permit that
existing shareholder's ownership percentage of the outstanding common stock
after this offering to equal his or her ownership percentage prior to the
offering.
Determination of Offering Price
We have determined the offering price of the common stock in this
offering through our own valuation of the shares and based upon the amount of
additional capital needed for corporate purposes, rather than on the trading
value of the common stock on the OTC Bulletin Board. Among the factors we took
into consideration in determining the price for the common stock were the price
to book value multiple indicated by the offering price (i.e., at an offering
price of $15.00 per share, the price would indicate a price to book value ratio
of 198% as of June 28, 2001), a review of our recent growth history and our
expectations for our future performance, and consideration of the price for
shares paid in recent offerings of de novo banks and bank holding companies in
New Jersey.
Offering Period
This offering of our common stock consists of two parts - the rights
offering and the public offering. We are offering for sale a total of between
100,000 and 335,000 shares of our common stock at a price of $15.00 per share.
The price will be the same in both the rights offering and the public offering.
Rights Offering
Initially, our existing shareholders will have a priority right to
purchase our common stock. This rights offering is open to any shareholder of
the company as of the record date, June 30, 2001. Any existing shareholder
may purchase up to a maximum of 5% of the shares we are offering, unless we, in
our sole discretion, accept a subscription for a greater number of shares. In
addition, we will accept subscriptions from our existing shareholders for an
amount in excess of 5% of the shares being offered in order to permit an
existing shareholder's ownership percentage of the outstanding common stock
after this offering to equal his or her ownership percentage prior to the
offering.
9
The rights offering will end on the earlier of (i) our receipt of
subscriptions for 100,000 shares unless we elect to continue to solicit
subscriptions for up to 335,000 shares, or (ii) at 5:00 p.m. New Jersey time on
September 14, 2001, prior to the commencement of the public offering on
September 15, 2001.
Public Offering
Commencing September 15, 2001, any shares of our common stock not sold
in the rights offering will be offered to the general public in a public
offering. We will accept subscriptions for our shares in the public offering
until the earlier of (i) our receipt of total subscriptions (including
subscriptions from the rights offering) for 100,000 shares unless we elect to
continue to solicit subscriptions for up to 335,000 shares, or (ii) at 5:00
p.m., New Jersey time, on October 15, 2001 (unless we extend this date, at our
sole discretion to a date not later than December 31, 2001).
No investor or group of investors may purchase more than 5% of the
total number of shares we are offering, unless we, in our sole discretion,
accept a subscription for a greater number of shares.
Sale of Common Stock
We are offering shares of our common stock on a best efforts basis. The
shares are being sold through the efforts of certain of our officers and
directors without the use of an underwriter. These officers and directors will
be exempt from registration as brokers under SEC Rule 3a4-1. We will not pay any
commissions on the sales of our stock. We will, however, reimburse these
individuals for reasonable expenses they incur in connection with the offering.
How to Subscribe
If you wish to subscribe for shares of our common stock, you must
complete the steps set forth below before the offer ends. You may subscribe for
whole shares only. The minimum subscription amount per subscriber is 100 shares.
1) Complete and sign the subscription agreement which accompanies this
prospectus;
2) Make full payment of the entire purchase price for the shares
subscribed in United States currency by check, or money order payable
to First Washington FinancialCorp; and
3) Deliver the subscription agreement, together with the payment
described above, to First Washington FinancialCorp, U.S. Route 130 &
Main Street, Windsor, New Jersey 08561, Attn: Nora Rauscher.
No minimum subscription amount is required before we accept
subscription funds. Pending acceptance of subscription funds by us, we will hold
funds in a non-interest bearing account. We may reject any subscription at our
discretion. We may accept subscriptions all at one time, or from time-to-time,
at our discretion. In the event any subscription is not accepted, those
subscription funds will be returned without interest or deduction.
10
CAPITALIZATION
The following table sets forth our capitalization as of March 31,
2001 and as adjusted to give effect, after deducting offering expenses, to the
sale of the common stock by this prospectus, at an offering price of $15.00 per
share.
March 31, 2001
As Adjusted for this Offering
100,000 335,000
Actual Shares Sold Shares Sold
-------------------------------------------
(dollars in thousands)
Shareholders' equity
Preferred stock, no par value, 1,000,000 shares
authorized, no shares issued or outstanding..................... $-0- $-0- $-0-
Common stock no par value, 10,000,000 shares
authorized, 2,569,371 shares issued and outstanding (actual).... 16,945 18,345 21,870
Retained earnings ................................................ 1,909 1,909 1,909
Accumulated other comprehensive income(loss)...................... 601 601 601
----------------------------------------
Total shareholder's equity............................ $19,455 $20,855 $24,380
Book value per share.............................................. $7.57 $7.81 $8.39
The following tables set forth our capital ratios for both the company as of
March 31, 2001, and as adjusted to give effect, after deducting offering
expenses, to the sale of the common stock offered by this prospectus at an
offering price of $15.00 per share, as well as the minimum required regulatory
capital.
First Washington FinancialCorp
- --------------------------------------------------------------------------------------------------------------------
March 31, 2001 As Adjusted For Capital
Actual 100,000 / 335,000 Adequacy Purposes
Shares Sold (1)
- --------------------------------------------------------------------------------------------------------------------
Risk-based Capital:
- --------------------------------------------------------------------------------------------------------------------
Total Capital (to risk-weighted assets) 10.99% 11.72% / 13.54% 8.00%
- --------------------------------------------------------------------------------------------------------------------
Tier I Capital (to risk-weighted assets) 10.03% 10.76% / 12.58% 4.00%
- --------------------------------------------------------------------------------------------------------------------
Tier I Capital (to average assets) 6.83% 7.30% / 8.46% 4.00%
- --------------------------------------------------------------------------------------------------------------------
- ---------------
(1) Assumes that net proceeds are invested in U.S. Government Agency securities,
risk-weighted at 20%.
Market for the Common Stock
Our common stock is traded on the over-the-counter market and listed on the
OTC Bulletin Board under the symbol "FWFC." A requirement for inclusion on the
OTC Bulletin Board is that there be at least one market maker for the common
stock. Acting as a market maker involves the publication of "bid" and "ask"
prices and maintaining the ability, subject to compliance with various
securities laws and other regulatory requirements, to act as principal in
effecting transactions in reasonable quantities at the quoted prices. At the
date of this prospectus, the OTC Bulletin Board listed four market makers acting
as principals with regard to our common stock.
11
The following table shows the high and low bid price for the common
stock on the OTC Bulletin Board for the last two fiscal years. High and low bid
prices reported on the OTC Bulletin Board reflect inter-dealer quotations,
without retail markup, mark-down or commissions, and may not necessarily
represent actual transactions.
2001
High Low
---- ---
1st Quarter ............................... $17.50 $14.12
2nd Quarter through June 19, 2001 ......... $23.00 $15.60
2000
High Low
---- ---
1st Quarter ............................... $17.25 $12.00
2nd Quarter ............................... $16.13 $15.09
3rd Quarter ............................... $16.59 $15.09
4th Quarter ............................... $16.50 $14.12
1999
High Low
---- ---
1st Quarter ............................... $16.48 $14.96
2nd Quarter ............................... $17.54 $15.68
3rd Quarter ............................... $17.25 $15.75
4th Quarter ............................... $17.25 $12.00
The Company has historically not paid cash dividends, but has declared
annual stock dividends or stock splits. The market prices above are adjusted to
account for (i) a 5% stock dividend declared on August 11, 1999, and (ii) a
four-for-three stock split declared on September 13, 2000.
As of March 31, 2001, the company had 487 shareholders of record.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are the holding company for First Washington State Bank. The bank was founded
in 1989 with the goal of providing high quality products and superior, personal
customer service to individuals and businesses in the markets surrounding our
office locations. Since we opened our first office in Windsor, New Jersey in
December 1989, we have sought new locations with business communities
underserved by the state's larger financial institutions. Our strategy of
providing local, community based financial products and services has led us to
grow to eleven offices, with our newest four offices opening in 1999 and 2000.
We will continue to seek new locations in markets with a strong, small business
community. We believe we can meet the needs of these customers faster and more
efficiently than large, multi-state institutions, while maintaining our
excellent history of credit quality and producing a return for our shareholders.
We also believe that the continuing consolidation within our New Jersey market
place will continue to provide us with opportunities to acquire customers who
are not adequately served.
RESULTS OF OPERATIONS
For the quarter ended March 31, 2001, we recognized net income of $586 thousand,
or $0.23 per basic share, compared to net income of $529 thousand, or $0.21 per
basic share for the quarter ended March 31, 2000. At March 31, 2001, our total
assets were $289.3 million, an increase of $15.0 million over total assets at
year-end 2000. Our net loans increased by $6.5 million to $159.4 million and our
total deposits increased by $13.2 million to $259.9 million.
For the year ended December 31, 2000 we recognized net income of $2.2 million or
$0.84 per share-basic compared to net income of $1.9 million, or $0.75 per
share-basic for the year ended December 31, 1999. At December 31, 2000, our
total assets reached $274.3 million, an increase of 12.6% over total assets at
December 31, 1999, our net loans totaled $152.9 million, an increase of 12.9%
over net loans at December 31, 1999 and our deposits totaled $246.7 million, an
increase of 11.4% over total deposits at December 31, 1999.
Our continued growth, both through the year 2000 and in the first quarter of
2001, has occurred both in our existing markets and through our new office
locations in Whiting and East Windsor, New Jersey (both opened in 1999) and
Lakewood and Hamilton Square, New Jersey (both opened in 2000).
Our results of operations depend primarily on net interest income, which is the
difference between the interest earned on interest-earning assets and the
interest paid on deposits and funds borrowed to support those assets. Net
interest margin is a function of the difference between the weighted average
rate received on interest-earning assets and the weighted average rate paid on
interest-bearing liabilities. Net income is also affected by the amount of
non-interest income (primarily service fees on deposit accounts) and operating
expenses.
Net Income. For the quarter ended March 31, 2001, we recognized net income of
$586 thousand, an increase of $57 thousand over the quarter ended March 31,
2000. The increase in our net income resulted from a $624 thousand increase in
interest income, a $46 thousand increase in non-interest income and a $26
thousand decrease in total non-interest expenses, substantially offset by a $590
thousand increase in interest expense, a $20 thousand increase in provision for
loan losses, and a $29 thousand increase in income tax expense.
For the year ended December 31, 2000, we recognized a net income of $2.2
million, an increase of $217 thousand from income of $1.9 million for the year
ended December 31, 1999. The period to period increase in reported net income is
attributable to an increase in our net interest income, partially offset by an
increase in non-interest expense, as we incurred increased salary, employee
benefit and occupancy expenses in connection with our new office locations and
overall growth.
13
Interest Income. Total interest income increased by $624 thousand to $4.9
million for the quarter ended March 31, 2001 from $4.3 million for the prior
year quarter. The increase in interest income primarily reflects an increase in
our interest earning assets, as our total average interest earning assets for
the quarter ended March 31, 2001 increased to $263.9 million from $232.7 million
from the 2000 first quarter. In addition, the average yield on total interest
earning assets increased by three (3) basis points, to 7.74% from 7.71% for the
first quarter of 2000. The increase in average assets consisted primarily of an
increase of average loans outstanding to $156 million from $136 million. The
yield on loans also increased by three (3) basis points to 8.61% from 8.58% in
the prior year quarter.
Total interest income increased $2.7 million, or 17.2%, to $18.4 million for the
year ended December 31, 2000 from $15.7 million in 1999. This increase in
interest income primarily reflects an increase in our average balance of earning
assets, as well as an increase in rates reflecting general increases in market
rates of interest. Average balances increased by $17.6 million for loans, $5.9
million for investment securities, and $3.0 million for federal funds sold. The
average yield on the loan portfolio increased to 8.81% from 8.73%, the average
yield on taxable investment securities increased to 6.69% from 5.91% and the
average yield on federal funds sold increased to 6.32% from 5.22% in 2000 as
compared to 1999 reflecting higher market rates of interest. The narrower
increase in average yield on loans is a reflection of the repricing
characteristics of these products as compared to securities and federal funds
sold.
Interest Expense. Our interest expense for the quarter ended March 31, 2001
increased by $590 thousand to $2.7 million from $2.1 million. Of this, our
expense for borrowed funds increased to $107 thousand from $82 thousand. The
increase in our interest expense represents both an increase in the outstanding
balance of liabilities and an increase in the average rate paid on interest
bearing liabilities. Total average interest bearing liabilities for the quarter
ended March 31, 2001 were $219.4 million, an increase of $29.5 million, or 15.5%
over average outstanding interest bearing liabilities for the quarter ended
March 31, 2000. In addition, the average rate paid on interest bearing
liabilities increased by forty-nine basis points to 4.87% in the current year
quarter from 4.38% in the prior year quarter. The increase in the average
balance of interest bearing liabilities reflects our continued penetration of
the markets surrounding our existing branch locations as well as the continued
success of our newer branch locations. Our two newest branches opened during the
course of 2000, and so had no impact on the first quarter of 2000. The increase
in average rate paid on interest bearing deposits reflects rates paid to retain
current customers as well as to attract new customers to the new branches opened
in 2000.
Our interest expense for the year ended December 31, 2000 increased $1.9
million, or 25.6%, to $9.5 million from $7.6 million for 1999. The increase in
interest expense reflects a 12.6% increase in average interest bearing
liabilities during 2000. In addition, interest expense for borrowed funds
increased by approximately $200 thousand from $224 thousand for the year ended
December 31, 1999 to $424 thousand for the year ended December 31, 2000. The
increase in interest expense on borrowed funds is attributable to our sweep
repurchase agreement program which began in December 1999. Although deposits
remain our primary source of funding, it is our strategy to fund loans from the
most cost effective source. While the composition of deposits did not change
from year to year, an increase in market rates affected interest expense, both
on existing accounts and on new accounts. During 2000, as we opened two new
branches, a large number of new accounts, particularly time deposits, were
opened at higher prevailing market rates.
Net-Interest Income. Net interest income for the three months ended March 31,
2001 was $2.2 million, unchanged from the $2.2 million in net income recognized
in the first quarter of 2000. The net interest margin for the quarter ended
March 31, 2001 was 3.69%, compared to a net interest margin of 4.13% for the
quarter ended March 31, 2000. The decline reflects the accelerating increase in
interest expense during the first quarter of 2001 compared to the prior year
quarter.
As a result of the changes discussed above, net interest income increased by
$763 thousand, or 9.4%, for the year ended December 31, 2000 over net interest
income for 1999. The net interest margin for the year ended December 31, 2000
was 4.00 as compared to 4.14 for the year ended December 31, 1999. While the
interest margin decreased from 1999 to 2000, the timing of market rate increases
coupled with the repricing intervals of assets and liabilities enabled us to
offset the decline.
14
COMPARATIVE AVERAGE BALANCE SHEETS
The following tables reflect the components of our net interest income, setting
forth for the periods presented herein, (1) average assets, liabilities and
shareholders' equity, (2) interest income earned on interest-earning assets and
interest expense paid on interest-bearing liabilities, (3) average yields earned
on interest-earning assets and average rates paid on interest bearing
liabilities, (4) the company's net interest spread (i.e., the average yield on
interest-earnings assets less the average rate on interest-bearing liabilities)
and (5) the company's net yield on interest-earning assets. Rates are computed
on a tax equivalent basis.
AVERAGE BALANCE SHEET
(dollars in thousands)
31-Mar-01 31-Mar-00
----------------------------------- -------------------------------------
AVG BAL INTEREST YIELD AVG BAL INTEREST YIELD
INC/EXP INC/EXP
ASSETS
DUE FROM BANKS $ 476 8 6.72% $ 93 2 8.60%
LOANS (1) 155,519 3,347 8.61% 136,461 2,927 8.58%
TAXABLE SECURITIES 65,731 1,069 6.51% 54,317 883 5.50%
TAX EXEMPT SECURITIES (2) 34,015 574 6.75% 34,622 574 6.63%
FED FUNDS SOLD 8,173 110 5.38% 7,237 99 5.47%
---------------------- -----------------------
TOTAL INTEREST EARNING ASSETS 263,914 5,108 7.74% 232,730 4,485 7.71%
NON-INTEREST EARNING ASSETS 17,278 15,417
ALLOWANCE FOR POSSIBLE LOAN LOSSES (1,862) (1,647)
-------- --------
TOTAL ASSETS $279,330 $246,500
======== ========
LIABILITIES & EQUITY
REPURCHASE AGREEMENTS $ 5,520 67 4.86% $ 3,063 35 4.57%
INTEREST BEARING DEMAND DEPOSITS
23,192 124 2.14% 16,550 76 1.84%
SAVINGS AND MONEY MARKET DEPOSITS
43,268 299 2.76% 41,416 255 2.46%
FHLB ADVANCES 2,500 40 6.40% 3,000 47 6.27%
TIME DEPOSITS 144,909 2,142 5.91% 125,903 1,668 5.30%
---------------------- -----------------------
TOTAL INTEREST BEARING LIABILITIES 219,389 2,672 4.87% 189,932 2,081 4.38%
DEMAND DEPOSITS 39,865 39,730
OTHER LIABILITIES 1,490 1,514
-------- --------
TOTAL NON-INTEREST 41,244
BEARING LIABILITIES 41,355
TOTAL LIABILITIES 260,744 231,176
SHAREHOLDERS' EQUITY 18,586 15,324
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $279,330 $246,500
======== ========
NET INTEREST DIFFERENTIAL 2.87% 3.33%
==== ====
NET YIELD ON INTEREST EARNING ASSETS 3.69% 4.13%
NET INTEREST INCOME $2,436 $2,404
====== ======
15
AVERAGE BALANCE SHEET
(dollars in thousands)
31-Dec-00 31-Dec-99
--------------------------------------------------------------------
AVG BAL INTEREST YIELD AVG BAL INTEREST YIELD
INC/EXP INC/EXP
--------------------------------------------------------------------
ASSETS
DUE FROM BANKS $ 88 7 7.95% $ 93 7 7.53%
LOANS (1) 142,946 12,593 8.81% 125,323 10,942 8.73%
TAXABLE SECURITIES 57,545 3,849 6.69% 51,245 3,030 5.91%
TAX EXEMPT SECURITIES (2) 33,596 2,243 6.68% 33,968 2,265 6.67%
FED FUNDS SOLD 8,123 513 6.32% 5,127 268 5.23%
-------------------- --------------------
TOTAL INTEREST EARNING ASSETS 242,298 19,205 7.93% 215,756 16,512 7.65%
NON-INTEREST EARNING ASSETS 16,707 13,731
ALLOWANCE FOR POSSIBLE LOAN
LOSSES (1,711) (1,570)
--------- ---------
TOTAL ASSETS $ 257,294 $ 227,917
========= =========
LIABILITIES & EQUITY
REPURCHASE AGREEMENTS $ 3,889 203 5.22% $ 166 5 3.01%
INTEREST BEARING DEMAND
DEPOSITS 19,566 396 2.02% 14,589 249 1.71%
SAVINGS AND MONEY MARKET
DEPOSITS 41,284 1,132 2.74% 41,643 1,011 2.43%
FHLB ADVANCES 3,514 221 6.29% 3,475 218 6.27%
TIME DEPOSITS 130,886 7,563 5.78% 117,017 6,093 5.21%
-------------------- --------------------
TOTAL INTEREST BEARING
LIABILITIES 199,139 9,515 4.78% 176,890 7,576 4.28%
------ -----
DEMAND DEPOSITS 36,775 31,674
OTHER LIABILITIES 5,270 4,593
--------- ---------
TOTAL NON-INTEREST BEARING
LIABILITIES 42,045 36,267
TOTAL LIABILITIES 241,184 213,157
SHAREHOLDERS' EQUITY 16,110 14,760
--------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 257,294 $ 227,917
========= =========
NET INTEREST DIFFERENTIAL 3.15% 3.37%
===== =====
NET YIELD ON INTEREST EARNING
ASSETS 4.00% 4.14%
===== =====
NET INTEREST INCOME $9,690 $8,936
====== ======
31-Dec-98
----------------------------------------
AVG BAL INTEREST YIELD
INC/EXP
----------------------------------------
ASSETS
DUE FROM BANKS $ 205 12 5.85%
LOANS (1) 110,403 9,975 9.04%
TAXABLE SECURITIES 37,674 2,202 5.84%
TAX EXEMPT SECURITIES (2) 24,078 1,642 6.82%
FED FUNDS SOLD 5,204 287 5.51%
------------------------
TOTAL INTEREST EARNING ASSETS 177,564 14,118 7.95%
NON-INTEREST EARNING ASSETS 10,126
ALLOWANCE FOR POSIIBLE LOAN
LOSSES (1,152)
---------
TOTAL ASSETS $ 186,538
=========
LIABILITIES & EQUITY
REPURCHASE AGREEMENTS $ 0 - 0.00%
INTEREST BEARING DEMAND
DEPOSITS 12,056 208 1.73%
SAVINGS AND MONEY MARKET
DEPOSITS 38,184 1,060 2.78%
FHLB ADVANCES 3,985 249 6.25%
TIME DEPOSITS 91,147 5,084 5.58%
------------------------
TOTAL INTEREST BEARING
LIABILITIES 145,372 6,601 4.54%
------
DEMAND DEPOSITS 26,593
OTHER LIABILITIES 980
---------
TOTAL NON-INTEREST BEARING
LIABILITIES 27,573
TOTAL LIABILITIES 172,945
SHAREHOLDERS' EQUITY 13,593
---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 186,538
=========
NET INTEREST DIFFERENTIAL 3.41%
=====
NET YIELD ON INTEREST EARNING
ASSETS 4.23%
=====
NET INTEREST INCOME $7,517
======
- ---------------
(1) Average loans include non-accrual loans, which were $240 thousand and $5
thousand at March 31, 2001 and 2000, respectively, and $266 thousand, $7
thousand and $9 thousand at December 31, 2000, 1999 and 1998, respectively.
Loan fees of $317 thousand, $449 thousand and $535 thousand for the years
ended December 31, 2000, 1999, 1998, respectively, are included in interest
income.
(2) The indicated interest income and average yields are presented on a taxable
equivalent basis, utilizing effective tax rate of 35%. The taxable
equivalent adjustments included above are $200 thousand and $201 thousand
for the three months ended March 31, 2001 and 2000, respectively, and $785
thousand, $794 thousand and $575 thousand for the years ended December 31,
2000, 1999 and 1998, respectively.
16
The following tables present by category the major factors that contributed to
the changes in net interest income for the periods presented. Amounts have been
computed on a fully tax-equivalent basis.
Three months ended
March 31, 2001 and 2000
Increase (Decrease) Due to Change in:
Average Average
Volume Rate Net
------- ------- ----
(in thousands)
Interest Income:
Due from banks...................... $ 6 $ - $ 6
Loans............................... 410 10 420
Taxable investment securities....... 186 - 186
Tax exempt securities............... (10) 10 -
Federal funds sold.................. 13 (2) 11
---- ----- ----
Total interest income............... 605 18 623
Interest Expense:
Interest bearing-demand deposits ... 34 14 48
Savings and money market deposits... 11 33 44
Time deposits....................... 268 206 474
Repurchase agreements............... 30 2 32
FHLB advances....................... (8) 1 (7)
---- ----- ----
Total interest expense.............. 335 256 591
---- ----- ----
Net interest income................. $270 $(238) $ 32
==== ===== ====
Year Ended December 31,
2000 versus 1999
--------------------------------------
Increase (Decrease) Due to Change in:
--------------------------------------
Average Average
Volume Rate Net
------------- --------- --------
(in thousands)
Interest Income:
Due from banks......................... $ -- $ -- $ --
Loans.................................. 1,552 99 1,651
Taxable investment securities.......... 396 423 819
Tax exempt securities.................. (25) 3 (22)
Federal funds sold..................... 181 64 245
------- ------ -------
Total interest income.................. $ 2,104 $ 589 $ 2,693
------- ------ -------
Interest Expense:
Interest bearing-demand deposits....... 95 52 147
Savings and money market deposits...... (9) 130 121
Time deposits.......................... 763 707 1,470
Repurchase agreements.................. 192 6 198
FHLB advances.......................... 2 1 3
------- ------ -------
Total interest expense................. 1,043 896 1,939
------- ------ -------
Net interest income.................... $ 1,061 $ (307) $ 754
======= ====== =======
Year Ended December 31,
1999 versus 1998
--------------------------------------
Increase (Decrease) Due to Change in:
--------------------------------------
Average Average
Volume Rate Net
------------- --------- --------
(in thousands)
Interest Income:(1)
Due from banks......................... $ (8) $ 3 $ (5)
Loans.................................. 1,312 (345) 967
Taxable investment securities.......... 802 26 828
Tax exempt securities.................. 660 (37) 623
Federal funds sold..................... (4) (15) (19)
------- ------ -------
Total interest income.................. $ 2,762 $ (368) $ 2,394
------- ------ -------
Interest Expense:(1)
Interest bearing-demand deposits....... 43 (2) 41
Savings and money market deposits...... 91 (140) (49)
Time deposits.......................... 1,318 (309) 1,009
Repurchase agreements.................. 5 - 5
FHLB advances.......................... (32) 1 (31)
------- ------ -------
Total interest expense................. 1,425 (450) 975
------- ------ -------
Net interest income.................... $ 1,337 $ 82 $ 1,419
======= ====== =======
17
(1) The indicated interest income and average yields are presented on a taxable
equivalent basis, utilizing effective tax rate of 35%. The taxable
equivalent adjustments included above are $200 thousand and $201 thousand
for the three months ended March 31, 2001 and 2000, respectively, and $785
thousand, $794 thousand and $575 thousand for the years ended December 31,
2000, 1999 and 1998, respectively.
18
Provision for Loan Losses. For the quarter ended March 31, 2001, we recognized a
provision for loan losses of $65 thousand, an increase of $20 thousand over the
provision of $45 thousand in the prior year first quarter. For the year ended
December 31, 2000, we recognized a provision for loan losses of $255 thousand,
an increase of $45 thousand over the provision of $210 thousand for the prior
year. The increase in the provision for loan losses during each of the periods
presented reflects the significant growth in the loan portfolio. Our provision
for loan losses maintained the reserve at a level management believes
appropriate in light of our lending activities, the quality of our loan
portfolio, historical experience, volume and type of lending conducted by us,
the status of past-due and non performing loans, the general economic conditions
of our lending area and other factors affecting collectability of our loan
portfolio. We had net charge-offs of $126 thousand in the first quarter of 2001
and $27 thousand for the year ended December 31, 2000 and did not experience any
material change in our level of classified loans during 2000. While our
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions, the financial status of borrowers and regulatory requirements.
Non-Interest Income. Total non-interest income increased by $46 thousand to $383
thousand for the first quarter of 2001 from $337 thousand for the first quarter
of 2000. Our non-interest income consists primarily of service fees on deposit
accounts, fee income recognized on mortgage sales and other non-interest income
(such as annuity sale fees and safe deposit box fees). The quarter to quarter
increases in non-interest income primarily relates to an increase in service
fees on deposit accounts of $63 thousand, reflecting the higher volume of
deposits during the 2001 quarter. The increase in service fees on deposit
accounts is partially offset by decreases of $19 thousand in fee income on
mortgage sales, $15 thousand in other income and $3 thousand in other service
charges and fees. In addition, we recognized $20 thousand in gains on the sale
of investments and mortgage backed securities in the first quarter of 2001,
while we had no such gains in the first quarter of 2000.
Total non-interest income remained stable at $1.4 million for both 2000 and
1999. Although our non-interest income overall remains stable, service fees on
deposit accounts increased by $58 thousand, late charge fees on loans increased
by $50 thousand and other non-interest income increased by $113 thousand,
primarily reflecting increases in wire transfer fees and income from the Visa
check cards we have issued. These increases were offset by a reduction in fee
income on sales of mortgages of $214 thousand, due to a decrease in origination
volume caused by an increase in overall interest rates for most of 2000 versus
1999. It is our strategy to sell the majority of our residential mortgages in
the secondary market, which gives us greater liquidity and less interest rate
risk.
Non-Interest Expense. Total non-interest expense for the first quarter of 2001
declined by $26 thousand to $1.9 million from the first quarter 2000. An
increase in salaries and employee benefit expenses of $82 thousand was offset by
a decrease in occupancy expenses of $13 thousand and other non-interest expenses
of $94 thousand, primarily consisting of decreases in advertising expense of $25
thousand and in data processing expense of $18 thousand.
Our non-interest expense for 2000 increased over non-interest expense for 1999
by $515 thousand, or 7.3%. For 2000, our total non-interest expense was $7.6
million, compared to total non-interest expense of $7.1 million for 1999. The
increase in non-interest expense reflects expenses incurred primarily as a
result of our continued growth and expansion, as we opened four new offices in
1999 and 2000. Our salary expense increased by $110 thousand, employee benefit
expense increased by $55 thousand and occupancy expenses increased by $112
thousand. In addition, furniture and equipment expenses increased by $97
thousand, stationary and printing expenses increased by $75 thousand and
professional fees increased by $45 thousand. These increases reflect both normal
and customary salary and benefit increases as well as our continued expansion.
Income Taxes. Our effective income tax rate for the first quarter of 2001 was
12.0% and in 2000 it was 13.2%, compared to 14.7% in 1999. Our effective income
tax was positively effected by the large amount of our tax exempt interest
income during all periods. The tax exempt income reduced our effective rate by
23% in the first quarter of 2001, 22% in 2000 and 18.7% in 1999.
19
FINANCIAL CONDITION
At March 31, 2001, our total assets were $289.3 million compared to $274.3
million at December 31, 2000, and $243.5 million at December 31, 1999. Increases
through the first quarter of 2001 compare to year end 2000 included a $6.5
million increase in net loans and a $1.9 million increase in mortgage backed
securities available for sale. Our investment portfolio remained stable during
the first quarter. Deposits increased by $13.2 million from December 31, 2000
through March 31, 2001. Increases in total assets from year end 1999 to year end
2000 included increases of $17.5 million in net loans, $7.9 million in
investment securities held to maturity, and $3.7 million in mortgage-backed
securities available for sale. Federal funds sold decreased $4.7 million, as
funds were used for new loan demand and to purchase new investment and
mortgage-backed securities. Total deposits were $246.7 million at December 31,
2000 compared to $221.4 million at December 31, 1999.
Cash and Cash Equivalents. At March 31, 2001, total cash and cash equivalents
equaled $18.3 million, an increase of $7.6 million from total cash and cash
equivalents of $10.7 million at year-end, 2000. At December 31 2000, cash and
equivalents decreased $1.2 million from December 31, 1999. Federal funds sold
increased by $8.8 million to $11.2 million at March 31, 2001 from $2.4 million
at year-end 2000 and decreased by $4.7 million from December 31, 1999 while cash
and due from banks increased by $3.5 million. The first quarter increase in
federal funds sold reflects current market conditions, with increased deposits
and less attractive investment opportunities, while the year-to-year decrease
reflects higher cash reserve requirements at our correspondent banks. The
year-to-year decrease is attributable primarily to our loan and investment
portfolio growth outpacing deposit growth during the period.
Loan Portfolio. For the first quarter of 2001, our loan portfolio, net increased
by $6.5 million, after increasing by $17.5 million during 2000. The increases
were primarily concentrated in commercial real estate loans, which increased by
$5.0 million in the quarter and $10.9 million for 2000. The remainder of the
increases in the year ended December 31, 2000 occurred in home equity loans,
which increased by $3.7 million, and installment loans secured by first and
second mortgages, which increased by $1.8 million.
Our lending limit to any one borrower at one time is equal to 15% of our capital
funds, as defined under the New Jersey Banking Act and the Department of Banking
and Insurance regulations. Capital funds include our unimpaired capital stock,
surplus and undivided profits. This limit may be increased to 25% of our capital
funds if at least 10% of the outstanding credit is fully secured by readily
available marketable collateral. As of March 31, 2001, 15% of our capital funds
was $3.1 million and 25% of our capital funds was $5.2 million.
The following schedules present the components of loans, by type, as of March
31, 2001 and 2000, and December 31, 2000, 1999, 1998, 1997 and 1996.
March 31,
---------------------------------------------------
2001 2000
---------------------------------------------------
Amount Pct Amount Pct
------ --- ------ ---
(in thousands, except percentages)
Commercial $ 25,790 16.0% $ 25,096 18.0%
RE Coml Properties 81,520 50.6% 67,093 48.2%
RE Res Properties 13,817 8.6% 12,146 8.7%
Consumer 2,547 1.6% 1,975 1.5%
Installment 19,253 12.0% 17,933 12.9%
Home Equity 18,080 11.2% 14,841 10.7%
-------- ----- -------- -----
Gross Loans 161,007 100.0% 139,084 100.0%
===== =====
Plus: Net deferred fees 181 217
-------- --------
Total Loans 161,188 139,301
Less: Allowance for
possible loan
losses (1,804) (1,680)
-------- --------
Net Loans $159,384 $137,621
======== ========
20
December 31,
---------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---------------------------------------------------------------------------------------------------
Amount Pct Amount Pct Amount Pct Amount Pct Amount Pct
-------- ------ -------- ----- -------- ------ -------- ----- ------- -----
(in thousands, except percentages)
Commercial $ 25,118 16.3% $ 24,559 18.0% $19,242 16.6% $ 21,769 20.9% $17,670 22.3%
RE Coml Properties 76,493 49.5% 65,613 48.0% 54,788 47.3% 41,530 39.9% 27,333 34.5%
RE Res Properties 12,665 8.2% 12,367 9.0% 11,315 9.8% 12,055 11.6% 8,474 10.7%
Consumer 2,451 1.6% 1,946 1.4% 1,850 1.6% 3,164 3.0% 3,278 4.1%
Installment 19,967 12.9% 18,178 13.3% 17,308 14.9% 16,970 16.3% 14,568 18.4%
Home Equity 17,830 11.5% 14,121 10.3% 11,281 9.7% 8,653 8.3% 7,813 9.9%
-------- ----- -------- ----- -------- ------ -------- ----- ------- -----
Gross Loans 154,524 100.0% 136,783 100.0% 115,783 100.0% 104,142 100.0% 79,137 100.0%
===== ===== ====== ===== =====
Plus: Net deferred
fees 202 222 169 9 (46)
-------- -------- -------- -------- -------
Total Loans 154,726 137,005 115,952 104,151 79,091
Less: Allowance for
possible loan
losses (1,865) (1,637) (1,466) (1,048) (977)
-------- -------- -------- -------- -------
Net Loans $152,860 $135,368 $114,486 $103,103 $78,114
======== ======== ======== ======== =======
The following table sets forth, in terms of interest rate sensitivity, certain
components of our loan portfolio as well as our fixed and adjustable rate loans
within that portfolio at March 31, 2001.
Within 1 Year 1 to 5 Years After 5 Years Total
------------- ------------ ------------- -----
Commercial(1)............ $31,037 $68,350 $7,923 $107,310
======= ======= ====== ========
Fixed Rate Loans......... $ 2,300 $ 7,829 $7,077 $ 17,206
Variable Rate Loans...... 28,736 60,521 846 90,103
------- ------- ------ --------
Total(1)............... $31,037 $68,350 $7,923 $107,310
======= ======= ====== ========
(1) Includes commercial and real estate commercial loans only.
Our loan portfolio consists primarily of loans secured by real estate and, to a
lesser extent, commercial and consumer loans. Our loans are made primarily to
businesses and individuals located in our New Jersey trade area. We have not
made loans to borrowers outside the United States. Commercial lending activities
are focused primarily on lending to small business borrowers. We believe that
our strategy of customer service, competitive rates and selective marketing have
enabled us to gain market entry to local loans. Mergers and reorganizations by
larger banks competing with us have also contributed to our efforts to attract
borrowers.
Real estate loans consist of loans secured by commercial and residential real
properties. The largest segment of our portfolio is commercial real estate
loans. These loans are secured by mortgages on real estate and assignments of
rents and leases and generally by the personal guarantees of the principles of
the borrowers. These loans are generally on multi-tenanted commercial
properties. Loans for $500 thousand or greater require full Board approval,
unless secured by marketable securities and deposits held at the bank. Loans
meeting these collateral standards require Board approval if they involve a
credit in excess of $600 thousand. We believe that this segment of the loan
market, i.e. for loans with an original principal balance of less than $1
million secured by commercial real estate, receives the least attention from the
large regional and money centered banks serving the New Jersey market. Risks
effecting this segment of our portfolio generally involve commercial real estate
valuations.
21
The second largest component of our loan portfolio is commercial loans. These
loans include commercial lines of credit, term loans, and our small business
administration guaranteed loans, which constitutes approximately 20% of the
commercial loan segment of our portfolio. Under the SBA program, the SBA
guarantees up to 80% of the loan. From time to time, we sell the guaranteed
portion of the loan into the secondary market, and retain the unguaranteed
portion for our portfolio. Commercial loans are secured by non-real estate
assets of the business borrowers, and we also generally receive the personal
guarantees of the principles of the borrowers. These loans generally have
maturities of five (5) years or less. All of these loans must be approved by our
full Board of Directors if they involve credit exposures over $200 thousand.
Risks inherent in these loans involve the success of the business of the
borrower, which may be impacted both by the borrowers business model and general
economic conditions in the market served by the borrower.
Our installment loan portfolio consists primarily of loans secured by a first or
second lien on residential real estate. These loans are generally fixed rate,
fixed term loans with maturities of ten (10) to fifteen (15) years. The proceeds
of these loans may be used for either personal or business uses. Installment
loans for original balances in excess of $150 thousand must be approved by our
full Board of Directors. Risks inherent in these loans include both general
economic conditions, which may impact the borrowers ability to repay, and real
estate values, which will impact the value of collateral supporting the loan.
The home equity loan segment of our portfolio is made up of variable rate loans
secured primarily by first and second mortgages on residential real estate.
Loans in this portfolio generally have terms of twenty (20) years. As with
installment loans, home equity loans for amounts in excess of $150 thousand must
be approved by our full Board of Directors.
Our portfolio also contains a limited number of loans secured by residential
real estate. Although the bank seeks to originate these loans as part of its
marketing strategy, the majority of these loans are sold to secondary market
investors and are not kept in portfolio. The loans which are held in our
portfolio generally have fixed rates and maturities of ten (10) to fifteen (15)
years. Included within this portfolio are a limited number of residential
construction loans which are made only with end financing in place. These loans
are generally secured by a first lien on a residential property.
The smallest component of our loan portfolio is consumer loans. Loans in this
portfolio include auto loans (used to finance the purchase of both new and used
automobiles), loans to finance the purchase of mobile homes, and unsecured
loans. The risks in this segment of the portfolio deal more with the borrower's
ability to repay their loans than with the underlying collateral. As such, the
risks inherent in these loans generally relate to general economic conditions
and employment conditions in the company's primary trade area.
ASSET QUALITY
Our principal earning assets are loans. Inherent in the lending function is the
risk of the borrower's inability to repay their loan under its existing terms.
Risk elements include non-accrual loans, past due and restructured loans,
potential problem loans, loan concentrations and other real estate owned.
Non-performing assets include loans that are not accruing interest (non-accrual
loans) as a result of principal or interest being in default for a period of 90
days or more. When a loan is placed on such non-accrual status, all accumulated
accrued interest receivable is charged against current period income. Until the
loan becomes current, any payments received from the borrower are applied to
outstanding principal until such time as management determines that the
financial condition of the borrower and other factors merit recognition of such
payments as interest.
We attempt to minimize overall credit risk through loan diversification and our
loan approval procedures. Our due diligence begins at the time we begin to
discuss with a borrower the origination of a loan. Documentation, including a
borrower's credit history, materials establishing the value and liquidity of
potential collateral, the purpose of the loan, the source and timing of the
repayment of the loan, and other factors are analyzed before a loan is submitted
for approval. Loans made are also subject to periodic review.
For the first quarter of 2001, our total non-accrual loans and total
non-performing assets declined by $26 thousand. We had no other real estate
owned at either March 31, 2001 or December 31, 2000. During 2000, our
non-accrual loans increased to $266 thousand from $7 thousand at December 31,
1999. This balance represents term loans of $128 thousand and the unguaranteed
portion of SBA term loans of $138 thousand.
The following table sets forth information concerning our non-performing
assets as of the dates indicated:
Non-Performing Loans
March 31, Year Ended December 31,
-----------------------------------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------
(dollars in thousands)
Non-accrual loans $ 240 $5 $ 266 $ 7 $ 9 $ 192 $ 0
Other real estate owned 0 0 0 0 90 0 0
----- -- ----- ----- ----- ----- -----
Total non-performing assets (1) $ 240 $5 $ 266 $ 7 $ 99 $ 192 $ 0
===== == ===== ===== ===== ===== =====
Non-accrual loans to total loans 0.15% NM 0.17% 0.01% 0.01% 0.18% 0.00%
Non-performing assets to total assets 0.08% NM 0.10% 0.00% 0.05% 0.11% 0.00%
Allowance for possible loan losses as a
percentage of non-performing assets NM NM NM NM NM NM NM
- -------------------
(1) Excludes loans past due 90 days or more and still accruing interest of
approximately $601 thousand and $100 thousand at March 31, 2001 and 2000,
respectively, and $124 thousand and $0.5 thousand at December 31, 2000 and
1999, respectively.
NM - Not meaningful
If the above-described non-accruing loans had been current, our interest income
would have increased by $7 thousand, $15 thousand and $1 thousand for the three
months ended March 31, 2001 and the years ended December 31, 2000 and 1999,
respectively. At the dates indicated in the table above, there were no
concentration of loans to our borrowers exceeding 10% of our total loans and we
had no foreign loans in either period.
At March 31, 2001, we had loans with outstanding balances of $900 thousand where
known information caused management to have doubts as to the ability of the
borrowers to comply with their present loan repayment terms and which are not
disclosed above. The borrower on one of the loans is currently seeking a buyer
for their business. The borrower for the second loan is currently involved in a
bankruptcy reorganization. The loan is current and is performing in accordance
with its terms.
Allowance for Loan Losses. We attempt to maintain an allowance for loan losses
at a sufficient level to provide for losses in the loan portfolio. Loan losses
are charged directly to the allowance when they occur and any recovery within
the same year as the charge-off is credited to the allowance.
Risks within the loan portfolio are analyzed on a continuous basis by the
company's officers, by outside, independent loan review auditors and by our
Directors' Loan Committee. A risk system, consisting of multiple grading
categories, is utilized as an analytical tool to assess risk and appropriate
reserves. We segregate the loan portfolio for loan loss purposes into segments
based upon the underlying collateral. We provide for a general allowance for
22
losses inherent in the portfolio by the collateral categories. General loss
percentages are calculated based upon historical analyses as well as estimates
of the inherent losses which may exist as of the evaluation date but are not
quantifiable at that time. This portion of the allowance is particularly
subjective and requires judgments based on qualitative factors which do not lend
themselves to exact mathematical calculations such as: trends in delinquencies
and non-accruals; migration trends in the portfolio; trends in volume and
portfolio mix; new credit products; and peer group comparisons. During the
periods disclosed on the table below, our level of non-accrual loans and
non-performing assets remained relatively stable, fluctuating by approximately
$259 thousand during the entire five (5) year period discussed below, from a low
of $7 thousand at December 31, 1999 to a high of $266 thousand at December 31,
2000. Because of the relative stability in our non-performing assets, the
majority of changes within our allowance for loan losses occurred within the
general loss percentages, rather than with regard to the specific allowances
discussed below. Therefore, during the periods disclosed in the tables below,
the biggest factors in setting our level of allowance for loan losses were the
trends in volume of our portfolio and the mix of our portfolio as well as the
migration among the types of loans within our portfolio. For example, from
December 31, 1996 through March 31, 2001, our real estate loans secured by
non-residential properties increased from 35% of our portfolio to 51% of our
portfolio. The percentage of the allocation of the allowance for loan losses
attributable to commercial loans secured by non-residential real estate
increased similarly during this period. Also during this period, loans secured
by residential real estate declined from 11% of our portfolio at December 31,
1996 to 9% of our portfolio at March 31, 2001, and the portion of our allowance
attributable to these loans decreased accordingly.
23
Specific allowances are provided in the event that the specific analysis on each
classified loan indicates that the probable loss would be in excess of the
general percentage allocation. In determining a specific loss allocation, we
also take into account local, statewide and national economic performance but
only to the extent such economic conditions actually impact the financial health
of the borrower. If economic conditions produce deterioration in a borrower's
cash flow or income statements, those factors are taken into account in setting
the specific reserves, along with other factors management may deem appropriate.
The provision for loan loss is adjusted to bring the allowance for loan losses
to the required level as determined above. These estimates are reviewed at least
quarterly, and, as adjustments become necessary, they are realized in the
periods in which they become known. As mentioned above, during the periods
disclosed in the tables below, our asset quality has remained stable, and
application of the specific reserves has not caused significant changes in the
allowance during these periods.
Additions to the allowance are made by provisions charged to expense and the
allowance is reduced by net charge-offs (i.e., loans judged to be uncollectible
and charged against the reserve, less any recoveries on such loans). Although
the allowance reflects management's best estimate of probable losses inherent in
the loan portfolio, future additions to the allowance may be necessary based
upon changes in market conditions. In addition, various regulatory agencies
periodically review the company's allowance for loan losses. These agencies may
require us to take additional provisions based on their judgments about
information available to them at the time of their examination.
In setting the allowance for loan losses, we take account of environmental
factors only to the extent they effect individual borrowers. For example, the
allowance for loan losses increased by $20 thousand for the first quarter of
2001 from the first quarter of 2000. Between these periods, the economy in our
market area began to slow, as it did nationally. Due to the slowing economy, we
perceived deterioration in the financial standing and cash flow strengths of
certain borrowers, although their loans continue to perform at all times. Based
upon our estimate of these economic weaknesses, caused by environmental factors
but impacting particularized borrowers, we increased our provision between the
first quarter of 2000 and the first quarter of 2001. We receive financial
statements from borrowers on a periodic basis, and review them to determine
whether the borrowers are experiencing any signs of financial weakness or
deterioration, even while their loan may be performing. Based on these reviews
and the existing level of our allowance, we then make adjustments as we deem
appropriate.
Our allowance for possible loan losses totaled $1.8 million, $1.9 million and
$1.6 million at March 31, 2001, December 31, 2000 and 1999, respectively. The
following is a summary of the reconciliation of the allowance for loan losses
for the periods presented.
24
March 31, Year Ended December 31,
----------------------------------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
----------------------------------------------------------------------------------
(dollars in thousands)
Balance at beginning of period $1,865 $1,637 $1,637 $1,466 $1,048 $ 977 $850
CHARGE-OFFS:
Real estate 16 0 0 29 192 0 0
Installment 0 2 27 10 39 154 22
Commercial 111 0 0 0 11 0 0
------ ------ ------ ------ ------ ----- ----
Total Charge-offs 127 2 27 39 242 154 22
RECOVERIES:
Installment 1 0 0 0 0 0 (4)
------ ------ ------ ------ ------ ----- ----
Total Recoveries 1 0 0 0 0 0 (4)
Net Charge-offs 126 2 27 39 242 154 18
Provision charged to expense 65 45 255 210 660 225 145
------ ------ ------ ------ ------ ----- ----
Balance of allowance at end of period $1,804 $1,680 $1,865 $1,637 $1,466 $1,048 $977
====== ====== ====== ====== ====== ====== ====
Ratio of net charge-offs to avg loans
outstanding 0.08% NM 0.02% 0.03% 0.22% 0.17% 0.03%
Balance of allowance at period end as
a percent of total loans at period end 1.12% 1.22% 1.21% 1.19% 1.26% 1.01% 1.24%
NM - Not meaningful
The following table sets forth, for each of our major lending areas, the amount
and percentage of our allowance for loan losses attributable to such category,
and the percentage of total loans presented by such category, as of the periods
indicated:
Allocation of the Allowance for Loan Losses By Category
March 31,
----------------------------------------------
2001 2000
----------------------------------------------
% total % total
Amount loans Amount loans
----------------------------------------------
(dollars in thousands)
Balance applicable to:
Commercial and industrial $ 289 16% $ 265 16%
Real Estate:
Non-residential properties 856 47% 719 43%
Residential properties 111 6% 124 7%
Consumer 30 2% 18 1%
Installment 161 9% 178 10%
Home Equity 152 8% 144 9%
------- --- ------- ---
Subtotal 1,599 88% 1,448 86%
Unallocated Reserves 205 12% 232 14%
------- --- ------- ---
Total $ 1,804 100% $ 1,680 100%
======= === ======= ===
25
2000 1999 1998 1997
----------------------------------------------------------------------------------------
% total % total % total % total
Amount loans Amount loans Amount loans Amount loans
----------------------------------------------------------------------------------------
(dollars in thousands)
Balance applicable to:
Commercial and Industrial $ 289 15% $ 232 14% $ 261 18% $ 232 22%
Real Estate:
Non-residential Properties 843 45% 670 41% 602 41% 357 34%
Residential Properties 108 6% 131 8% 111 8% 91 9%
Consumer 28 1% 23 1% 20 1% 32 3%
Installment 162 9% 189 12% 177 12% 128 12%
Home Equity 153 8% 142 9% 118 8% 64 6%
------- --- ------- --- ------- --- ------- ---
Subtotal 1,583 85% 1,387 85% 1,288 88% 904 86%
Unallocated Reserves 282 15% 250 15% 178 12% 144 14%
------- --- ------- --- ------- --- ------- ---
Total $ 1,865 100% $ 1,637 100% $ 1,466 100% $ 1,048 100%
======= === ======= === ======= === ======= ===
1996
-----------------------
% total
Amount loans
-----------------------
Balance applicable to:
Commercial and industrial $ 223 23%
Real Estate:
Non-residential properties 288 29%
Residential properties 97 10%
Consumer 32 3%
Installment 127 13%
Home Equity 78 8%
----- ---
Subtotal 845 86%
Unallocated Reserves 132 14%
----- ---
Total $ 977 100%
===== ===
Investment and Mortgage Backed Securities Portfolios. We maintain investment and
mortgage backed securities portfolios to fund increased loan demand or decreased
deposits and other liquidity needs and to provide an additional source of
interest income. The portfolios are composed primarily of tax-free municipal
securities and obligations of U.S. Government agencies and government sponsored
entities, including collateralized mortgage obligations issued by such agencies
and entities, and to a lesser extent, corporate and other debt securities.
We classify our investment securities and mortgage-backed securities as either
held to maturity or available for sale. Investment and mortgage backed
securities are classified as securities held to maturity based on management's
intent and the company's ability to hold them to maturity. Such securities are
stated at cost, adjusted for unamortized purchase premiums and discounts.
Securities that are bought and held principally for the purpose of selling them
in the near term are classified as trading securities, which are carried at
market value. Realized gains and losses from marking the portfolio to market
value are included in trading revenue. Securities not classified as securities
held to maturity or trading securities are classified as securities available
for sale, and are stated at fair value. Unrealized gains and losses on
securities available for sale are excluded from results of operations, and are
reported as a separate component of shareholders' equity, net of taxes.
Securities classified as available for sale include securities that may be sold
in response to changes in interest rates, changes in prepayment risks, the need
to increase regulatory capital or other similar requirement.
Management determines the appropriate classification of securities at the time
of purchase. At March 31, 2001, $35.2 million of our investment securities
portfolio was classified as available for sale and $17.0 million of the
portfolio was classified as held to maturity. At December 31, 2000 we had $38.8
million and $14.0 million of our investment portfolio classified as available
for sale and held to maturity, respectively. At both period ends, our entire
mortgage backed securities portfolio was classified as available for sale.
During the first quarter of 2000, our investment portfolio remained relatively
unchanged at $52.2 million, compared to a total investment securities portfolio
of $52.7 million at year-end 2000. The composition of the portfolio changed
slightly with available for sale investment securities declining by $3.6 million
and held to maturity investment securities increasing by $3.1 million.
During 2000, our total investment securities portfolio increased to $52.7
million, an increase of $9.4 million over our total investment securities
portfolio of $43.3 million at December 31, 1999. The increase on our investment
securities portfolio primarily occurred in the held-to-maturity portfolio, which
increased to $14.0 million from $6.1 million at December 31, 1999. Investment
securities available-for-sale increased to $38.8 million at December 31, 2000
from $37.2 million a year earlier. The increase in the held to maturity
portfolio reflects the purchases of tax-free municipal securities. Our mortgage
backed securities portfolio increased to $47.6 million at December 31, 2000 from
$43.9 million at December 31, 1999.
26
The increase in the investment and mortgage-backed securities portfolios
reflects our investment of excess liquidity not needed to fund loan demand. The
following tables set forth the carrying value of our securities portfolio as of
the dates indicated. A comparative summary of investment securities available
for sale for the periods presented is as follows (in thousands):
March 31, 2001
Fair
Amortized Cost Value
-------------- --------
Investment securities available-for-sale
U.S. Government and agencies securities $ 5,837 $ 5,902
Federal Home Loan Bank stock 878 878
State and Municipal obligations 25,076 25,535
Corporate securities 80 82
Other 2,757 2,762
------- -------
$34,628 $35,159
======= =======
Investment securities held-to-maturity
U.S. Government and agency securities $ 9,042 $ 9,169
State and Municipal obligations 7,965 8,173
------- -------
$17,007 $17,342
======= =======
2000 1999 1998
---------------------------------------------------------------------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
------- ------- ------- ------- ------- -------
Investment securities
available-for-sale
U.S. Government and agencies $ 8,241 $ 8,257 $ 4,642 $ 4,566 $ 4,483 $ 4,490
securities
Federal Home Loan Bank stock 800 800 622 622 590 590
State and Municipal obligations 26,719 26,671 31,114 30,142 23,399 23,717
Corporate securities 80 80 12 12 42 42
Other 2,968 2,968 1,905 1,900 2,512 2,503
------- ------- ------- ------- ------- -------
$38,808 $38,776 $38,295 $37,242 $31,026 $31,342
======= ======= ======= ======= ======= =======
Investment securities
held-to-maturity
U.S. Government and agency $ 6,276 $ 6,340 $ 2,395 $ 2,320 $ 702 $ 728
securities
State and Municipal obligations 7,682 7,788 3,691 3,682 5,184 5,352
------- ------- ------- ------- ------- -------
$13,958 $14,128 $ 6,086 $ 6,002 $ 5,886 $ 6,080
======= ======= ======= ======= ======= =======
Realized gains on sales of investment securities available-for-sale were $20
thousand for the three months ended March 31, 2001. There were no realized gains
in 2000 and 1999.
The amortized cost and fair value of our investment securities at March 31,
2001, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
27
2001
------------------------------------------------------------------------
Available-for-sale Held-to-maturity
Weighted Weighted
Amortized Fair Average Amortized Fair Average
Cost Value Yield Cost Value Yield
------------------------------------------------------------------------
(in thousands except percentages)
Investment securities
Due in one year or less $ 6,206 $ 6,240 5.34% $ 3,809 $ 3,840 4.63%
Due in one year to five years 10,927 11,147 4.53 9,428 9,643 5.99
Due in five years to ten years 13,174 18,436 4.82 2,551 2,621 6.76
Due after ten years 3,443 3,458 4.94 1,219 1,239 4.96
Equity securities 878 878 - -
$34,628 $35,158 $17,007 $ 17,343
======= ======= ======= ========
The amortized cost and fair value of our mortgage-backed securities
available-for-sale are as follows in thousands:
--------------------------
March 31, 2001
--------------------------
Amortized Fair
Cost Value
------- -------
Mortgage-backed securities
available-for-sale
Federal National Mortgage
Association $28,928 $29,194
Federal Home Loan
Mortgage Corporation 11,668 11,752
Government National
Mortgage Association 8,478 8,518
------- -------
$49,074 $49,464
======= =======
--------------------------------------------------------------------------------------------------
2000 1999 1998
------------------------- ------------------------- --------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
------- ------- ------- ------- ------- -------
Mortgage-backed securities
available-for-sale
Federal National Mortgage
Association $27,832 $27,721 $20,951 $20,657 $17,841 $17,830
Federal Home Loan
Mortgage Corporation 11,951 11,934 17,330 16,909 15,440 15,388
Government National
Mortgage Association 7,956 7,901 6,365 6,299 2,699 2,684
------- ------- ------- ------- ------- -------
$47,739 $47,556 $44,647 $43,865 $35,980 $35,903
======= ======= ======= ======= ======= =======
The amortized cost and fair value of our mortgage-backed securities at March 31,
2001, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
28
2001
----------------------------------------
Amortized Fair Weighted
Cost Value Average Yield
--------- ----- -------------
(in thousands)
Mortgage-backed securities
available-for-sale
Due in one year or less $ 71 $ 71 4.66%
Due in one year to five years 1,802 1,821 6.56
Due in five years to ten years 17,157 17,310 5.83
Due after ten years 30,044 30,262 6.42
------- -------
$49,074 $49,464
======= =======
Other Assets. Other assets, consisting primarily of prepaid expense accounts,
increased by $150 thousand to $932 thousand during the first quarter of 2001 and
declined by $975 thousand to $782 thousand at December 31, 2000 from $1.8
million at December 31, 1999. The first quarter increase was due to an increase
of $145 thousand in principal receivable on investments. The 2000 decline is
mainly due to costs attributed to the opening of our 10th branch in Lakewood, in
early January 2000. As we prepared the branch for opening during 1999,
construction in process was booked to the prepaid expense account. After the
branch opened, the expenses were booked into fixed assets.
Deposits. Deposits are our primary source of funds. During the first quarter of
2001, our total deposits increased by $13.2 million, or 5.3%. Increases within
deposits during the first quarter of 2001 included a $2.2 million increase in
non-interest bearing demand deposits, a $5.5 million increase in certificates of
deposits of $100 thousand or more, a $4.6 million increase in savings and money
market deposits and a $1.3 million increase in interest bearing demand deposits.
During 2000, our deposits increased by $25.3 million, or 11.4%, to $246.7
million at December 31, 2000 from $221.4 million at December 31, 1999. Increases
within the portfolio during 2000 included an increase of $17.5 million in
certificates of deposit under $100,000 and $7.8 million in interest bearing
demand deposits. With the opening of new branches this year, we offered
promotional rates on certificates of deposits in order to attract a deposit
base. The addition of these branches caused deposits to increase $16.4 million,
concentrated in certificates of deposits of $10.2 million, demand deposits of
$5.1 million and savings deposits of $1.1 million.
The increase in our certificates of deposit represent management's reaction to
the inverted yield curve prevalent during 2000 and early 2001. During this
period, we chose to fund our lending and investment operations with shorter term
certificates of deposit, anticipating lower market rates of interests. During
2001, we replaced these certificates of deposit with new certificates of deposit
with three (3) year maturities and short-term certificates of deposits of
$100,000 or more to accommodate our existing customers. Our certificates of
deposit have traditionally been retail deposits originated from communities
served by our branch network and generally relate to other account relationships
at the bank. The deposits are not brokered deposits nor wholesale jumbo time
deposits originated through the internet or other, similar deposit gathering
methods. Historically, a large percentage of our certificates of deposit have
renewed upon maturity. In addition, between our ability to borrow from the
Federal Home Loan Bank and our available for sale investment securities
portfolio, we have adequate alternative sources of liquidity should a
significant percentage of our certificates of deposit not renew. In light of
this, we do not believe we will experience significant liquidity or operational
impacts upon the maturity of these deposit accounts.
29
The following table sets forth the average amounts of various types of deposits
for each of the periods indicated:
March 31,
------------------------------------------------------
2001 2000
------------------------------------------------------
(dollars in thousands)
Average Average Average Average
Amount Yield Amount Yield
-------- -------- -------- -------
Non-Interest Bearing Demand $39,865 - $39,730
Interest-Bearing Demand 23,192 2.14% 16,550 1.84%
Savings and Money Market Deposit 43,268 2.76% 41,416 2.46%
Time Deposits 144,909 5.91% 125,903 5.30%
------- -------
Total $251,234 $223,599
======= ========
The following table sets forth the average amounts of various types of deposits
for each of the peiods indicated:
December 31,
-----------------------------------------------------------------------
2000 1999 1998
-----------------------------------------------------------------------
(dollars in thousands)
Average Average Average Average Average Average
Amount Yield Amount Yield Amount Yield
-------- -------- -------- -------- -------- --------
Non-Interest Bearing Demand $36,775 - $31,674 - $26,593 -
Interest-Bearing Demand 19,568 2.02% 14,589 1.71% 12,056 1.73%
Savings and Money Market Deposit 41,284 2.74% 41,643 2.43% 38,184 2.78%
Time Deposits 130,886 5.78% 117,017 5.21% 91,147 5.58%
------- ------- -------
Total $228,511 $204,923 $167,980
======= ======= =======
We do not actively solicit short-term deposits of $100,000 or more because of
the liquidity risks posed by such deposits, but generally accept them as an
accommodation to our existing customers and the development of new
relationships. The following table summarizes the maturity distribution of
certificates of deposits of denominations of $100,000 or more as of March 31,
2001 (in thousands):
Time Deposits ($100,000 and over)
Three months or less........................ $ 5,666
Over three months through nine months....... 3,784
Over nine months through twelve months...... 1,423
Over twelve months.......................... 314
-------
Total..................................... $11,187
=======
Sweep Repurchase Agreements. In late December of 1999, we began offering sweep
repurchase agreements to our commercial customers to provide them with a more
competitive rate. These accounts are overnight agreements with commercial
customers that are collateralized by U.S. Government agency securities. At March
31, 2001 and December 31, 2000, respectively, we had $6.3 million and $5.8
million outstanding under repurchase agreements, compared to $3.0 million
outstanding under such agreements at December 31, 1999. Over the course of 2000,
our average liability on repurchase agreements was $3.9 million compared to $0.9
million in average outstanding during the year ended December 31, 1999.
Interest Rate Risk Management. Interest rate risk management involves managing
the extent to which interest-sensitive assets and interest-sensitive liabilities
are matched. Interest rate sensitivity is the relationship between market
interest rates and earnings volatility due to the repricing characteristics of
assets and liabilities. Our net interest income is affected by changes in the
level of market interest rates. In order to maintain consistent earnings
performance, the company seeks to manage, to the extent possible, the repricing
characteristics of its assets and liabilities.
30
The ratio between assets and liabilities repricing in specific time intervals is
referred to as an interest rate sensitivity gap. Interest rate sensitivity gaps
can be managed to take advantage of the slope of the yield curve as well as
forecasted changes in the level of interest rate changes.
One of our major objectives when managing the rate sensitivity of our assets and
liabilities is to stabilize net interest income. The management of and authority
to assume interest rate risk is the responsibility of our Asset/Liability
Committee ("ALCO"), which is comprised of five Board members. The process to
review interest rate risk management is a regular part of our management. In
addition, there is an annual process to review the interest rate risk policy
with the Board of Directors which includes limits on the impact to earnings from
shifts in interest rates.
To manage the interest sensitivity position, an asset/liability model called
"gap analysis" is used to monitor the difference in the volume of our interest
sensitive assets and liabilities that mature or reprice within given periods. A
positive gap (asset sensitive) indicates that more assets reprice during a given
period compared to liabilities, while a negative gap (liability sensitive) has
the opposite effect. We employ computerized interest income simulation modeling
to assist in quantifying interest rate risk exposure. This process measures and
quantifies the impact on net interest income through varying interest rate
changes and balance sheet compositions. The use of this model assists the ALCO
to gauge the effects of the interest rate changes on interest sensitive assets
and liabilities in order to determine what impact these rates changes will have
upon the net interest spread.
At March 31, 2001, we maintained a one-year negative cumulative gap of $24.1
million, or 8.4% of total assets.
Interest Sensitivity Gap at March 31, 2001
3 3 to 12 1 to 5 Over 5
Months Months Years Years TOTAL
-------- --------- --------- -------- ---------
Investment and mortgage-backed securities,
at amortized cost $ 40,183 $ 23,563 $ 21,396 $ 26,818 $ 111,960
Loans 33,744 23,630 83,778 20,036 161,188
-------- -------- --------- -------- ---------
Total earning assets 73,927 47,193 105,174 46,854 273,148
Non-interest bearing assets 7,568 - - 7,708 15,276
-------- -------- --------- -------- ---------
Total assets $ 81,495 $ 47,193 $ 105,174 $ 54,562 $ 288,424
======== ======== ========= ======== =========
Interest bearing transactions deposits 4,388 11,236 49,893 5,062 70,579
Time deposits 52,706 70,195 22,745 - 145,646
Repurchase agreements 6,272 500 - - 6,772
FHLB advances - - 1,000 1,000 2,000
-------- -------- --------- -------- ---------
Total interest bearing liabilities 63,366 81,931 73,638 6,062 224,997
Non-interest bearing liabilities 7,203 274 10,842 26,254 44,573
-------- -------- --------- -------- ---------
Total liabilities 70,569 82,205 84,480 32,316 269,570
Equity - - - 18,854 18,854
-------- -------- --------- -------- ---------
Total liabilities & equity $ 70,569 $ 82,205 $ 84,480 $ 51,170 $ 288,424
======== ======== ========= ======== =========
Interest sensitivity gap $ 10,926 $(35,012) $ 20,694 $ 3,392 $ 0
Cumulative gap $ 10,926 $(24,086) $ (3,392) $ 0 $ 0
Liquidity. Our liquidity is a measure of our ability to fund loans, withdrawals
or maturities of deposits, and other cash outflows in a cost effective manner.
Our principal sources of funds are deposits, scheduled amortization and
repayments of loan principal, sales and maturities of investment securities and
funds provided by operations. While scheduled loan payments and maturing
investments are relatively predictable sources of funds, deposit flows and loan
prepayments are greatly influenced by general interest rates, economic
conditions and competition.
31
Through our investment portfolio we generally have sought to obtain a safe yet
slightly higher yield than would have been available to us as a net seller of
overnight Federal Funds, while still maintaining liquidity. Through our
investment portfolio, we also attempt to manage our maturity gap by seeking
maturities of investments which coincide as closely as possible with maturities
of deposits.
As of March 31, 2001 our one year cumulative, negative gap was 8.4%, which is
due to the maturing of certificates of deposits, which we anticipate will be
renewed with either similar terms or longer terms. This short-term funding was
strategically carried out, as the Bank anticipated a drop in interest rates due
to the presence of an inverted yield curve. The Bank also has decided to fund
some of the run-off of deposits with long-term FHLB advances. This should help
to stabilize interest expense, as it will not be necessary to offer higher rates
to attract renewals. The Bank is not dependent upon volatile liabilities either
in the short or long-term, but has a consistent pool of core deposits. Our loan
to asset ratio as of March 31, 2001 was 55%, with the majority of loans maturing
or having interest rate adjustments beyond 1 year, but within 5 years. These
loans are funded by a stable core deposit base.
As an additional source of liquidity, we have available to us a $14.5 million
overnight borrowing line with FHLB secured by our 1-4 family loan portfolio and
other secured lines of credit totaling $6.5 million with our correspondent
banks. In addition, we have available $10 million from the FHLB with a minimum
term of (1) one month. Of this $10 million, $2.5 million is being utilized as of
March 31, 2001. During the three months ended March 31, 2001, and the year 2000,
the bank did not find it necessary to purchase overnight Federal Funds, as
deposit run-off and loan prepayments were at a minimum due to pricing
strategies.
In late 1999, an overnight repurchase agreement product was begun. The initial
accounts were transfers from existing products and did not add to our liability
base. The average liabilities for these accounts for the 3 months ended March
31, 2001 and for the year ended December 31, 2000 were $5.5 million and $3.9
million respectively. The proceeds from these accounts has enabled the bank to
fund loan growth.
Net cash provided by our operating activities was $3.4 million in 2000 compared
to $155 thousand in 1999, primarily due to an increase in other assets. This
increase was due primarily to a reallocation of assets on the balance sheet, and
deferred tax benefits included as part of FASB 115 adjustments due to market
valuation changes.
Net cash used in investing activities was $32.2 million in 2000 compared to
$36.7 million in 1999. We used $11.9 million for net investment securities.
$17.7 million of the increase was to fund loan growth, which was down from 1999
by 3.3 million, accounting for the majority of the decrease from year to year.
Net cash provided by our financing activities was $27.6 million for 2000
compared to $35.2 million in 1999. The decrease in 2000 was due primarily to a
decrease in net deposit growth of $10.4 million.
The proceeds of the offering are not being utilized for liquidity needs, but to
enhance our capital adequacy and to provide for growth. Therefore, our liquidity
should not be materially affected, positively or negatively, by this offering.
Capital. A significant measure of the strength of a financial institution is its
capital base. Our Federal regulators have classified and defined capital into
the following components: (1) Tier I capital, which includes tangible
shareholders' equity for common stock and qualifying preferred stock, and (2)
Tier II capital, which includes a portion of the allowance for possible loan
losses, certain qualifying long-term debt and preferred stock which does not
qualify for Tier I capital. Minimum capital levels are regulated by risk-based
capital adequacy guidelines which require a financial institution to maintain
certain capital as a percent of its assets and certain off-balance sheet items
adjusted for predefined credit risk factors (risk-adjusted assets). A financial
institution is required to maintain, at a minimum, Tier I capital as a
percentage of risk-adjusted assets of 4.0% and combined Tier I and Tier II
capital as a percentage of risk-adjusted assets of 8.0%.
In addition to the risk-based guidelines, the federal regulators require that a
financial institution which meets the regulators' highest performance and
operation standards maintain a minimum leverage ratio (Tier I capital as a
percentage of tangible assets) of 3%. For those institutions with higher levels
of risk or that are experiencing or anticipating significant growth, the minimum
leverage ratio will be proportionately increased by at least 100 to 200 basis
points. Minimum leverage ratios for each bank are evaluated through the ongoing
regulatory examination process.
32
Our Federal regulators impose capital standards on bank holding companies which
are substantially similar to those imposed upon the bank.
The following tables show our capital amounts and regulatory requirements for
the periods shown.
For capital adequacy
Actual purposes To be well capitalized
----------------------------- ---------------------------- ----------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ---------- --------------- -------- -------------- ----------
As of March 31, 2001
Total capital (to risk-
weighted assets) $20,658,082 10.99% $15,038,784 8.00% $18,798,480 10.00%
Tier I capital (to risk-
weighted assets) 18,853,957 10.03% 7,519,392 4.00% 11,279,088 6.00%
Tier I capital (to average
assets) 18,853,957 6.83% 11,039,037 4.00% 13,798,797 5.00%
As of December 31, 2000
Total capital (to risk-
weighted assets) $20,114,815 11.00% $14,627,025 8.00% $18,283,781 10.00%
Tier I capital (to risk-
weighted assets) 18,249,610 9.98% 7,313,512 4.00% 10,970,268 6.00%
Tier I capital (to average
assets) 18,249,610 6.74% 10,830,019 4.00% 13,537,524 5.00%
As of December 31, 1999
Total capital (to risk-
weighted assets) $17,730247 10.43% $13,594,087 8.00% $16,992,609 10.00%
Tier I capital (to risk-
weighted assets) 16,093,256 9.47% 6,797,043 4.00% 10,195,565 6.00%
Tier I capital (to average
assets) 16,093,256 6.56% 9,808,555 4.00% 12,260,694 5.00%
Impact Of Inflation And Changing Prices. Our financial statements and the notes
to those financial statements, included in this prospectus, were prepared in
accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power of money
over time and due to inflation. The impact of inflation is reflected in the
increased cost of our operations. Unlike most industrial companies, nearly all
of our assets and liabilities are monetary. As a result, interest rates have a
greater impact on our performance than do the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the prices of goods and services.
RECENT ACCOUNTING PRONOUNCEMENTS
We account for its transfers and servicing financial assets in
accordance with SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," as amended by SFAS No.
127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125." This statement provides accounting guidance on transfers of financial
assets, servicing of financial assets, and extinguishments of liabilities.
In September 2000, the SFAS No. 140 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," replaced SFAS
No. 125. This new statement revised the standard for accounting and reporting
for transfers and servicing of financial assets and extinguishments of
liabilities. The new standard is based on consistent application of a
financial-components approach that recognizes the financial and servicing assets
it controls and the liabilities it has incurred, derecognizes financial assets
when control has been surrendered and derecognizes liabilities when
33
extinguished. The standard provides consistent guidelines for distinguishing
transfers of financial assets from transfers that are secured borrowings. We are
required to adopt this new standard by March 31, 2001 and we do not expect this
new standard to have a material impact upon our consolidated financial
statements.
In June 1998, the SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" was issued. It was amended in June 1999 by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133," and in June 2000, by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities,"
(collectively SFAS No. 133). SFAS No. 133 requires that entities recognize all
derivatives as either assets or liabilities in the statement of financial
condition and measure those instruments at fair value. Under SFAS No. 133 an
entity may designate a derivative as a hedge of exposure to either changes in:
(a) fair value of a recognized asset or liability or firm commitment, (b) cash
flows of a recognized or forecasted transaction, or (c) foreign currencies of a
net investment in foreign operations, firm commitments, available-for-sale
securities or a forecasted transaction. Depending upon the effectiveness of the
hedge and/or the transaction being hedged, any changes in the fair value of the
derivative instrument is either recognized in earnings in the current year,
deferred to future periods, or recognized in other comprehensive income. Changes
in the fair value of all derivative instruments not recognized as hedge
accounting are recognized in current year earnings. SFAS No. 133 is required for
all fiscal quarters or fiscal years beginning after June 15, 2000. We adopted
SFAS No. 133 effective July 1, 2000 and no adjustment was required as a result
of the change in accounting principle.
SFAS No. 119 "Disclosure About Derivative Financial Instruments and
Fair Value of Financial Instruments requires disclosures about financial
instruments, which are defined as futures, forwards, swap and option contracts
and other financial instruments with similar characteristics. On balance sheet
receivables and payables are excluded from this definition. We did not hold any
derivative financial instruments as defined by SFAS No. 119 at December 31, 2000
or 1999.
THE COMPANY
General
First Washington FinancialCorp is registered with the board of
governors of the Federal Reserve System as bank holding company under the Bank
Holding Company Act of 1956, as amended and incorporated under the laws of the
State of New Jersey. We are the holding company for First Washington State Bank,
a New Jersey state chartered commercial bank. The bank is a full service
commercial bank, providing a wide range of business and consumer financial
services in our target marketplace, which is comprised primarily of Mercer,
Monmouth and Ocean Counties, New Jersey. The bank operates through its main
office located in Windsor, New Jersey, and ten branch offices located in
Allentown, East Windsor, Freehold, Hamilton Square, Jackson, Lakewood, West
Windsor and Whiting, New Jersey.
The bank's deposits are insured by the Bank Insurance Fund of the
Federal Deposit Insurance Corporation up to applicable limits. The operations of
the bank are subject to the supervision and regulation of the Federal Reserve
Bank and the New Jersey Department of Banking and Insurance. The principal
executive offices of the bank are located at U.S. Route 130 & Main Street,
Windsor, New Jersey 08561and the telephone number is (609) 426-1000.
Our vision for the bank is to continue to serve our local communities
by providing customers with quick response and access to senior bank officers
and decision-makers, while also offering new and innovative products and
services. In 2000, we expanded or introduced several products and services,
including the "Senior Now Direct Account", which was implemented to provide
senior citizens with an attractive package of convenient banking services,
"Physicians Presidential Banking" to cater to the many medical professionals in
our market, and the "Commercial Equity Line of Credit Account", to permit
businesses to use longer term lines of credit. We also introduced our VISA Check
Card and 24 hour telephone banking. In 2001, we plan to make available
"ExecuBanc" to provide PC banking services. We also intend to explore expansion
into non-banking lines of business such as insurance to enhance our non-interest
income.
34
We intend to use the proceeds of this offering to provide working
capital for general corporate purposes and to fund our continued growth. In
addition, the additional capital will allow us to fund larger loans, and
therefore to better compete in our market area.
Business of the Company
We conduct a traditional commercial banking business and offer services
including personal and business checking accounts and time deposits, money
market accounts and regular savings accounts. We recently implemented telephone
banking, and plan to offer PC-banking in 2001. We structure our specific
services and charges in a manner designed to attract the business of (i) small
and medium-sized businesses, and the owners and managers of these entities; (ii)
professionals and middle managers of locally-based corporations; and (iii)
individuals residing, working and shopping in the Mercer, Monmouth and Ocean
Counties, New Jersey trade area that we serve. We engage in a wide range of
lending activities and offer commercial, consumer, residential and
non-residential mortgage and construction loans.
Service Area
Our service area primarily consists of Mercer, Monmouth and Ocean
Counties, New Jersey, although we make loans throughout New Jersey. We operate
through our main office in Windsor, New Jersey, and ten branch offices located
in Allentown, East Windsor, Freehold, Hamilton Square, Jackson, Lakewood, West
Windsor and Whiting, New Jersey.
Competition
We operate in a highly competitive environment competing for deposits
and loans with commercial banks, thrifts and other financial institutions, many
of which have greater financial resources than we do. Many large financial
institutions compete for business in our service area. In addition, in November,
1999, the Gramm-Leach-Bliley Financial Modernization Act of 1999 was passed into
law. The Act permits insurance companies and securities firms, among others, to
acquire financial institutions and has increased competition within the
financial services industry. Certain of our competitors have significantly
higher lending limits than we do and provide services to their customers which
we do not offer.
We believe that we are able to compete favorably with our competitors
because we provide responsive personalized services through management's
knowledge and awareness of our service area, customers and businesses.
Employees
At March 31, 2001, we employed 98 full-time equivalent employees.
None of these employees is covered by a collective bargaining agreement and we
believe that our employee relations are good.
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under both
federal and state law. These laws and regulations are intended to protect
depositors, not shareholders. To the extent that the following information
describes statutory and regulatory provisions, it is qualified in its entirety
by reference to the particular statutory and regulatory provisions. Any change
in the applicable law or regulation may have a material effect on the business
and prospects of the company and the bank.
35
Bank Holding Company Regulation
As a bank holding company registered under the Bank Holding Company
Act, the company is subject to the regulation and supervision applicable to bank
holding companies by the Board of Governors of the Federal Reserve System. The
company is required to file with the Federal Reserve Bank annual reports and
other information regarding its business operations and those of its
subsidiaries.
The Bank Holding Company Act requires, among other things, the prior
approval of the Federal Reserve Bank in any case where a bank holding company
proposes to (i) acquire all or substantially all of the assets of any other
bank, (ii) acquire direct or indirect ownership or control of more than 5% of
the outstanding voting stock of any bank (unless it owns a majority of such
company's voting shares) or (iii) merge or consolidate with any other bank
holding company. The Federal Reserve Bank will not approve any acquisition,
merger, or consolidation that would have a substantially anti-competitive
effect, unless the anti-competitive impact of the proposed transaction is
clearly outweighed by a greater public interest in meeting the convenience and
needs of the community to be served. The Federal Reserve Bank also considers
capital adequacy and other financial and managerial resources and future
prospects of the companies and the banks concerned, together with the
convenience and needs of the community to be served, when reviewing acquisitions
or mergers.
The Bank Holding Company Act generally prohibits a bank holding
company, with certain limited exceptions, from (i) acquiring or retaining direct
or indirect ownership or control of more than 5% of the outstanding voting stock
of any company which is not a bank or bank holding company, or (ii) engaging
directly or indirectly in activities other than those of banking, managing or
controlling banks, or performing services for its subsidiaries, unless such
non-banking business is determined by the Federal Reserve to be so closely
related to banking or managing or controlling banks as to be properly incident
thereto.
The Bank Holding Company Act was substantially amended through the
Modernization Act. The Modernization Act permits bank holding companies and
banks which meet certain capital, management and Community Reinvestment Act
standards to engage in a broader range of non-banking activities. In addition,
bank holding companies which elect to become financial holding companies may
engage in certain banking and non-banking activities without prior FRB approval.
Finally, the Modernization Act imposes certain new privacy requirements on all
financial institutions and their treatment of consumer information. At this
time, the Company has elected not to become a financial holding company, as it
does not engage in any non-banking activities.
There are a number of obligations and restrictions imposed on bank
holding companies and their depository institution subsidiaries by law and
regulatory policy that are designed to minimize potential loss to the depositors
of such depository institutions and the FDIC insurance funds in the event the
depository institution becomes in danger of default. Under a policy of the
Federal Reserve Bank with respect to bank holding company operations, a bank
holding company is required to serve as a source of financial strength to its
subsidiary depository institutions and to commit resources to support such
institutions in circumstances where it might not do so absent such policy. The
Federal Reserve also has the authority under the Bank Holding Company Act to
require a bank holding company to terminate any activity or to relinquish
control of a non-bank subsidiary upon the Federal Reserve's determination that
such activity or control constitutes a serious risk to the financial soundness
and stability of any bank subsidiary of the bank holding company.
Capital Adequacy Guidelines for Bank Holding Companies.
The Federal Reserve has adopted risk-based capital guidelines for bank
holding companies. The risk-based capital guidelines are designed to make
regulatory capital requirements more sensitive to differences in risk profile
among banks and bank holding companies, to account for off-balance sheet
exposure, and to minimize disincentives for holding liquid assets. Under these
guidelines, assets and off-balance sheet items are assigned to broad risk
categories each with appropriate weights. The resulting capital ratios represent
capital as a percentage of total risk-weighted assets and off-balance sheet
items.
The minimum ratio of total capital to risk-weighted assets (including
certain off-balance sheet activities, such as standby letters of credit) is 8%.
At least 4% of the total capital is required to be "Tier I Capital," consisting
of common shareholders' equity and qualifying preferred stock, less certain
goodwill items and other intangible assets. The remainder ("Tier II Capital")
may consist of (a) the allowance for loan losses of up to 1.25% of risk-weighted
assets, (b) non-qualifying preferred stock, (c) hybrid capital instruments, (d)
perpetual debt, (e) mandatory convertible securities, and (f) qualifying
36
subordinated debt and intermediate-term preferred stock up to 50% of Tier I
capital. Total capital is the sum of Tier I and Tier II capital less reciprocal
holdings of other banking organizations' capital instruments, investments in
unconsolidated subsidiaries and any other deductions as determined by the FRB
(determined on a case by case basis or as a matter of policy after formal
rule-making).
Bank holding company assets are given risk-weights of 0%, 20%, 50% and
100%. In addition, certain off-balance sheet items are given similar credit
conversion factors to convert them to asset equivalent amounts to which an
appropriate risk-weight will apply. These computations result in the total
risk-weighted assets. Most loans are assigned to the 100% risk category, except
for performing first mortgage loans fully secured by residential property which
carry a 50% risk-weighting and loans secured by deposits in the Bank which carry
a 20% risk weighting. Most investment securities (including, primarily, general
obligation claims of states or other political subdivisions of the United
States) are assigned to the 20% category, except for municipal or state revenue
bonds, which have a 50% risk-weight, and direct obligations of the U.S. Treasury
or obligations backed by the full faith and credit of the U.S. Government, which
have a 0% risk-weight. In converting off-balance sheet items, direct credit
substitutes including general guarantees and standby letters of credit backing
financial obligations are given a 100% risk-weighting. Transaction related
contingencies such as bid bonds, standby letters of credit backing nonfinancial
obligations, and undrawn commitments (including commercial credit lines with an
initial maturity of more than one year) have a 50% risk-weighting. Short term
commercial letters of credit have a 20% risk-weighting and certain short-term
unconditionally cancelable commitments have a 0% risk-weighting.
In addition to the risk-based capital guidelines, the FRB has adopted a
minimum Tier I capital (leverage) ratio, under which a bank holding company must
maintain a minimum level of Tier I capital to average total consolidated assets
of at least 3% in the case of a bank holding company that has the highest
regulatory examination rating and is not contemplating significant growth or
expansion. All other bank holding companies are expected to maintain a leverage
ratio of at least 100 to 200 basis points above the stated minimum.
Bank Regulation
As a New Jersey-chartered commercial bank, we are subject to the
regulation, supervision, and control of the New Jersey Department of Banking and
Insurance. As an FDIC-insured institution, we are subject to regulation,
supervision and control of the FDIC, an agency of the federal government. The
regulations of the FDIC and the New Jersey Department of Banking and Insurance
impact virtually all of our activities, including the minimum level of capital
we must maintain, our ability to pay dividends, our ability to expand through
new branches or acquisitions and various other matters.
Insurance Deposits. Our deposits are insured up to a maximum of
$100,000 per depositor under the Bank Insurance Fund of the FDIC. The FDIC has
established a risk-based assessment system for all insured depository
institutions. Under the risk-based assessment system, deposit insurance premium
rates range from 0-27 basis points of assessed deposits. For the year ended
December 31, 2000, we paid $44,982 in deposit insurance premiums.
In addition, we pay assessments used to repay a portion of the amounts
owed on bonds issued by the Federal Financing Cooperation to help pay for the
thrift bailout of the early 1980s. This payment, equal to (.0013%) of assessed
deposits, is in addition to the deposit insurance premiums discussed above.
Capital Adequacy Guidelines. The FDIC has promulgated risk-based
capital guidelines which are designed to make regulatory capital requirements
more sensitive to differences in risk profile among banks, to account for
off-balance sheet exposure, and to minimize disincentives for holding liquid
assets. Under these guidelines, assets and off-balance sheet items are assigned
to broad risk categories, each with appropriate weights. The resulting capital
ratios represent capital as a percentage of total risk-weighted assets and
off-balance sheet items. These guidelines are substantially similar to the
Federal Reserve Board guidelines discussed above.
In addition to the risk-based capital guidelines, the FDIC has adopted
a minimum Tier 1 capital (leverage) ratio. This measurement is substantially
similar to the Federal Reserve Board leverage capital measurement discussed
above. At December 31, 2000, the bank's ratio of total capital to risk-weighted
assets was 11.00%. Our Tier I capital to risk-weighted assets was 9.98%, and our
Tier I capital to average assets was 6.74%.
37
Dividends. The bank may pay dividends as declared from time to time by
the Board of Directors out of funds legally available, subject to certain
restrictions. Under the New Jersey Banking Act of 1948, the bank may not pay a
cash dividend unless, following the payment, the bank's capital stock will be
unimpaired and the bank will have a surplus of no less than 50% of the bank
capital stock or, if not, the payment of the dividend will reduce the surplus.
In addition, the bank cannot pay dividends in such amounts as would reduce the
bank's capital below regulatory imposed minimums.
Description of Property
The bank owns its main office in Windsor, New Jersey, and its branch
offices in Allentown, West Windsor, Lakewood and Hamilton, New Jersey. There are
no outstanding mortgages on any of those properties. In addition, the bank
leases its branch offices in Freehold (two offices), Lakewood, Jackson, Whiting
and East Windsor, New Jersey, and its operations center in Windsor, New Jersey.
The following table sets forth certain information regarding the bank's
properties:
Owned Properties
-----------------------------------------
Location Square Feet
-----------------------------------------
Windsor 9,120
Allentown 2,210
West Windsor 2,630
Lakewood (Kennedy Blvd) 6,700
Hamilton 3,282
Leased Properties
Location Square Feet Monthly Rental Expiration of Term
- ----------------- ----------- -------------- ------------------
Freehold 3,200 $ 4,000 July, 2012
Freehold (Applewood) 146 521 November, 2010
Lakewood 450 4,583 February, 2010
Jackson 450 3,833 September, 2016
Whiting 5,600 2,500 February, 2009
East Windsor 12,000 9,421 April, 2009
Windsor (operations center) 5,200 2,839 March, 2008
Legal Proceedings
We are periodically parties to or otherwise involved in legal
proceedings arising in the normal course of business, such as claims to enforce
liens, claims involving the making and servicing of real property loans, and
other issues incident to the business of the company and the bank. Management
does not believe that there is any pending or threatened proceeding against the
company or the bank which, if determined adversely, would have a material effect
on the business or financial position of the company.
MANAGEMENT
The direction and control of the company is vested in the Board of
Directors. The term of each director is three years. Directors are divided into
three classes and elections are staggered so that the term for one class of
directors expires each year. The following table sets forth information with
respect to the directors and certain executive officers, including their ages, a
brief description of their recent business experience, certain directorships
held by each, the year in which each became a director of the company and the
year in which their terms as director of the company expire.
38
Current Board of Directors and Executive Officers
Directors: Term of Office
Name, Age, Position Five Years Professional Experience Since - Expires
- ------------------- ---------------------------------- ---------------
Joe J. Mayes President and Owner, Lets Go Travel; Consultant to 1991 2002
Director, 60 Manufactured Housing Industry
Steven I. Pfeffer Shareholder in the law firm of Levin, Shea, Pfeffer & 1989 2002
Director, 55 Topas, P.A.
C. Herbert Schneider President and Chief Executive Officer of the Bank 1991 2002
Director, 53
James N. Corcodilos Retired, formerly Owner and Executive Officer, Jim's 1989 2003
Director, 75 Country Diner and Corcodilos, Inc. (restaurants)
Abraham S. Opatut President, Colonial Marketing Associates/Colonial 1989 2003
Chairman Foods, Inc. (wholesale foods)
Director, 53
Ross Wishnick President, r.e.w.Build, Corp. (builder/developer) 1989 2003
Director, 49
Harry Horowitz President, H&H Gas and Appliance Co., (propane and 1989 2004
Vice Chairman appliance sales)
Director, 77
James R. Johnson, Jr. President, Bil-Jim Construction Co., Inc. (heavy 1989 2004
Director, 49 construction)
Jerry Kokes Senior Vice President 1989 2004
Director, 53 The Kokes Organization (developer)
- ---------------
(1) Includes prior service on the Board of Directors of the bank prior to
formation of the holding company on October 1, 1998.
Executive Officers: Executive
Name, Age, Position Five Years Professional Experience Officer Since
- ------------------- ---------------------------------- -------------
Lisa M. Albert, 35, Vice Vice President, Branch Administrator, Branch 2000
President, Branch Administration Supervisor of First Washington State
Administrator Bank
Dawn S. Everett, 46, Vice President, Human Resources, Facilities, Security 2000
Vice President, Human and Insurance for First Washington State Bank
Resources and Facilities
Lewis H. Foulke, 39, Vice President, Finance, Management Information 2000
Vice President, Finance Systems and Accounting for First Washington State Bank
and Management
Information Systems
Carol M. Jones, 52, Vice Vice President, Marketing Officer and Branch 2000
President, Marketing Coordinator for First Washington State Bank
Sharon A. Lordi, 44, Vice President, Retail Lending for First Washington 2000
Vice President, Retail State Bank
Lending
Elizabeth A. Solewater, Senior Vice President, Commercial Lending, Commercial 2001
54, Senior Vice Lender, SBA Lender for First Washington State Bank,
President, Commercial SBA Department Head for PNC Bank
Lending
Edna K. Stout, 64, Senior Vice President, Loan Administration for First 1993
Senior Vice President, Washington State Bank
Loan Administration
39
Stock Ownership of Management and Controlling Shareholders
The following tables set forth, as of December 31, 2000, certain
information concerning the ownership of the company's common stock by (i) each
person who is known by the company to own beneficially more than five percent
(5%) of the issued and outstanding common stock, (ii) each director of the
company and each director of the bank, (iii) each named executive officer and
(iv) all directors and officers of the company as a group.
- --------------------------------------------------------------------------------
Number of Shares Percent of Common
Name of Beneficial Owner Beneficially Owned (1) Common Stock
- --------------------------------------------------------------------------------
Directors:
James N. Corcodilos 174,646 (2) 6.73%
- --------------------------------------------------------------------------------
Harry Horowitz 43,192 (3) 1.66%
- --------------------------------------------------------------------------------
James R. Johnson, Jr. 222,110 (4) 8.57%
- --------------------------------------------------------------------------------
Jerry Kokes 121,935 (5) 4.70%
- --------------------------------------------------------------------------------
Joe J. Mayes 220,164 (6) 8.49%
- --------------------------------------------------------------------------------
Abraham S. Opatut 107,299 (7) 4.14%
- --------------------------------------------------------------------------------
Steven I. Pfeffer 143,780 (8) 5.55%
- --------------------------------------------------------------------------------
C. Herbert Schneider 109,011 (9) 4.15%
- --------------------------------------------------------------------------------
Ross Wishnick 85,539 (10) 3.30%
- --------------------------------------------------------------------------------
Directors and Executive 1,249,525 (11) 44.63%
Officers of the Bank as
a group (16 persons)
- --------------------------------------------------------------------------------
5% Shareholders:
- --------------------------------------------------------------------------------
Mr. James R. Johnson, Jr. 222,110 (4) 8.57%
PO Box 783
Jackson, NJ 08527
- --------------------------------------------------------------------------------
Mr. Joe J. Mayes 220,164 (6) 8.49%
28 Clearview Court South
Palm Coast, FL 32137
- --------------------------------------------------------------------------------
Mr. James N. Corcodilos 174,676 (2) 6.73%
PO Box 301
Windsor, NJ 08561
- --------------------------------------------------------------------------------
Mr. Steven I. Pfeffer 143,922 (8) 5.55%
1448 14th Street
Lakewood, NJ 08701
- --------------------------------------------------------------------------------
- ---------------
(1) Beneficially owned shares include shares over which the named person
exercises either sole or shared voting power or sole or shared investment
power. It also includes shares owned (i) by a spouse, minor children or by
relatives sharing the same home, (ii) by entities owned or controlled by
the named person, and (iii) by other persons if the named person has the
right to acquire such shares within 60 days by the exercise of any right or
option. Unless otherwise noted, all shares are owned of record and
beneficially by the named person. Shares granted under the 1997 Incentive
Stock Option Plan, are also included.
40
(2) Of this total, 2,868 shares are held by Mr. Corcodilos as custodian for his
three grandchildren and 23,078 shares are purchasable upon the exercise of
stock options.
(3) Of this total, 15,509 shares are held by a profit sharing plan of which Mr.
Horowitz is trustee and 23,078 shares are purchasable upon the exercise of
stock options.
(4) Of this total, 6,937 shares are held by a limited partnership of which Mr.
Johnson is the general managing partner; 13,881 shares are held by a
partnership of which Mr. Johnson is a general partner and 23,078 shares are
purchasable upon the exercise of stock options.
(5) Of this total, 98,544 shares are held jointly with Mr. Kokes' wife and
23,078 shares are purchasable upon the exercise of stock options.
(6) Of this total, 44,166 shares are held by a trust of which Mr. Mayes is a
trustee,794 shares are held jointly with Mr. Mayes' wife as custodian for
their grandchild and 23,078 shares are purchasable upon the exercise of
stock options.
(7) Of this total, 65,345 shares are held jointly with Mr. Opatut's wife; 2,252
shares are held by Mr. Opatut's wife in her name; 8,298 shares are owned by
a partnership of which Mr. Opatut is a partner; and 23,078 shares are
purchasable upon the exercise of stock options.
(8) Of this total, 98,016 shares are held jointly by Mr. Pfeffer and his wife
and 6,085 shares are held by Mr. Pfeffer's wife in her name, 23,078 shares
are purchasable upon the exercise of stock options.
(9) Of this total, 14,745 shares are held by Mr. Schneider's wife in her name.
Also included are 55,153 shares that may be acquired by Mr. Schneider upon
the exercise of stock options under the 1997 Incentive Stock Option Plan.
(10) Of this total, 29,633 shares are held by Mr. Wishnick's wife in her name
and 23,078 shares are purchasable upon the exercise of stock options.
(11) Includes 8,755 shares that may be acquired upon the exercise of stock
options not otherwise disclosed in these notes.
41
Executive Compensation
The following table sets forth a summary for the last three fiscal
years of the cash and non-cash compensation awarded to, earned by, or paid to,
the Chief Executive Officer of the company. Other than the Chief Executive
Officer, no officer received compensation in excess of $100,000 in 2000.
SUMMARY COMPENSATION TABLE
Cash and Cash Equivalent Forms of Remuneration
- ------------------------------------------------------------------------------------------------------------------
Annual Compensation Long-Term Compensation
----------------------------------------------------------------------
Awards
-------------------------
Other Securities Underlying
Annual Options/
Salary Bonus Compensation SARs
Name and Principal Position Year ($) ($) ($)(1) (#)
- ------------------------------------------------------------------------------------------------------------------
C. Herbert Schneider, Chief
Executive Officer and President 2000 220,148 - - -
-------------------------------------------------------------------------------
1999 198,098 - - 6,250
-------------------------------------------------------------------------------
1998 192,300 - - -
- ------------------------------------------------------------------------------------------------------------------
- -----------------
(1) The company believes the value of these perquisites and other benefits to
be less than 10% of the salary and bonus reported in the table above. Mr.
Schneider is provided with an automobile for business use in connection
with his services as an executive and all expenses relating to this vehicle
are paid by the company. We are unable to determine with reasonable effort
and expense the extent or value of the benefits, if any, which Mr.
Schneider may have derived for the value of the personal use of such
automobile. In any event, we believe after reasonable inquiry that the
value of the personal use of the automobile does not exceed $5,000 per year
in the aggregate.
Employment Agreements
The company entered into a Change in Control Agreement with Mr. Schneider,
as of November 4, 1998. The Agreement remains in effect for a period of three
years and is automatically extended for an additional one year period on the
anniversary date unless the Board of Directors votes not to extend the initial
term. The Agreement defines a "Change in Control" to mean the following: (1) the
acquisition of the beneficial ownership of at least 25% of the company's voting
securities or all or substantially all of the assets of the company by a single
person or entity, or a group of affiliated persons or entities acting in
concert; (2) the merger, consolidation or combination of the company with an
unaffiliated corporation in which the Directors of the company immediately prior
to such merger, consolidation or combination constitute less than a majority of
the Board of Directors of the surviving, new or combined entity; (3) the
transfer of all or substantially all of the company's assets; (4) the election
to the Board of Directors of the company during any consecutive three year
period of a group of individuals constituting a majority of the Board who were
not serving as Directors of the company immediately prior to the consecutive
three year period.
In the event of a Change in Control and Mr. Schneider's termination, as a
result of the change, as provided in the agreement, he will receive a lump sum
equal to 2.99 times the highest annual compensation paid to him during any three
calendar years immediately prior to the Change in Control. Should there be a
Change in Control and termination during 2001, Mr. Schneider would be entitled
to a payment of $658,243. In no event may the Change in Control payments and
benefits to Mr. Schneider exceed the limitations imposed under Section 280G of
the Internal Revenue Code. The Board has the right to terminate Mr. Schneider
for cause as defined in the Agreement.
42
1997 Stock Option Plan
Under the 1997 Stock Option Plan, options for an aggregate of 332,668
shares of common stock may be issued, subject to adjustment in the event of
stock dividends, stock splits, and certain other capital changes. The 1997 Stock
Option Plan provides that both nonqualified options and incentive stock options
under the Internal Revenue Code of 1986, as amended may be issued. During 2000,
no options were granted under the 1997 Stock Option Plan to our Chief Executive
Officer.
The following table sets forth information concerning the fiscal
year-end value of unexercised options held by the executive officers of the
company named in the table above. No stock options were exercised by such
executive officers during 2000.
AGGREGATED OPTION/SAR
EXERCISES IN LAST FISCAL
YEAR AND FY-END OPTION
- -----------------------------------------------------------------------------------------------------------------
Number of Securities
Underlying
Unexercised Options/SARs Value of Unexercised
Shares Acquired on Value at FY-End (#) Exercisable/ In-the-Money Options/
Name Exercise (#) Realized Unexercisable SARs at FY-End
- -----------------------------------------------------------------------------------------------------------------
C. Herbert Schneider N/A $ N/A 55,153(E) $584,125(E)
=================================================================================================================
Director Compensation
The company does not currently pay Directors fees. Directors of the bank
receive $500 per Board meeting attended. In addition, during 2000, the Chairman
of the bank received a retainer of $6,250 per month and the Vice Chairman of the
bank received a retainer of $1,458 per month. During 2000, no Director received
compensation for any committee meeting attended.
1999 Stock Option Plan
During 1999, the Board of Directors adopted the 1999 Stock Option Plan
pursuant to which non-employee directors of the company may receive options to
purchase up to an aggregate of 66,667 shares of the company's common stock. The
Board adopted this program because it believed that tying director compensation
to performance of the company's stock is in the best interests of the company's
shareholders. Under the 1999 Stock Option Plan, the exercise price of all
options granted is to be no less than 100% of the fair market value of the
common stock on the date of grant. In addition, the number of shares subject to
the 1999 Stock Option Plan and the shares purchasable upon the exercise of any
options granted under the Plan will be adjusted in the event of certain stock
dividends, stock splits and certain other capital changes. During 2000, no
options were granted under the 1999 Stock Option Plan to any Director.
DESCRIPTION OF THE COMPANY'S SECURITIES
Capital Stock
General. First Washington FinancialCorp is incorporated under the laws
of the State of New Jersey. Therefore, the rights of holders of our stock will
be governed by the New Jersey Business Corporation Act and the Certificate of
Incorporation. Our Certificate of Incorporation provides for an authorized
capitalization of 11,000,000 shares of capital stock, consisting of 10,000,000
shares of common stock, no par value, and 1,000,000 shares of preferred stock,
to be issued in series as determined by the Board of Directors.
43
As of March 31, 2001, there were 2,569,371 shares of common stock
outstanding.
Dividend Rights. The holders of our common stock will be entitled to
dividends, when, as, and if declared by our Board of Directors, subject to the
restrictions imposed by New Jersey law. The only statutory limitation applicable
to the company is that dividends must be paid out of surplus or, if there is no
surplus, out of net profits for the fiscal year in which the dividend is
declared or out of the preceding year's net profit. However, as a practical
matter, unless we expand our activities, our primary source of income will be
the bank.
Voting Rights. Except as discussed under "Anti-Takeover Provisions",
each share of our common stock is entitled to one vote per share. Cumulative
voting is not permitted. Under our Certificate of Incorporation, certain matters
require a 66 2/3% stockholder vote. See "Anti-Takeover Provisions".
Preemptive Rights. Under New Jersey law, shareholders may have
preemptive rights if these rights are provided in the Certificate of
Incorporation. Our Certificate of Incorporation does not provide for preemptive
rights.
Appraisal Rights. Under New Jersey law, dissenting shareholders of the
company have appraisal rights (subject to the broad exception set forth in the
next sentence) upon certain mergers or consolidations. Appraisal rights are not
available in any such transaction if shares of the company are listed for
trading on a national securities exchange or designated as a national market
system security on the NASDAQ system or held of record by more than 2,000
holders.
Directors. Under New Jersey law and our Certificate of Incorporation,
the company is to have a minimum of five and a maximum of 25 directors, with the
number of directors at any given time to be fixed by the Board of Directors. We
currently have nine members of our Board of Directors.
Preferred Stock
Our Certificate of Incorporation authorizes us to issue up to 1,000,000
shares of preferred stock, in one or more series, with such designations and
such relative voting, dividend, liquidation, conversion and other rights,
preferences and limitations as shall be set forth in resolutions providing for
the issuance thereof adopted by the Board of Directors. No shares of preferred
stock have been issued.
ANTI-TAKEOVER PROVISIONS
Bank Regulatory Requirements. Under the Federal Change in Bank Control Act (the
"Control Act"), a 60 day prior written notice must be submitted to the FRB if
any person, or any group acting in concert, seeks to acquire 10% or more of any
class of outstanding voting securities of a bank holding company, unless the
Federal Reserve Bank ("FRB") determines that the acquisition will not result in
a change of control. Under the Control Act, the FRB has 60 days within which to
act on such notice taking into consideration certain factors, including the
financial and managerial resources of the acquirer, the convenience and needs of
the community served by the bank holding company and its subsidiary banks and
the antitrust effects of the acquisition. Under the Bank Holding Company Act of
1956, as amended ("BHCA"), a company is generally required to obtain prior
approval of the FRB before it may obtain control of a bank holding company.
Under the BHCA, control is generally described to mean the beneficial ownership
of 25% or more of the outstanding voting securities of a company, although a
presumption of control may exist if a party beneficially owns 10% or more of the
outstanding voting securities of a company and certain other circumstances are
present.
Classified Board of Directors. Pursuant to the company's Certificate of
Incorporation, the Board of Directors is divided into three classes, each of
which contains approximately one-third of the whole number of the members of the
board. Each class serves a staggered term, with approximately one-third of the
total number of directors being elected each year. The Certificate of
Incorporation and Bylaws provide that the size of the board shall be determined
by a majority of the directors. The Certificate of Incorporation and the Bylaws
provide that any vacancy occurring in the Board, including a vacancy created by
an increase in the number of directors or resulting from death, resignation,
retirement, disqualification, removal from office or other cause, shall be
filled for the remainder of the unexpired term exclusively by a majority vote of
the directors then in office. The classified Board is intended to provide for
continuity of the Board of Directors and to make it more difficult and time
consuming for a stockholder group to use its voting power to gain control of the
Board of Directors without the consent of the incumbent Board of Directors of
the company.
44
Stockholder Vote Required to Approve Business Combinations. The Certificate of
Incorporation requires the approval of the holders of at least 66 2/3% of the
company's outstanding shares of voting stock to approve certain "Business
Combinations," and related transactions. Under Delaware law, absent this
provision, Business Combinations, including mergers, consolidations and sales of
all or substantially all of the assets of a corporation must, subject to certain
exceptions, be approved by the vote of the holders of only a majority of the
outstanding shares of Common Stock of the company and any other affected class
of stock. Under the Certificate of Incorporation, at least 80% approval of
stockholders is required in connection with any Business Combination except in
cases where the proposed transaction has been approved in advance by a majority
of the company's Board of Directors. This provisions of the Certificate of
Incorporation applies to any "Business Combination," which is defined to include
(i) any merger or consolidation of the company or any of its subsidiaries with
or into any other person; (ii) any sale, lease, exchange, mortgage, pledge,
transfer, or other disposition to or with any other person of substantially all
of the assets of the company or combined assets of the company and any of its
subsidiaries, or (iii) any offer for the exchange of securities of another entry
for the securities of the company.
Evaluation of Offers. The Certificate of Incorporation further provides that the
Board of Directors, when evaluating any offer of another "Person", to (i) make a
tender or exchange offer for any equity security of the company, (ii) merge or
consolidate the company with another corporation or entity, or (iii) purchase or
otherwise acquire all or substantially all of the properties and assets of the
company, may, in connection with the exercise of its judgment in determining
what is in the best interest of the company, the bank and the shareholders of
the company, give due consideration (to the extent permitted by law) to all
relevant factors, including, without limitation, the social and economic effects
of acceptance of such offer on the company's customers and the bank's present
and future account holders, borrowers and employees; on the communities in which
the company and the bank operate or are located; and on the ability of the
company to fulfill its corporate objectives as a bank holding company and on the
ability of the bank to fulfill the objectives of a state chartered stock bank
under applicable statutes and regulations. By having these standards in the
Certificate of Incorporation of the company, the Board of Directors may be in a
stronger position to oppose such a transaction if the board concludes that the
transaction would not be in the best interest of the company, even if the price
offered is significantly greater than the then market price of any equity
security of the company.
Amendment of Certificate of Incorporation and Bylaws. Amendments to the
Certificate of Incorporation must be approved by a majority vote of the
company's Board of Directors and also by a majority of the outstanding shares of
its voting stock, provided, however, that an affirmative vote of at least 66
2/3% of the outstanding voting stock entitled to vote (after giving effect to
the provision limiting voting rights) is required to amend or repeal certain
provisions of the Certificate of Incorporation, including the provision limiting
voting rights and the provisions relating to approval of certain business
combinations.
Certain Bylaw Provisions The Bylaws also require a stockholder who intends to
nominate a candidate for election to the Board of Directors to give at least 90
days advance notice in writing to the Secretary of the company. The notice
provision requires a stockholder wishing to nominate any person or election as a
director provide the company with certain information concerning the nominee and
the proposing stockholder.
TRANSFER AGENT
Our transfer agent is Registrar & Transfer Co., 10 Commerce Drive,
Cranford, New Jersey 07016. Telephone: (800) 368-5948.
45
LEGAL MATTERS
The validity of the shares of the common stock offered by this
prospectus will be passed upon for us by Windels Marx Lane & Mittendorf, LLP,
New Brunswick, New Jersey.
EXPERTS
Our consolidated financial statements as of December 31, 2000 and 1999
and for years then ended included in this registration statement and prospectus
have been audited by Grant Thornton LLP, independent certified public
accountants, whose report is included in this registration statement and
prospectus and given upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
The company has filed with the Securities and Exchange Commission a
Registration Statement on Form SB-2 under the Securities Exchange Act of 1934,
as amended, with respect to the shares of common stock offered hereby. This
prospectus, which constitutes a part of the Registration Statement, omits
certain of the information contained in the Registration Statement and the
exhibits and schedules thereto on file with the Securities and Exchange
Commission pursuant to the Securities Exchange Act of 1934, as amended, and the
rules and regulations of the Securities and Exchange Commission promulgated
thereunder. For further information with respect to the company and the shares
of common stock, reference is made to the Registration Statement and the
exhibits and schedules attached hereto. The Registration Statement, including
exhibits thereto, may be inspected and copied at the public reference facilities
maintained by the Securities and Exchange Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and the Securities and
Exchange Commission's Regional Offices at 7 World Trade Center, Suite 1300, New
York, New York 10048, and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, and copies may be obtained at prescribed rates from the
Public Reference Section of the Commission at its principal office in
Washington, D.C. The Securities and Exchange Commission also maintains a Website
that contains copies of such material. The address of the Securities and
Exchange Commission's Website is http://www.sec.gov.
46
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants....................... F - 1
Consolidated Balance Sheets as of March 31, 2001 (unaudited) and
December 31, 2000 and 1999............................................ F - 2
Consolidated Statements of Income for the three months ended March 31,
2001 and 2000 (unaudited) and for the years ended
December 31, 2000 and 1999............................................ F - 3
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 2000 and 1999 and the three months ended
March 31, 2001 (unaudited)............................................ F - 4
Consolidated Statements of Cash Flows for the three months ended March
31, 2001 and 2000 (unaudited) and for the years ended
December 31, 2000 and 1999............................................ F - 5
Notes to Consolidated Financial Statements............................... F - 6
F-I
Report of Independent Certified Public Accountants
The Board of Directors and Stockholders
First Washington FinancialCorp
We have audited the accompanying consolidated balance sheets of First
Washington FinancialCorp as of December 31, 2000 and 1999, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of First
Washington FinancialCorp as of December 31, 2000 and 1999, and the consolidated
results of their operations and their consolidated cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States of America.
/s/ Grant Thornton, LLP
Philadelphia, Pennsylvania
February 1, 2001
F-1
FIRST WASHINGTON FINANCIALCORP
Consolidated Balance Sheets
December 31,
March 31, -------------------------------
2001 2000 1999
------------- ------------- -------------
(Unaudited)
ASSETS
Cash and due from banks $ 7,091,634 $ 8,309,870 $ 4,828,620
Federal funds sold 11,245,000 2,400,000 7,140,000
------------ ------------ ------------
Total cash and cash equivalents 18,336,634 10,709,870 11,968,620
Interest bearing deposits with banks 476,000 476,000 93,000
Investment securities available-for-sale 35,158,793 38,776,008 37,242,890
Investment securities held-to-maturity (fair value of
$17,342,540, $14,127,959 and $6,002,262 in 2001,
2000 and 1999, respectively) 17,006,745 13,957,646 6,085,991
Mortgage-backed securities available-for-sale 49,463,703 47,555,701 43,865,467
Loans, net 159,384,346 152,860,409 135,368,043
Premises and equipment, net 6,324,344 6,455,471 4,448,314
Accrued interest receivable 1,754,028 1,798,138 1,445,148
Deferred tax asset, net 506,471 903,722 1,211,670
Other assets 931,966 782,232 1,756,775
------------ ------------ ------------
Total assets $289,343,030 $274,275,197 $243,485,918
============ ============ ============
LIABILITIES
Deposits
Non-interest bearing - demand $ 43,627,386 $ 41,435,236 $ 40,664,271
Interest bearing - demand 24,538,358 23,190,157 15,422,144
Savings and money market 46,040,723 41,416,213 41,341,152
Certificates of deposit, under $100,000 134,458,438 134,946,632 117,428,176
Certificates of deposit, $100,000 and over 11,187,770 5,697,140 6,518,669
------------ ------------ ------------
Total deposits 259,852,675 246,685,378 221,374,412
------------ ------------ ------------
Securities sold under agreements to repurchase 6,272,366 5,755,165 2,979,000
FHLB advances 2,500,000 2,500,000 3,000,000
Accrued interest payable 452,762 435,819 350,698
Other liabilities 810,149 767,925 852,323
------------ ------------ ------------
Total other liabilities 10,035,277 9,458,909 7,182,021
------------ ------------ ------------
Total liabilities 269,887,952 256,144,287 228,556,433
------------ ------------ ------------
STOCKHOLDERS' EQUITY
Common stock - authorized, 10,000,000 shares of no
par value; issued and outstanding, 2,569,371, 2,569,371
and 2,566,965 shares in 2001, 2000 and 1999, respectively 16,945,203 16,945,203 16,938,230
Retained earnings (accumulated deficit) 1,908,765 1,322,348 (829,492)
Accumulated other comprehensive income (loss) 601,110 (136,641) (1,179,253)
------------ ------------ ------------
Total stockholders' equity 19,455,078 18,130,910 14,929,485
------------ ------------ ------------
Total liabilities and stockholders' equity $289,343,030 $274,275,197 $243,485,918
============ ============ ============
The accompanying notes are an integral part of these statements.
F-2
FIRST WASHINGTON FINANCIALCORP
Consolidated Statements of Income
For the three months ended For the years ended
March 31, December 31,
--------------------------- ---------------------------
2001 2000 2000 1999
------------ ----------- ----------- -----------
(Unaudited) (Unaudited)
INTEREST INCOME
Loans, including fees $ 3,347,376 $ 2,927,094 $12,592,773 $10,942,061
Investment and mortgage-backed securities 1,441,920 1,256,215 5,307,433 4,501,970
Federal funds sold 110,463 99,058 513,450 267,791
Deposits with banks 8,077 1,623 6,569 6,510
----------- ----------- ----------- -----------
Total interest income 4,907,836 4,283,990 18,420,225 15,718,332
----------- ----------- ----------- -----------
INTEREST EXPENSE
Deposits 2,565,608 1,999,427 9,091,315 7,352,717
Borrowed funds 106,538 82,476 423,428 223,672
----------- ----------- ----------- -----------
Total interest expense 2,672,146 2,081,903 9,514,743 7,576,389
----------- ----------- ----------- -----------
Net interest income 2,235,690 2,202,087 8,905,482 8,141,943
PROVISION FOR LOAN LOSSES 65,000 45,000 255,000 210,000
----------- ----------- ----------- -----------
Net interest income after provision
for loan losses 2,170,690 2,157,087 8,650,482 7,931,943
----------- ----------- ----------- -----------
NON-INTEREST INCOME
Service fees on deposit accounts 285,804 222,679 902,776 844,347
Other service charges and fees 29,785 32,998 105,293 55,618
Net gains on sales of investment and
mortgage-backed securities 20,178 - - -
Fee income on sales of mortgages 23,045 41,955 175,463 389,162
Other 24,613 39,037 242,755 130,132
----------- ----------- ----------- -----------
Total non-interest income 383,425 336,669 1,426,287 1,419,259
----------- ----------- ----------- -----------
NON-INTEREST EXPENSE
Salaries 875,806 809,296 3,371,575 3,261,076
Employee benefits 193,476 178,316 677,955 622,779
Occupancy expense 227,157 240,069 892,259 780,350
Other 590,951 685,460 2,656,811 2,419,121
----------- ----------- ----------- -----------
Total non-interest expense 1,887,390 1,913,141 7,598,600 7,083,326
----------- ----------- ----------- -----------
Income before income tax expense 666,725 580,615 2,478,169 2,267,876
INCOME TAX EXPENSE 80,308 51,608 326,329 333,000
----------- ----------- ----------- ------------
NET INCOME $ 586,417 $ 529,007 $ 2,151,840 $ 1,934,876
=========== =========== =========== ===========
PER SHARE DATA
NET INCOME - BASIC $ 0.23 $ 0.21 $ 0.84 $ 0.75
=========== =========== =========== ===========
NET INCOME - DILUTED $ 0.22 $ 0.20 $ 0.81 $ 0.72
=========== ============== =========== ===========
The accompanying notes are an integral part of these statements.
F-3
FIRST WASHINGTON FINANCIALCORP
Consolidated Statement of Changes in Stockholders' Equity
for the years ended December 31, 2000 and 1999
and the three months ended March 31, 2001 (Unaudited)
Retained Accumulated
earnings other Total
Common (Accumulated comprehensive Comprehensive stockholders'
stock deficit) income (loss) income equity
----------- ------------ ------------- ------------- -------------
Balance at January 1, 1999 $15,098,638 $ (920,046) $ 174,884 $ - $14,353,476
Net income - 1,934,876 - 1,934,876 1,934,876
5% stock dividend (91,431 shares) 1,839,592 (1,844,322) - (4,730)
Other comprehensive income (loss),
net of reclassification adjustments
and taxes - - (1,354,137) (1,354,137) (1,354,137)
-----------
Total comprehensive income - - - $ 580,739 -
----------- ----------- ------------ =========== -----------
Balance at December 31, 1999 16,938,230 (829,492) (1,179,253) 14,929,485
Net income - 2,151,840 - $ 2,151,840 2,151,840
Stock options exercised 10,000 - - - 10,000
Payment on fractional shares for
4 for 3 stock split (3,027) - - - (3,027)
Other comprehensive income, net
of reclassification adjustments
and taxes - - 1,042,612 1,042,612 1,042,612
-----------
Total comprehensive income - - - $ 3,194,452 -
----------- ----------- ------------ =========== -----------
Balance at December 31, 2000 $16,945,203 $ 1,322,348 $ (136,641) $18,130,910
Net income for the three months
ended March 31, 2001 (unaudited) - 586,417 - $ 586,417 586,417
Other comprehensive income, net
of reclassification adjustments
and taxes (unaudited) - - 737,751 737,751 737,751
-----------
Total comprehensive income (unaudited) - - - $ 1,324,168 -
----------- ----------- ------------ =========== -----------
Balance at March 31, 2001 (unaudited) $16,945,203 $ 1,908,765 $ 601,110 $19,455,078
=========== =========== ============ ===========
The accompanying notes are an integral part of this statement.
F-4
FIRST WASHINGTON FINANCIALCORP
Consolidated Statements of Cash Flows
For the three months ended For the years ended
March 31, December 31,
--------------------------- ----------------------------
2001 2000 2000 1999
----------- ------------ ------------ ------------
(Unaudited) (Unaudited)
OPERATING ACTIVITIES
Net income $ 586,417 $ 529,007 $ 2,151,840 $ 1,934,876
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization 140,425 134,306 539,240 428,840
Provision for loan losses 65,000 45,000 255,000 210,000
Gains on sales of investment securities (20,178) - - -
Amortization of premium on investment securities 18,036 22,654 88,886 83,186
Amortization of premium on mortgage-backed securities 23,087 47,567 86,303 134,635
Accretion of discount on investment securities (1,460) (1,753) (6,574) (6,294)
Accretion of discount on mortgage-backed securities (49,162) (43,868) (92,526) (97,325)
Increase in accrued interest receivable 44,110 (21,895) (352,990) (285,254)
Increase (decrease) in other assets (259,216) 274,647 706,398 (2,508,623)
Increase (decrease) in accrued interest payable 16,942 (24,349) 85,121 30,002
Increase (decrease) in other liabilities 42,224 109,995 (84,398) 231,254
----------- ----------- ------------ ------------
Net cash provided by operating activities 606,225 1,071,311 3,376,300 155,297
----------- ----------- ------------ ------------
INVESTING ACTIVITIES
Maturities (purchases) of interest bearing deposits with banks, net - - (383,000) -
Purchases of investment securities available-for-sale (200,803) (2,930,349) (7,937,573) (18,795,390)
Purchases of investment securities held-to-maturity (5,848,672) (999,766) (8,682,744) (1,000,000)
Proceeds from maturities of investment securities available-for-sale 3,807,295 1,200,925 3,622,832 5,883,786
Proceeds from maturities of investment securities held-to-maturity 2,800,000 310,000 735,000 1,939,012
Proceeds from sales of investment securities available-for-sale 595,779 - - -
Purchases of mortgage-backed securities available-for-sale (4,224,245) (2,062,882) (13,041,122) (19,390,400)
Repayments of principal on investment securities available-for-sale 35,302 32,537 3,802,650 6,471,931
Repayments of principal on mortgage-backed securities
available-for-sale 2,839,620 2,255,678 9,948,566 10,077,809
Net increase in loans (6,458,937) (2,297,669) (17,747,366) (21,092,371)
Purchases of premises and equipment (9,298) (1,018,836) (2,546,397) (808,100)
----------- ----------- ------------ ------------
Net cash used in investing activities (6,663,959) (5,510,362) (32,229,154) (36,713,723)
----------- ----------- ----------- ------------
FINANCING ACTIVITIES
Issuance of common stock - - 10,000 -
Payment for fractional shares - - (3,027) (4,730)
Net increase in demand deposits and savings accounts 8,164,861 2,341,013 8,614,039 13,692,701
Net increase in certificates of deposit 5,002,436 1,402,711 16,696,927 22,060,530
Net increase (decrease) in borrowed funds 517,201 1,850,421 2,276,165 (500,000)
----------- ----------- ------------ ------------
Net cash provided by financing activities 13,684,498 5,594,145 27,594,104 35,248,501
----------- ----------- ------------ ------------
Net increase (decrease) in cash and cash equivalents 7,626,764 1,155,094 (1,258,750) (1,309,925)
Cash and cash equivalents, beginning 10,709,870 11,968,620 11,968,620 13,278,545
----------- ----------- ------------ ------------
Cash and cash equivalents, end $18,336,634 $13,123,714 $ 10,709,870 $ 11,968,620
=========== =========== ============ ============
F-5
The accompanying notes are an integral part of these statements.
FIRST WASHINGTON FINANCIALCORP
Notes to Consolidated Financial Statements
Three months ended March 31, 2001 and 2000 (unaudited)
and years ended December 31, 2000 and 1999
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
First Washington FinancialCorp (the Company) was formed to operate as a bank
holding company. Concurrently with its formation in 1998, the Company issued
one share of its common stock in exchange for one share of common stock of
First Washington State Bank (the Bank). The formation of the holding company
called for a conversion of par value from $5.00 to no par value.
The Bank is a New Jersey-chartered commercial bank. The Bank provides
banking services to individual and corporate customers through its eleven
branches in Mercer, Ocean, and Monmouth Counties, New Jersey.
The Bank competes with other banking and financial institutions in its
primary market communities, including financial institutions with resources
substantially greater than its own. Commercial banks, savings banks, savings
and loan associations, and credit unions actively compete for savings and
time deposits, and for types of loans. Such institutions, as well as
consumer finance, insurance, and brokerage firms, may be considered
competitors of the Bank with respect to one or more of the services it
provides.
The Bank is subject to regulations of certain state and federal agencies
and, accordingly, is periodically examined by those regulatory authorities.
As a consequence of the extensive regulation of commercial banking
activities, the Bank's business is particularly susceptible to being
affected by state and federal legislation and regulations.
1. Basis of Financial Statement Presentation
The accounting and reporting policies of the Bank conform with accounting
principles generally accepted in the United States of America and
predominant practices within the banking industry. The accompanying
consolidated financial statements include the accounts of the Bank and its
wholly owned subsidiaries, FWS Holdings, Inc. and Windsor Realty Holdings,
Inc. FWS Holdings, Inc. maintains and manages certain of the Bank's
intangible assets, such as a portion of its investment portfolio. Windsor
Realty Holdings, Inc. owns real estate where the Bank now has or may in the
future have operations. All intercompany balances and transactions have been
eliminated.
The financial statements as of March 31, 2001, and for the three months
ended March 31, 2001 and 2000 are unaudited. In the opinion of management,
all adjustments (consisting only of normal recurring accruals) necessary for
a fair presentation of financial position and results of operations have
been included. The results of operations for the three months ended March
31, 2001 and 2000 are not necessarily indicative of the results that may be
attained for an entire fiscal year.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the balance sheets and the reported amounts of revenues and expenses
during the reporting periods. Therefore, actual results could differ
significantly from those estimates.
The principal estimate that is particularly susceptible to significant
change in the near term relates to the allowance for loan losses. The
evaluation of the adequacy of the allowance for loan losses includes an
analysis of the individual loans and overall risk characteristics and size
of the different loan portfolios, and takes into consideration current
economic and market conditions, the capability of specific borrowers to pay
specific loan obligations, as well as current loan collateral values.
However, actual losses on specific loans, which also are encompassed in the
analysis, may vary from estimated losses.
(Continued)
F-6
FIRST WASHINGTON FINANCIALCORP
Notes to Consolidated Financial Statements
Three months ended March 31, 2001 and 2000 (unaudited)
and years ended December 31, 2000 and 1999
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
1. Basis of Financial Statement Presentation (continued)
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
131, "Disclosures About Segments of an Enterprise and Related Information."
SFAS No. 131 redefines how operating segments are determined and requires
disclosures of certain financial and descriptive information about the
Company's operating segments. Under current conditions, management has
determined that the Company and its subsidiaries operate in one business
segment, community banking.
2. Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities
The Bank accounts for its transfers and servicing financial assets in
accordance with SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," as amended by SFAS No.
127, "Deferral of the Effective Date of Certain Provisions of FASB Statement
No. 125." This statement provides accounting guidance on transfers of
financial assets, servicing of financial assets, and extinguishments of
liabilities.
In September 2000, the Financial Accounting Standards Board issued SFAS No.
140 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," replacing SFAS No. 125. This new statement
revises the standard for accounting and reporting for transfers and
servicing of financial assets and extinguishments of liabilities. The new
standard is based on consistent application of a financial-components
approach that recognizes the financial and servicing assets it controls and
the liabilities it has incurred, derecognizes financial assets when control
has been surrendered and derecognizes liabilities when extinguished. The
standard provides consistent guidelines for distinguishing transfers of
financial assets from transfers that are secured borrowings. The Company
adopted this new standard on March 31, 2001 and it did not have a material
impact upon the Company's consolidated financial statements.
3. Financial Instruments
The Bank accounts for its financial instruments in accordance with SFAS No.
107, "Disclosures about Fair Value of Financial Instruments," which requires
all entities to disclose the estimated fair value of their assets and
liabilities considered to be financial instruments. Financial instruments
requiring disclosure consist primarily of investment securities, loans, and
deposits.
4. Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts due from banks, and
federal funds sold. Generally, federal funds are purchased and sold for
one-day periods.
Cash paid during the period and year for interest and income taxes are as
follows:
Three months ended Year ended
March 31, December 31,
--------------------------- ---------------------------
2001 2000 2000 1999
----------- ----------- ----------- -----------
Interest $ 2,545,734 $ 2,067,069 $ 9,429,622 $ 7,546,387
Income taxes $ 120,000 $ 44,230 $ 466,920 $ 486,400
(Continued)
F-7
FIRST WASHINGTON FINANCIALCORP
Notes to Consolidated Financial Statements
Three months ended March 31, 2001 and 2000 (unaudited)
and years ended December 31, 2000 and 1999
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
5. Investment and Mortgage-Backed Securities
The Bank accounts for its investment and mortgage-backed securities in
accordance with SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." This standard requires investments in securities to
be classified in one of three categories: held-to-maturity, trading, or
available-for-sale. Debt securities that the Bank has the positive intent
and ability to hold to maturity are classified as held-to-maturity and are
reported at amortized cost. As the Bank does not engage in security trading,
the balance of its debt securities and any equity securities are classified
as available-for-sale. Net unrealized gains and losses for such securities,
net of tax, are required to be recognized as a separate component of
stockholders' equity and excluded from the determination of net income.
In June 1998, the SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued. It was amended in June, 1999 by SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133," and in June 2000,
by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities," (collectively SFAS No. 133). SFAS No. 133 requires that
entities recognize all derivatives as either assets or liabilities in the
statement of financial condition and measure those instruments at fair
value. Under SFAS No. 133 an entity may designate a derivative as a hedge of
exposure to either changes in: (a) fair value of a recognized asset or
liability or firm commitment, (b) cash flows of a recognized or forecasted
transaction, or (c) foreign currencies of a net investment in foreign
operations, firm commitments, available-for-sale securities or a forecasted
transaction. Depending upon the effectiveness of the hedge and/or the
transaction being hedged, any changes in the fair value of the derivative
instrument is either recognized in earnings in the current year, deferred to
future periods, or recognized in other comprehensive income. Changes in the
fair value of all derivative instruments not recognized as hedge accounting
are recognized in current year earnings. SFAS No. 133 is required for all
fiscal quarters or fiscal years beginning after June 15, 2000. The Company
adopted SFAS No. 133 effective July 1, 2000. No adjustment was required as a
result of the change in accounting principle.
SFAS No. 119 "Disclosure About Derivative Financial Instruments and Fair
Value of Financial Instruments requires disclosures about financial
instruments, which are defined as futures, forwards, swap and option
contracts and other financial instruments with similar characteristics. On
balance sheet receivables and payables are excluded from this definition.
The Company did not hold any derivative financial instruments, as defined by
SFAS No. 119, at March 31, 2001, December 31, 2000 or 1999.
6. Loans and Allowance for Loan Losses
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at their
outstanding principal adjusted for any charge-offs, the allowance for loan
losses, and any deferred fees or costs on originated loans. Interest on
loans is accrued and credited to operations based upon the principal amounts
outstanding. The allowance for loan losses is established through a
provision for possible loan losses charged to expenses. Loans are charged
against the allowance for loan losses when management believes that the
collectibility of the principal is unlikely. The allowance is an amount that
management believes will be adequate to absorb loan losses on existing loans
that may become uncollectible based on evaluations of the collectibility of
loans and prior loan loss experience. The evaluations take into
consideration such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problem loans, and
current economic conditions that may affect the borrower's ability to pay.
(Continued)
F-8
FIRST WASHINGTON FINANCIALCORP
Notes to Consolidated Financial Statements
Three months ended March 31, 2001 and 2000 (unaudited)
and years ended December 31, 2000 and 1999
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Accrual of interest is discontinued on a loan when principal and interest
become 90 days or more past due and when management believes, after
considering economic and business conditions and collection efforts, that
the borrower's financial condition is such that collection of interest is
doubtful. Once a loan is placed on non-accrual status, interest previously
accrued and uncollected is charged to operations and interest is included in
income thereafter only to the extent actually received in cash.
The Bank accounts for its impaired loans in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," as amended by SFAS No.
118, "Accounting by Creditors for Impairment of a Loan - Income Recognition
and Disclosures." This standard requires that a creditor measure impairment
based on the present value of expected future cash flows discounted at the
loan's effective interest rate, except that as a practical expedient, a
creditor may measure impairment based on a loan's observable market price,
or the fair value of the collateral if the loan is collateral dependent.
Regardless of the measurement method, a creditor must measure impairment
based on the fair value of the collateral when the creditor determines that
foreclosure is probable.
7. Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is charged to operations on a straight-line basis over the
estimated useful lives of the assets.
8. Income Taxes
Under the liability method specified by SFAS No. 109, deferred tax assets
and liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities as measured by the enacted
tax rates which will be in effect when these differences reverse. Deferred
tax expense is the result of changes in deferred tax assets and liabilities.
The Company and its Subsidiaries file a consolidated federal income tax
return and the amount of income tax expense or benefit is computed and
allocated on a separate return basis.
9. Earnings Per Share
The Company follows the provisions of SFAS No. 128, "Earnings Per Share,"
which eliminates primary and fully diluted earnings per share (EPS) and
requires presentation of basic and diluted EPS in conjunction with the
disclosure of the methodology used in computing such EPS. Basic EPS excludes
dilution and is computed by dividing income available to common shareholders
by the weighted average common shares outstanding during the period. Diluted
EPS takes into account the potential dilution that could occur if securities
or other contracts to issue common stock were exercised and converted into
common stock.
EPS is computed based on the weighted average number of shares of common
stock outstanding, after giving retroactive effect to a 5% stock dividend
declared on August 11, 1999 and a 4-for-3 stock split declared on September
13, 2000.
10. Advertising Costs
The Company expenses advertising costs as incurred.
(Continued)
F-9
FIRST WASHINGTON FINANCIALCORP
Notes to Consolidated Financial Statements
Three months ended March 31, 2001 and 2000 (unaudited)
and years ended December 31, 2000 and 1999
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
11. Stock Options
The Company accounts for its stock options under SFAS No. 123, "Accounting
for Stock-Based Compensation." The standard contains a fair value-based
method for valuing stock-based compensation that entities may use, and
measures compensation cost at the grant date based on the fair value of the
award. Compensation is then recognized over the service period, which is
usually the vesting period. Alternatively, the standard permits entities to
continue accounting for employee stock options and similar equity
instruments under Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees." Entities that continue to
account for stock options using APB Opinion No. 25 are required to make pro
forma disclosures of net income and earnings per share, as if the fair
value-based method of accounting defined in SFAS No. 123 had been applied.
The Company's stock option plans are accounted for under APB Opinion No. 25.
All stock option information has been revised to give retroactive effect to
a 5% stock dividend declared on August 11, 1999 and a 4-for-3 stock split
declared on September 13, 2000.
12. Comprehensive Income
The Company follows SFAS No. 130, "Reporting Comprehensive Income." This
standard established new standards for reporting comprehensive income which
includes net income as well as certain other items which result in a change
to equity during the period.
The income tax effects allocated to comprehensive income (loss) is as
follows for the following periods ended:
March 31, 2001
----------------------------------------
Before tax Tax Net of tax
amount expense amount
----------- -------------------------
(Unaudited)
Unrealized gains on securities
Unrealized holding gains (losses) arising during period $ 1,154,839 $ (403,972) $ 750,867
Less reclassification adjustment for gains
realized in net income (20,178) 7,062 (13,116)
----------- ---------- -----------
Other comprehensive income (loss), net $ 1,134,661 $ (396,910) $ 737,751
========== ========== ===========
December 31, 2000
---------------------------------------
Before tax Tax Net of tax
amount expense amount
------------ -------------------------
Unrealized gains on securities
Unrealized holding gains (losses) arising during period $ 1,618,705 $ (576,093) $ 1,042,612
Less reclassification adjustment for gains
realized in net income - - -
----------- ---------- -----------
Other comprehensive income (loss), net $ 1,618,705 $ (576,093) $ 1,042,612
=========== ========== ===========
(Continued)
F-10
FIRST WASHINGTON FINANCIALCORP
Notes to Consolidated Financial Statements
Three months ended March 31, 2001 and 2000 (unaudited)
and years ended December 31, 2000 and 1999
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
December 31, 1999
---------------------------------------
Before tax Tax Net of tax
amount benefit amount
------------ -------------------------
Unrealized losses on securities
Unrealized holding gains (losses) arising during period $(2,083,288) $ 729,151 $(1,354,137)
Less reclassification adjustment for gains
realized in net income - - -
----------- --------- -----------
Other comprehensive income (loss), net $(2,083,288) $ 729,151 $(1,354,137)
=========== ========= ===========
13. Reclassifications
Certain 1999 amounts have been reclassified to conform to the 2000
presentation.
NOTE B - INVESTMENT SECURITIES
The amortized cost, unrealized gains and losses, and fair value of the
Bank's available-for-sale and held-to-maturity investment securities are as
follows:
March 31, 2001
-------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
----------- ---------- ----------- ------------
(Unaudited)
Investment securities available-for-sale
U.S. Government and agencies securities $ 5,836,839 $ 69,657 $ (4,341) $ 5,902,155
Federal Home Loan Bank stock 878,200 - - 878,200
State and municipal obligations 25,075,856 468,679 (10,142) 25,534,393
Corporate securities 80,000 1,937 - 81,937
Other 2,757,595 4,513 - 2,762,108
----------- ---------- ----------- -----------
$34,628,490 $ 544,786 $ (14,483) $35,158,793
=========== ========== =========== ===========
Investment securities held-to-maturity
U.S. Government and agency securities $ 9,041,695 $ 129,352 $ (1,710) $ 9,169,337
State and municipal obligations 7,965,050 208,153 - 8,173,203
----------- ---------- ----------- -----------
$17,006,745 $ 337,505 $ (1,710) $17,342,540
=========== ========== =========== ===========
(Continued)
F-11
FIRST WASHINGTON FINANCIALCORP
Notes to Consolidated Financial Statements
Three months ended March 31, 2001 and 2000 (unaudited)
and years ended December 31, 2000 and 1999
NOTE B - INVESTMENT SECURITIES - Continued
December 31, 2000
-------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
------------ ---------- ----------- ------------
Investment securities available-for-sale
U.S. Government and agencies securities $ 8,240,920 $ 28,123 $ (12,290) $ 8,256,753
Federal Home Loan Bank stock 799,700 - - 799,700
State and municipal obligations 26,718,558 139,015 (186,466) 26,671,107
Corporate securities 80,000 - - 80,000
Other 2,968,246 1,065 (863) 2,968,448
------------ ---------- ----------- ------------
$38,807,424 $ 168,203 $ (199,619) $ 38,776,008
========== ========== =========== ============
Investment securities held-to-maturity
U.S. Government and agency securities $ 6,276,061 $ 64,410 $ - $ 6,340,471
State and municipal obligations 7,681,585 105,903 - 7,787,488
------------ ---------- ----------- ------------
$ 13,957,646 $ 170,313 $ - $ 14,127,959
============ ========== =========== ============
December 31, 1999
-------------------------------------------------------------
Gross Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
------------ ---------- ----------- ------------
Investment securities available-for-sale
U.S. Government and agencies securities $ 4,642,078 $ 850 $ (77,129) $ 4,565,799
Federal Home Loan Bank stock 622,500 - - 622,500
State and municipal obligations 31,113,805 - (971,547) 30,142,258
Corporate securities 12,000 - - 12,000
Other 1,904,950 - (4,617) 1,900,333
------------ ---------- ----------- ------------
$ 38,295,333 $ 850 $(1,053,293) $ 37,242,890
============ ========== =========== ============
Investment securities held-to-maturity
U.S. Government and agencies securities $ 2,395,198 $ 5,234 $ (80,131) $ 2,320,301
State and municipal obligations 3,690,793 - (8,832) 3,681,961
------------ ---------- ----------- ------------
$ 6,085,991 $ 5,234 $ (88,963) $ 6,002,262
============ ========== =========== ============
Realized gains on sales of investment securities available-for-sale were
approximately 20,000 for the three months ended March 31, 2001 and $-0- for
the three months ended March 31, 2000, the years ended December 31, 2000 and
1999, respectively.
The amortized cost and fair value of the Bank's investment securities at
March 31, 2001 and December 31, 2000, by contractual maturity, are shown
below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
(Continued)
F-12
FIRST WASHINGTON FINANCIALCORP
Notes to Consolidated Financial Statements
Three months ended March 31, 2001 and 2000 (unaudited)
and years ended December 31, 2000 and 1999
NOTE B - INVESTMENT SECURITIES - Continued
March 31, 2001
------------------------------------------------------------
Available-for-sale Held-to-maturity
---------------------------- ---------------------------
Amortized Fair Amortized Fair
cost value cost value
----------- ----------- ----------- -----------
(Unaudited)
Investment securities
Due in one year or less $ 6,206,394 $ 6,240,420 $ 3,809,306 $ 3,839,827
Due in one year to five years 10,926,607 11,146,751 9,427,710 9,643,298
Due in five years to ten years 13,173,607 13,436,154 2,551,296 2,620,674
Due after ten years 3,443,682 3,457,268 1,218,433 1,238,741
----------- ----------- ----------- -----------
Equity securities 878,200 878,200 - -
----------- ----------- ----------- -----------
$34,628,490 $35,158,793 $17,006,745 $17,342,540
=========== =========== =========== ===========
December 31, 2000
------------------------------------------------------------
Available-for-sale Held-to-maturity
---------------------------- ---------------------------
Amortized Fair Amortized Fair
cost value cost value
----------- ----------- ----------- -----------
Investment securities
Due in one year or less $ 8,093,560 $ 8,090,677 $ 4,229,658 $ 4,240,067
Due in one year to five years 8,866,850 8,894,122 5,120,145 5,175,803
Due in five years to ten years 15,409,423 15,416,007 4,308,540 4,400,202
Due after ten years 5,637,891 5,575,502 299,303 311,887
----------- ----------- ----------- -----------
Equity securities 799,700 799,700 - -
----------- ----------- ----------- -----------
$38,807,424 $38,776,008 $13,957,646 $14,127,959
=========== =========== =========== ===========
Investment securities having a carrying value of approximately $7,923,000
and $338,000 as of December 31, 2000 and 1999, respectively, were pledged to
secure public funds or other purposes required or permitted by law.
NOTE C - MORTGAGE-BACKED SECURITIES
The amortized cost, unrealized gains and losses, and fair value of the
Bank's mortgage-backed securities available-for-sale are as follows:
March 31, 2001
------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
----------- ----------- ----------- -----------
(Unaudited)
Mortgage-backed securities
available-for-sale
Federal National Mortgage Association $28,927,704 $ 308,224 $ (42,548) $29,193,380
Federal Home Loan Mortgage
Corporation 11,668,594 101,079 (17,526) 11,752,147
Government National Mortgage
Association 8,477,967 46,825 (6,616) 8,518,176
----------- ----------- ----------- -----------
$49,074,265 $ 456,128 $ (66,690) $49,463,703
=========== =========== =========== ===========
(Continued)
F-13
FIRST WASHINGTON FINANCIALCORP
Notes to Consolidated Financial Statements
Three months ended March 31, 2001 and 2000 (unaudited)
and years ended December 31, 2000 and 1999
NOTE C - MORTGAGE-BACKED SECURITIES - Continued
December 31, 2000
------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
----------- ----------- ----------- -----------
Mortgage-backed securities
available-for-sale
Federal National Mortgage Association $27,831,614 $ 126,608 $ (237,486) $27,720,736
Federal Home Loan Mortgage
Corporation 11,951,283 56,601 (74,116) 11,933,768
Government National Mortgage
Association 7,956,308 11,154 (66,265) 7,901,197
----------- ----------- ----------- -----------
$47,739,205 $ 194,363 $ (377,867) $47,555,701
=========== =========== =========== ===========
December 31, 1999
------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
----------- ----------- ----------- -----------
Mortgage-backed securities
available-for-sale
Federal National Mortgage Association $20,950,802 $ - $ (293,407) $20,657,395
Federal Home Loan Mortgage
Corporation 17,330,404 - (421,001) 16,909,403
Government National Mortgage
Association 6,365,443 - (66,774) 6,298,669
----------- ----------- ----------- -----------
$44,646,649 $ - $ (781,182) $43,865,467
=========== =========== =========== ===========
The amortized cost and fair value of the Bank's mortgage-backed securities
at March 31, 2001 and December 31, 2000, by contractual maturity, are shown
below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
March 31, 2001 December 31, 2000
------------------------------------------------------------
Amortized Fair Amortized Fair
cost value cost value
----------- ----------- ----------- -----------
(Unaudited)
Mortgage-backed securities available-for-sale
Due in one year or less $ 71,506 $ 71,466 $ 266,014 $ 264,696
Due in one year to five years 1,801,703 1,820,824 955,467 948,564
Due in five years to ten years 17,156,853 17,310,070 15,214,717 15,135,473
Due after ten years 30,044,203 30,261,343 31,303,007 31,206,968
----------- ----------- ----------- -----------
$49,074,265 $49,463,703 $47,739,205 $47,555,701
=========== =========== =========== ===========
(Continued)
F-14
FIRST WASHINGTON FINANCIALCORP
Notes to Consolidated Financial Statements
Three months ended March 31, 2001 and 2000 (unaudited)
and years ended December 31, 2000 and 1999
NOTE D - LOANS
Loans are as follows:
December 31,
March 31, ----------------------------
2001 2000 1999
------------ ------------ ------------
(Unaudited)
Commercial $25,790,075 $ 25,118,315 $ 24,558,824
Real estate - residential 13,816,883 12,664,559 12,366,559
Real estate - commercial 81,519,614 76,493,496 65,613,352
Consumer 2,546,671 2,450,945 1,945,659
Installment - 1st and 2nd mortgages 19,252,850 19,966,713 18,177,825
Home equity 18,080,880 17,829,552 14,120,807
------------ ------------ ------------
161,006,973 154,523,580 136,783,026
Deferred loan fees 181,498 202,034 222,008
Allowance for possible loan losses (1,804,125) (1,865,205) (1,636,991)
------------ ------------ ------------
Loans, net $159,384,346 $152,860,409 $135,368,043
============ ============ ============
Non-performing assets include loans past due 90 days or more, impaired loans
and other real estate owned. The aggregate amount of these assets at March
31, 2001, December 31, 2000 and 1999, was approximately $240,000, $266,000
and $7,300, respectively.
In the ordinary course of business, the Bank has granted loans to
stockholders, officers, directors, and their affiliates. All loan
transactions entered into between the Bank and such related parties were
made on the same terms and conditions as transactions with all other
parties. In management's opinion, such loans are consistent with sound
banking practices and are within applicable regulatory lending limitations.
The aggregate approximate amount of these loans outstanding at December 31,
2000 and 1999, was $4,128,000 and $2,453,000, respectively. New loans
amounted to approximately $2,409,000 and $874,000, and repayments amounted
to approximately $734,000 and $825,000 during the years ended December 31,
2000 and 1999, respectively.
Changes in the allowance for possible loan losses were as follows:
Three months ended Year ended
March 31, December 31,
--------------------------- ---------------------------
2001 2000 2000 1999
------------ ------------ ------------ ------------
(Unaudited)
Balance at beginning of period $ 1,865,205 $ 1,636,991 $ 1,636,991 $ 1,466,145
Provision charged to expense 65,000 45,000 255,000 210,000
Net charge-offs (126,080) (1,548) (26,786) (39,154)
----------- ----------- ----------- -----------
Balance at end of period $ 1,804,125 $ 1,680,443 $ 1,865,205 $ 1,636,991
=========== =========== =========== ===========
F-15
FIRST WASHINGTON FINANCIALCORP
Notes to Consolidated Financial Statements
Three months ended March 31, 2001 and 2000 (unaudited)
and years ended December 31, 2000 and 1999
NOTE E - PREMISES AND EQUIPMENT
Premises and equipment are as follows:
December 31,
Estimated March 31, ------------------------
useful life 2001 2000 1999
----------- ---------- --------- -------
(Unaudited)
Land Indefinite $ 1,708,525 $ 1,708,525 $ 889,207
Land and building improvements 2-15 years 1,543,876 1,543,876 1,351,072
Building 40 years 3,190,976 3,190,976 2,165,222
Furniture and equipment 5 years 2,657,333 2,648,035 2,139,514
---------- ---------- -----------
9,100,710 9,091,412 6,545,015
Less accumulated depreciation and amortization (2,776,366) (2,635,941) (2,096,701)
---------- ---------- -----------
$ 6,324,344 $ 6,455,471 $ 4,448,314
=========== =========== ===========
Depreciation and amortization charged to operations amounted to
approximately $140,000 and $134,000 for the three months ended March 31,
2001 and 2000, respectively, and $539,000 and $429,000 for the years ended
December 31, 2000 and 1999, respectively.
NOTE F - DEPOSITS
The schedule of maturities of certificates of deposit is as follows:
March 31, December 31,
2001 2000
------------ ------------
(Unaudited)
2001 $102,458,279 $121,840,372
2002 30,042,512 11,268,910
2003 7,421,683 3,899,759
2004 2,679,980 2,004,192
2005 1,863,474 1,630,539
2006 1,180,280 -
------------ ------------
$145,646,208 $140,643,772
============ ============
NOTE G - FEDERAL HOME LOAN BANK ADVANCES
At March 31, 2001 and December 31, 2000, the Bank had $2,500,000 of advances
due to the Federal Home Loan Bank (FHLB). These advances mature as follows
$500,000 in 2001; $500,000 in 2002; $500,000 in 2004; $1,000,000 in 2007.
The weighted average interest rate was 6.39%.
At December 31, 1999, the Bank had $3,000,000 of advances due to the FHLB.
The weighted average interest rate was 6.33%.
F-16
FIRST WASHINGTON FINANCIALCORP
Notes to Consolidated Financial Statements
Three months ended March 31, 2001 and 2000 (unaudited)
and years ended December 31, 2000 and 1999
NOTE H - OTHER EXPENSE
The components of other expense are detailed as follows:
Three months ended Year ended
March 31, December 31,
--------------------------- ---------------------------
2001 2000 2000 1999
------------ ------------ ------------ ------------
(Unaudited)
Furniture and equipment $ 144,061 $ 148,009 $ 551,855 $ 455,080
Data processing 63,122 81,616 269,655 268,201
FDIC premiums 11,346 11,335 44,982 21,778
Stationery and printing 43,671 52,487 255,771 180,802
Professional and other fees 40,468 59,120 510,603 466,410
Other 288,283 332,893 1,023,945 1,026,850
--------- --------- ----------- -----------
$ 590,951 $ 685,460 $ 2,656,811 $ 2,419,121
========= ========= =========== ===========
NOTE I - INCOME TAXES
Income tax expense (benefit) is comprised of the following:
Three months ended Year ended
March 31, December 31,
-------------------------- --------------------------
2001 2000 2000 1999
---------- --------- ---------- ----------
(Unaudited)
Federal
Current $ 52,265 $ 76,203 $ 481,851 $ 444,839
Deferred 26,992 (25,271) (159,795) (170,691)
--------- -------- --------- ---------
79,257 50,932 322,056 274,148
--------- -------- --------- ---------
State
Current 27,702 17,817 112,623 96,912
Deferred (26,651) (17,141) (108,350) (38,060)
--------- -------- --------- ---------
1,051 676 4,273 58,852
--------- -------- --------- ---------
$ 80,308 $ 51,608 $ 326,329 $ 333,000
========= ======== ========= =========
A reconciliation of the difference between the effective rate and statutory
rate is as follows:
Three months ended Year ended
March 31, December 31,
------------------------- --------------------------
2001 2000 2000 1999
---------- -------- ---------- ----------
(Unaudited)
Federal income tax at statutory rate $ 226,687 $197,409 $ 842,578 $ 771,078
Tax-exempt interest (126,800) (126,753) (493,506) (498,227)
State income taxes, net of federal income
tax benefit 11,000 9,580 74,331 63,962
Other (30,579) (28,628) (97,074) (3,813)
--------- -------- --------- ---------
$ 80,308 $ 51,608 $ 326,329 $ 333,000
========= ======== ========= =========
(Continued)
F-17
FIRST WASHINGTON FINANCIALCORP
Notes to Consolidated Financial Statements
Three months ended March 31, 2001 and 2000 (unaudited)
and years ended December 31, 2000 and 1999
NOTE I - INCOME TAXES - Continued
Net deferred tax assets and liabilities consist of the following:
December 31,
March 31, ---------------------------
2001 1999 2000
----------- ----------- -----------
(Unaudited)
Deferred tax assets
Provision for loan losses $ 719,357 $ 719,357 $ 619,799
Other, primarily state net operating loss carryforwards 117,633 117,974 4,345
Basis of premises and equipment 82,292 82,292 45,263
Unrealized loss on securities available-for sale - 78,279 654,372
Alternative minimum tax credit 169,300 169,300 84,623
----------- ----------- -----------
1,088,582 1,167,202 1,408,402
----------- ---------- -----------
Deferred tax liabilities
Unrealized gain on securities available-for-sale (318,631) - -
Deferred loan costs (119,600) (119,600) (117,570)
Discount accretion (143,880) (143,880) (79,162)
----------- ----------- -----------
(582,111) (263,480) (196,732)
----------- ----------- -----------
Net deferred tax asset $ 506,471 $ 903,722 $ 1,211,670
=========== =========== ===========
NOTE J - EARNINGS PER SHARE
The following table illustrates the required disclosure of the
reconciliation of the numerators and denominators of the basic and diluted
EPS computations:
For the three months ended March 31, 2001
-----------------------------------------------
Income Shares Per share
(numerator) (denominator) amount
----------- ------------- -----------
(Unaudited)
Basic EPS
Income available to common stockholders $ 586,417 2,569,371 $ 0.23
Effect of dilutive securities
Options - 100,249 (0.01)
--------- --------- ------
Diluted EPS
Income available to common stockholders
plus assumed conversions $ 586,417 2,669,620 $ 0.22
========= ========= ======
122,567 options to purchase shares of common stock with exercise prices
ranging from $16.00 to $21.00 per share were not included in the computation
of diluted EPS for the three months ended March 31, 2001 because the
exercise price was greater than the average market price of the stock.
(Continued)
F-18
FIRST WASHINGTON FINANCIALCORP
Notes to Consolidated Financial Statements
Three months ended March 31, 2001 and 2000 (unaudited)
and years ended December 31, 2000 and 1999
NOTE J - EARNINGS PER SHARE - Continued
For the three months ended March 31, 2000
------------------------------------------
Income Shares Per share
(numerator) (denominator) amount
----------- ------------- ---------
(Unaudited)
Basic EPS
Income available to common stockholders $ 529,007 2,566,965 $ 0.21
Effect of dilutive securities
Options - 94,618 (0.01)
--------- --------- ------
Diluted EPS
Income available to common stockholders
plus assumed conversions $ 529,007 2,661,583 $ 0.20
========= ========= ======
122,311 options to purchase shares of common stock with exercise prices
ranging from $16.00 to $21.00 per share were not included in the computation
of diluted EPS for the three months ended March 31, 2000 because the
exercise price was greater than the average market price of the stock.
For the year ended December 31, 2000
--------------------------------------------
Income Shares Per share
(numerator) (denominator) amount
----------- ------------- ---------
Basic EPS
Income available to common stockholders $ 2,151,840 2,568,231 $ 0.84
Effect of dilutive securities
Options - 99,893 (0.03)
----------- --------- -------
Diluted EPS
Income available to common stockholders
plus assumed conversions $ 2,151,840 2,668,124 $ 0.81
=========== ========= =======
126,054 options to purchase shares of common stock with exercise prices
ranging from $16.00 to $21.00 per share were not included in the computation
of diluted EPS for the year ended December 31, 2000 because the exercise
price was greater than the average market price of the common stock.
For the year ended December 31, 1999
----------------------------------------------
Income Shares Per share
(numerator) (denominator) amount
----------- ------------- ---------
Basic EPS
Income available to common stockholders $ 1,934,876 2,566,965 $ 0.75
Effect of dilutive securities
Options - 104,457 (0.03)
----------- --------- -------
Diluted EPS
Income available to common stockholders
plus assumed conversions $ 1,934,876 2,671,422 $ 0.72
=========== ========= =======
(Continued)
F-19
FIRST WASHINGTON FINANCIALCORP
Notes to Consolidated Financial Statements
Three months ended March 31, 2001 and 2000 (unaudited)
and years ended December 31, 2000 and 1999
NOTE J - EARNINGS PER SHARE - Continued
84,402 options to purchase shares of common stock with exercise prices
ranging from $16.00 to $17.06 per share were not included in the computation
of diluted EPS for the year ended December 31, 1999 because the exercise
price was greater than the average market price of the common stock.
NOTE K - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS
OF CREDIT RISK
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements
of credit and interest rate risk in excess of the amount recognized in the
consolidated balance sheets. The Bank's exposure to credit loss in the event
of non-performance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit is represented by
the contractual amount of those instruments. The Bank uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
The Bank had the following approximate off-balance-sheet financial
instruments whose contract amounts represent credit risk at the dates
indicated:
December 31,
March 31, ---------------------------
2001 2000 1999
----------- ----------- -----------
(Unaudited)
Commitments to extend credit $66,365,000 $48,558,000 $38,660,000
Standby letters of credit $ 2,197,000 $ 2,016,000 $ 2,191,000
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Bank upon extension of
credit, is based on management's credit evaluation of the customer.
Collateral held varies but may include Small Business Administration
guarantees, deposit accounts at the Bank, marketable securities, personal or
commercial real estate, accounts receivable, inventory, and equipment.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support contracts entered into by customers. Most
guarantees extend for one year. The credit risk involved in issuing letters
of credit is essentially the same as that involved in extending loan
facilities to customers. The Bank holds collateral to support these
commitments.
The Bank provides credit services, predominantly to small businesses and
their owners, located within Mercer, Monmouth, and Ocean Counties, New
Jersey. Substantially all of the loans outstanding at March 31, 2001,
December 31, 2000 and 1999, are real estate related and the collateral is
primarily located within the above-mentioned area. Although the Bank has a
diversified loan portfolio, a substantial portion of its debtors' ability to
honor their contracts is dependent upon the economic stability of this
region.
F-20
FIRST WASHINGTON FINANCIALCORP
Notes to Consolidated Financial Statements
Three months ended March 31, 2001 and 2000 (unaudited)
and years ended December 31, 2000 and 1999
NOTE L - LEASE COMMITMENTS
The Bank has entered into several non-cancelable operating lease agreements
for its banking facilities. Additionally, the Bank is responsible for pro
rata operating expense escalations. The approximate minimum annual rental
payments at December 31, 2000, under these leases are as follows:
2001 $ 329,000
2002 341,000
2003 353,000
2004 365,000
2005 377,000
Thereafter 2,045,000
-----------
$ 3,810,000
NOTE M - FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 requires disclosure of the estimated fair value of an entity's
assets and liabilities considered to be financial instruments. For the Bank,
as for most financial institutions, the majority of its assets and
liabilities are considered financial instruments as defined in SFAS No. 107.
However, many such instruments lack an available trading market, as
characterized by a willing buyer and seller engaging in an exchange
transaction. Therefore, the Bank had to use significant estimations and
present value calculations to prepare this disclosure, as required by SFAS
No. 107. Accordingly, the information presented below does not purport to
represent the aggregate net fair value of the Bank.
Changes in the assumptions or methodologies used to estimate fair values may
materially affect the estimated amounts. Also, management is concerned that
there may not be reasonable comparability between institutions due to the
wide range of permitted assumptions and methodologies in the absence of
active markets. This lack of uniformity gives rise to a high degree of
subjectivity in estimating financial instrument fair values.
Estimated fair values have been determined by the Bank using the best
available data and an estimation methodology suitable for each category of
financial institutions. The estimation methodologies used, the estimated
fair values, and recorded book balances at December 31, 2000 and 1999,
respectively, are outlined below.
For cash and due from banks, federal funds sold, and interest bearing
deposits with banks, the recorded book value of approximately $11,186,000
and $12,062,000 approximates fair value at December 31, 2000 and 1999,
respectively. The estimated fair values of investment securities are based
on quoted market prices, if available. Estimated fair values are based on
quoted market prices of comparable instruments if quoted market prices are
not available.
The fair values of loans are estimated based on a discounted cash flow
analysis using interest rates currently offered for loans with similar terms
to borrowers of similar credit quality. The carrying value of accrued
interest approximates fair value.
(Continued)
F-21
FIRST WASHINGTON FINANCIALCORP
Notes to Consolidated Financial Statements
Three months ended March 31, 2001 and 2000 (unaudited)
and years ended December 31, 2000 and 1999
NOTE M - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
2000 1999
----------------------------- -----------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
------------ ------------ ------------ ------------
Investment and mortgage-backed
securities $100,289,000 $100,460,000 $ 87,194,000 $ 87,111,000
Loans $154,726,000 $155,026,000 $137,005,000 $134,032,000
The estimated fair values of demand deposits (i.e., interest and
non-interest bearing checking accounts, passbook savings, and certain types
of money market accounts) are, by definition, equal to the amount payable on
demand at the reporting date (i.e., their carrying amounts). The carrying
amounts of variable rate, fixed-term money market accounts, and certificates
of deposit approximate their fair values at the reporting date. The fair
values of fixed-rate certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered to a schedule of aggregated expected monthly time deposit
maturities. The carrying amount of accrued interest payable approximates its
fair value.
2000 1999
----------------------------- -----------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
------------ ------------ ------------ ------------
Time deposits $140,644,000 $139,143,000 $123,947,000 $123,959,000
The fair values securities under agreements to repurchase totaling
approximately $5,755,000 and $2,979,000 and of the FHLB advances totaling
approximately $2,500,000 and $3,000,000 are estimated to approximate their
recorded book balances at December 31, 2000 and 1999, respectively.
There was no material difference between the notional amount and the
estimated fair value of off-balance-sheet items which totaled approximately
$50,574,000 and $40,851,000 at December 31, 2000 and 1999, respectively, and
primarily comprise unfunded loan commitments which are generally priced at
market at the time of funding.
NOTE N - STOCK OPTION PLANS
The Board of Directors adopted the First Washington State Bank 1997 Stock
Option Plan (the 1997 Stock Option Plan). Participation in the Plan is
limited to directors and key employees of the Company and any of its
subsidiaries. The Plan provides for the issuance of both Incentive Stock
Options and Non-Qualified Stock Options. The Plan provided for an aggregate
of 332,668 shares of common stock to be issued pursuant to stock options
granted under the Plan. Effective with the approval of the 1997 Stock Option
Plan, all 38,488 options previously granted under the 1991 Stock Option Plan
are now considered granted under the 1997 Stock Option Plan and the 1991
Stock Option Plan was terminated.
In December 1999, the Board of Directors adopted the First Washington
Financial Corp 1999 Stock Option Plan (the Plan). Plan participation is
limited to Directors of the Company and any of its subsidiaries. The Plan
provides for the issuance of both Incentive Stock Options and Non-Qualified
Stock Options. The Plan provides for an aggregate of 66,667 shares of common
stock to be issued pursuant to Stock Options granted under the Plan.
Generally, options will vest at rates varying from 20% per year, (full
vesting after 5 years), except for these options which vested immediately in
the year of grant.
(Continued)
F-22
FIRST WASHINGTON FINANCIALCORP
Notes to Consolidated Financial Statements
Three months ended March 31, 2001 and 2000 (unaudited)
and years ended December 31, 2000 and 1999
NOTE N - STOCK OPTION PLANS - Continued
The Company has adopted only the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." It applies Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations in accounting for its plans and does not recognize
compensation expense for its stock-based compensation plans. Had
compensation cost for the plans been based on the fair value of the options
on the grant date consistent with SFAS No. 123, the Company's net earnings
and earnings per common share would have been reduced to the pro forma
amounts indicated below:
2000 1999
----------- -----------
Net income As reported $ 2,152,000 $ 1,935,000
Pro forma $ 2,115,000 $ 1,416,000
Basic EPS As reported $ 0.84 $ 0.75
Pro forma $ 0.82 $ 0.57
Diluted EPS As reported $ 0.81 $ 0.72
Pro forma $ 0.80 $ 0.53
These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense related
to grants before October 1, 1995. The fair value of these options is
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions: risk-free interest rate of
6.13% and 5.28% in 2000 and 1999, respectively; and expected life of 10 for
both years.
A summary of the status of the Company's fixed stock option plan for the
years ended December 31, 2000 and 1999, and changes during the years ending
on those dates is presented below.
2000 1999
---------------------- -----------------------
Weighted Weighted
average average
exercise exercise
Shares price Shares price
---------- ----------- -------- ---------
Outstanding at beginning of year 285,638 $ 10.40 209,669 $ 8.36
Granted 9,412 17.13 91,420 16.52
Cancelled (666) 16.69 (15,451) 16.36
Exercised (2,406) 4.16 - -
--------- --------
Outstanding at end of year 291,978 $ 10.91 285,638 $ 10.40
======== ======== ======== =======
Options exercisable at year-end 204,218 $ 8.17 185,244 $ 7.16
======== ======== ======== =======
Weighted average fair value of
options granted during the year $ 7.83 $ 6.77
======== =======
(Continued)
F-23
FIRST WASHINGTON FINANCIALCORP
Notes to Consolidated Financial Statements
Three months ended March 31, 2001 and 2000 (unaudited)
and years ended December 31, 2000 and 1999
NOTE N - STOCK OPTION PLANS - Continued
The following table summarizes information concerning options outstanding at
December 31, 2000:
Options outstanding Options exercisable
- ---------------------------------------------------------------------------------------- -------------------
Weighted
average Weighted Weighted
remaining average average
Range of Number contractual exercised Number exercise
exercise prices outstanding life (years) price exercisable price
- --------------------- ----------- ---------------- --------------- ----------- --------------
$ 3.12 35,281 1.69 $ 3.12 35,281 $ 3.12
$ 7.21 - $ 7.63 132,713 6.23 $ 7.25 132,713 $ 7.25
$11.85 - $17.06 122,484 8.50 $ 16.47 36,224 $ 16.47
$21.00 1,500 9.79 $ 21.00 - $ -
--------- -------
291,978 204,218
======== =======
NOTE O - EMPLOYEE BENEFIT PLAN
The Bank has a defined contribution plan 401(k) covering all employees, as
defined under the plan document. Employees may contribute up to 15% of
compensation, as defined under the plan document. The Bank can make
discretionary contributions. The Bank contributed approximately $45,000 and
$31,000 into the plan in 2000 and 1999, respectively, and approximately
$13,000 and $12,000 for the three months ended March 31, 2001 and 2000,
respectively.
NOTE P - REGULATORY MATTERS
State Banking statutes restrict the amount of dividends on capital stock.
Accordingly, no dividends shall be paid by the Bank on its capital stock
unless following the payment of such dividends, the capital stock of the
Bank will be unimpaired, and (1) the Bank will have a surplus of not less
than 50% of its capital, or, if not, (2) the payment of such dividend will
not reduce the surplus of the Bank.
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). As of March 31, 2001 and December 31, 2000,
management believes that the Bank meets all capital adequacy requirements to
which it is subject.
(Continued)
F-24
FIRST WASHINGTON FINANCIALCORP
Notes to Consolidated Financial Statements
Three months ended March 31, 2001 and 2000 (unaudited)
and years ended December 31, 2000 and 1999
NOTE P - REGULATORY MATTERS - Continued
As of March 31, 2001 and December 31, 2000, the most recent notification
from the Federal Deposit Insurance Corporation categorized the Bank as
adequately capitalized under the regulatory framework for prompt corrective
action. To be categorized as adequately capitalized, the Bank must maintain
minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as
set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's
category.
The Company and the Bank's actual capital amounts and ratios are also
presented in the table.
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
------------------------ ------------------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ --------- ------------ --------- ------------ ---------
As of March 31, 2001 (unaudited)
Total capital (to risk-
weighted assets) $20,658,082 10.99% $15,038,784 8.00% $18,798,480 10.00%
Tier I capital (to risk-
weighted assets) 18,853,957 10.03% 7,519,392 4.00% 11,279,088 6.00%
Tier I capital (to
average assets) 18,853,957 6.83% 11,039,037 4.00% 13,798,797 5.00%
As of December 31, 2000
Total capital (to risk-
weighted assets) $20,114,815 11.00% $14,627,025 8.00% $18,283,781 10.00%
Tier I capital (to risk-
weighted assets) 18,249,610 9.98% 7,313,512 4.00% 10,970,268 6.00%
Tier I capital (to
average assets) 18,249,610 6.74% 10,830,019 4.00% 13,537,524 5.00%
As of December 31, 1999
Total capital (to risk-
weighted assets) $17,730,247 10.43% $13,594,087 8.00% $16,992,609 10.00%
Tier I capital (to risk-
weighted assets) 16,093,256 9.47% 6,797,043 4.00% 10,195,565 6.00%
Tier I capital (to
average assets) 16,093,256 6.56% 9,808,555 4.00% 12,260,694 5.00%
F-25
No dealer, salesperson or any other person has been authorized to give 200,000 Shares
information or make any representation not contained in this prospectus in Common Stock
connection with the offer made hereby. If given or made, such information or
representation must not be relied upon as having been authorized by company or
underwriter. This prospectus does not constitute an offer to sell or a FIRST WASHINGTON FINANCIALCORP
solicitation of an offer to buy any of the securities offered hereby in any
jurisdiction to any person to whom it is unlawful to make such offer in such
jurisdiction. Neither the delivery of this prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that there has
been no change in the affairs of the company since the date hereof or that
information contained herein is current as of any time subsequent to such date. P R O S P E C T U S
Until _____________, 2001, all dealers effecting transactions in the common
stock, whether or not participating in this distribution, may be required to
deliver a prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
_______________, 2001
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Article VI of the Corporation's Certificate of Incorporation provides as
follows:
Subject to the following, a director or officer of the Corporation
shall not be personally liable to the Corporation or its shareholders
for damages for breach of any duty owed to the Corporation or its
shareholders. The preceding sentence shall not relieve a director or
officer from liability for any breach of duty based upon an act or
omission (i) in breach of such person's duty of loyalty to the
Corporation or its shareholders, (ii) not in good faith or involving a
knowing violation of law, or (iii) resulting in receipt by such person
of an improper personal benefit. If the New Jersey Business Corporation
Act is amended to authorize corporate action further eliminating or
limiting the personal liability of directors or officers, then the
liability of a director or officer or both of the Corporation shall be
eliminated or limited to the fullest extent permitted by the New Jersey
Business Corporation Act as so amended. Any amendment to this
Certificate of Incorporation, or change in law which authorizes this
paragraph shall not adversely affect any then existing right or
protection of a director or officer of the Corporation.
Article VII of the Corporation's Certificate of Incorporation provides as
follows:
Article VII of the Certificate of Incorporation of the Company provides
that the Company shall indemnify its present and former officers,
directors, employees and agents and persons serving at its request
against expenses, including attorneys' fees, judgments, fines or
amounts paid in settlement incurred in connection with any pending or
threatened civil or criminal proceedings to the fullest extent
permitted by the New Jersey Business Corporation Act. Article VII also
provides that such indemnification shall not exclude any other rights
to indemnification to which a person may otherwise be entitled, and
authorizes the Company to purchase insurance on behalf of any of the
persons enumerated against any liability whether or not the Company
would have the power to indemnify him under the provisions of Article
VII. The New Jersey Business Corporation Act empowers a corporation to
indemnify a corporate agent against his expenses and liabilities
incurred in connection with any proceeding (other than a derivative
lawsuit) involving the corporate agent by reason of his being or having
been a corporate agent if (a) the agent acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and (b) with respect to any criminal
proceeding, the corporate agent had no reasonable cause to believe his
conduct was unlawful. For purposes of the Act, the term "corporate
agent" includes any present or former director, officer, employee or
agent of the corporation, and a person serving as a "corporate agent"
for any other enterprise at the request of the corporation. With
respect to any derivative action, the corporation is empowered to
indemnify a corporate agent against his expenses (but not his
liabilities) incurred in connection with any proceeding involving the
II-1
corporate agent by reason of his being or having been a corporate agent
if the agent acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the corporation.
However, only the court II-1 in which the proceeding was brought can
empower a corporation to indemnify a corporate agent against expenses
with respect to any claim, issue or matter as to which the agent was
adjudged liable for negligence or misconduct. The corporation may
indemnify a corporate agent in a specific case if a determination is
made by any of the following that the applicable standard of conduct
was met: (i) the Board of Directors, or a committee thereof, acting by
a majority vote of a quorum consisting of disinterested directors; (ii)
by independent legal counsel if there is not a quorum of disinterested
directors or if the disinterested quorum empowers counsel to make the
determination; or (iii) by the stockholders. A corporate agent is
entitled to mandatory indemnification to the extent that the agent is
successful on the merits or otherwise in any proceeding, or in defense
of any claim, issue or matter in the proceeding. If a corporation fails
or refuses to indemnify a corporate agent, whether the indemnification
is permissive or mandatory, the agent may apply to a court to grant him
the requested indemnification. In advance of the final disposition of a
proceeding, the corporation may pay an agent's expenses if the agent
agrees to repay the expenses unless it is ultimately determined he is
entitled to indemnification.
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the expenses (other than underwriting
compensation expected to be incurred) in connection with the offering described
in this Registration Statement. All of such amounts (except the SEC Registration
Fee and the NASD Filing Fee) are estimated.
SEC Registration Fee $ 1,500
Printing and Engraving Costs 6,000
Legal Fees and Expenses 50,000
Accounting Fees and Expenses 35,000
Transfer Agent and Registrar Fees and Expenses 2,500
Miscellaneous 5,000
---------
TOTAL $100,000
=========
Item 26. Recent Sales of Unregistered Securities
Other than as described below, there have been no securities of the
Company sold or issued within the past three years that were not registered
under the Securities Act of 1933, as amended (the "Securities Act"): In June of
2000, the Company issued 2,406 shares of Common Stock upon the exercise of stock
options. The aggregate proceeds were $10,000. The transaction was exempt from
registration pursuant to SEC Rule 701.
II-2
Item 27. Exhibits
Exhibits List
-------------
Number Description of Exhibits
- ------ -----------------------
3.1 Certificate of Incorporation of First Washington FinancialCorp,
a New Jersey corporation(1)
3.2 Certificate of Incorporation of First Washington State Bank(1)
3.3 Bylaws of First Washington FinancialCorp(1)
3.4 Bylaws of First Washington State Bank(1)
4.1 Form of Common Stock Certificate(1)
4.2 1997 Stock Option Plan(1)
4.3 1999 Stock Option Plan(1)
5 Opinion of Windels Marx Lane & Mittendorf, LLP(1)
10 Change of Control Agreement between First Washington(1)
FinancialCorp. and C. Herbert Schneider(1)
21 Subsidiaries of the Registrant(1)
23.1 Consent of Windels Marx Lane & Mittendorf, LLP (see Exhibit 5)(1)
23.2 Consent of Grant Thornton, LLP, as auditor to First Washington
FinancialCorp.
24 Power of Attorney(1)
99(a) Form of Subscription Agreement(1)
99(b) Form of Cover Letter(1)
99(c) Form of Question & Answer Brochure(1)
(1) Previously filed.
II-3
Item 28. Undertakings.
A. The undersigned Registrant hereby undertakes:
(1) To file, during any period, in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933, as amended;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in
the volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of the Registration Fee"
table in the effective Registration Statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, as amended, each such post-effective amendment shall be deemed to
be a new Registration Statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To file a post-effective amendment to remove from registration any of the
securities being registered which remain unsold at the conclusion of the
offering.
B. Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-4
C. The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act of 1933 shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new Registration Statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-4a
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
has duly caused this amendment to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Windsor, State of New Jersey, on the
12th day of July, 2001.
FIRST WASHINGTON FINANCIALCORP
/s/ Abraham S. Opatut
---------------------
ABRAHAM S. OPATUT
Chairman of the Board
/s/ Harry Horowitz
------------------
HARRY HOROWITZ
Vice Chairman of the Board
/s/ James N. Corcodilos
-----------------------
JAMES N. CORCODILOS
Director
/s/ James R. Johnson, Jr.
-------------------------
JAMES R. JOHNSON, JR.
Director
/s/ Jerry Kokes
---------------
JERRY KOKES
Director
/s/ Joe J. Mayes
----------------
JOE J. MAYES
Director
/s/ C. Herbert Schneider
------------------------
C. HERBERT SCHNEIDER
President, Chief Executive Officer
and Director
(Principal Executive Officer)
/s/ Ross Wishnick
-----------------
ROSS WISHNICK
Director
/s/ Lewis H. Foulke
-------------------
LEWIS H. FOULKE
Vice President - Treasurer
(Principle Financial
and Accounting Officer)
II-5