SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______________ to ____________________
Commission File Number 0-25076
WASHINGTON BANCORP
----------------------------------------------------
(Exact Name of Small Business Issuer in its Charter)
Iowa 42-1446740
- ------------------------------- -------------------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
102 East Main Street
Washington, Iowa 52353
- --------------------------------------- --------
(Address of Principal Executive Offices) Zip Code
Issuer's telephone number, including area code: (319) 653-7256
Securities Registered under Section 12(b) of the Exchange Act:
None
Securities Registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.01 per share
--------------------------------------
(Title of Class)
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such requirements for the past 90 days. YES X . NO ___.
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The Issuer had $4,404,000 in revenues for the fiscal year ended June
30, 1996.
As of September 1, 1996, there were issued and outstanding 657,519
shares of the Issuer's Common Stock. The aggregate market value of the voting
stock held by non-affiliates of the Issuer, computed by reference to the last
known sale price of such stock as of September 1, 1996, was $6.0 million. (The
exclusion from such amount of the market value of the shares owned by any person
shall not be deemed an admission by the Issuer that such person is an affiliate
of the Issuer.)
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-KSB - Portions of Annual Report to Stockholders for the
Fiscal Year Ended June 30, 1996. Part III of Form 10-KSB - Portions of the Proxy
Statement for the 1996 Annual Meeting of Shareholders.
<PAGE>
PART I
Item 1. Description of Business
General
Washington Bancorp ("Washington" or the "Company") is a Iowa corporation which
was organized in October 1995 by Washington Federal Savings Bank ("Washington
Federal" or the "Bank") for the purpose of becoming a savings and loan holding
company. Washington Federal is a federally chartered savings bank headquartered
in Washington, Iowa. Originally chartered in 1934, the Bank converted to a
federal savings bank in 1994. Its deposits are insured up to applicable limits
by the Federal Deposit Insurance Corporation ("FDIC").
In March 1996, the Bank converted to the stock form of organization through the
sale and issuance of its common stock to the Company. The principal asset of the
Company is the outstanding stock of the Bank, its wholly owned subsidiary. The
Company presently has no separate operation and its business consists of the
business of the Bank. All references to the Company, unless otherwise indicated,
at or before March 11, 1996 refer to the Bank.
Washington attracts deposits from the general public in its local market area
and uses such deposits primarily to invest in one- to four-family residential
loans secured by owner occupied properties and non-residential properties, as
well as construction loans on such properties. Washington also makes commercial
loans, consumer loans, automobile loans, and has occasionally been a purchaser
of fixed-rate mortgage-backed securities.
In anticipation of possible federal legislation that may inhibit future
branching opportunities for savings associations, Washington Federal filed
applications with the Office of Thrift Supervision ("OTS") on October 20, 1995
for three branch offices. These applications have been approved and are valid
through February 1997. Although management has not made a determination to open
any branch offices, the purpose of the applications is to possibly preserve
Washington Federal's branching opportunities. No assurance can be given that the
applications will satisfy the legislation nor that Washington Federal will open
any branch offices.
At June 30, 1996, the Company had assets of approximately $60.9 million,
deposits of approximately $44.2 million and shareholders' equity of
approximately $10.5 million.
The executive office of the Company is located at 102 East Main Street,
Washington, Iowa 52353, telephone (319) 653-7256.
Lending Activities
General. Washington's loan portfolio predominantly consists of mortgage loans
secured by one- to four-family residences. Washington also makes home equity and
second mortgage loans, multi-family and commercial real estate loans,
construction loans, commercial business loans and consumer loans.
<PAGE>
At June 30, 1996, Washington's net loan portfolio totalled $42.9 million. Loans
secured by first mortgages on one- to four-family residences totalled $33.9
million, or 79% of Washington's loan portfolio at June 30, 1996, before net
items. Washington originates and retains its mortgage loan portfolio, and
currently originates only a limited number of mortgage loans for sale to the
secondary market.
Loan Approval Authority. Loans for the purchase of real estate, construction
loans, first mortgage refinances, second mortgages, or commercial loans to
existing customers for more than $100,000, secured consumer loans for more than
$20,000, unsecured consumer loans for more than $10,000 and commercial loans to
new customers for more than $25,000 require loan committee approval. All other
loans require the approval of two loan officers. The Board of Directors is
provided a listing of all loans granted on a monthly basis for ratification.
Loans to One Borrower. Savings banks are subject to the same limits as those
applicable to national banks, which under current regulations limit loans-to-one
borrower in an amount equal to 15% of unimpaired capital and retained income on
an unsecured basis and an additional amount equal to 10% of unimpaired capital
and retained income if the loan is secured by readily marketable collateral
(generally financial instruments, not real estate) or $500,000, whichever is
higher. Washington's maximum loan-to-one borrower limit was approximately
$1,195,000 as of June 30, 1996. Washington's largest amount outstanding to one
borrower or group of related borrowers was a group of loans secured by
commercial real estate and equipment in the aggregate amount of $366,000. All of
the loans to this borrower have performed in accordance with their terms since
their origination.
<PAGE>
Loan Portfolio Composition. The following information sets forth the composition
of Washington's loan portfolio in dollar amounts and in percentages at the dates
indicated. All of the loans in the table have fixed interest rates, except for
the commercial business loans which have adjustable rates, and certain
adjustable rate one- to four-family real estate loans offered beginning in March
1996. The amount of adjustable rate one- to four-family loans totaled $3.4
million at June 30, 1996.
<TABLE>
At June 30,
------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------------- ---------------- ---------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans
One- to four-family ................... $33,914 78.66% $33,328 82.01% $30,496 80.97% $28,895 86.41% $26,616 87.24%
Home equity and second mortgage ....... 1,569 3.64 1,669 4.11 956 2.54 786 2.35 879 2.88
Multi-family and commercial real estate 2,896 6.72 1,741 4.28 1,825 4.85 330 0.99 93 0.30
Other ................................. 115 0.27 472 1.16 299 0.79 753 2.25 898 2.94
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total mortgages .................. 38,494 89.29 37,210 91.56 33,576 89.15 30,764 92.00 28,486 93.36
Construction loans .................... 1,119 2.60 589 1.45 438 1.16 209 0.63 186 0.61
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total real estate loans .......... 39,613 91.89 37,799 93.01 34,014 90.31 30,973 92.63 28,672 93.97
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Commercial Business Loans ............. 1,546 3.59 1,084 2.67 1,780 4.73 219 0.65 109 0.36
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Consumer Loans
Automobile ............................ 1,134 2.62 785 1.93 685 1.82 793 2.37 801 2.63
Deposit account ....................... 822 1.90 970 2.39 1,185 3.14 1,456 4.35 927 3.04
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total consumer loans ............. 1,956 4.52 1,755 4.32 1,870 4.96 2,249 6.72 1,728 5.67
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total Loans ........................... 43,115 100.00% 40,638 100.00% 37,664 100.00% 33,441 100.00% 30,509 100.00%
====== ====== ====== ====== ======
Less
Allowance for loan losses ............. 209 203 203 202 116
------- ------- ------- ------- -------
Total loans receivable, net ...... $42,906 $40,435 $37,461 $33,239 $30,393
======= ======= ======= ======= =======
</TABLE>
There are no foreign loans outstanding for any of the years presented.
<PAGE>
Loan Maturities. The following schedule illustrates the contractual maturity and
weighted average rates of Washington's loan portfolio at June 30, 1996. Loans
which have adjustable or renegotiable interest rates are shown as maturing in
the period during which the contract is due. The schedule does not reflect the
effects of possible prepayments or enforcement of due-on-sale clauses.
<TABLE>
Real Estate
-------------------------------------------
Mortgage Construction Commercial Business Consumer Total
------------------- -------------------- --------------------- ------------------- --------------------
Due During Weighted Weighted Weighted Weighted Weighted
period Ending Average Average Average Average Average
June 30, Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
- ------------- ------- -------- ------- -------- ------- -------- ------- -------- ------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 ........ $ 6,337 8.11% $ 1,119 8.17% $ 519 10.33% $ 595 10.24% $ 8,570 8.40%
1998 ........ 10,313 8.85 -- -- 118 10.21 444 10.51 10,875 8.93
1999 ........ 12,581 8.90 -- -- 144 8.87 463 10.41 13,188 8.95
2000 and 2001 3,993 7.70 -- -- 464 7.92 417 9.96 4,874 7.92
2002 to 2006 1,537 8.12 -- -- 93 9.17 37 9.49 1,667 8.21
2007 to 2011 914 8.26 -- -- -- 6.00 -- -- 914 8.26
2012 and
thereafter .. 2,819 7.78 -- -- 208 9.33 -- -- 3,027 7.89
-------- ------- ------- ------- -------
$ 38,494 $ 1,119 $ 1,546 $ 1,956 $43,115
======== ======= ======= ======= =======
</TABLE>
As of June 30, 1996, the total amount of loans due after June 30, 1997 which
have predetermined interest rates was $29.0 million, while the total amount of
loans due after such date which have floating or adjustable interest rates was
$5.5 million.
<PAGE>
Loan Originations, Purchases and Sales. Real estate loans are originated by
Washington's staff of salaried loan officers who receive applications from
existing customers, walk-in customers from the local community, advertising, and
referrals from realtors and contractors.
While the Company originates both adjustable-rate and fixed-rate loans, its
ability to originate loans is dependent upon the relative customer demand for
loans in its market. Demand is affected by the interest rate environment.
The Company purchases a limited amount of real estate loans from other financial
institutions in its market area. The Company reviews and underwrites all loans
to be purchased to insure that they meet the Company's underwriting standards.
The Company originates loans for its own portfolio and originates a limited
number of loans for sale on the secondary market. Washington Federal originated
$208,000 of loans for the secondary market during fiscal 1996.
In periods of rising interest rates, the Company's ability to originate large
dollar volumes of real estate loans may be substantially reduced or restricted,
with a resultant decrease in related fee income and operating earnings.
The following table shows the loan origination, purchase, sale and repayment
activities of Washington Federal for the periods indicated.
Year Ended June 30,
-----------------------------------
1996 1995 1994
-------- --------- ---------
(In Thousands)
Originations by type:
Real estate
One- to four-family ................... $ 9,915 $ 6,988 $ 11,515
Home equity and second mortgage ....... 1,098 182 682
Multi-family and commercial
real estate .......................... 484 -- --
Construction .......................... 1,647 449 1,315
Other ................................. -- 255 122
Non real estate
Commercial business ................... 1,551 1,406 1,361
Consumer .............................. 2,198 1,822 1,430
-------- -------- --------
Total loans originated ........... 16,893 11,102 16,425
Purchases ............................... -- -- 150
Loans sold to secondary market .......... (208) -- --
Principal (repayments) .................. (14,208) (8,128) (12,352)
Decrease (increase) in allowance
for loan losses ........................ (6) -- (1)
-------- -------- --------
Net increase (decrease) ................. $ 2,471 $ 2,974 $ 4,222
======== ======== ========
One- to Four-Family Residential Mortgage Lending. Washington's primary lending
activity consists of the origination of residential mortgage loans secured by
property located in Washington's market area of Washington County, Iowa and
adjoining counties. Washington will not normally originate any loan which
exceeds 90% of the lesser of the appraised value or selling price of the
mortgaged property.
Prior to March 1996, Washington primarily originated three year balloon mortgage
loans with an amortization up to 30 years. Since March 1996, Washington has
primarily originated adjustable rate mortgages for terms of up to 30 years, with
interest rates that primarily adjust annually after an initial three year term.
Interest rates charged on mortgage loans are competitively priced based on
market conditions and Washington's cost of funds. Washington generally does not
charge origination fees for loans. Washington originates its loans for its own
portfolio and originates a limited number of loans for sale to the secondary
market. Accordingly, Washington's portfolio lending may not conform to secondary
market guidelines, such as FHLMC, primarily as it relates to appraisal
requirements. It is the current policy of Washington to remain primarily a
portfolio lender.
<PAGE>
Loan originations are generally obtained from existing customers, members of the
local community, advertising, and referrals from realtors and contractors within
Washington's market area. Mortgage loans originated and held by Washington in
its portfolio generally include due-on-sale clauses which provide Washington
with the contractual right to deem the loan immediately due and payable in the
event that the borrower transfers ownership of the property without Washington's
consent.
Washington also has a limited amount of non-owner-occupied permanent residential
oneto four-family mortgage loans in its portfolio. These loans are underwritten
using generally the same criteria as owner-occupied permanent residential one-
to four-family mortgage loans, except that the maximum loan to value ratio is
generally 80% of the lesser of the appraised value or purchase price of the
property and such loans are generally provided at an interest rate higher than
owner-occupied loans.
Home Equity and Second Mortgage Lending. Washington originates home equity and
second mortgage improvement loans. Home equity and second mortgage loans,
together with loans secured by all prior liens, are generally limited to 90% or
less of the appraised value. Generally, such loans have a maximum term of up to
three years with an amortization of up to 10 years. As of June 30, 1996, home
equity and second mortgage loans amounted to $1,569,000 which represented 3.64%
of Washington's total loan portfolio, before net items.
Multi-Family and Commercial Real Estate Loans. Washington Federal has
historically engaged in a limited amount of multi-family and commercial real
estate lending. All such loans are at fixed rates of interest and have terms up
to 20 years and loan-to-value ratios of up to 75%. At June 30, 1996, $2,896,000
or 6.72% of Washington's total loan portfolio, before net items, consisted of
loans secured by existing multi-family residential real estate and commercial
real estate, including primarily a professional building, grocery store, a
condominium and a hog confinement facility. All of Washington's multi-family and
commercial real estate loans are secured by properties located in its market
area. The average outstanding balance of multi-family and commercial real estate
loans was $2,699,000 during the year ended June 30, 1996, and the largest as of
June 30, 1996 was $259,000, secured by developed residential lots. The loan has
performed in accordance with its terms since origination.
Multi-family residential and commercial real estate lending is generally
considered to involve a higher degree of risk than permanent residential one- to
four-family lending. Such lending typically involves large loan balances
concentrated in a single borrower or groups of related borrowers. In addition,
the payment experience on loans secured by income producing properties is
typically dependent on the successful operation of the related real estate
project and thus may be subject to a greater extent to adverse conditions in the
real estate market or in the economy generally. Washington generally attempts to
mitigate the risks associated with multi-family residential and commercial real
estate lending by, among other things, lending on collateral located in its
market area and generally to individuals who reside in its market.
<PAGE>
Washington requires appraisals of all properties securing non-residential and
multi-family residential real estate loans. Currently, such appraisals are done
by Washington's staff. In originating multi-family residential and
non-residential real estate loans, Washington considers the quality of the
property, the credit of the borrower, cash flow of the project, location of the
real estate and the quality of management involved with the property. Recently,
consistent with regulatory changes designed to facilitate lending to small
businesses, Washington began offering loans secured by commercial real estate
and residential investment (non-owner occupied) properties with reduced
documentation requirements. Such loans, which are limited to a $100,000 maximum
balance, typically are originated pursuant to Washington's standard underwriting
guidelines and procedures. Washington may waive the requirement for an appraisal
of the security property. Such loans typically have been made to borrowers with
whom Washington is familiar and upon a review of the borrower's financial
statements and tax records, and publicly available sales records of the security
property. As of June 30, 1996, Washington had an aggregate of $100,000 of
reduced documentation loans in its portfolio.
Construction Loans. Washington makes construction loans primarily to individuals
for the construction of single-family residences. At June 30, 1996, construction
loans amounted to $1,119,000, or 2.6% of Washington's total loan portfolio,
before net items. Construction loans have rates which generally match the
non-construction loans then offered by Washington. The terms of these loans are
generally six months with an option to renew for an additional six months, at
which time the loans are due. During the construction period, only interest
payments are due, and on a case by case basis, the Company may allow the payment
of interest from loan proceeds. The Washington construction loan agreements
generally provide that loan proceeds are disbursed in increments as construction
progresses. Washington periodically reviews the progress of the underlying
construction project. Construction loans are underwritten pursuant to the same
general guidelines used for originating permanent one- to four-family loans.
Construction lending is generally limited to Washington's market area.
Construction lending is generally considered to involve a higher degree of
credit risk than long- term financing of residential properties. Washington's
risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the property's value at completion of construction and
the estimated cost of construction. If the estimate of construction cost and the
marketability of the property upon completion of the project prove to be
inaccurate, Washington may be compelled to advance additional funds to complete
the construction.
Furthermore, if the estimate of value proves to be inaccurate, Washington may be
confronted, at or prior to the maturity of the loan, with a property with a
value that is insufficient to assure full repayment. For the small number of
speculative loans originated to builders, the ability of the builder to sell
completed dwelling units will depend, among other things, on demand, pricing and
availability of comparable properties, and economic conditions. As of June 30,
1996, the Company had $154,400 in speculative loans to builders.
Commercial Business Lending. At June 30, 1996, $1,546,000 million or 3.59% of
the Company's total loans were comprised of commercial business loans. The
Company's current commercial business lending portfolio is predominantly secured
by accounts receivable, inventory, and equipment. The largest commercial
business loan was $200,000 at June 30, 1996 and was secured by inventory and
equipment.
Unlike residential mortgage loans, which generally are made on the basis of the
borrower's ability to make repayment from his or her employment and other income
and which are secured by real property, the value of which tends to be more
easily ascertainable, commercial business loans typically are made on the basis
of the borrower's ability to make repayment from the cash flow of the borrower's
business. As a result, the availability of funds for the repayment of commercial
business loans may be substantially dependent on the success of the business
itself (which, in turn, is likely to be dependent upon the general economic
environment). The Company's commercial business loans are sometimes, but not
always, secured by business assets. However, the collateral securing the loans
may depreciate over time, may be difficult to appraise and may fluctuate in
value based on the success of the business.
<PAGE>
Consumer Lending. Washington offers a variety of consumer loans, including
automobile loans and loans secured by deposits. Washington currently originates
substantially all of its consumer loans in its market area generally to its
existing customers. At June 30, 1996, Washington's consumer loan portfolio
totalled $1,956,000 or 4.52% of its total loan portfolio, before net items.
A component of Washington's consumer loan portfolio consists of automobile
loans. Washington originates new and used automobile loans on a direct basis,
where the Company extends credit directly to the borrower. These loans generally
have terms that do not exceed five years and carry a fixed rate of interest.
Generally, loans on new vehicles are made in amounts up to 90% of dealer cost
and loans on used vehicles are made in amounts up to 80% of purchase price or
its published value, whichever is less. At June 30, 1996, Washington's
automobile loans totalled $1,134,000 or 2.62% of Washington's total loan
portfolio, before net items.
Consumer loan terms vary according to the type and value of collateral, length
of contract and creditworthiness of the borrower. The underwriting standards
employed by Washington for consumer loans include an application, a
determination of the applicant's payment history on other debts and an
assessment of ability to meet existing obligations and payments on the proposed
loan. Although creditworthiness of the applicant is a primary consideration, the
underwriting process also includes a comparison of the value of the security, if
any, in relation to the proposed loan amount.
Consumer loans may entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured or are
secured by rapidly depreciable assets, such as automobiles. Further, any
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan balance as a result of the greater
likelihood of damage, loss or depreciation. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be affected by adverse personal circumstances.
Furthermore, the application of various federal and state laws, including
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans. At June 30, 1996, $17,000 of Washington's consumer loans were
non-performing. See "- Non-Performing Assets and Classified Assets." There can
be no assurances, however, that delinquencies will not increase in the future.
Asset Quality
Loan Delinquencies. Washington's collection procedures provide that when a
mortgage loan is 15 days past due, a notice of nonpayment is sent. If payment is
still delinquent after 30 days, the customer will receive a letter and/or
telephone call and may receive a visit from a representative of Washington. If
the delinquency continues, similar subsequent efforts are made to eliminate the
delinquency. If the loan continues in a delinquent status for 60 days past due
and no repayment plan is in effect, a notice of right to cure default is mailed
to the customer giving 45 additional days to bring the account current before
foreclosure is commenced. The loan committee meets regularly to determine when
foreclosure proceedings should be initiated and the customer is notified when
foreclosure has been commenced.
The following table sets forth the Company's loan delinquencies by type, by
amount and by percentage of category at June 30, 1996. The amounts presented
represent the total remaining principal balances of the elapsed loans, rather
than the actual payment amounts which are overdue.
<TABLE>
Loans Delinquent at June 30, 1996 for:
--------------------------------------------------------------------------------------------
30-59 Days 60-89 Days 90 Days & Over Total
-------------------- ---------------------- --------------------- --------------------
No. Amt. Percent No. Amt. Percent No. Amt. Percent No. Amt. Percent
---- ---- ------- ----- ---- -------- --- ---- ------- --- ---- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
Mortgage Loans ............. 24 $515 92.29% 7 $208 89.27% 1 $ 27 61.36% 32 $750 89.82%
Consumer ..................... 5 43 7.71 6 25 10.73 5 17 38.64 16 85 10.18
---- ---- ------ ---- ---- ------ ---- ---- ------ ---- ---- ------
Total ........................ 29 $558 100.00% 13 $233 100.00% 6 $ 44 100.00% 48 $835 100.00%
==== ==== ====== ==== ==== ====== ==== ==== ====== ==== ==== ======
</TABLE>
<PAGE>
Non-Performing Assets. The following table sets forth information regarding
accruing loans delinquent more than 90 days and foreclosed assets. Loans are
reviewed on a monthly basis and are generally placed on a non-accrual status
when the loan becomes more than 90 days delinquent and, in the opinion of
management, the collection of additional interest is doubtful. Interest accrued
and unpaid at the time a loan is placed on non-accrual status is charged against
interest income. Subsequent payments, if any, are either applied to the
outstanding principal balance or recorded as interest income, depending on the
assessment of the ultimate collectibility of the loan. For all years presented,
in the opinion of management, the collection of additional interest on loans
delinquent more than 90 days is not doubtful. Therefore, there are no
nonaccruing loans. For all years presented, the Company had no troubled debt
restructurings (which involved forgiving a portion of interest or principal on
any loans or making loans at a rate materially less than that of market rates).
At June 30,
-------------------------
1996 1995 1994
---- ----- ------
(Dollars in Thousands)
Accruing loans delinquent more than 90 days:
Mortgage ..................................... $ 27 $256 $ 92
Consumer ..................................... 17 39 65
---- ---- ----
44 295 157
---- ---- ----
Foreclosed assets:
One- to four-family .......................... -- -- 50
---- ---- ----
Total non-performing assets ...................... $ 44 $295 $207
==== ==== ====
Total as a percentage of total assets ............ 0.07% 0.54% 0.39%
==== ==== ====
Classified Assets. OTS regulations provide for a classification system for
problem assets of insured institutions which covers all problem assets. Under
this classification system, problem assets of insured institutions are
classified as "substandard," "doubtful," or "loss." An asset is considered
substandard if it is inadequately protected by the current net worth and paying
capacity of the obligor or of the collateral pledged, if any. Substandard assets
include those characterized by the "distinct possibility" that the insured
institution will sustain "some loss" if the deficiencies are not corrected.
Assets classified as doubtful have all of the weaknesses inherent in those
classified substandard, with the added characteristic that the weaknesses
present make "collection or liquidation in full," on the basis of currently
existing facts, conditions and values, "highly questionable and improbable."
Assets classified as loss are those considered "uncollectible" and of such
little value that their continuance as assets without the establishment of a
specific loss reserve is not warranted. Assets may also be designated "special
mention" because of potential weakness that do not currently warrant
classification in one of the aforementioned categories.
When an insured institution classifies problem assets as either substandard or
doubtful, it may establish general allowances for loan losses in an amount
deemed prudent by management. General allowances represent loss allowances which
have been established to recognize the inherent risk associated with lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem assets. When an insured institution classifies problem assets
as loss, it is required either to establish a specific allowance for losses
equal to 100% of that portion of the asset so classified or to charge off such
amount. An institution's determination as to the classification of its assets
and the amount of its valuation allowances is subject to review by the OTS,
which may order the establishment of additional general or specific loss
allowances. A portion of general loss allowances established to cover possible
losses related to assets classified as substandard or doubtful may be included
in determining an institution's regulatory capital, while specific valuation
allowances for loan losses generally do not qualify as regulatory capital. At
June 30, 1996, Washington had classified $53,000 of its assets as substandard,
and $1,000 as doubtful as compared to $295,000 at June 30, 1995 classified as
substandard. This decrease is primarily due to a decrease at June 30, 1996 from
June 30, 1995 in mortgage loans delinquent more than 90 days. None of the
mortgage loans delinquent more than 90 days have an outstanding balance in
excess of $27,000 at June 30, 1996. Management believes this decrease is a
direct result of improved communications with past due customers.
<PAGE>
Other Loans of Concern. In addition to the non-performing loans set forth in the
tables above, as of June 30, 1996, there was $242,000 of loans designated as
special mention for which known information about the possible credit problems
of the borrowers or the cash flows of the security properties have caused
management to have some doubts as to the ability of the borrowers to comply with
present loan repayment terms and which may result in the future inclusion of
such items in the non-performing asset categories. The largest loan at that date
had an outstanding balance of $55,000 and was secured by a one- to four-family
residence in Keokuk County, Iowa.
Foreclosed Real Estate. Real estate acquired by Washington as a result of
foreclosure or by deed in lieu of foreclosure is classified as real estate owned
until it is sold. When property is acquired it is recorded at the fair value at
the date of foreclosure less estimated costs of disposition.
Washington records loans as in-substance foreclosures if the borrower has little
or no equity in the property based upon its documented current fair value,
Washington can only expect repayment of the loan to come from the sale of the
property and if the borrower has effectively abandoned control of the collateral
or has continued to retain control of the collateral but because of the current
financial status of the borrower, it is doubtful the borrower will be able to
repay the loan in the foreseeable future. In-substance foreclosures are
accounted for as real estate acquired through foreclosure. There may be
significant other expenses incurred such as attorney and other extraordinary
servicing costs involved with in substance foreclosures. Washington had no
foreclosed real estate at June 30, 1996.
Allowances for Loan Losses
It is management's policy to provide for losses on unidentified loans in its
loan portfolio. A provision for loan losses is charged to operations based on
management's evaluation of the potential losses that may be incurred in
Washington's loan portfolio. Such evaluation, which includes a review of all
loans of which full collectibility of interest and principal may not be
reasonably assured, considers Washington's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, estimated value of any underlying collateral, and
current economic conditions. The amount of provisions recorded in future periods
may be significantly greater or less than the provisions taken in the past. The
allowance for loan losses was $209,000, or as a ratio of total loans was 0.48%,
at June 30, 1996.
While management believes that the provision for loan losses and the resulting
allowance for loan losses is reasonable and adequate to cover any known losses
and any losses reasonably expected in Washington's loan portfolio, management
will continue to review the entire loan portfolio to determine the extent, if
any, to which further additional loss provisions may be deemed necessary. There
can be no assurance that the allowance for losses will be adequate to cover
losses which may in fact be realized in the future and that additional
provisions for losses will not be required.
<PAGE>
Allocation of Allowance for Loan Losses. The following table sets forth the
allocation of Washington's allowance for loan losses by loan category and the
percent of loans in each category to total loans receivable at the dates
indicated. The portion of the loan loss allowance allocated to each loan
category does not represent the total available for future losses that may occur
within the loan category because the total loan loss allowance is a valuation
reserve applicable to the entire loan portfolio.
<TABLE>
At June 30,
---------------------------------------------------------
1996 1995 1994
------------------ ------------------ ------------------
Percent of Percent of Percent of
Loans in Loans in Loans in
Each Each Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage Loans ........... $121 88.09% $ 95 93.01% $119 90.31%
Commercial Business Loans 13 3.54 11 2.67 18 4.73
Consumer Loans ........... 36 8.37 30 4.32 45 4.96
Unallocated .............. 39 -- 67 -- 21 --
---- ------ ---- ------ ---- ------
$209 100.00% $203 100.00% $203 100.00%
==== ====== ==== ====== ==== ======
</TABLE>
Analysis of the Allowance for Loan Losses. The following table sets forth
information with respect to Washington's allowance for loan losses at the dates
and for the periods indicated:
Year Ended June 30,
-------------------------
1996 1995 1994
------ ----- -----
(Dollars in Thousands)
Balance at beginning of period .................... $ 203 $ 203 $ 202
Charge offs:
Mortgage ...................................... -- -- --
Consumer ...................................... (14) (19) (7)
----- ----- -----
Total charge offs ......................... (14) (19) (7)
Recoveries ........................................ 5 19 8
----- ----- -----
Net Charge offs ................................... (9) -- 1
----- ----- -----
Provisions charged to operations .................. 15 -- --
----- ----- -----
Balance at end of period .......................... $ 209 $ 203 $ 203
===== ===== =====
Ratio of net charge offs during the period to
average loans outstanding during
the period ....................................... 0.02% ---% ---%
===== ===== =====
Ratio of net charge offs during the period to
average nonperforming assets ...................... 20.45% ---% (0.36)%
===== ===== =====
<PAGE>
Investment Activities
Washington is required under federal regulations to maintain a minimum amount of
liquid assets which may be invested in specified short-term securities and
certain other investments. See "Regulation -- Federal Regulation of Savings
Associations" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources" in the Annual
Report to Stockholders attached hereto as Exhibit 13. Washington has
continuously maintained a liquidity portfolio in excess of regulatory
requirements. Liquidity levels may be increased or decreased depending upon the
yields on investment alternatives and upon management's judgment as to the
attractiveness of the yields then available in relation to other opportunities
and its expectation of future yield levels, as well as management's projections
as to the short-term demand for funds to be used in Washington's loan
origination and other activities. At June 30, 1996, Washington had an investment
portfolio of approximately $14.6 million, consisting primarily of U.S. Treasury
Securities, U.S. government agency obligations and corporations securities. To a
lesser extent, the portfolio also includes mortgage-backed and related
securities, municipal bonds, and FHLB stock, as permitted by OTS regulations.
Washington classifies its investments as held to maturity or available for sale.
Washington has found its level of investment securities and mortgage-backed and
related securities has decreased in recent years as a result of increased loan
demand. Washington will continue to seek high quality investments.
Federally chartered savings institutions have the authority to invest in various
types of liquid assets, including United States Treasury obligations, securities
of various federal agencies, certain certificates of deposit of insured banks
and savings institutions, certain bankers' acceptances, repurchase agreements
and federal funds. Subject to various restrictions, federally chartered savings
institutions may also invest their assets in commercial paper, investment grade
corporate debt securities and mutual funds whose assets conform to the
investments that a federally chartered savings institution is otherwise
authorized to make directly.
Generally, the investment policy of Washington, as established by the Board of
Directors, is to invest funds among various categories of investments and
maturities based upon Washington's liquidity needs, asset/liability management
policies, investment quality, marketability and performance objectives.
<PAGE>
Investment Portfolio. The following table sets forth the carrying value of
Washington's investment securities portfolio, short-term investments, FHLB
stock, and mortgage-backed and related securities at the dates indicated. At
June 30, 1995, the market value of Washington's held to maturity investment
securities portfolio was $3,091,000. The net unrealized gain of $12,000 as of
June 30, 1995, on such investment securities is not reflected in the table below
because these securities are classified as held to maturity and are therefore
not reported at fair value. For additional information concerning Washington's
investments, see Note 3 to the Notes to Consolidated Financial Statements in the
Annual Report to Stockholders attached hereto as Exhibit 13.
<TABLE>
At June 30,
--------------------------------------------------------------------------
1996 1995 1994
------------------------ ----------------------- ------------------------
Percent of Percent of Percent of
Book Value Total Book Value Total Book Value Total
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment Securities:
Available for sale (1):
U.S. Treasury securities ...................... $ 394 2.63% $ 495 4.17% $ -- ---%
U.S. Government agencies ...................... 7,961 53.08 2,329 19.61 -- --
State and political subdivisions .............. 404 2.69 -- -- -- --
Mortgage-backed securities .................... 152 1.01 -- -- -- --
Corporations .................................. 4,217 28.12 5,616 47.27 -- --
Certificates of deposit with
financial institutions ...................... 1,500 10.00 -- -- -- --
------- ------ ------- ------ ------- ------
Total Available for Sale ................ 14,628 97.53 8,440 71.05 -- --
------- ------ ------- ------ ------- ------
Held to maturity(1):
U.S. Treasury securities ......................... -- -- -- -- 613 4.51
U.S. Government Agencies ......................... -- -- -- -- 1,903 13.99
Corporations and Other ........................... -- -- -- -- 7,403 54.44
State and political subdivisions ................. -- -- 1,238 10.42 1,183 8.70
Mortgage-backed securities ....................... -- -- 1,839 15.48 2,178 16.01
------- ------ ------- ------ ------- ------
Total held to maturity ...................... -- -- 3,077 25.90 13,280 97.65
------- ------ ------- ------ ------- ------
Total Investment Securities ................. 14,628 97.53 11,517 96.95 13,280 97.65
------- ------ ------- ------ ------- ------
FHLB Stock ........................................... 369 2.47% 362 3.05 320 2.35
------- ------ ------- ------ ------- ------
Total Investment Securities
and FHLB Stock ............................. $14,997 100.00% $11,879 100.00% $13,600 100.00%
======= ====== ======= ====== ======= ======
Average remaining life of investment
securities (excluding FHLB Stock) .................... 3.3 Years 3.2 Years 3.9 Years
Interest-Earning Assets:
Interest-bearing deposits with banks............... $ 1,110 100.00% $ 1,290 100.00% $ -- ---%
======= ====== ======= ====== ======= ======
- ---------------------
<FN>
(1) Securities classified as available for sale were carried at fair value at
June 30, 1996 and 1995. Securities classified as held to maturity were
carried at historical cost at all respective dates.
</FN>
</TABLE>
In November, 1995 the Financial Accounting Standards Board issued a Special
Report entitled "A Guide Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities". The Special Report contained
guidance on applying the provisions of Statement 115 and, in addition, contained
a provision which allowed entities to reassess the classification of their
investment securities and to make transfers from the held to maturity category
without calling into question the intent of the entity to hold securities to
maturity in the future. Accordingly, in December, 1995 Washington Federal
elected to transfer all of the Bank's investment securities in the held to
maturity category to the available for sale category. The carrying value of the
investment securities transferred was approximately $2,872,000 and an unrealized
loss of $35,000, net of related deferred income tax, was recorded in the
Statement of Stockholders' Equity. The fair value of the available for sale
investment portfolio at June 30, 1996 was $14.6 million resulting in a net
unrealized loss at that date of approximately $68,000.
<PAGE>
The category of investment securities entitled "corporations and other" is
comprised of investments in corporate bonds, except for approximately $300,000
invested in a mutual fund at June 30, 1995 and 1994. The mutual fund investment
was sold during December of 1995. The corporate bonds are considered investment
grade bonds, but carry additional credit risk compared to bonds guaranteed by
the U.S. government or agencies thereof. Washington evaluates the benefit of
higher yields on these bonds versus increased credit risk as compared to U.S.
Treasury or agency securities. The quality of these bonds is monitored primarily
by reviewing the investment ratings assigned to the bonds by independent sources
such as Standard & Poors, etc.
Investment Portfolio Maturities. The following table sets forth certain
information regarding the carrying values, weighted average yields and
maturities of Washington's investment securities portfolio at June 30, 1996.
<TABLE>
At June 30, 1996
----------------------------------------------------------
Less Than Over Investment
1 Year 1- 5 Years 5-10 Years 10 Years Securities
Book Value Book Value Book Value Book Value Book Value
---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
U.S. treasury securities ....... $ -- $ 394 $ -- $ -- $ 394
U.S. government agencies ....... 483 6,482 996 -- 7,961
State and political subdivisions 50 233 121 -- 404
Mortgage-backed securities ..... -- -- -- 152 152
Corporations ................... 2,299 1,918 -- -- 4,217
Certificates of deposit with
financial institutions ........ 1,500 -- -- -- 1,500
------- ------- ------- ------- -------
Total ..................... $ 4,332 $ 9,027 $ 1,117 $ 152 $14,628
======= ======= ======= ======= =======
Weighted average yield ......... 6.46% 7.03% 7.29% 6.13% 6.87%
======= ======= ======= ======= =======
</TABLE>
Sources of Funds
General. Deposits are the major external source of Washington's funds for
lending and other investment purposes. Washington derives funds from
amortization and prepayment of loans and, to a much lesser extent, maturities of
investment securities, borrowings, mortgage-backed securities and operations.
Scheduled loan principal repayments are a relatively stable source of funds,
while deposit inflows and outflows and loan prepayments are significantly
influenced by general interest rates and market conditions. Washington had $5.5
million FHLB advances outstanding at June 30, 1996.
Deposits. Consumer and commercial deposits are attracted principally from within
Washington's market area through the offering of a broad selection of deposit
instruments including regular savings accounts, money market accounts, and term
certificate accounts. Washington also offers individual retirement accounts
("IRA), NOW accounts and money market deposit accounts ("MMDA"). Deposit account
terms vary according to the minimum balance required, the time period the funds
must remain on deposit, and the interest rate, among other factors.
The interest rates paid by Washington on deposits are set weekly at the
direction of the Board of Directors. Washington determines the interest rate to
offer the public on new and maturing accounts by reviewing the current Treasury
rate for the term and the market interest rates offered by competitors.
Washington Federal reviews, weekly, the interest rates being offered by the
other two principal financial institutions within its market area.
<PAGE>
Passbook accounts constituted $2.2 million, or 5.05% of Washington's deposit
portfolio at June 30, 1996. Certificates of deposit constituted $30.3 million or
68.27% of the deposit portfolio of which $919,000 or 2.07% of the deposit
portfolio were certificates of deposit with balances of $100,000 or more. MMDA
accounts constituted $9.1 million or 20.46% of Washington's deposit portfolio at
June 30, 1996. As of June 30, 1996, Washington Federal had no brokered deposits.
In fiscal year 1995, transactions and savings deposits were $12.6 million or
29.25% of total deposits. At June 30, 1996, transactions and savings deposits
were $13.9 million or 31.21% of total deposits. During this same period,
certificates of deposit remained at $30.3 million.
Savings Deposit Activities. The following table sets forth the savings activity
at Washington Federal during the period indicated.
Year Ended June 30,
------------------------------------
1996 1995 1994
-------- -------- --------
(Dollars in Thousands)
Opening balance ...................... $ 42,950 $ 43,872 $ 44,268
Net increase (decrease) before
interest credited .................. (390) (2,473) (1,821)
Interest credited .................... 1,616 1,551 1,425
-------- -------- --------
Ending balance ....................... $ 44,176 $ 42,950 $ 43,872
======== ======== ========
Net increase (decrease) .............. $ 1,226 $ (922) $ (396)
======== ======== ========
Percent increase (decrease) .......... 2.85% (2.10)% (0.89)%
======== ======== ========
The following table sets forth the dollar amount of savings deposits in the
various types of deposit programs offered by Washington Federal for the periods
indicated.
<TABLE>
June 30,
---------------------------------------------------------------
1996 1995 1994
----------------- ------------------ -------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------- -------- ------- -------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Transactions and Savings Deposits
Demand and NOW Accounts (0.00%-3.35%) ................ $ 2,529 5.70% $ 2,129 4.93% $ 2,236 5.08%
Money Market Accounts (2.30% - 5.00%) ................ 9,087 20.46 8,310 19.25 12,846 29.17
Passbook Savings Accounts (2.30% - 3.00%) ............ 2,244 5.05 2,187 5.07 2,323 5.28
------- ------ ------- ------ ------- ------
Total Non-Certificates ............................... 13,860 31.21 12,626 29.25 17,405 39.53
------- ------ ------- ------ ------- ------
Certificates
3.00% - 4.00% ........................................ 28 0.06 1,203 2.79 7,234 16.43
4.01% - 5.00% ........................................ 4,976 11.21 6,160 14.27 7,113 16.15
5.01% - 6.00% ........................................ 14,445 32.53 11,297 26.16 8,149 18.51
6.01% - 7.00% ........................................ 10,867 24.47 11,521 26.68 2,824 6.41
7.01% - 8.00% ........................................ -- -- 143 0.33 1,118 2.54
8.01% - 9.00% ........................................ -- -- -- -- -- --
9.01% and over ....................................... -- -- -- -- 29 0.06
------- ------ ------- ------ ------- ------
Total Certificates ................................... 30,316 68.27 30,324 70.23 26,467 60.10
------- ------ ------- ------ ------- ------
Accrued Interest ..................................... 231 0.52 226 0.52 164 0.37
------- ------ ------- ------ ------- ------
Total Deposits and Accrued Interest .................. $44,407 100.00% $43,176 100.00% $44,036 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
<PAGE>
The following table shows rate and maturity information for Washington's
certificates of deposit as of June 30, 1996.
<TABLE>
0.00- 4.01- 5.01- 6.01- Percent of
4.00% 5.00% 6.00% 7.00% Total Total
------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Certificate accounts maturing in
quarter ending:
September 30, 1996 ............. $ 25 $ 1,197 $ 1,343 $ 1,374 $ 3,939 12.99%
December 31, 1996 .............. 3 1,410 2,357 1,560 5,330 17.58
March 31, 1997 ................. -- 1,030 1,773 705 3,508 11.57
June 30, 1997 .................. -- 878 615 3,354 4,847 15.99
September 30, 1997 ............. -- 246 991 59 1,296 4.27
December 31, 1997 .............. -- 100 799 81 980 3.23
March 31, 1998 ................. -- 90 1,009 1,997 3,096 10.21
June 30, 1998 .................. -- 25 2,082 787 2,894 9.55
September 30, 1998 ............. -- -- 1,499 75 1,574 5.19
December 31, 1998 .............. -- -- 898 -- 898 2.96
March 31, 1999 ................. -- -- 390 13 403 1.33
June 30, 1999 .................. -- -- 201 40 241 0.79
Thereafter ..................... -- -- 488 822 1,310 4.32
------- ------- ------- ------- ------- ------
Total .......................... $ 28 $ 4,976 $14,445 $10,867 $30,316 100.00%
======= ======= ======= ======= ======= ======
Percent of Total ............ 0.09% 16.41% 47.65% 35.85%
======= ======= ======= =======
</TABLE>
The following table indicates the amount of Washington's certificates of deposit
and other deposits by time remaining until maturity as of June 30, 1996.
<TABLE>
MATURITY
---------------------------------------
3 Months Over 3- 6 Over 6-12 Over 12
or Less Months Months Months Total
-------- --------- --------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of Deposit less than
$100,000 ........................ $ 3,835 $ 5,330 $ 8,133 $12,099 $29,397
Certificates of Deposit of
$100,000 or More ................ 104 -- 222 593 919
------- ------- ------- ------- -------
Total Certificates of Deposit ... $ 3,939 $ 5,330 $ 8,355 $12,692 $30,316
======= ======= ======= ======= =======
</TABLE>
Borrowings
Deposits are the primary source of funds of Washington's lending and investment
activities and for its general business purposes. In addition, Washington may
obtain advances from the FHLB of Des Moines to supplement its supply of lendable
funds. Advances from the FHLB of Des Moines are typically secured by a pledge of
Washington's stock in the FHLB of Des Moines and a portion of Washington's first
mortgage loans and certain other assets. Washington, if the need arises, may
also access the Federal Reserve discount window to supplement its supply of
lendable funds and to meet deposit withdrawal requirements. At June 30, 1996,
Washington had $5.5 million of borrowings.
<PAGE>
The following table sets forth the maximum month-end balance and average balance
of FHLB advances at and for the dates indicated.
At and For the Year Ended June 30,
------------------------------------
1996 1995 1994
------ ------ ------
(In Thousands)
Maximum Balance ................... $6,433 $7,230 $4,489
Average Balance ................... $4,621 $4,773 $1,946
The following table sets forth certain information as to the Bank's FHLB
advances at the dates indicated.
June 30,
-----------------------------
1996 1995 1994
--------- --------- ---------
(Dollars in Thousands)
FHLB Advances .................................. $ 5,505 $ 7,230 $ 4,489
Weighted average interest rate during the period
of FHLB advances ............................... 5.48% 5.13% 5.40%
Weighted average interest rate at end of period
of FHLB advances ............................... 5.46% 5.85% 4.76%
Competition
Washington is one of five financial institutions serving its immediate market
area of Washington County, Iowa. The competition for deposit products comes from
two banks owned by multi-bank holding companies, a local independent community
bank and a credit union. Deposit competition also includes a number of insurance
products sold by local agents, and investment products such as mutual funds and
other securities sold by local and regional brokers. Loan competition varies
depending upon market conditions.
Washington has traditionally maintained a competitive position in mortgage loan
originations and market share throughout its service area by virtue of its local
presence and its involvement in the community. Washington believes that it has
been able to effectively market its loans and other financial products and
services when compared to other local-based institutions and its superior
customer service when compared to other institutions and mortgage bankers based
outside of Washington's market area.
Washington believes that it is one of the few area lenders that has consistently
offered a variety of loans throughout all types of economic conditions.
Washington believes that it has been able to effectively market its loans and
other financial products and services when compared to other local-based
institutions, and it has superior customer service when compared to the branch
of a larger institution based outside of Washington's market area.
Subsidiary Activity
Washington is permitted to invest up to 2% of its assets in the capital stock
of, or secured or unsecured loans to, subsidiary corporations, with an
additional investment of 1% of assets when such additional investment is
utilized primarily for community development purposes. Under such limitations,
as of June 30, 1996, Washington Federal was authorized to invest up to
approximately $1,209,000 in the stock of, or loans to, service corporations
(based upon the 2% limitation).
Washington Federal has one wholly-owned subsidiary. The subsidiary conducts
business under the name of Washington Financial Services, Inc. Washington
Federal's investment in its subsidiary totalled $52,014 at June 30, 1996. The
subsidiary's source of income is brokerage fees, and it had net income of
$12,154, $9,646 and $3,092 for the years ended June 30, 1996, 1995 and 1994,
respectively. The primary activity of the subsidiary is the brokering of
mortgage insurance.
<PAGE>
Regulation
General. Washington Federal is a federally chartered savings bank, the deposits
of which are federally insured and backed by the full faith and credit of the
United States Government. Accordingly, Washington Federal is subject to broad
federal regulation and oversight extending to all its operations. The Bank is a
member of the FHLB of Des Moines and is subject to certain limited regulation by
the Board of Governors of the Federal Reserve System ("Federal Reserve Board").
As the savings and loan holding company of the Bank, the Company also is subject
to federal regulation and oversight. The purpose of the regulation of the
Company and other holding companies is to protect subsidiary savings
associations. The Bank is a member of the Savings Association Insurance Fund
("SAIF"), which together with the Bank Insurance Fund ("BIF") are the two
deposit insurance funds administered by the FDIC, and the deposits of the Bank
are insured by the FDIC. As a result, the FDIC has certain regulatory and
examination authority over the Bank.
Certain of these regulatory requirements and restrictions are discussed below or
elsewhere in this document.
Federal Regulation of Savings Associations. The OTS has extensive authority over
the operations of savings associations. As part of this authority, the Bank is
required to file periodic reports with the OTS and is subject to periodic
examinations by the OTS and the FDIC. The last regular OTS examination of the
Bank was as of June 30, 1995. The FDIC has not examined the Bank in the last
four years. When these examinations are conducted by the OTS and the FDIC, the
examiners may require the Bank to provide for higher general or specific loan
loss reserves. All savings associations are subject to a semi-annual assessment,
based upon the savings association's total assets, to fund the operations of the
OTS. The Bank's OTS assessment for the fiscal year ended June 30, 1996 was
$19,000.
The OTS also has extensive enforcement authority over all savings institutions
and their holding companies, including the Bank and the Company. This
enforcement authority includes, among other things, the ability to assess civil
money penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with the OTS. Except under certain
circumstances, public disclosure of final enforcement actions by the OTS is
required.
In addition, the investment, lending and branching authority of the Bank is
prescribed by federal laws, and it is prohibited from engaging in any activities
not permitted by such laws and regulations. For instance, no savings institution
may invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal associations in loans secured by
non-residential real property may not exceed 400% of total capital, except with
approval of the OTS. Federal savings associations are also generally authorized
to branch nationwide. The Bank is in compliance with the noted restrictions.
The Bank's general permissible lending limit for loans-to-one-borrower is equal
to the greater of $500,000 or 15% of unimpaired capital and surplus (except for
loans fully secured by certain readily marketable collateral, in which case this
limit is increased to 25% of unimpaired capital and surplus). At June 30, 1996,
the Bank's lending limit under this restriction was $1,195,000. The Bank is in
compliance with the loans-to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted guidelines
establishing safety and soundness standards on such matters as loan underwriting
and documentation, asset quality, earnings standards, internal controls and
audit systems, interest rate risk exposure and compensation and other employee
benefits. Any institution which fails to comply with these standards must submit
a compliance plan. A failure to submit a plan or to comply with an approved plan
will subject the institution to further enforcement action.
Insurance of Accounts and Regulation by the FDIC. Washington Federal is a member
of the SAIF, which is administered by the FDIC. Deposits are insured up to
applicable limits by the FDIC and such insurance is backed by the full faith and
credit of the United States Government. As insurer, the FDIC imposes deposit
insurance premiums and is authorized to conduct examinations of and to require
reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious risk to the SAIF or the BIF. The FDIC also has the
authority to initiate enforcement actions against savings associations, after
giving the OTS an opportunity to take such action, and may terminate the deposit
insurance if it determines that the institution has engaged in unsafe or unsound
practices, or is in an unsafe or unsound condition.
<PAGE>
The FDIC's deposit insurance premiums are assessed through a risk-based system
under which all insured depository institutions are placed into one of nine
categories and assessed insurance premiums based upon their level of capital and
supervisory evaluation. Under the system, institutions classified as well
capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1 or
core capital to risk-weighted assets ("Tier 1 risk-based capital") of at least
6% and a risk-based capital ratio of at least 10%) and considered healthy pay
the lowest premium while institutions that are less than adequately capitalized
(i.e., core or Tier 1 risk-based capital ratios of less than 4% or a risk-based
capital ratio of less than 8%) and considered of substantial supervisory concern
pay the highest premium. Risk classification of all insured institutions will be
made by the FDIC for each semi-annual assessment period. For the first six
months of 1995, the assessment schedule for BIF members and SAIF members ranged
from .23% to .31% of deposits.
The FDIC is authorized to increase assessment rates, on a semiannual basis, if
it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
As is the case with the SAIF, the FDIC is authorized to adjust the insurance
premium rates for banks that are insured by the BIF of the FDIC in order to
maintain the reserve ratio of the BIF at 1.25% of BIF insured deposits. As a
result of the BIF reaching its statutory reserve ratio the FDIC revised the
premium schedule for BIF insured institutions to provide a range of .04% to .31%
of deposits. The revisions became effective in the third quarter of 1995. In
addition, the BIF rates were further revised, effective January 1996, to provide
a range of 0% to .27% with a minimum annual assessment of $2,000. The SAIF
rates, however, were not adjusted. As a result of these revisions, BIF members
will generally pay lower premiums.
The SAIF is not expected to attain the designated reserve ratio until the year
2002 due to the shrinking deposit base for SAIF assessments and the requirement
that SAIF premiums be used to make the interest payments on bonds issued by the
Financing Corporation ("FICO") in order to finance the costs of resolving thrift
failures in the 1980s. As a result, SAIF members will generally be subject to
higher deposit insurance premiums than BIF members until, all things being
equal, the SAIF attains the required reserve ratio.
The effect of this disparity on the Bank and other SAIF members is uncertain at
this time. It may have the effect of permitting BIF insured institutions to
offer loan and deposit products on more attractive terms than SAIF members due
to the cost savings achieved through lower deposit premiums, thereby placing
SAIF members at a competitive disadvantage. In order to eliminate this disparity
a number of proposals to recapitalize the SAIF have been recently considered by
the United States Congress. The plan under current consideration provides for a
one-time assessment, anticipated be approximately .70%, to be imposed on all
deposits assessed at the SAIF rates as of March 31, 1995, including those held
by commercial banks. The BIF and SAIF would be merged into one fund as soon as
practicable, but no later than January 1, 1998.
There can be no assurance that any particular proposal will be enacted or that
premiums for either BIF or SAIF members will not be adjusted in the future by
the FDIC or by legislative action.
Regulatory Capital Requirements. Federally insured savings associations, such as
the Bank, are required to maintain a minimum level of regulatory capital. The
OTS has established capital standards, including a tangible capital requirement,
a leverage ratio (or core capital) requirement and a risk-based capital
requirement applicable to such savings associations. These capital requirements
must be generally as stringent as the comparable capital requirements for
national banks. The OTS is also authorized to impose capital requirements in
excess of these standards on individual associations on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of adjusted
total assets (as defined by regulation). Tangible capital generally includes
common stockholders' equity and retained income, and certain noncumulative
perpetual preferred stock and related income. In addition, all intangible
assets, other than a limited amount of purchased mortgage servicing rights, must
be deducted from tangible capital. At June 30, 1996, the Bank did not have any
intangible assets and an excludable valuation allowable, net of tax of $68,000.
<PAGE>
The OTS regulations establish special capitalization requirements for savings
associations that own subsidiaries. In determining compliance with the capital
requirements, all subsidiaries engaged solely in activities permissible for
national banks or engaged in certain other activities solely as agent for its
customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital. At June 30, 1996, the Bank had one excludable
subsidiary.
At June 30, 1996, the Bank had tangible capital of $8.0 million, or 13.3% of
adjusted total assets, which is approximately $7.1 million above the minimum
requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3% of adjusted
total assets. Core capital generally consists of tangible capital plus certain
intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings association must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio. At June 30, 1996, the Bank
had no intangibles which were subject to these tests.
At June 30, 1996, the Bank had core capital equal to $8.0 million, or 13.3% of
adjusted total assets, which is $6.2 million above the minimum leverage ratio
requirement of 3% as in effect on that date.
The OTS risk-based requirement requires savings associations to have total
capital of at least 8% of risk-weighted assets. Total capital consists of core
capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. At
June 30, 1996, the Bank had no capital instruments that qualify as supplementary
capital and $209,000 of general loss reserves, which was less than 1.25% of
risk-weighted assets.
Certain exclusions from capital and assets are required to be made for the
purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. The Bank had $21,000 of
such exclusions from capital and assets at June 30, 1996.
In determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet items, will be multiplied by a risk weight, ranging from 0% to
100%, based on the risk inherent in the type of asset. For example, the OTS has
assigned a risk weight of 50% for prudently underwritten permanent one- to
four-family first lien mortgage loans not more than 90 days delinquent and
having a loan to value ratio of not more than 80% at origination unless insured
to such ratio by an insurer approved by the FNMA or FHLMC.
The OTS has adopted a final rule that requires every savings association with
more than normal interest rate risk exposure to deduct from its total capital,
for purposes of determining compliance with such requirement, an amount equal to
50% of its interest-rate risk exposure multiplied by the present value of its
assets. This exposure is a measure of the potential decline in the net portfolio
value of a savings association, greater than 2% of the present value of its
assets, based upon a hypothetical 200 basis point increase or decrease in
interest rates (whichever results in a greater decline). Net portfolio value is
the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The rule provides for a two quarter lag between
calculating interest rate risk and recognizing any deduction from capital. Any
savings association with less than $300 million in assets and a total capital
ratio in excess of 12% is exempt from this requirement unless the OTS determines
otherwise.
<PAGE>
On June 30, 1996, the Bank had total capital of $8.2 million and risk-weighted
assets of $39.6 million or total capital of 20.8% of risk-weighted assets. This
amount was $5.1 million above the 8% requirement in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances required,
to take certain actions against savings associations that fail to meet their
capital requirements. The OTS is generally required to take action to restrict
the activities of an "undercapitalized association" (generally defined to be one
with less than either a 4% core capital ratio, a 4% Tier 1 riskedbased capital
ratio or an 8% risk-based capital ratio). Any such association must submit a
capital restoration plan and until such plan is approved by the OTS may not
increase its assets, acquire another institution, establish a branch or engage
in any new activities, and generally may not make capital distributions. The OTS
is authorized to impose the additional restrictions that are applicable to
significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any company
controlling an undercapitalized association must agree that it will enter into a
limited capital maintenance guarantee with respect to the institution's
achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or is
"significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios
of less than 3% or a risk-based capital ratio of less than 6%) must be made
subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized.
Any undercapitalized association is also subject to the general enforcement
authority of the OTS and the FDIC, including the appointment of a conservator or
a receiver.
The OTS is also generally authorized to reclassify an association into a lower
capital category and impose the restrictions applicable to such category if the
institution is engaged in unsafe or unsound practices or is in an unsafe or
unsound condition.
The imposition by the OTS or the FDIC of any of these measures on Washington
Federal may have a substantial adverse effect on the Bank's operations and
profitability. Company shareholders do not have preemptive rights, and
therefore, if the Company is directed by the OTS or the FDIC to issue additional
shares of Common Stock, such issuance may result in the dilution in the
percentage of ownership of the Company.
Limitations on Dividends and Other Capital Distributions. OTS regulations impose
various restrictions on savings associations with respect to their ability to
make distributions of capital, which include dividends, stock redemptions or
repurchases, cash-out mergers and other transactions charged to the capital
account. OTS regulations also prohibit a savings association from declaring or
paying any dividends or from repurchasing any of its stock if, as a result, the
regulatory capital of the association would be reduced below the amount required
to be maintained for the liquidation account established in connection with its
mutual to stock conversion.
Generally, savings associations, such as the Bank, that before and after the
proposed distribution meet their capital requirements, may make capital
distributions during any calendar year equal to the greater of 100% of net
income for the year-to-date plus 50% of the amount by which the lesser of the
association's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of its net income for the most recent four quarter period.
However, an association deemed to be in need of more than normal supervision by
the OTS may have its dividend authority restricted by the OTS. The Bank may pay
dividends in accordance with this general authority.
Savings associations proposing to make any capital distribution need only submit
written notice to the OTS 30 days prior to such distribution. Savings
associations that do not, or would not meet their current minimum capital
requirements following a proposed capital distribution, however, must obtain OTS
approval prior to making such distribution. The OTS may object to the
distribution during that 30-day notice period based on safety and soundness
concerns. See "- Regulatory Capital Requirements."
<PAGE>
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings association may make a
capital distribution without notice to the OTS (unless it is a subsidiary of a
holding company) provided that it has a CAMEL 1 or 2 rating, is not of
supervisory concern, and would remain adequately capitalized (as defined in the
OTS prompt corrective action regulations) following the proposed distribution.
Savings associations that would remain adequately capitalized following the
proposed distribution but do not meet the other noted requirements must notify
the OTS 30 days prior to declaring a capital distribution. The OTS stated it
will generally regard as permissible that amount of capital distributions that
do not exceed 50% of the institution's excess regulatory capital plus net income
to date during the calendar year. A savings association may not make a capital
distribution without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a result of, such a distribution. As under the
current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted.
Liquidity. All savings associations, including Washington Federal, are required
to maintain an average daily balance of liquid assets equal to a certain
percentage of the sum of its average daily balance of net withdrawable deposit
accounts and borrowings payable in one year or less. For a discussion of what
Washington Federal includes in liquid assets, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations Liquidity and Capital
Resources" in the Annual Report to Stockholders filed as Exhibit 13 hereto. This
liquid asset ratio requirement may vary from time to time (between 4% and 10%)
depending upon economic conditions and savings flows of all savings
associations. At the present time, the minimum liquid asset ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain time deposits,
certain bankers acceptances and short-term United States Treasury obligations)
currently must constitute at least 1% of the association's average daily balance
of net withdrawable deposit accounts and current borrowings. Penalties may be
imposed upon associations for violations of either liquid asset ratio
requirement. At June 30, 1996, Washington Federal was in compliance with both
requirements, with an overall liquid asset ratio of 14.6% and a short-term
liquid assets ratio of 8.0%
Qualified Thrift Lender Test. All savings associations, including Washington
Federal, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (as defined by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. Such assets primarily consist of residential
housing related loans and investments. At June 30, 1996, the Bank met the test
and has always met the test since its effectiveness.
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "- Holding Company Regulation."
<PAGE>
Community Reinvestment Act. Under the Community Reinvestment Act ("CRA"), every
FDIC insured institution has a continuing and affirmative obligation consistent
with safe and sound banking practices to help meet the credit needs of its
entire community, including low and moderate income neighborhoods. The CRA does
not establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the OTS, in connection with
the examination of the Bank, to assess the institution's record of meeting the
credit needs of its community and to take such record into account in its
evaluation of certain applications, such as a merger or the establishment of a
branch, by the Bank. An unsatisfactory rating may be used as the basis for the
denial of an application by the OTS.
The federal banking agencies, including the OTS, have recently revised the CRA
regulations and the methodology for determining an institution's compliance with
the CRA. Due to the heightened attention being given to the CRA in the past few
years, the Bank may be required to devote additional funds for investment and
lending in its local community. The Bank was examined for CRA compliance in
April 1996 and received a rating of Satisfactory - "2".
Transactions with Affiliates. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on terms
as favorable to the association as transactions with non-affiliates. In
addition, certain of these transactions, such as loans to an affiliate, are
restricted to a percentage of the association's capital. Affiliates of the Bank
include the Company and any company which is under common control with the Bank.
In addition, a savings association may not lend to any affiliate engaged in
activities not permissible for a bank holding company or acquire the securities
of most affiliates. The Bank's subsidiaries are not deemed affiliates, however;
the OTS has the discretion to treat subsidiaries of savings associations as
affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons are also
subject to conflict of interest regulations enforced by the OTS. These conflict
of interest regulations and other statutes also impose restrictions on loans to
such persons and their related interests. Among other things, such loans must be
made on terms substantially the same as for loans to unaffiliated individuals.
Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). At June 30, 1996, Washington was in compliance with these
reserve requirements. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve Board may be used to satisfy liquidity
requirements that may be imposed by the OTS. See "- Liquidity."
Savings associations are authorized to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve Board regulations require associations to
exhaust other reasonable alternative sources of funds, including FHLB
borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System. The Bank is a member of the FHLB of Dallas, which
is one of 12 regional FHLBs, that administers the home financing credit function
of savings associations. Each FHLB serves as a reserve or central bank for its
members within its assigned region. It is funded primarily from proceeds derived
from the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures established
by the board of directors of the FHLB. These policies and procedures are subject
to the regulation and oversight of the Federal Housing Finance Board. All
advances from the FHLB are required to be fully secured by sufficient collateral
as determined by the FHLB. In addition, all long-term advances are required to
provide funds for residential home financing.
As a member, the Bank is required to purchase and maintain stock in the FHLB of
Des Moines. At June 30, 1996, Washington Federal had $369,000 in FHLB stock,
which was in compliance with this requirement. In past years, Washington Federal
has received substantial dividends on its FHLB stock. Over the past five fiscal
years, such dividends have averaged 8.0% and were 7.1% for fiscal year 1996.
<PAGE>
Under federal law, the FHLBs are required to provide funds for the resolution of
troubled savings associations and to contribute to low- and moderately priced
housing programs through direct loans or interest subsidies on advances targeted
for community investment and low- and moderate-income housing projects. These
contributions have affected adversely the level of FHLB dividends paid and could
continue to do so in the future. These contributions could also have an adverse
effect on the value of FHLB stock in the future. A reduction in value of
Washington Federal's FHLB stock may result in a corresponding reduction in the
Bank's capital.
Holding Company Regulation. The Company is a unitary savings and loan holding
company subject to regulatory oversight by the OTS. As such, the Company is
required to register and file reports with the OTS and is subject to regulation
and examination by the OTS. In addition, the OTS will has enforcement authority
over the Company and its non-savings association subsidiaries which also permits
the OTS to restrict or prohibit activities that are determined to be a serious
risk to the subsidiary savings association.
As a unitary savings and loan holding company, the Company generally is not
subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of the Company and any of its
subsidiaries (other than the Bank or any other SAIF-insured savings association)
would become subject to such restrictions unless such other associations each
qualify as a QTL and were acquired in a supervisory acquisition.
If Washington fails the QTL test, the Company must obtain the approval of the
OTS prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure the Company must register as, and will become subject
to, the restrictions applicable to bank holding companies. The activities
authorized for a bank holding company are more limited than are the activities
authorized for a unitary or multiple savings and loan holding company. See "-
Qualified Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control of any
other SAIF-insured association. Such acquisitions are generally prohibited if
they result in a multiple savings and loan holding company controlling savings
associations in more than one state. However, such interstate acquisitions are
permitted based on specific state authorization or in a supervisory acquisition
of a failing savings association.
Federal Securities Law. The stock of the Company is registered with the SEC
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Company is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally officers, directors
and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
Federal and State Taxation
Federal Taxation. Savings associations such as the Bank that meet certain
definitional tests relating to the composition of assets and other conditions
prescribed by the Internal Revenue Code of 1986, as amended (the "Code"), had
been permitted to establish reserves for bad debts and to make annual additions
thereto which may, within specified formula limits, be taken as a deduction in
computing taxable income for federal income tax purposes. The amount of the bad
debt reserve deduction for "non-qualifying loans" is computed under the
experience method. The amount of the bad debt reserve deduction for "qualifying
real property loans" (generally loans secured by improved real estate) may be
computed under either the experience method or the percentage of taxable income
method (based on an annual election).
Under the experience method, the bad debt reserve deduction is an amount
determined under a formula based generally upon the bad debts actually sustained
by the savings association over a period of years.
The percentage of specially computed taxable income that is used to compute a
savings association's bad debt reserve deduction under the percentage of taxable
income method (the "percentage bad debt deduction") is 8%. The percentage bad
debt deduction thus computed is reduced by the amount permitted as a deduction
for non-qualifying loans under the experience method. The availability of the
percentage of taxable income method permits qualifying savings associations to
be taxed at a lower effective federal income tax rate than that applicable to
corporations generally (approximately 31.3% assuming the maximum percentage bad
debt deduction).
<PAGE>
If an association's specified assets (generally, loans secured by residential
real estate or deposits, educational loans, cash and certain government
obligations) constitute less than 60% of its total assets, the association may
not deduct any addition to a bad debt reserve and generally must include
existing reserves in income over a four-year period.
Under the percentage of taxable income method, the percentage bad debt deduction
cannot exceed the amount necessary to increase the balance in the reserve for
"qualifying real property loans" to an amount equal to 6% of such loans
outstanding at the end of the taxable year or the greater of (i) the amount
deductible under the experience method or (ii) the amount which when added to
the bad debt deduction for "non-qualifying loans" equals the amount by which 12%
of the amount comprising savings accounts at year-end exceeds the sum of
surplus, undivided profits and reserves at the beginning of the year. At June
30, 1996, the 6% and 12% limitations did not restrict the percentage bad debt
deduction available to the Bank. It is not expected that these limitations would
be a limiting factor in the foreseeable future.
In August 1996, legislation was enacted that repeals the reserve method of
accounting (including the percentage of taxable income method) used by many
thrifts, including the Bank, to calculate their bad debt reserve for federal
income tax purposes. As a result, large thrifts must recapture that portion of
the reserve that exceeds the amount that could have been taken under the
specific charge-off method for post-1987 tax years. The legislation also
requires thrifts to account for bad debts for federal income tax purposes on the
same basis as commercial banks for tax years beginning after December 31, 1995.
The recapture will occur over a six-year period, the commencement of which will
be delayed until the first taxable year beginning after December 31, 1997,
provided the institution meets certain residential lending requirements. The
management of the Company and the Bank do not believe that the legislation will
have a material impact on the Company or the Bank.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such as
the Bank, are also subject to an environmental tax equal to 0.12% of the excess
of alternative minimum taxable income for the taxable year (determined without
regard to net operating losses and the deduction for the environmental tax) over
$2 million.
To the extent earnings appropriated to a savings association's bad debt reserves
for "qualifying real property loans" and deducted for federal income tax
purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses).
The Company files consolidated federal income tax returns with the Bank on a
fiscal year basis using the accrual method of accounting. Savings associations,
such as the Bank, that file federal income tax returns as part of a consolidated
group are required by applicable Treasury regulations to reduce their taxable
income for purposes of computing the percentage bad debt deduction for losses
attributable to activities of the non-savings association members of the
consolidated group that are functionally related to the activities of the
savings association member.
The Company has not been audited by the IRS for the last five years. With
respect to years examined by the IRS, either all deficiencies have been
satisfied or sufficient reserves have been established to satisfy asserted
deficiencies. In the opinion of management, any examination of still open
returns would not result in a deficiency which could have a material adverse
effect on the financial condition of the Company.
Iowa Taxation. Washington Federal is subject to a franchise tax by the state of
Iowa. The franchise tax is imposed annually in an amount equal to 5% of
Washington Federal's adjusted federal taxable income, computed before any net
operating loss deduction. An alternative minimum tax is imposed on Washington
Federal to the extent such tax exceeds Washington Federal's regular tax
liability. The franchise tax is in lieu of Iowa income tax imposed on
corporations doing business within the State. The Company is not subject to the
Iowa franchise tax, but is subject to Iowa's regular corporate income tax.
<PAGE>
Executive Officers
Set forth below are the names, ages and positions of each of the executive
officers of the Company. Except as otherwise indicated, the persons named have
served as officers of the Company since it became the holding company of the
Bank, and all offices and positions described below are with the Company and the
Bank. There are no arrangements or understandings between the persons named and
any other person pursuant to which such officers were selected.
Stan Carlson, age 39, was appointed President and Chief Executive Officer of
Washington Federal in 1993. Prior to joining the Bank, he was Executive Vice
President of Northwoods State Bank, Northwoods, Iowa.
Sandra K. Bush, age 27, has been an employee of Washington Federal for twelve
years. Mrs. Bush is the Vice President of customer service for Washington
Federal and is primarily responsible for deposits.
Jeff Johnson, age 37, became Vice President of Washington Federal primarily
responsible for the Bank's lending department in June 1995. Prior to that time,
he was mortgage lender with Midland Savings Bank, Ottumwa, Iowa.
Leisha A. Linge, age 31, has been an employee of Washington Federal for four
years. She became Controller of Washington Federal in 1995 and acts as the
Bank's chief financial and accounting officer. Prior to that time, she was a
loan officer.
Employees
As of June 30, 1996 Washington Federal had 13 full-time and 10 part-time and
seasonal employees. None of Washington Federal's employees are represented by a
collective bargaining group. Washington Federal believes that its relationship
with its employees is satisfactory.
Item 2. Description of Property
Washington Federal operates from its main office and one drive-up facility.
Washington's total investment in offices, office property and equipment is
$1,139,000 with a net book value of $544,000 at June 30, 1996. The following
table sets forth information regarding Washington's properties:
Net Book Value
of Real Property
Leased/ or Leasehold Improvements Year
Owned at June 30, 1996 Opened
------- ------------------------- -------
Location:
Main Office
102 East Main Street
Washington, Iowa Owned $223,000 1976
Drive-thru Owned $227,000 1994
220 East Washington Street
Washington, Iowa
<PAGE>
Item 3. Legal Proceedings
Washington, from time to time, is a party to ordinary routine litigation, which
arises in the normal course of business, such as claims to enforce liens,
condemnation proceedings on properties in which Washington holds security
interests, claims involving the making and servicing of real property loans, and
other issues incident to the business of Washington Federal. The resolution of
these proceedings should not have a material adverse effect on the Company or
Washington.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the solicitation
of proxies or otherwise, during the quarter ended June 30, 1996.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Pages 46 and 47 of the attached 1996 Annual Report to Stockholder is herein
incorporated by reference.
Item 6. Management's Discussion and Analysis or Plan of Operations
Pages 6 to 18 of the attached 1996 Annual Report to Stockholders are herein
incorporated by reference.
Item 7. Financial Statements
Pages 19 to 44 of the Company's 1996 Annual Report to Stockholders are herein
incorporated by reference.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
Directors
Information concerning directors and executive officers of the Company is
incorporated herein by reference from the Company's definitive Proxy Statement
for the Annual Meeting of Shareholders, a copy of which will be filed not later
than 120 days after the close of the fiscal year.
Executive Officers
Information regarding the business experience of the executive officers of the
Company and the Bank who are not also directors contained in Part I of this Form
10-KSB is incorporated herein by reference.
Compliance With Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires the Company's directors and executive
officers, and persons who own more than 10% of a registered class of the
Company's equity securities, to file with the SEC initial reports of ownership
and reports of changes in ownership of Company common stock and other equity
securities of the Company by the tenth of the month following a change.
Officers, directors and greater than 10% stockholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms they
file.
<PAGE>
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended June 30, 1996, all Section
16(a) filing requirements applicable to its officers, directors and 10%
beneficial owners were complied with.
Item 10. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the Company's definitive Proxy Statement for the Annual Meeting
of Shareholders, a copy of which will be filed not later than 120 days after the
close of the fiscal year.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the Company's definitive
Proxy Statement for the Annual Meeting of Shareholders, a copy of which will be
filed not later than 120 days after the close of the fiscal year.
Item 12. Certain Relationships and Related Transactions
Information concerning certain relationships and transactions is incorporated
herein by reference from the Company's definitive Proxy Statement for the Annual
Meeting of Shareholders, a copy of which will be filed not later than 120 days
after the close of the fiscal year.
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits:
<TABLE>
Reference to
Prior Filing or
Regulation S-B Exhibit Number
Exhibit Number Document Attached Hereto
- -------------- -------- ---------------
<S> <C> <C>
2 Plan of Acquisition, Reorganization, Arrangement, None
Liquidation or Succession
4 Articles of Incorporation and *
amendments thereto
4 Bylaws *
9 Voting Trust Agreement None
10 Executive Compensation Plans and Arrangements:
Employment Agreement with Stan Carlson *
Employee Stock Ownership Plan *
Stock Option Plan *
Recognition and Retention Plan *
11 Statement re computation of per share earnings None
13 Annual Report to Security Holders 13
16 Letter re change in certifying accountant None
18 Letter re change in accounting principles None
21 Subsidiaries of Registrant 21
22 Published report regarding matter submitted None
to vote
23 Consent of Accountants None
24 Power of Attorney Not Required
27 Financial Data Schedule 27
28 Information from reports furnished to State Insurance None
regulatory authorities
99 Additional Exhibits None
</TABLE>
- ---------------------
* Filed on January 3, 1996, as exhibits to the Company's Form S-1
registration statement (File number 33-98778). All of such previously filed
documents are hereby incorporated herein by reference in accordance with
Item 601 of Regulation S-B.
(b) Reports on Form 8-K:
No current reports on Form 8-K were filed by the Company during the
three months ended June 30, 1996.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
WASHINGTON BANCORP
Date: September 25, 1996 By: /S/STAN CARLSON
---------------------- --------------------------------
Stan Carlson
(Duly Authorized Representative)
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
/S/CHARLES C. HOTLE /S/STAN CARLSON
- --------------------------- -------------------------------------
Charles C. Hotle, Director Stan Carlson, President, Chief
Executive Officer and Director
Date: September 25, 1996 Date: September 25, 1996
---------------------- -------------------------------
/S/MYRON L. GRABER /S/RICK R. HOFER
- ---------------------------- -------------------------------------
Myron L. Graber, Director Rick R. Hofer, Chairman of the Board
Date: September 25, 1996 Date: September 25, 1996
---------------------- -------------------------------
/S/MARY LEVY /S/RICHARD L. WEEKS
- ---------------------------- --------------------------------------
Mary Levy, Director Richard L. Weeks, Director
Date: September 25, 1996 Date: September 25, 1996
---------------------- ---------------------------------
/S/J. RICHARD WILEY /S/LEISHA A. LINGE
- ---------------------------- ---------------------------------------
J. Richard Wiley, Director Leisha A. Linge, Treasurer
(Principal Financial and Accounting
Officer)
Date: September 25, 1996 Date: September 25, 1996
----------------------- ---------------------------------
/S/JAMES D. GORHAM
James D. Gorham, Director
Date: September 25, 1996
----------------------
Washington Bancorp
1996 Annual Report
<PAGE>
WASHINGTON BANCORP
TABLE OF CONTENTS
Letter to Stockholders........................................
Selected Consolidated Financial Information...................
Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................
Report of Independent Auditors ...............................
Consolidated Financial Statements.............................
Directors and Executive Officers .............................
Stockholder Information.......................................
CONSOLIDATED FINANCIAL HIGHLIGHTS
June 30, 1996
(Dollars in Thousands)
Total assets $60,891
Total loans, net 42,906
Investment securities and other
earning assets 16,107
Deposits 44,176
Borrowings 5,505
Net income 441
Stockholders' equity 10,548
Stockholders' equity as a
percent of assets 17.32%
ANNUAL MEETING
The Annual Meeting of Stockholders of Washington
Bancorp will be held on October 15, 1996 at 1:00 P.M.
at the office of the Company, located at 102 East
Main Street, Washington, Iowa.
<PAGE>
WASHINGTON BANCORP
102 East Main Street
Washington, Iowa 52353
September 12, 1996
Dear Fellow Stockholders:
It is with pleasure that the board of directors, officers, and staff of
Washington Bancorp and our wholly owned subsidiary, Washington Federal Savings
Bank, provide you with our first annual report. During the fiscal year ended
June 30, 1996, we completed our subscription and community offering. At the same
time we converted to a federal chartered stock savings bank from our previous
mutual savings bank charter. The initial public offering ("IPO") was very
successful with 604,917 shares being sold at a price of $10.00 per share.
Currently we have in excess of 444 stockholders of record giving our stock added
liquidity in the stock market. We are confident this event will help Washington
Federal Savings Bank to meet the challenges and opportunities in the ever
changing financial services industry.
Washington Federal Savings served the mortgage and consumer credit needs of
Southeast Iowa for over sixty years as a mutual company. In our first year as a
stock company, and specifically a public company, our goals have not changed.
Our mission is to continue as a strong,
customer-driven, community-involved financial institution providing diversified
services for both depositors and borrowers, with attention to present and future
needs.
Net earnings for the year ending June 30, 1996 were $441,422. This represented
an increase of 23% over last year. Capital was greatly enhanced by our stock
conversion and profits. Capital levels grew to $10,548,165 compared to
$4,400,156 at June 30, 1995. This results in a capital ratio in excess of 17%
and growth in capital over the same period of 139%. Total assets grew from
$55,100,315 to $60,890,943, an increase of $5,790,628 or 10% when compared to
June 30, 1995. Our asset quality continues to be among the best in the industry,
and we believe we are one of the most prudently managed savings associations
because of our low overhead costs, due to an efficient, cost effective staff.
Our directors, officers and staff have strong ties to our community. Numerous
local civic and charitable organizations flourish because of their enthusiasm
and participation. Washington Federal Savings Bank is committed to future growth
and performance and will demonstrate this commitment within our community. We
have a sixty year history of stability and quality of service to our community.
Due to our high quality, dedicated personnel, coupled with the support of you,
our stockholders, we embrace the future with confidence and enthusiasm. We thank
our customers for their loyalty, our directors and employees for their
dedication, and our stockholders for their support and confidence.
Sincerely,
/s/ Stan Carlson
- -------------------------------------
Stan Carlson
President and Chief Executive Officer
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following consolidated financial information does not purport to be complete
and is qualified in its entirety by reference to the more detailed consolidated
financial information contained elsewhere herein.
<TABLE>
At June 30,
-----------------------------------------------
1996 1995 1994 1993 1992
-----------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets ................................ $60,891 $55,100 $52,985 $48,253 $45,463
Loans receivable, net ....................... 40,906 40,435 37,461 33,239 30,393
Cash and cash equivalents ................... 1,903 1,658 735 2,346 795
Investment securities ....................... 14,628 11,517 13,280 11,531 13,221
Investment in Federal Home Loan Bank ("FHLB") 369 362 320 320 281
Stock
Deposits .................................... 44,176 42,950 43,872 44,268 41,869
Borrowed funds .............................. 5,505 7,230 4,489 -- --
Stockholders' equity ........................ 10,548 4,400 4,141 3,562 3,099
</TABLE>
<TABLE>
Year Ended June 30,
------------------------------------------
1996 1995 1994 1993 1992
------------------------------------------
(in Thousands)
<S> <C> <C> <C> <C> <C>
Selected Operations Data:
Total interest income .................................. $4,207 $3,939 $3,854 $3,850 $3,877
Total interest expense ................................. 2,499 2,181 2,043 2,248 2,553
- -------------------------------------------------------- ------ ------ ------ ------ ------
Net interest income (expense) ........................ 1,708 1,758 1,811 1,602 1,324
Provision for loan losses .............................. 15 -- -- 133 28
- -------------------------------------------------------- ------ ------ ------ ------ ------
1,693 1,758 1,811 1,469 1,296
Total noninterest income ............................... 197 138 209 153 118
Total noninterest expense .............................. 1,206 1,278 1,149 989 789
- -------------------------------------------------------- ------ ------ ------ ------ ------
Income before income taxes ............................. 684 618 871 633 625
Income tax expense ..................................... 243 259 291 170 175
- -------------------------------------------------------- ------ ------ ------ ------ ------
Net income ............................................. $ 441 $ 359 $ 580 $ 463 $ 450
====== ====== ====== ====== ======
</TABLE>
<PAGE>
<TABLE>
Year Ended June 30,
-----------------------------------------------------
1996 1995 1994 1993 1992
----- ----- ----- ----- ----
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net earnings to
average 0.78% 0.67% 1.14% 0.98% 1.04%
total assets)
Interest rate spread information:
Average during period 2.55 3.04 3.44 3.29 2.81
End of period 2.96 2.91 3.47 3.42 2.86
Net interest margin(1) 3.13 3.38 3.70 3.54 3.17
Ratio of operating expense to average total 2.15 2.38 2.27 2.10 1.83
assets
Return on equity (ratio of net income to 6.94 8.41 15.06 13.90 15.66
average equity)
Quality Ratios:
Non-performing assets to total assets at end 0.07 0.54 0.39 0.72 0.90
of period(2)
Allowance for loan losses to non-performing 475.00 68.81 98.07 57.93 28.43
loans
Capital Ratios:
Equity to total assets at end of period.. 17.32 7.99 7.82 7.38 6.82
Average equity to average assets 11.31 7.96 7.60 7.08 6.65
Ratio of average interest-earning assets to
average 112.79 108.01 106.24 105.20 105.85
interest-bearing liabilities
Number of full service offices 1 1 1 1 1
- ---------------------
<FN>
(1) Net interest income divided by average interest-earning assets. (2)
Non-performing assets consist of nonaccruing loans, accruing loans past-due
90 or more days and foreclosed assets.
</FN>
</TABLE>
Capital Requirements. The following table sets forth Washington Federal Savings
Bank's compliance with its capital requirements at June 30, 1996.
Capital Level
OTS Requirement at June 30, 1996(1)
--------------- --------------------------
% of % of Amount
Assets Amount Assets Amount of Excess
------ ------ ------- ------ ---------
(Dollars in Thousands)
Capital Standard
Tangible Capital ........... 1.5% $ 907 13.3% $8,032 $7,125
Core Capital ............... 3.0% 1,814 13.3% 8,032 6,218
Risk-based capital ......... 8.0% 3,167 20.8% 8,220 5,053
- -------------------
(1) Tangible and core capital figures are determined as a percentage of
adjusted total assets; risk-based capital figures are determined as a
percentage of risk-weighted assets in accordance with OTS regulations.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Washington Bancorp ("Washington" or the "Company"), an Iowa corporation, became
the holding company of Washington Federal Savings Bank (the "Bank") on March 11,
1996. The Bank is a federally chartered stock savings bank headquartered in
Washington, Iowa. The principal asset of the Company is the outstanding stock of
the Bank, its wholly-owned subsidiary. The Company presently has no separate
operations and its business consists only of the business of the Bank. All
references to the Company, unless otherwise indicated, at or before March 11,
1996 refer to the Bank.
The earnings of Washington depend primarily on its level of net interest income,
which is the difference between interest earned on
interest-earning assets, consisting primarily of mortgage loans, and investment
securities, and the interest paid on interest-bearing liabilities, consisting
primarily of deposits. Net interest income is a function of Washington's
"interest rate spread," which is the difference between the average yield earned
on interest-earning assets and the average rate paid on interest-bearing
liabilities. The interest rate spread is affected by regulatory, economic and
competitive factors that influence interest rates, loan demand and deposit
flows. Washington, like other financial institutions, is subject to
interest-rate risk to the degree that its interest-earning assets mature or
reprice at different times, or on a different basis, than its interest-bearing
liabilities. To a lesser extent, Washington's operating results are also
affected by the amount of its non-interest income, including service charges and
loan fees, and other income which includes commissions from sales of insurance
by the Bank's service corporation. Non-interest expense consists primarily of
compensation and benefits, occupancy and equipment, federal insurance premiums,
data processing, and other operating expenses. Washington's operating results
are significantly affected by general economic conditions, in particular, the
changes in market interest rate, government policies and actions by regulatory
authorities.
Washington's basic mission is to originate mortgage loans on a profitable basis
to the communities it serves. In seeking to accomplish this mission, the Board
of Directors and management have adopted a business strategy designed (i) to
maintain Washington's capital level in excess of regulatory requirements; (ii)
to maintain Washington's asset quality; (iii) to control operating expenses;
(iv) to maintain, and if possible, increase Washington's interest rate spread
and other income; and (v) to manage Washington's exposure to changes in interest
rates. Washington has attempted to achieve these goals by focusing on
originating first mortgage home loans, consumer loans and by offering a full
range of deposit products.
FinancialCondition
Total Assets. Total assets increased from $53.0 million at June 30, 1994 to
$55.1 million at June 30, 1995, to $60.9 million at June 30, 1996. The net
increase from 1994 to 1995 was primarily funded by an increase in FHLB advances
used to fund the increase in assets. The net increase from 1995 to 1996 was
primarily funded by the net proceeds from the IPO.
Loans Receivable. Loans receivable, net increased from $37.5 million at June 30,
1994 to $40.4 million at June 30, 1995 to $42.9 million at June 30, 1996. The
increase is primarily due to increased loan demand in Washington's market area.
The Company's non-performing assets were $44,000 or .07% of total assets as of
June 30, 1996, as compared to $295,000 or .54% of total assets as of June 30,
1995. Management believes that this improvement is primarily the result of
hiring a new collections officer in June 1995.
Deposits. Deposits decreased $1.0 million or 2.3% from $43.9 million, at June
30, 1994 to $42.9 million, at June 30, 1995. Interest credited during 1995
totalled $1.5 million while withdrawals exceeded deposits by $2.5 million.
Management believes that the net withdrawals were mainly due to depositors
seeking higher yielding alternative investments. During fiscal year 1995,
depositors shifted from transaction and savings deposits to certificates of
deposit offering higher rates of interest. This shift reflected a general rise
in interest rates between 1994 and 1995. Transactions and savings deposits
dropped as a percentage of total deposits from $17.4 million or 39.7% in fiscal
year 1994 to $12.6 million or 29.5% in fiscal year 1995. Certificates of deposit
rose as a percentage of total deposits from $26.5 million or 60.3% in fiscal
year 1994 to $30.3 million or 70.5% in fiscal year 1995.
<PAGE>
Deposits increased $1.3 million or 2.9% to $44.2 million, at June 30, 1996 from
$42.9 million at June 30, 1995, due primarily to funds obtained through the IPO.
Transactions and savings deposits rose as a percentage of total deposits from
$12.6 million or 29.3% at June 30, 1995 to $13.9 million or 31.2% at June 30,
1996. Certificates of deposit dropped as a percentage of total deposits from
$30.3 million or 70.5% at June 30, 1995 to $30.3 million or 68.3% at June 30,
1996.
Stockholders' Equity. Stockholders' equity increased from $4.1 million at June
30, 1994, to $4.4 million at June 30, 1995 to $10.5 million at June 30, 1996,
due to net earnings partially offset by the net effect of unrealized losses on
available for sale securities and the net proceeds from the IPO. The portfolio
of available for sale securities is comprised primarily of investment securities
carrying fixed interest rates. The fair value of these securities is subject to
changes in interest rates and the fair value of these securities is less than
their carrying value as of June 30, 1996 due to an increase in interest rates
since the purchase date of the securities.
<PAGE>
Net Interest Income Analysis
The following table presents for the periods indicated the total dollar amount
of interest income from average interest-earning assets and the resultant
yields, as well as the total dollar amount of interest expense on average
interest-bearing liabilities and the resultant rates. No tax equivalent
adjustments were made. All average balances are monthly average balances.
<TABLE>
Year Ended June 30,
-------------------------------------------------------------------------------------------
1996 1995 1994
----------------------------- ---------------------------- ----------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
-------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1) .............. $41,329 $ 3,446 8.34% $39,077 $ 3,183 8.15% $34,825 $ 2,944 8.45%
Investment securities ............ 9,580 632 6.60 12,044 710 5.90 12,615 839 6.65%
FHLB stock ....................... 366 26 7.10 338 26 7.69 320 26 8.13
Other interest-earning assets .... 3,311 103 3.11 572 20 3.50 1,239 45 3.63
------- ------- ------- ------- ------- -------
Total interest-earning assets(1) $54,586 $ 4,207 7.71 $52,031 $ 3,939 7.57 $48,999 $ 3,854 7.87
======= ======= ======= ======= ======= =======
Interest-bearing liabilities:
Certificates of deposit .......... $30,658 $ 1,746 5.70 $28,691 $ 1,499 5.22 $26,289 $1,353 5.15
NOW, money market and passbook
savings ....................... 12,955 496 3.83 14,546 432 2.97 17,720 582 3.28
Advances from borrowers for taxes
and insurance .................. 163 4 2.45% 163 5 3.07 164 3 1.83
FHLB advances .................... 4,621 253 5.48 4,773 245 5.13 1,946 105 5.40
------- ------- ------- ------- ------- -------
Total interest-bearing
liabilities .................. $48,397 $ 2,499 5.16 $48,173 $ 2,181 4.53 $46,119 $ 2,043 4.43
======= ======= ======= ======= ======= =======
Net interest income ................ $ 1,708 $ 1,758 $ 1,811
======= ======= =======
Net interest rate spread(2) ........ 2.55% 3.04% 3.44%
===== ===== =====
Net interest earning assets ........ $ 6,189 $ 3,858 $ 2,880
======= ======= =======
Net yield on average interest-
earnings assets .................. 3.13% 3.38% 3.70%
===== ===== =====
Average interest-earning assets to
average interest-earning
liabilities ...................... 112.79% 108.01% 106.24%
======= ======= =======
- ---------------------
<FN>
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves.
(2) Net interest rate spread represents the difference between the average
yield on interest-earning assets and the average rate on interest-bearing
liabilities.
</FN>
</TABLE>
<PAGE>
The following table presents the weighted average yields on loans, investments
and other interest-earning assets, and the weighted average rates paid on
deposits and borrowings and the resultant interest rate spreads at the dates
indicated.
At June 30,
-------------------------
1996 1995 1994
-------------------------
Weighted average yield on:
Loans receivable ............................ 8.52% 8.30% 8.17%
Investment securities ....................... 6.87 6.85 6.31
Other interest-earning assets ............... 5.33 5.92 --
Combined weighted average yield on interest-
earning assets ............................... 8.05 7.93 7.68
Weighted average rate paid on:
Passbook savings accounts ................... 2.30 2.50 2.50
NOW accounts ................................ 2.30 2.50 2.50
Money market accounts ....................... 4.14 3.26 3.26
Certificates of deposit ..................... 5.67 5.62 4.85
Advances from borrowers for taxes &
insurance .................................. 2.30 2.50 2.50
FHLB advances ............................... 5.46 5.85 4.76
Combined weighted average rate paid on
interest-bearing liabilities ................. 5.09 5.02 4.21
Spread ........................................ 2.96 2.91 3.47
Rate/Volume Analysis
The following schedule presents the dollar amount of changes in interest income
and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the changes due to
changes in outstanding balances and those due to changes in interest rates. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by prior interest rate) and (ii) changes in rate
(i.e., changes in rate multiplied by prior volume). For purposes of this table,
changes attributable to both rate and volume, which cannot be segregated, have
been allocated proportionately to the changes due to the volume and the changes
due to rate.
<TABLE>
Year Ended June 30,
----------------------------------------------------
1996 vs. 1995 1995 vs. 1994
----------------------- --------------------------
Increase Increase
(Decrease) (Decrease)
Due To Total Due To Total
-------------- Increase --------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------------------------- --------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable ................................ $ 188 $ 75 $ 263 $ 340 $(101) $ 239
Investment securities ........................... (156) 78 (78) (92) (129)
FHLB stock ...................................... 2 (2) -- 1 (1) --
Other interest-earning
assets ......................................... 85 (2) 83 (23) (2) (25)
--------------------------------------------------
Total interest-earning
assets .......................................... $ 119 $ 149 $ 268 $ 281 ($196) $ 85
==================================================
Interest-bearing liabilities:
Certificates of Deposit .......................... $ 106 $ 141 $ 247 $ 127 $ 19 $ 146
NOW, money market, and
passbook savings ................................ (51) 115 64 (98) (52) (150)
Advances from borrowers for
taxes and insurance ............................. -- (1) (1) -- 2 2
FHLB advances ................................... (8) 16 8 145 (5) 140
--------------------------------------------------
Total interest-bearing
liabilities ...................................... $ 47 $ 271 $ 318 $ 174 ($ 36) $ 138
==================================================
Net interest income ............................... $ (50) $ (53)
===== =====
</TABLE>
<PAGE>
Comparison of Operating Results for the Years Ended June 30, 1996 and 1995
Performance Summary. Net earnings for the year ended June 30, 1996 increased by
$82,000 or 23% to $441,000 from $359,000 for the year ended June 30, 1995. The
increase was primarily due to an increase in noninterest income of $59,000, a
decrease in noninterest expense of $72,000, and a decrease in income tax expense
of $16,000, partially offset by a decrease in net interest income of $50,000 and
an increase in provision for loan losses of $15,000. For the years ended June
30, 1996 and 1995 the return on average assets was .78% and .67%, respectively,
while return on average equity was 6.94% and 8.41%, respectively.
Net Interest Income. For the year ended June 30, 1996, net interest income
decreased by $50,000 as compared to June 30, 1995. This reflects an increase of
$268,000 in interest income to $4.2 million from $3.9 million and an increase in
interest expense of $318,000 to $2.5 million from $2.2 million. The net decrease
was primarily due to the cost of the Company's interest-bearing liabilities
increasing as a result of customer preference for higher yielding products
partially offset by an increase in the yield on interest-earning assets. For the
year ended June 30, 1996 the average yield on interest-earning assets was 7.71%
compared to 7.57% for 1995. The average cost of interest-bearing liabilities was
5.16% for the year ended June 30, 1996 an increase from 4.53% for the year ended
June 30, 1995. The average balance of interest-earning assets increased by $2.6
million to $54.6 million for the year ended June 30, 1996 from $52.0 million for
the year ended June 30, 1995. During this same time period, the average balance
of interest-bearing liabilities increased by $.2 million to $48.4 million for
the year ended June 30, 1996 from $48.2 million for the year ended June 30,
1995.
Due to the higher funding costs, the average interest rate spread was 2.55% for
the year ended June 30, 1996 compared to 3.04% for the year ended June 30, 1995.
The average net interest margin was 3.13% for the year ended June 30, 1996
compared to 3.38% for the year ended June 30, 1995.
Provision for Loan Loss. During the year ended June 30, 1996 the provision for
loan loss was $15,000 compared to none for the year ended June 30, 1995. The
primary reason for the provision was the increased size of the loan portfolio
during the last few years. The Company's loan portfolio consists primarily of
residential mortgage loans, and it has experienced little change in the
composition of the loan portfolio and a minimal amount of charge-offs in the
past three years. The allowance for loan losses of $209,000 or .49% of loans
receivable, net at June 30, 1996 compares to $203,000 or .50% of loans
receivable, net at June 30, 1995. The allowance for loan losses as a percentage
of non-performing assets was 475.00% at June 30, 1995, compared to 68.81% at
June 30, 1995.
Management will continue to monitor its allowance for loan losses and make
additions to the allowance through the provision for loan losses as economic
conditions dictate. Although Washington maintains its allowance for loan losses
at a level which management considers to be adequate to provide for loan losses,
there can be no assurance that future losses will not exceed estimated amounts
or that additional provisions for loan losses will not be required in the
future.
Non-Interest Income. For the year ended June 30, 1996, non-interest income
increased $59,000 or 42.8% compared to the year ended June 30, 1995 due
primarily to security gains recognized in fiscal year 1996 and a $30,000 other
than temporary impairment on equity securities in fiscal year 1995, offset by a
net decrease in bank service charges, primarily due to an increase in overdraft
fees which had the effect of reducing the number of accounts in an overdraft
position. Management is committed to realigning the Bank's service charges to be
more competitive with other financial service corporations our size yet
remaining conscious of the needs of our customers.
Non-Interest Expense. For the year ended June 30, 1996, non-interest expense has
decreased $72,000 to $1.2 million compared to $1.3 million for the year ended
June 30, 1995. Compensation and benefits decreased $32,000 to $582,000 for the
year ended June 30, 1996 from $614,000 for the year ended June 30, 1995 due to a
reduction in average full-time equivalent employees during the year ended June
30, 1996. Other expenses decreased $48,000 to $289,000 for the year ended June
30, 1996 from $338,000 for the year ended June 30, 1995. The decrease can be
primarily attributed to legal and accounting fees incurred during fiscal year
1995 relative to isolated data processing and compensation issues.
<PAGE>
Federal law requires that the FDIC maintain reserves of at least 1.25% of
insured deposits at both the Savings Association Insurance Fund ("SAIF") and the
Bank Insurance Fund ("BIF"), up to applicable limits. The reserves are funded
through the payment of insurance premiums by the insured institution members of
each fund. The BIF reached this level during 1995 enabling the FDIC to reduce
BIF insurance premiums to a range of .04% to .27% of deposits for the second
half of 1996 (as compared to the previous range of 0.23% to 0.31% of deposits
for both BIF and SAIF-insured institutions). Effective in January 1996, the FDIC
again revised the premium schedule for BIF-insured banks to provide for a range
of 0% to 0.23% of deposits with an annual statutory minimum payment of $2,000.
The FDIC action does not affect the premium rates currently applicable to SAIF
members, such the Bank, which continue to range from 0.23% to 0.31% of deposits
depending on the institution's capital level and other factors. As a result, BIF
members generally pay lower premiums than SAIF members. While the magnitude of
the competitive advantage of BIF-insured institutions and its impact on the
Bank's results of operations cannot be determined at this time, the decrease in
BIF premiums could place the Bank and other SAIF members at a material
competitive disadvantage. The Bank currently qualifies for the minimum SAIF
premium level of 0.23% of deposits.
Federal legislation, which has been proposed in various forms, provides for a
one-time assessment (in an amount sufficient for the SAIF to achieve the 1.25%
reserve ratio) to be imposed on all SAIF-insured deposits, including those held
by commercial banks, and for a portion of BIF deposit insurance premiums to be
used to pay the Financing Corporation bond interest. If a requirement were
implemented for the Bank to pay a one-time assessment equal to 0.80% of SAIF
assessable deposits (based on deposits at March 31, 1995 as currently proposed),
the amount of such assessment would have been approximately $229,000, net of
taxes. The final form of any such legislation has been the subject of continuing
negotiation and cannot be assured. If the legislation is enacted during the next
Congressional session, however, it is anticipated the assessment could be
payable in 1996. Accordingly, this special assessment would significantly
increase noninterest expense and adversely affect the Company's results of
operations. Depending on the Bank's capital level and supervisory rating, and
assuming (although there can be no assurance) that the insurance premium levels
for BIF and SAIF members are again equalized, deposit insurance premiums could
decrease significantly for future periods.
As part of the legislation, Congress is considering requiring all federal thrift
institutions, such as the Bank, to either convert to a national bank or a
state-chartered depository institution by January 1, 1998. The OTS also would be
abolished and its functions transferred among the other federal banking
regulators. Certain aspects of the legislation remain to be resolved and
therefore no assurance can be given as to whether or in what form the
legislation will be enacted or its effect on the Company and the Bank.
In addition, legislation was recently passed which will require the recapture of
a portion of the Bank's tax bad debt reserve. The recapture will occur over a
six-year period and begin with the Bank's fiscal year ending June 30, 1997. It
is not anticipated that this recapture will have a material adverse effect on
the Company's results of operations because the Bank has already established a
deferred tax liability of approximately $88,000 on its balance sheet for this
purpose.
Income Taxes. Income taxes decreased $16,000 to $243,000 for the year ended June
30, 1996 from $259,000 for the year ended June 30, 1995. The effective income
tax rates for the years ended June 30, 1996 and 1995 were 35.4% and 41.9%,
respectively. The fluctuations in the effective income tax rate relates
primarily to the changes to the over\under accrual of income taxes.
Comparison of Operating Results for the Years Ended June 30, 1995 and June 30,
1994
Performance Summary. Net earnings for the year ended June 30, 1995 decreased by
$221,000 or 38% to $359,000 from $580,000 for the year ended June 30, 1994. The
decrease was primarily due to a reduction in net interest income of $52,000, a
reduction in non-interest income of $72,000, and an increase in non-interest
expense of $129,000, partially offset by a reduction in income tax expense of
$32,000. For the years ended June 30, 1995 and 1994, the return on average
assets was .67% and 1.14% respectively, while the return on average equity was
8.41% and 15.06%, respectively.
Net Interest Income. For the year ended June 30, 1995, net interest income
decreased by $52,000 as compared to the year ended June 30, 1994. This reflects
an increase of $86,000 in interest income to $3.9 million from $3.8 million and
an increase in interest expense of $138,000 to $2.2 million from $2.0 million.
The net decrease was primarily due to the cost of the Company's interest-bearing
liabilities increasing as a result of customer preference for higher yielding
products coupled with a decrease in the yield on interest-earning assets. In
addition, the Company borrowed from the FHLB, at a rate higher than its average
cost of liabilities, to meet a higher than expected loan demand.
<PAGE>
For the year ended June 30, 1995, the average yield on interest-earning assets
was 7.57% compared to 7.87% for 1994. The average cost of interest-bearing
liabilities was 4.53% for the year ended June 30,1995 an increase from 4.43% for
the year ended June 30, 1994. The average balance of interest-earning assets
increased by $3.0 million to $52.0 million for the year ended June 30, 1995
compared to $49.0 million for the year ended June 30, 1994. During this same
time period, the average balance of interest-bearing liabilities increased by
$2.1 million to $48.2 million for the year ended June 30, 1995 from $46.1
million for the year ended June 30, 1994.
Due to the higher funding costs and lower yield on interest-earning assets, the
average interest rate spread was 3.04% for the year ended June 30, 1995 compared
to 3.44% for the year ended June 30, 1994. The average net interest margin was
3.38% for the year ended June 30, 1995 compared to 3.70% for the year ended June
30, 1994.
Provision for Loan Losses. During the year ended June 30, 1995, Washington did
not record a provision for additional loan losses. This was based upon
management's review of the loan portfolio, including assessment of the estimated
net realizable value of the collateral, consideration of historical loss
experience and then current economic conditions. The allowance for loan losses
of $203,000 or .50% of loans receivable, net at June 30, 1995, compares to
$203,000 or .54% of loans receivable, net at June 30, 1994. There were no net
charge-offs in the fiscal year ended June 30, 1995. The allowance for loan
losses as a percentage of non-performing assets was 68.81% at June 30, 1995,
compared to 98.07% at June 30, 1994.
Non-Interest Income. For the year ended June 30, 1995, non-interest income
decreased by $72,000 or 34.3% due primarily to securities gains recognized in
fiscal year 1994 not being repeated in fiscal year 1995 and a $30,000 other than
temporary impairment on equity securities in fiscal year 1995. In fiscal year
1995, there were no sales of investment securities.
Non-Interest Expense. Non-interest expense increased by $129,000 to $1.3 million
for the year ended June 30, 1995 from $ 1.1 million for the year ended June 30,
1994. Compensation and benefit expense increased $74,000 to $614,000 in fiscal
year 1995 from $540,000 in fiscal year 1994. The increase represents normal
salary increases, the addition of 1.5 full time equivalent new employees to
staff the drive-up facility that opened July 1, 1994, and increases in other
employee benefits. Occupancy and equipment expense increased by $23,000 to
$144,000 in fiscal year 1995 from $121,000 in fiscal year 1994, due primarily to
the addition of the drive-up facility. Data processing expense decreased $34,000
to $66,000 in fiscal 1995 due to cost savings realized under a new data
processing contract and a one time contract termination fee of $10,000 paid in
fiscal 1994 not repeated in 1995. Other non-interest expenses increased by
$67,000 to $338,000 in fiscal 1995 due primarily to miscellaneous expenses
previously discussed above.
Income Taxes. Income taxes decreased by $32,000 to $259,000 for the year ended
June 30, 1995 from $291,000 for the year ended June 30, 1994. This decrease
results from the decrease in income before taxes. The effective income tax rates
for the years ended June 30, 1995 and 1994 were 41.9% and 33.4%, respectively.
The fluctuations in the effective income tax rate relates primarily to the
changes to the over/under accrual of income taxes.
Asset/Liability Management
One of Washington's principal financial objectives is to achieve long-term
profitability while reducing its exposure to fluctuations in interest rates.
Washington has sought to reduce exposure of its earnings to changes in market
interest rates by managing the mismatch between asset and liability maturities
and interest rates. The principal element in achieving this objective has been
to increase the interest-rate sensitivity of Washington's assets by originating
loans with interest rates subject to periodic adjustment to market conditions.
Accordingly, Washington's primary one- to four-family loan product has been a
three year balloon loan accounting for $27.6 million of its $42.9 million loan
portfolio, or 64% at June 30, 1996. In keeping with the objective to improve
interest-rate sensitivity and in order to satisfy customer preferences,
management made the decision to discontinue the three year balloon product and
replace it with an array of adjustable rate mortgage loan products effective
March 1996. Adjustable rate loans account for $3.4 million of its $42.9 million
loan portfolio, or 8% at June 30, 1996.
<PAGE>
Washington has historically relied upon retail deposit accounts as its primary
source of funds and will continue to do so. Management believes that retail
deposit accounts and long term borrowings as sources of funds, compared to
brokered deposits, reduce the effects of interest rate fluctuations because
these deposits and borrowings generally represent a more stable source of funds.
In addition, Washington has emphasized longer term certificate accounts in an
effort to extend the maturity of its liabilities.
Net Portfolio Value. In order to encourage savings associations to reduce their
interest rate risk, the Office of Thrift Supervision ("OTS") adopted a rule
incorporating an interest rate risk ("IRR") component into the risk-based
capital rules. The IRR component is a dollar amount that will be deducted from
total capital for the purpose of calculating an institution's risk-based capital
requirement and is measured in terms of the sensitivity of its net portfolio
value ("NPV") to changes in interest rates. NPV is the difference between
incoming and outgoing discounted cash flows from assets, liabilities, and
off-balance sheet contracts. An institution's IRR is measured as the change to
its NPV as a result of hypothetical 200 basis point ("bp") changes in market
interest rates. A resulting change in NPV of more than 2% of the estimated
market value of its assets will require the institution to deduct from its
capital 50% of that excess change. The rules provide that the OTS will calculate
the IRR component quarterly for each institution. Washington, based on asset
size and risk-based capital, has been informed by the OTS that it is exempt from
this rule.
Presented below, as of March 31, 1996 (the latest date for which information was
available), is an analysis of Washington's interest rate risk as measured by
changes in NPV for instantaneous and sustained parallel shifts in the yield
curve, in 100 basis point increments, up and down 400 basis points in accordance
with OTS regulations. Management believes that Washington's NPV as of June 30,
1996, will not be significantly different from that at March 31, 1996. As
illustrated in the table below, Washington's NPV does not change significantly
in a 400 basis point change in interest rates. For example, a 400 basis point
increase in interest rates would decrease Washington's NPV by $129,000 or 1% and
a 400 basis point decrease in interest rates would increase NPV by $324,000 or
4%. As previously mentioned, the OTS has informed the Bank that it is not
subject to the IRR component discussed above. Further, were the Bank subject to
the IRR component at March 31, 1996, it would not have been considered to have
had a greater than normal level of interest rate exposure and a deduction from
capital would not have been required, although it is still subject to interest
rate risk and, as can be seen below, decreasing rates will reduce the Bank's
NPV.
<TABLE>
At June 30, 1996
- -------------------------------------------------------------------------------------------------------
Net Portfolio Value
- --------------------------------------------------------------------
Change in
Rate $ Amount $ Change % Change NPV as % of PV of Assets
- -------- --------- --------- --------- ------------------------
<S> <C> <C> <C> <C> <C>
Dollars in Thousands
+400 bp $9,340 $129 +1% 15.16% +51bp
+300 bp 9,348 138 +1% 15.09% +44bp
+200 bp 9,336 126 +1% 14.99% +34bp
+100 bp 9,298 88 -1% 14.85% +21bp
0 bp 9,210 14.65%
- -100 bp 9,092 -118 -1% 14.40% -25bp
- -200 bp 8,964 -246 -3% 14.13% -52bp
- -300 bp 8,900 -310 -3% 13.95% -70bp
- -400 bp 8,886 -324 -4% 13.84% -81bp
</TABLE>
<PAGE>
Certain shortcomings are inherent in the method of analysis presented in the
computation of NPV. Although certain assets and liabilities may have similar
maturities or periods within which they will reprice, they may react differently
to changes in market interest rates. The interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, Washington's primary loan products, the three-year balloon
and adjustable rate loans, may permit Washington to adjust to changes in
interest rates on a short-term basis and over the life of the asset. The
proportion of three-year balloon and adjustable rate loans could be reduced in
future periods if market interest rates decrease and remain at lower levels for
a sustained period, due to increased refinance activity. Further, in the event
of a change in interest rates, prepayment and early withdrawal levels would
likely deviate significantly from those assumed in the table. Finally, the
ability of many borrowers to service their three-year balloon and adjustable
rate mortgage loans may decrease in the event of a sustained interest rate
increase.
Liquidity and Capital Resources
Washington's primary sources of funds are deposits, long-term borrowings from
the FHLB, repayments and prepayments of loans, the maturity of investment
securities and interest income. Although maturity and scheduled amortization of
loans are relatively predictable sources of funds, deposit flows and prepayments
on loans are influenced significantly by general interest rates, economic
conditions and competition. In fact, since early 1994, interest rates have
increased and mortgage loan refinancing has been moderate.
The primary investing activity of Washington is originating mortgage loans to be
held to maturity. For the fiscal years ended June 30, 1996, 1995 and 1994,
Washington originated loans for its portfolio in the amount of $16.7 million,
$11.1 million and $16.4 million, respectively. These activities were funded
primarily by FHLB borrowings and principal repayments of loans, and proceeds
from the IPO. FHLB borrowings have been more costly than deposits, but less than
other financing sources available.
For investment and liquidity purposes, Washington maintains a portfolio of
investment securities including U.S. Treasury securities, U.S. government
agencies, state and political subdivisions, mortgaged-backed securities and
corporation and other securities.
The Bank is required to maintain minimum levels of liquid assets under the OTS
regulations. Savings institutions are required to maintain an average daily
balance of liquid assets (including cash, certain time deposits, and specified
U.S. Government, state or federal agency obligations) of not less than 5.0% of
its average daily balance of net withdrawal accounts plus short-term borrowings.
It is the Bank's policy to maintain its liquidity portfolio in excess of
regulatory requirements. The Bank's eligible liquidity ratios were 14.6%, 8.6%
and 11.3% respectively, at June 30, 1996, 1995 and 1994.
Cash was generated by Washington's operating activities during the years ended
June 30, 1996, 1995 and 1994, primarily as a result of net income. The
adjustments to reconcile net income to net cash provided by operations during
the periods presented consisted primarily of amortization of premiums and
discounts on debt securities, depreciation expense, deferred income taxes and
increases and decreases in other assets and other liabilities. The primary
investing activities of Washington are the origination of loans and the purchase
of investment securities; which are funded with cash provided from operations
and financing activities, as well as proceeds from amortization and prepayments
on existing loans and proceeds from sales and maturities of securities. The
primary financing activity consist of deposits, borrowing/repayments with the
FHLB of Des Moines, and proceeds from the IPO.
Washington's most liquid assets are cash and cash equivalents, which include
short-term investments. At June 30, 1996, 1995 and 1994, cash and cash
equivalents were $1,903,000, $1,658,000 and $735,000, respectively.
<PAGE>
Liquidity management for Washington is both an ongoing and long-term function of
Washington's asset/liability management strategy. Excess funds generally are
invested in overnight deposits at the FHLB of Des Moines or financial
institutions. Should Washington require funds beyond its ability to generate
them internally, additional sources of funds are available through FHLB of Des
Moines advances. Washington would pledge its FHLB of Des Moines stock and
certain other assets as collateral for such advances. During fiscal 1996 and
1995, Washington used FHLB advances to meet cash flow requirements and finance
loan growth. The FHLB advances are generally at a higher rate of interest than
transaction and savings deposit accounts.
At June 30, 1996, Washington had outstanding loan commitments of $1,213,000 and
undisbursed loans in process of $562,000. Washington anticipates it will have
sufficient funds available to meet its current loan commitments, including loan
applications received and in process prior to the issuance of firm commitments.
Certificates of deposit which are scheduled to mature in one year or less at
June 30, 1996 were $17,624,000. Based on past experience, management believes
that a significant portion of such deposits will remain with the Company.
Under federal law, the Bank is required to meet certain tangible, core and risk
based capital requirements. For information regarding Washington's regulatory
capital compliance, see "Selected Consolidated Financial Information."
Recent Accounting Developments
Statement of Financial Accounting Standards No. 121 ("SFAS 121") "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of," is
effective for the fiscal year beginning July 1, 1996. The statement requires
that long-lived assets and certain identifiable intangibles to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. An impairment loss is recognized if the sum of the expected future
cash flows is less than the carrying amount of the asset. Management does not
expect the implementation of SFAS No. 121 to have a material impact on
Washington's consolidated financial position or results of operations.
SFAS No. 123, Accounting for Stock-Based Compensation was issued in October,
1995 and is effective for transactions entered into in fiscal years beginning
after December 15, 1995. The statement establishes financial accounting and
reporting standards for stock-based employee compensation plans, such as
Washington's proposed stock option plans. The statement defines a fair value
method of accounting for stock option plans and encourages entities to adopt
that method of accounting for their stock option plans. However, the statement
allows entities to use the intrinsic value based method of accounting as
prescribed by APB No. 25. Under the fair value based method compensation cost is
measured at the grant dated based on the value of the award and is recognized
over the service period. Under the intrinsic value based method, compensation
cost is the excess, if any, of the quoted market price of the stock at the grant
date or other measurement date over the amount an employee must pay to acquire
the stock. Washington intends to apply the intrinsic value based method of
accounting for the proposed stock option plans as provided for in APB No. 25.
Since the proposed stock option plans have no intrinsic value at the grant date,
no compensation cost will be recognized in the financial statements. Washington
will be required to make pro forma disclosures of net income and earnings per
share as if the fair value based method of accounting were used. Since
Washington intends to use the intrinsic value based method of accounting and
only report the effect of the fair value based method on a pro forma basis,
management does not expect the implementation of SFAS No. 123 to have a material
impact on the Company's consolidated financial position or results of
operations.
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," is effective for transactions entered into
after December 31, 1996. The statement requires that after a transfer of
financial assets, an entity 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.
Servicing assets or liabilities are to be recognized and amortized over the
period of estimated net servicing income or net servicing loss. Management does
not expect the implementation of SFAS No. 125 to have a material impact on
Washington's consolidated financial position or results of operations.
<PAGE>
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto presented herein have
been prepared in accordance with generally accepted accounting principles, which
generally requires 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 due to inflation. The impact of inflation is
reflected in the increased cost of Washington's operations. Nearly all the
assets and liabilities of Washington are financial, unlike most industrial
companies. As a result, Washington's performance is directly impacted by changes
in interest rates, which are indirectly influenced by inflationary expectations.
Washington's ability to match the interest sensitivity of its financial assets
to the interest sensitivity of its financial liabilities in its asset/liability
management may tend to minimize the effect of change in interest rates on
Washington's performance. Changes in interest rates do not necessarily move to
the same extent as changes in the price of goods and services. The liquidity and
the maturity structure of Washington's assets and liabilities are critical to
the maintenance of acceptable performance levels.
<PAGE>
WASHINGTON BANCORP
AND SUBSIDIARY
CONSOLIDATED FINANCIAL REPORT
JUNE 30, 1996
<PAGE>
CONTENTS
- --------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
Consolidated statements of financial condition
Consolidated statements of income
Consolidated statements of stockholders' equity
Consolidated statements of cash flows
Notes to financial statements
- --------------------------------------------------------------------------------
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Washington Bancorp
Washington, Iowa
We have audited the accompanying consolidated statements of financial condition
of Washington Bancorp and its subsidiary, as of June 30, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended June 30, 1996. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Washington Bancorp
and subsidiary as of June 30, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1996 in conformity with generally accepted accounting principles.
/S/ McGLADREY & PULLEN, LLP
Cedar Rapids, Iowa
August 6, 1996
<PAGE>
WASHINGTON BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 1996 and 1995
<TABLE>
ASSETS 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents (Note 2):
Interest-bearing ......................................... $ 1,109,583 $ 1,289,842
Noninterest-bearing ...................................... 793,769 368,201
Investment securities (Notes 2, 3 and 8):
Held to maturity ......................................... 3,077,341
Available for sale ....................................... 14,628,089 8,439,858
Loans receivable, net (Notes 4, 8 and 14) ................... 42,905,699 40,434,734
Accrued interest receivable (Note 5) ........................ 465,789 421,262
Federal Home Loan Bank stock ................................ 369,100 361,900
Premises and equipment, net (Note 6) ........................ 543,606 572,677
Other assets ................................................ 75,308 134,500
----------- -----------
Total assets ........................................ $60,890,943 $55,100,315
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------
Liabilities
Deposits (Note 7) ........................................ $44,176,448 $42,949,799
Borrowed funds (Notes 3 and 8) ........................... 5,504,742 7,230,215
Advances from borrowers for taxes and insurance .......... 218,506 199,834
Accrued expenses and other liabilities ................... 443,082 320,311
----------- -----------
Total liabilities ................................... 50,342,778 50,700,159
----------- -----------
Commitments and Contingencies (Note 12)
Stockholders' Equity (Notes 11 and 16)
Preferred stock, $.01 par value, authorized 1996 1,000,000
shares; 1995 none; none issued and outstanding - - - -
Common stock, $.01 par value, authorized 1996 4,000,000
shares; 1995 none; issued and outstanding 1996 657,519
shares; 1995 none ..................................... 6,575 - -
Additional paid-in capital ............................... 6,172,680 - -
Retained earnings, substantially restricted ............. 4,941,449 4,500,027
Unrealized (losses) on investment securities available
for sale, net of income taxes (Note 3) ................ (68,209) (99,871)
Unearned shares, employee stock ownership plan (Note 9) .. (504,330) - -
----------- -----------
Total stockholders' equity .......................... 10,548,165 4,400,156
----------- -----------
Total liabilities and stockholders' equity .......... $60,890,943 $55,100,315
=========== ===========
</TABLE>
See Notes to Financial Statements.
<PAGE>
WASHINGTON BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30, 1996, 1995 and 1994
<TABLE>
1996 1995 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans receivable:
First mortgage loans ...................... $2,987,869 $2,763,772 $2,565,505
Consumer and other loans .................. 458,102 419,044 378,235
Investment securities:
Taxable ................................... 713,988 687,754 837,735
Nontaxable ................................ 46,702 68,973 72,445
---------- ---------- ----------
Total interest income ............. 4,206,661 3,939,543 3,853,920
---------- ---------- ----------
Interest expense:
Deposits (Note 7) ............................ 2,246,017 1,936,410 1,938,705
Borrowed funds ............................... 252,657 244,862 104,632
---------- ---------- ----------
Total interest expense ............ 2,498,674 2,181,272 2,043,337
---------- ---------- ----------
Net interest income ............... 1,707,987 1,758,271 1,810,583
Provision for loan losses (Note 4) .............. 15,000 - - - -
---------- ---------- ----------
Net interest income after provision
for loan losses ............. 1,692,987 1,758,271 1,810,583
---------- ---------- ----------
Noninterest income:
Securities gains (losses), net (Note 3) ...... 32,534 (30,000) 55,560
Loan origination and commitment fees ......... 8,316 3,379 20,239
Service charges and fees ..................... 84,512 111,063 98,134
Insurance commissions ........................ 54,615 38,961 19,643
Other ........................................ 17,026 14,238 15,864
---------- ---------- ----------
Total noninterest income .......... 197,003 137,641 209,440
---------- ---------- ----------
Noninterest expense:
Compensation and benefits (Note 9) ........... 581,896 613,962 540,106
Occupancy and equipment ...................... 138,032 144,408 121,066
SAIF deposit insurance premium ............... 116,690 116,888 117,178
Data processing .............................. 80,076 65,533 100,101
Other ........................................ 289,496 337,575 270,696
---------- ---------- ----------
Total noninterest expense ......... 1,206,190 1,278,366 1,149,147
---------- ---------- ----------
Income before income taxes ........ 683,800 617,546 870,876
Income tax expense (Note 10) .................... 242,378 258,947 291,202
---------- ---------- ----------
Net income ........................ $ 441,422 $ 358,599 $ 579,674
========== ========== ==========
Earnings per common share subsequent to
to conversion (Note 1) ....................... $ 0.25 $ n/a $ n/a
========== ========== ==========
Weighted average common shares .................. $ 606,002 n/a n/a
========== ========== ==========
</TABLE>
See Notes to Financial Statements ...............
<PAGE>
WASHINGTON BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(NOTES 11 AND 16)
Years Ended June 30, 1996, 1995 and 1994
<TABLE>
Unrealized
(Losses) On
Investment Uneared
Securities Shares,
Available Employee
For Stock
Additional Sale, Net Ownership Total
Preferred Common Paid-In Retained Of Income Plan Stockholders'
Stock Stock Capital Earnings Taxes (Note 9) Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1993 .................. $ - - $ - - $ - - $3,561,754 $ - - $ - - $ 3,561,754
Net income ........................... - - - - - - 579,674 - - - - 579,674
--------- --------- ---------- ---------- --------- ---------- -----------
Balance, June 30, 1994 .................. - - - - - - 4,141,428 - - - - 4,141,428
Net income ........................... - - - - - - 358,599 - - - - 358,599
Cumulative effect of accounting
change as of July 1, 1994 (Note 3) - - - - - - - - (91,602) - - (91,602)
Net change in unrealized (losses)
on investment securities available
available for sale, net of,
net of income taxes ............... - - - - - - - - (8,269) - - (8,269)
--------- --------- ---------- ---------- --------- ---------- -----------
Balance, June 30, 1995 .................. - - - - - - 4,500,027 (99,871) - - 4,400,156
Net income ........................... - - - - - - 441,422 - - - - 441,422
Issuance of 604,917 shares of
common stock (Note 16) ............ - - 6,049 6,043,121 - - - - - - 6,049,170
Expenses incurred relating to
conversion to stock from (Note 16) - - - - (396,477) - - - - - - (396,477)
Issuance of 52,602 shares of
common stock to ESOP
(Note 9) ........................... - - 526 525,494 - - - - (526,020) - -
Allocation of ESOP shares (Note 9) ... - - - - 542 - - - - 21,690 22,232
Net change in unrealized (losses) on
investment securities available
for sale, net of income taxes ..... - - - - - - - - 31,662 - - 31,662
--------- --------- ---------- ---------- --------- ---------- -----------
Balance, June 30, 1996 .................. $ - - $ 6,575 $6,172,680 $4,941,449 $ (68,209) $ (504,330) $10,548,165
========= ========= ========== ========== ========== ========== ===========
</TABLE>
<PAGE>
WASHINGTON BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
<TABLE>
1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income .......................................... $ 441,422 $ 358,599 $ 579,674
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of premiums and discounts on
debt securities ................................ 80,890 93,263 67,814
Provision for loan losses ........................ 15,000 - - - -
Provision for impairment on available for sale
securities ..................................... - - 30,000 - -
(Gain) on sale of investment securities .......... (32,534) - - (55,560)
(Gain) loss on sale of foreclosed real estate .... - - (10,338) (1,670)
Depreciation ..................................... 68,847 76,474 68,748
ESOP contribution expense ........................ 22,232 - - - -
Deferred income taxes ............................ 28,360 44,221 77,000
(Increase) decrease in accrued interest receivable (44,527) 29,334 (132,052)
(Increase) decrease in other assets .............. 59,192 (1,638) (61,576)
Increase (decrease) in accrued expenses and
other liabilities .............................. 75,415 52,004 (28,850)
---------- ----------- -----------
Net cash provided by operating activities 714,297 671,919 513,528
---------- ----------- -----------
Cash Flows from Investing Activities
Held to maturity securities:
Sales ............................................ - - - - 1,236,950
Maturities and calls ............................. 166,988 379,660 3,047,286
Purchases ........................................ - - (100,000) (6,045,191)
Available for sale securities:
Sales ............................................ 3,807,939 - - - -
Maturities ....................................... 2,556,485 1,800,000 - -
Purchases ........................................ (9,647,200) (642,300) - -
Loans made to customers, net ........................ (2,485,965) (2,913,533) (4,242,581)
Purchase of premises and equipment .................. (39,776) (93,253) (225,268)
---------- ----------- -----------
Net cash (used in) investing activities .. (5,641,529) (1,569,426) (6,228,804)
---------- ----------- -----------
(Continued)
</TABLE>
<PAGE>
WASHINGTON BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS ( CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
<TABLE>
1996 1995 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Financing Activities
Net increase (decrease) in deposits ............. $ 1,226,649 $ (922,602) $ (395,907)
Proceeds from Federal Home Loan Bank advances ... 16,820,000 51,415,000 9,050,000
Principal payments on Federal Home Loan Bank
advances ..................................... (18,545,473) (48,673,522) (4,561,263)
Net increase in advances from borrowers for taxes
and insurance ................................ 18,672 1,810 11,107
Proceeds from issuance of 604,917 shares
of common stock .............................. 6,049,170 - - - -
Payments for expenses incurred relating to
conversion to stock form ..................... (396,477) - - - -
---------- ----------- -----------
Net cash provided by financing
activities ..................... 5,172,541 1,820,686 4,103,937
---------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents ............... 245,309 923,179 (1,611,339)
Cash and cash equivalents:
Beginning ....................................... 1,658,043 734,864 2,346,203
----------- ----------- -----------
Ending .......................................... $ 1,903,352 $ 1,658,043 $ 734,864
=========== =========== ===========
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest paid to depositors .................. $ 2,241,023 $ 1,875,273 $ 1,961,738
Interest paid on other obligations ........... 252,657 271,862 128,632
Income taxes, net of refunds ................. 99,356 297,442 179,275
Supplemental Schedule of Noncash Investing and
Financing Activities
Transfers from loans to foreclosed real estate .. $ - - $ 33,152 $ 49,905
Contract sales of foreclosed real estate ........ - - 93,395 28,846
Transfer of held-to-maturity securities to
available-for-sale securities in accordance
with the adoption of FAS #115 ................ $ - - $ 9,919,066 $ - -
Investment securities transferred from
held-to-maturity portfolio to available
for sale, at fair value ...................... $ 2,872,058 $ - - $ - -
</TABLE>
See Notes to Financial Statements.
<PAGE>
WASHINGTON BANCORP AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Significant Accounting Policies
Organization: On March 11, 1996, Washington Bancorp issued 604,917 shares of
common stock at $10 per share and simultaneously invested $3,089,356 for all the
outstanding common shares of Washington Federal Savings Bank in a transaction
accounted for like a pooling of interests.
Prior to March 11, 1996, the Savings Bank was a federally chartered mutual
savings bank. After a reorganization, effective March 11, 1996, the Savings Bank
is now a federally chartered stock savings bank and 100% of the Savings Bank's
common stock is owned by Washington Bancorp. See Note 16 for a description of
the reorganization.
Principles of consolidation: The accompanying consolidated financial statements
include the accounts of Washington Bancorp (the "Company"), Washington Federal
Savings Bank (the "Savings Bank"), and its wholly-owned subsidiary, Washington
Federal Financial Services, Inc., which is a discount brokerage firm. The
activity of the Savings Bank's subsidiary is not material. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Accounting estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash equivalents: Cash equivalents consist of FHLB-daily time, cash on hand, and
funds due from banks. For purposes of reporting cash flows, the Company
considers all highly liquid debt instruments purchased with a maturity of three
months or less to be equivalents. Cash flows from loans and deposits are
reported net.
Investment in debt securities and accounting change: The Company has investments
in debt securities, which consist primarily of obligations of the U. S.
government and related agencies and corporations, state governments and domestic
corporations.
The Company adopted the provisions of FASB Statement No. 115, Accounting for
Certain Investments in Debt and Equity Securities, as of July 1, 1994. Statement
115 requires that management determine the appropriate classification of
securities at the date of adoption, and thereafter at the date individual
investment securities are acquired, and that the appropriateness of such
classification be reassessed at each balance sheet date. The classifications are
as follows:
Securities available for sale: Securities classified as available for sale
are those debt securities that the Company intends to hold for an indefinite
period of time, but not necessarily to maturity. Any decision to sell a
security classified as available for sale would be based on various factors,
including significant movements in interest rates, changes in the maturity
mix of the Company's assets and liabilities, liquidity needs, regulatory
capital considerations, and other similar factors. Securities available for
sale are carried at fair value. Unrealized gains or losses, net of related
deferred tax effect, are reported as increases or decreases in the Company's
equity. Realized gains or losses, determined on the basis of the cost of
specific securities sold, are included in earnings.
<PAGE>
Note 1. Significant Accounting Policies (Continued)
Securities held to maturity: Securities classified as held to maturity are
those debt securities the Company has both the intent and ability to hold to
maturity regardless of changes in market conditions, liquidity needs or
changes in general economic conditions. These securities are carried at cost
adjusted for amortization of premium and accretion of discount, computed by
the interest method over their contractual lives. The cost of such securities
sold is determined using the specific identification method.
Prior to the adoption of Statement 115, the Company stated its debt securities
at amortized cost. Under both the newly adopted accounting standard and the
Company's former accounting practices, premiums and discounts on investments in
debt securities are amortized over their contractual lives. The method of
amortization results in a constant effective yield on those securities (the
interest method). Interest on debt securities is recognized in income as earned.
Realized gains and losses, including losses from declines in value of specific
securities determined by management to be other-than-temporary, are included in
income. Realized gains and losses are determined on the basis of the specific
securities sold.
Pursuant to a FASB Special Report, "A Guide to Implementation of Statements 115
on Accounting for Certain Investments in Debt and Equity Securities," the
Company's subsidiary savings bank transferred, at fair value, $2,872,058 of
investment securities from held-to-maturity to available-for-sale in December
1995.
Loans receivable: Loans receivable are stated at unpaid principal balances less
the allowance for loan losses.
Interest on loans is accrued daily on the outstanding balances. Accrual of
interest is discontinued on a loan when management believes, after considering
collection efforts and other factors, that the borrower's financial condition is
such that collection of interest is doubtful.
The allowance for loan losses is increased by provisions charged to income and
reduced by charge-offs, net of recoveries. Management's periodic evaluation of
the adequacy of the allowance is based on the Savings Bank's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay, estimated value of any underlying
collateral, and current economic conditions.
In accordance with Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment
of a Loan," loans are considered impaired when, based on all current information
and events, it is probable the Savings Bank will not be able to collect all
amounts due. The portion of the allowance for loan losses applicable to impaired
loans has been computed based on the present value of the estimated future cash
flows of interest and principal discounted at the loan's effective interest rate
or on the fair value of the collateral for collateral dependent loans. The
entire change in present value of expected cash flows or impaired loans is
reported as bad debt expense in the same manner in which impairment initially
was recognized or as a reduction in the amount of bad debt expense that
otherwise would be reported. Interest income on impaired loans is recognized on
the cash basis.
Foreclosed real estate: Real estate properties acquired through loan foreclosure
are initially recorded at the lower of cost or fair value less estimated selling
expenses at the date of foreclosure. Costs relating to development and
improvement of property are capitalized, whereas costs relating to holding
property are expensed.
<PAGE>
Note 1. Significant Accounting Policies (Continued)
Valuations are periodically performed by management. If the carrying value of a
property exceeds its estimated fair value less estimated selling expenses,
either an allowance for losses is established, or the property's carrying value
is reduced, by a charge to income.
Premises and equipment: Premises and equipment are carried at cost, net of
accumulated depreciation. Depreciation is computed by the straight-line and
declining-balance methods over the estimated useful lives of the assets.
Income taxes: Deferred taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and operating
loss and tax credit carryforwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment.
Earnings per common share: The earnings per common share amounts were computed
using the weighted average number of shares outstanding during the periods
presented. In accordance with Statement of Position 93-6, shares owned by the
ESOP that have not been committed to be released are not considered to be
outstanding for the purpose of computing earnings per share. Earnings per share
information for the year ended June 30, 1996 is calculated by dividing net
income, subsequent to the mutual to stock conversion, by the weighted average
number of shares outstanding. Net income subsequent to the conversion was
$150,832 for the period ended June 30, 1996. Earnings per share information is
not applicable for the years ended June 30, 1995 and 1994 because the Savings
Bank was a mutual association at that time.
ESOP obligations and expense: The receivable from the Company's ESOP has been
treated as a reduction of equity. Any principal repayment of the debt is treated
as an increase in equity. Compensation expense for the ESOP is based upon the
fair value of shares allocated to participants.
Fair value of financial instruments: FASB Statement No. 107, "Disclosures About
Fair Value of Financial Instruments," requires disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
using present value or their valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. In that regard, the derived fair value estimates
cannot be substantiated by comparison to independent markets and, in many cases,
could not be realized in immediate settlement of the instrument. Statement No.
107 excludes certain financial instruments and all nonfinancial instruments from
its disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.
<PAGE>
Note 1. Significant Accounting Policies (Continued)
The following methods and assumptions were used by the Company in estimating
fair value of its financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance sheet
for cash and cash equivalents approximate their fair values.
Investment securities (including mortgage-backed securities): Fair values for
investment securities are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments.
Loans receivable: For variable-rate loans that reprice frequently and have no
significant change in credit risk, the fair values are based on carrying
values. The fair values of other loans are determined using estimated future
cash flows, discounted at the interest rates currently being offered for
loans with similar terms to borrowers with similar credit quality. The
carrying amount of accrued interest receivable approximates its fair value.
Deposits: The fair values of demand deposits equal their carrying amounts
which represents the amount payable on demand. The carrying amounts for money
market and passbook savings accounts approximate their fair values at the
reporting date. Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies interest
rates currently being offered on certificates to a schedule of aggregated
expected monthly maturities on time deposits.
Borrowed funds: Fair values for borrowed funds are estimated using a
discounted cash flow calculation that applies interest rates currently being
charged for borrowed funds of similar maturities.
Off-balance-sheet instruments: Fair values for the Company's
off-balance-sheet instruments are valued based upon the current fee structure
for outstanding letters of credit. Unfunded loan commitments are not valued
since the loans are generally priced at market at the time of funding.
Note 2. Restrictions on Cash Due from Banks and Investments
The Savings Bank is required to maintain reserve balances in cash or on deposit
with Federal Reserve Banks. The total of those reserve balances was
approximately $25,000 at June 30, 1996.
In addition, the Savings Bank is required to maintain a minimum balance of
unpledged cash and investment securities totaling approximately $2,380,000 as of
June 30, 1996 to provide liquidity for deposits.
<PAGE>
Note 3. Investment Securities and Accounting Change
As discussed in Note 1, the Company adopted FASB Statement No. 115 as of July 1,
1994. The cumulative effect of adopting Statement 115 decreased the July 1, 1994
equity by $91,602, net of the $54,494 related deferred tax effect, to recognize
the net unrealized holding loss on securities at that date.
The amortized cost and fair value of investment securities as of June 30, 1996
and 1995 are as follows:
<TABLE>
1996
----------------------------------------------------
Cost Or Gross Gross
Amortized Unrealized Unrealized
Cost Gains (Losses) Fair Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Available for sale:
U. S. Treasury securities ...... $ 402,253 $ 3,653 $ (12,250) $ 393,656
U. S. Government agencies ...... 7,998,939 3,145 (40,743) 7,961,341
Corporations and other ......... 4,279,374 1,810 (64,036) 4,217,148
State and political subdivisions 403,750 - - - - 403,750
Mortgage-backed securities ..... 152,908 - - (714) 152,194
Certificates of deposit with
financial institutions ...... 1,500,000 - - - - 1,500,000
----------- ----------- ----------- -----------
Total ............... $14,737,224 $ 8,608 $ (117,743) $14,628,089
=========== =========== =========== ===========
1995
----------------------------------------------------
Cost Or Gross Gross
Amortized Unrealized Unrealized
Cost Gains (Losses) Fair Value
----------- ----------- ----------- -----------
Held to maturity:
State and political subdivisions $ 1,237,807 $ 21,973 $ (2,000) $ 1,257,780
Mortgage-backed securities ..... 1,839,534 11,165 (17,899) 1,832,800
----------- ----------- ----------- -----------
Total ............... 3,077,341 33,138 (19,899) 3,090,580
----------- ----------- ----------- -----------
Available for sale:
U. S. Treasury securities ...... 505,230 3,658 (14,263) 494,625
U. S. Government agencies ...... 2,395,771 6,760 (73,321) 2,329,210
Corporations and other ......... 5,698,650 22,004 (104,631) 5,616,023
----------- ----------- ----------- -----------
Total ............... 8,599,651 32,422 (192,215) 8,439,858
----------- ----------- ----------- -----------
Total ............... $11,676,992 $ 65,560 $ (212,114) $11,530,438
=========== =========== ============ ===========
</TABLE>
<PAGE>
Note 3. Investment Securities and Accounting Change (Continued)
The amortized cost and fair value of mortgage-backed securities are as follows:
June 30,
--------------------------------------------------
1996 1995
----------------------- -----------------------
Cost Or Gross Gross
Amortized Unrealized Unrealized
Cost Gains (Losses) Fair Value
---------- ----------- ---------- ----------
GNMA certificates . $ 624 $ 624 $ 403,369 $ 402,188
FHLMC certificates 152,284 151,570 336,753 332,535
FNMA certificates . - - - - 1,099,412 1,098,077
---------- ----------- ---------- ----------
Total $ 152,908 $ 152,194 $1,839,534 $1,832,800
========== =========== ========== ==========
The amortized cost and fair value of debt securities as of June 30, 1996 by
contractual maturity are shown below. Maturities may differ from contractual
maturities in mortgage-backed securities because the mortgages underlying the
securities may be called or repaid without any penalties. Therefore, these
securities are not included in the maturity categories in the following maturity
summary.
Amortized Fair
Cost Value
----------- -----------
Available for sale:
Due in one year or less ......................... $ 4,360,356 $ 4,331,550
Due after one year through five years ........... 9,107,165 9,027,465
Due after five years through ten years .......... 1,116,795 1,116,880
Mortgage-backed securities ...................... 152,908 152,194
----------- -----------
$14,737,224 $14,628,089
=========== ===========
Investment securities with a carrying amount of $3,322,469 and $3,349,095 at
June 30, 1996 and 1995, respectively, were pledged as collateral on public
deposits. Investment securities with a carrying amount of $3,521,611 and
$3,247,071 at June 30, 1996 and 1995, respectively, were pledged as collateral
on FHLB advances. The carrying amount at June 30, 1996 includes held to maturity
securities at book value and available for sale securities at fair value.
Securities gains (losses) for the years ended June 30, 1996, 1995 and 1994 are
as follows:
1996 1995 1994
--------- --------- --------
Realized gains ...................... $ 91,644 $ - - $ 57,137
Realized (losses) ................... (59,110) - - (1,577)
Other provision for impairment
on equity securities .............. - - (30,000) - -
-------- --------- --------
$ 32,534 $ (30,000) $ 55,560
========= ========= ========
The Company transferred securities with an amortized cost of $2,907,058 and an
unrealized loss of $35,000 from the held to maturity portfolio to the
available-for-sale portfolio on December 1, 1995, based on management's
reassessment of their previous descriptions of securities giving consideration
to liquidity needs, management of interest rate risk and other factors.
<PAGE>
Note 4. Loans Receivable
Loans receivable are summarized as follows:
June 30,
------------------------
1996 1995
----------- -----------
First mortgage loans (principally conventional):
Secured by one-to-four family residences .......... $33,914,215 $33,327,173
Home equity and second mortgage ................... 1,568,747 1,668,817
Multi-family and commercial real estate ........... 2,896,215 1,741,067
Construction loans ................................ 1,118,765 589,438
Other ............................................. 114,617 472,279
----------- -----------
Total first mortgage loans ............. 39,612,559 37,798,774
Commercial loans ..................................... 1,545,856 1,083,703
Consumer and other loans:
Automobile ........................................ 1,134,405 784,893
Other ............................................. 822,273 970,438
----------- -----------
Total loans ............................ 43,115,093 40,637,808
Less allowance for loan losses .................... 209,394 203,074
----------- -----------
$42,905,699 $40,434,734
=========== ===========
Loans receivable are net of loans in process of $561,976 and $361,142 as of June
30, 1996 and 1995, respectively.
Activity in the allowance for loan losses is summarized as follows for the years
ended June 30:
1996 1995 1994
-------- -------- --------
Balance, beginning .................. $203,074 $202,526 $201,194
Provision charged to expense ..... 15,000 - - - -
Charge-offs ...................... (13,574) (19,402) (6,737)
Recoveries ....................... 4,894 19,950 8,069
-------- -------- --------
Balance, ending ..................... $209,394 $203,074 $202,526
======== ======== ========
The Savings Bank has no loans receivable at June 30,1996 that it considers to be
impaired that are not part of a homogeneous group of loans. Accordingly, no
separate allowance has been provided for these loans.
Note 5. Accrued Interest Receivable
Accrued interest receivable at June 30 is summarized as follows:
1996 1995
-------- --------
Investment securities ................................. $144,064 $147,750
Loans receivable ...................................... 321,725 273,512
-------- --------
$465,789 $421,262
======== ========
Note 6. Premises and Equipment
Premises and equipment consisted of the following at June 30:
1996 1995
---------- ----------
Land ................................................... $ 83,080 $ 83,080
Building ............................................... 502,624 502,665
Furniture, fixtures and equipment ...................... 553,269 513,451
---------- ----------
1,138,973 1,099,196
Less accumulated depreciation .......................... 595,367 526,519
----------- ----------
$ 543,606 $ 572,677
=========== ==========
<PAGE>
Note 7. Deposits
Deposits at June 30 are as follows:
<TABLE>
Weighted
Average
Rate At 1996 1995
June 30, -------------------------- -----------------------------
1996 Amount Percent Amount Percent
-------- ------------- ------- --------------- --------
<S> <C> <C> <C> <C> <C>
Demand and NOW
accounts, including
noninterest-bearing
deposits 1996 $973,103;
1995 $760,305 1.41% $ 2,529,246 5.7% $ 2,128,594 5.0%
Money market 4.14 9,086,719 20.6 8,309,941 19.4
Passbook savings 2.30 2,243,982 5.0 2,187,348 5.1
-----------------------------------------------------------
13,859,947 31.3 12,625,883 29.5
-----------------------------------------------------------
Certificates of deposit:
3% to 4% 3.14 27,711 0.1 1,202,772 2.8
4.01% to 5% 4.61 4,976,426 11.3 6,160,507 14.3
5.01% to 6% 5.55 14,445,459 32.7 11,296,893 26.3
6.01% to 7% 6.31 10,866,905 24.6 11,520,670 26.8
7.01% to 8% 143,074 0.3
-----------------------------------------------------------
30,316,501 68.7 30,323,916 70.5
-----------------------------------------------------------
4.94 $ 44,176,448 100.0% $ 42,949,799 100.0%
==========================================================
</TABLE>
The aggregate amount of short-term jumbo certificates of deposit with a minimum
denomination of $100,000 was approximately $919,000 and $164,000 at June 30,
1996 and 1995, respectively. Deposits in excess of $100,000 are not insured by
the FDIC.
At June 30, 1996, scheduled maturities of certificates of deposit are as
follows:
<TABLE>
Year Ending June 30,
------------------------------------------------------------------------------------
1997 1998 1999 2000 2001 Total
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
3% to 4% $ 27,711 $ $ $ $ $ 27,711
4.01% to 5% 4,514,922 461,504 4,976,426
5.01% to 6% 6,088,865 4,880,284 2,987,814 288,968 199,528 14,445,459
6.01% to 7% 6,992,954 2,923,524 128,281 593,931 228,215 10,866,905
-------------------------------------------------------------------------------------
$ 17,624,452 $ 8,265,312 $ 3,116,095 $ 882,899 $ 427,743 $ 30,316,501
====================================================================================
</TABLE>
<PAGE>
Note 7. Deposits (Continued)
Interest expense on deposits for the years ended June 30 is summarized as
follows:
1996 1995 1994
---------------------------------
Money market ............................. $ 399,720 $ 330,703 $ 495,146
Passbook savings ......................... 63,349 74,041 52,009
NOW ...................................... 36,856 32,883 38,917
Certificates of deposit .................. 1,746,092 1,498,783 1,352,633
---------------------------------
$2,246,017 $1,936,410 $1,938,705
=================================
Note 8. Borrowed Funds
Borrowed funds at June 30 are as follows:
1996 1995
----------------------
Short-term advances from the Federal Home Loan Bank (A) $2,500,000 $ 3,130,000
Long-term advances from the Federal Home Loan Bank (B) 3,004,742 4,100,215
----------------------
$5,504,742 $ 7,230,215
======================
(A) Pursuant to collateral agreements with the Federal Home Loan Bank (FHLB),
these advances are collateralized by pledged investment securities with a
carrying amount of $3,521,611 and $3,247,071 at June 30, 1996 and 1995,
respectively.
(B) Pursuant to collateral agreements with the Federal Home Loan Bank (FHLB),
these advances are collateralized by all the Institution's stock in the
FHLB and qualifying first mortgage loans.
Advances at June 30, 1996 have maturity dates as follows:
Year Ending June
June 30 Interest Rate 1996
- --------------------------------------------------------------------------------
1997 4.983% to 6.05% $3,602,976
1998 4.983% to 5.74% 111,074
1999 4.983% to 5.74% 1,611,121
2000 5.74% 14,979
2001 5.74% 15,862
Thereafter 5.74% 148,730
----------
$5,504,742
==========
Note 9. Employee Benefit Plans
Employee Stock Ownership Plan: In conjunction with the Savings Bank's conversion
to stock ownership, the Company established an Employee Stock Ownership Plan
(ESOP) for eligible employees. The plan was established by amending the Savings
Bank's existing profit sharing plan. Employees of the Bank are eligible to
participate after they attain age 21 and complete one year of service during
which they work at least 1,000 hours. The Company issued 52,602 shares of common
stock to the ESOP on the date of the conversion and reorganization.
The Savings Bank makes annual contributions to the ESOP equal to the ESOP's debt
service less dividends received by the ESOP. All dividends received by the ESOP
are used to pay debt service. Contributions to the ESOP and shares released from
the suspense account in an amount proportional to the repayment of the ESOP loan
are allocated among ESOP participants on the basis of compensation in the year
of allocation. Benefits generally become 100% vested after seven years of
credited service. Forfeitures will be reallocated among remaining participating
employees, in the same proportion as contributions. Benefits may be payable in
the form of stock or cash upon termination of employment.
<PAGE>
As shares are released, the Company reports compensation expense equal to the
current market price of the shares, and the shares become outstanding for
earnings-per-share computations. Dividends on allocated ESOP shares are recorded
as a reduction of retained earnings; dividends on unallocated ESOP shares are
recorded as a reduction of debt and accrued interest. ESOP compensation expense
was $22,232 for the year ended June 30, 1996.
At June 30, 1996, the ESOP held 52,602 shares of the Company's common stock,
2,169 of which were released for allocation and the remaining 50,433 were
unreleased (unearned) shares. The 50,433 unreleased (unearned) shares had a fair
market value of approximately $530,000 at June 30, 1996.
The ESOP plan may allow, at the discretion of the Advisory Committee, employees
to elect to defer up to fifteen percent of compensation annually. The Company
may, at the discretion of the Advisory Committee, make matching contributions on
an annual basis.
Payments to the previous existing defined contribution plan were at the
discretion of the Board of Directors. The expense for this previous plan was
none, $30,815 and $27,620 for the years ended June 30, 1996, 1995 and 1994,
respectively.
Note 10. Income Taxes
The Company and its subsidiaries file a consolidated federal income tax return
on a calendar year basis. If certain conditions are met in determining taxable
income, the Savings Bank is allowed a special bad-debt deduction based on a
percentage of taxable income (presently 8%) or on specified experience. The
Savings Bank used the percentage of taxable income method in 1995 and
anticipates using the same method in 1996.
Net deferred income tax liabilities consist of the following components as of
June 30, 1996 and 1995:
1996 1995
------------------
Deferred tax assets:
Unrealized loss on investment securities
available for sale ........................... $ 40,926 $ 59,922
Impairment on equity securities ................. - - 11,000
Other ........................................... 7,343 7,650
------------------
48,269 78,572
------------------
Deferred tax liabilities:
Allowance for loan losses ....................... 87,857 73,490
FHLB stock dividends ............................ 44,067 41,381
------------------
131,924 114,871
------------------
Net deferred tax liability included in
other liabilities ............... $(83,655) $(36,299)
==================
Prior to 1988, the Savings Bank received cumulative income tax deductions
totaling $977,000 for bad debts which were based upon a percentage of income. No
deferred income taxes liabilities were recognized for these tax deductions and
the Savings Bank does not anticipate any events that would cause any of these
deductions to reverse and become taxable. The unrecorded deferred income tax
liability on the above amounts was approximately $365,000 at June 30, 1996.
Since 1988, the difference between the book and tax bad debt deduction has been
accounted for as a temporary difference and the tax effect has been included in
deferred income taxes.
<PAGE>
Note 10. Income Taxes (Continued)
The net change in the deferred income taxes is reflected in the financial
statements for the years ended June 30, 1996, 1995 and 1994 as follows:
1996 1995 1994
---------------------------------
Statement of income ................... $(28,360) $(44,221) $(77,000)
Statement of stockholders' equity* .... (18,996) 59,922 - -
----------------------------------
$(47,356) $ 15,701 $(77,000)
==================================
* Change in deferred tax asset related to unrealized loss on investment
securities available-for-sale.
The provision for income taxes charged to operations for the years ended June
30, 1996, 1995 and 1994 consisted
of the following:
1996 1995 1994
----------------------------
Current ............................ $214,018 $214,726 $214,202
Deferred ........................... 28,360 44,221 77,000
----------------------------
$242,378 $258,947 $291,202
============================
The income tax provision differs from the amount of income tax determined by
applying the U. S. Federal income tax rate to pretax income for the years ended
June 30, 1996, 1995 and 1994 due to the following:
<TABLE>
Year Ended June 30,
--------------------------------------------------------------------------------------
1996 1995 1994
------------------------- -------------------------- ------------------------
% Of % Of % Of
Pre-Tax Pre-Tax Pre-Tax
Amount Income Amount Income Amount Income
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Computed "expected" tax
expense ............................ $ 239,330 35.0% $ 216,141 35.0% $ 304,807 35.0%
Tax-exempt interest ................... (16,346) (2.4) (24,140) (3.9) (25,356) (2.9)
State income taxes, net of
federal benefit .................... 20,287 2.9 20,070 3.2 28,303 3.2
Other, net ............................ (893) (0.1) 46,876 7.6 (16,552) (1.9)
--------------------------------------------------------------------------------------
$ 242,378 35.4% $ 258,947 41.9% $ 291,202 33.4%
======================================================================================
</TABLE>
<PAGE>
Note 11. Regulatory Capital Requirements
The following is a reconciliation of the Savings Bank's capital in accordance
with generally accepted accounting principles (GAAP) to the three components of
regulatory capital calculated under the requirement of FIRREA at June 30, 1996:
<TABLE>
Regulatory Capital - Unaudited
----------------------------------------------------------------
Percent Percent Percent
Of Of Of Risk-
Tangible Tangible Core Tangible Risk-Based Based
Capital Assets Capital Assets Capital Assets
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
The Savings Bank
equity ..................... $ 7,963,481 $ 7,963,481 $ 7,963,481
Unrealized losses
of available for
sale securities ............ 68,209 68,209 68,209
Allowance for loan
losses ...................... - - - - 209,394
Other assets
required to be
deducted .................... - - - - (20,700)
----------------------------------------------------------------
Regulatory
capital
computed ............... 8,031,690 13.3% 8,031,690 3.3% 8,220,384 20.8%
Minimum capital
requirement ................. 906,766 1.5% 1,813,532 3.0% 3,167,056 8.0%
----------------------------------------------------------------
Regulatory capital
excess ...................... $ 7,124,924 11.8% $ 6,218,158 10.3% $ 5,053,328 12.8%
================================================================
</TABLE>
The Savings Bank's equity reported to the Office of Thrift Supervision ("OTS")
was the same as that shown in the above table as of June 30, 1996.
Note 12. Commitments, Contingencies and Financial Instruments
The Savings 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. Those
instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the statement of financial position.
The Savings Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The Savings
Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-statement of financial condition instruments.
Unless noted otherwise, the Savings Bank requires collateral or other security
to support financial instruments with credit risk.
Contract
Or
National
Amount
---------
Financial instruments whose contract amounts
represent credit risk, commitments to extend credit:
First mortgage loans $1,265,051
Consumer and other loans 510,044
----------
$1,775,095
==========
The above commitments are to make fixed rate loans with a June 30, 1996 weighted
average interest rate of 7.66%.
<PAGE>
Commitments to extend credit are agreements to lend to a customer as long as
there is not 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. The Savings Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Savings Bank, upon extension of credit is based on
management's credit evaluation of the party. Collateral held varies but may
include accounts receivable, inventory, property and equipment, and
income-producing commercial properties.
Most of the Savings Bank's lending activity is with customers located within the
state. The Savings Bank generally originates single-family residential loans
within its primary lending area of southeastern Iowa. The Savings Bank's
underwriting policies require such loans to be an 85% loan to value based upon
appraised values. These loans are secured by the underlying properties. The
Savings Bank is also active in originating secured consumer loans to its
customers, primarily automobile and home equity loans.
Note 13. Fair Value of Financial Instruments
The fair value of financial instruments at June 30, 1996 are as follows:
1996
-------------------------
Carrying Fair
Amount Value
-------------------------
Financial assets:
Cash and cash equivalents ...... $1,903,352 $ 1,903,352
Investment securities:
Available-for-sale .......... 14,628,089 14,628,089
Loans .......................... 42,905,699 42,826,036
Financial liabilities:
Deposits ....................... 44,176,448 44,603,760
Borrowed funds ................. 5,504,742 5,432,513
Face
Amount
----------
Off-balance-sheet instruments $1,775,095
<PAGE>
Note 14. Transactions with Related Parties
The Savings Bank has had, and may be expected to have in the future, banking
transactions in the ordinary course of business with directors, principal
officers, their immediate families and affiliated companies in which they are
principal stockholders (commonly referred to as related parties), all of which
have been, in the opinion of management, on the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with others.
Aggregate loan transactions with related parties were as follows:
Year Ended June 30,
-----------------------
1996 1995
-----------------------
Balance, beginning .......................... $ 847,878 $ 631,337
New loans ................................ 298,306 332,659
Repayments ............................... (148,075) (143,735)
Loans of former officers and directors ... (98,606) (4,142)
Loans of newly elected officers .......... - - 31,759
-----------------------
Balance, ending ............................. $ 899,503 $ 847,878
=======================
Maximum balance during the year ............. $1,146,184 $ 995,755
=======================
Note 15. Pending Accounting Pronouncements and Regulations
Accounting Pronouncements: Effective July 1, 1996 the Company adopted FASB
Statement No. 121 "Accounting for the Impairment of Long-Lived Assets to Be
Disposed Of." The adoption of this new accounting pronouncement did not have an
effect on the Company's financial statements.
The Financial Accounting Standards Board has also approved, Statement No. 125
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996. The adoption
of this new pronouncement is not expected to have a material effect on the
Company's financial statements.
Regulatory issues: Federal legislation, which has been proposed in various
forms, provides for a one-time assessment (in an amount sufficient for the SAIF
to achieve the 1.25% reserve ratio) to be imposed on all SAIF-insured deposits,
including those held by commercial banks, and for a portion of BIF deposit
insurance premiums to be used to pay the Financing Corporation bond interest. If
a requirement were implemented for the Savings Bank to pay a one time assessment
equal to 0.80% of SAIF assessable deposits (based upon deposits at March 31,
1995 as currently proposed), the amount of such assessment would have been
approximately $229,000, net of taxes. The final form of any such legislation has
been the subject of continuing negotiation and cannot be assured. If the
legislation is enacted during the next Congressional session, however, it is
anticipated the assessment could be payable in 1996. Accordingly, this special
assessment would significantly increase noninterest expense and adversely affect
the Company's results of operations. Depending on the Savings Bank's capital
level and supervisory rating, and assuming (although there can be no assurance)
that the insurance premium levels for BIF and SAIF members are again equalized,
deposit insurance premiums could decrease significantly for future periods.
As part of the legislation, Congress is considering requiring all federal thrift
institutions, such as the Savings Bank, to either convert to a national bank or
a state-chartered depository institution by January 1, 1998. The OTS also would
be abolished and its functions transferred among the other federal banking
regulators. Certain aspects of the legislation remain to be resolved and
therefore no assurance can be given as to whether or in what form the
legislation will be enacted or its effect on the Company and the Bank.
In addition, legislation was recently passed which will require the recapture of
a portion of the Savings Bank's tax bad debt reserve. The recapture will occur
over a six-year period and begin with the Bank's fiscal year ending June 30,
1997. It is not anticipated that this recapture will have a material adverse
effect on the Company's results of operations because the Bank has already
established a deferred tax liability of approximately $88,000 on its balance
sheet for this purpose.
<PAGE>
Note 16. Reorganization and Conversion to Stock Ownership
On September 7, 1995, the Board of Directors of the Savings Bank adopted a plan
of conversion to convert from a federally chartered mutual savings bank to a
federally chartered stock savings bank with the concurrent formation of a
holding company. The conversion was accomplished through an amendment of the
Savings Bank's Federal charter and the issuance of the holding company's common
stock through a public stock offering.
The reorganization and stock offering was completed on March 11, 1996 and the
holding company received stock offering proceeds of $5,652,693, net of costs of
$396,477. The Savings Bank concurrently issued one share of common stock to the
holding company representing 100% of the common stock of the Savings Bank at a
price of $3,089,356.
Persons who had liquidation rights with respect to the mutual savings bank as of
the date of reorganization shall, as long as they remain depositors of the
Savings Bank, continue to have such rights solely with respect to the mutual
savings bank after the reorganization.
<PAGE>
Note 17. Parent Company Only Financial Information
Following is condensed financial information of the Company (Parent Company
only):
STATEMENTS OF FINANCIAL CONDITION
June 30, 1996
ASSETS
- --------------------------------------------------------------------------------
Cash .......................................................... $ 2,111,119
Investment securities - available for sale .................... 500,000
Investment in subsidiary bank, at cost plus equity in
undistributed earnings ..................................... 7,963,481
Other assets .................................................. 35,028
------------
$ 10,609,628
============
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Liabilities, accrued expenses and other liabilities ........... $ 61,463
------------
Stockholders' Equity
Preferred stock
Common stock ............................................... 6,575
Additional paid-in capital ................................. 6,172,680
Retained earnings .......................................... 4,941,449
Unrealized (losses) on investment securities available
for sale of bank subsidiary ............................. (68,209)
Unearned shares, employee stock ownership plan ............. (504,330)
------------
10,548,165
------------
$ 10,609,628
============
<PAGE>
Note 17. Parent Company Only Financial Information (Continued)
STATEMENT OF INCOME
Year Ended June 30, 1996
- --------------------------------------------------------------------------------
Interest income ................................................... $ 35,027
Miscellaneous expense ............................................. 30
--------
Income before equity in subsidiary's
undistributed income and taxes on income ...... $ 34,997
Equity in undistributed net income of bank subsidiary ............. 420,075
--------
Income before taxes on income ....................... 455,072
Federal and state income taxes .................................... 13,650
--------
Net income .......................................... $441,422
========
<PAGE>
Note 17. Parent Company Only Financial Information (Continued)
STATEMENT OF CASH FLOWS
Year Ended June 30, 1996
- --------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income ................................................. $ 441,422
Adjustments to reconcile net income to net cash
provided by operations:
Equity in net income of subsidiary ...................... (420,075)
(Increase) in other assets .............................. (35,028)
Increase in accrued expenses and other liabilities ...... 61,463
-----------
Net cash provided by operating activities ....... 47,782
-----------
Cash Flows (Used In) Investing Activities
Purchases of available for sale securities ................. (500,000)
Purchase of stock in subsidiary ............................ (3,089,356)
-----------
Net cash (used in) investing activities ......... (3,589,356)
-----------
Cash Flows from Financing Activities
Proceeds from issuance of common stock ..................... 6,049,170
Payments for expenses incurred related to
conversion of stock form ................................ (396,477)
-----------
Net cash provided by financing activities ....... 5,652,693
-----------
Increase in cash ................................ 2,111,119
Cash Balance
Beginning
-----------
Ending ..................................................... $ 2,111,119
===========
Supplemental Disclosures
Cash payments for income taxes, net of
payments from subsidiary ................................ $ - -
<PAGE>
WASHINGTON BANCORP
and
WASHINGTON FEDERAL SAVINGS BANK
DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<S> <C>
Directors
Stan Carlson Rick R. Hofer
President and Chief Executive Chairman of the Board, Washington
Officer, Washington and the Bank and the Bank Employee, Sitler Electric Supply
Charles C. Hotle Mary Levy
Retired owner of Feed and Grain Treasurer and co-owner, Mose Levy
Company Steel Company
James D. Gorham Richard L. Weeks
District Agent, Northwestern Mutual Owner, Sitler Electric Supply, Inc.
Life Insurance Co.
Myron L. Graber J. Richard Wiley
Co-owner, Graber Home Owner, Wiley Mere Farm
Improvement, Inc.
Executive Officers
Stan Carlson Leisha Linge
President and Chief Executive Officer Controller
Jeff Johnson Sandra K. Bush
Vice President Vice President and Secretary
</TABLE>
<PAGE>
STOCKHOLDER INFORMATION
Corporate Profile
Washington is an Iowa corporation which was organized in 1995 by the Bank for
the purpose of becoming a thrift institution holding company. The Bank was
organized in 1934 and converted to a federal savings bank in 1994. In March
1996, the Bank converted to the stock form of organization and concurrently
became the wholly-owned subsidiary of Washington through the sale and issuance
of common stock. The principal asset of Washington is the outstanding stock of
the Bank, its wholly owned subsidiary. Washington presently has no separate
operations and its business consists only of the business of the Bank. The
Bank's primary business consists of attracting deposits from the general public
and using these deposits to provide financing for the purchase and construction
of residential and, to a lesser extent, other properties.
Main Office Drive-thru Office
102 East Main Street 220 East Washington Street
Washington, Iowa Washington, Iowa
Independent Auditors Local Counsel
McGladrey & Pullen, LLP Washington County Abstract Co.
Town Centre, Suite 300 225 W. Main Street
221 Third Avenue, SE Washington, Iowa 52353
Cedar Rapids, Iowa 52401
Transfer Agent Special Counsel
Registrar & Transfer Co. Silver, Freedman & Taff, L.L.P.
10 Commerce Drive 1100 New York Avenue, N.W.
Cramford, New Jersey Washington, D.C. 20005
Form 10-KSB Report
A copy of Washington's Annual Report on Form 10-KSB for the fiscal year ended
June 30, 1996 including financial statements, as filed with the SEC, will be
furnished without charge to stockholders of Washington upon written request to
the Secretary, Washington Bancorp, 102 East Main Street, Washington, Iowa 52353.
Stock Listing
Washington's common stock is reported on the National Daily Quotation Service by
the National Quotation Bureau under the symbol "WBIO". As of June 30, 1996,
Washington had 444 stockholders of record and 657,519 outstanding shares of
common stock.
Price Range of Common Stock
The table below shows the range of high and low bid prices. These prices do not
represent actual transactions and do not include retail markups, markdowns or
commissions.
1996
-------------------------
High Low
-------------------------
Third quarter ............................ $ 11.50 $ 10.50
Fourth quarter ........................... $ 11.38 $ 10.50
Washington declared its first dividend of $.08 per share to stockholders of
record as of July 30, 1996, to be paid August 14, 1996.
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
Parent Subsidiary Ownership Organization
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Washington Bancorp Washington Federal Savings Bank 100% Federal
Washington Federal Washington Financial Services, Inc. 100% Iowa
Savings Bank
The financial statements of the Registrant are consolidated with those of its
subsidiaries.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FOR THE ANNUAL
REPORT ON FORM 10-KSB FOR THE YEAR ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 794
<INT-BEARING-DEPOSITS> 1110
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 14,628
<INVESTMENTS-CARRYING> 3,077
<INVESTMENTS-MARKET> 3,091
<LOANS> 42,906
<ALLOWANCE> 209
<TOTAL-ASSETS> 60,890
<DEPOSITS> 44,176
<SHORT-TERM> 2,500
<LIABILITIES-OTHER> 662
<LONG-TERM> 3,005
0
0
<COMMON> 7
<OTHER-SE> 10,541
<TOTAL-LIABILITIES-AND-EQUITY> 60,891
<INTEREST-LOAN> 3,446
<INTEREST-INVEST> 761
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 4,207
<INTEREST-DEPOSIT> 2,246
<INTEREST-EXPENSE> 2,499
<INTEREST-INCOME-NET> 1,708
<LOAN-LOSSES> 15
<SECURITIES-GAINS> 33
<EXPENSE-OTHER> 1,206
<INCOME-PRETAX> 684
<INCOME-PRE-EXTRAORDINARY> 441
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 441
<EPS-PRIMARY> .25
<EPS-DILUTED> .25
<YIELD-ACTUAL> 3.13
<LOANS-NON> 0
<LOANS-PAST> 44
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 242
<ALLOWANCE-OPEN> 203
<CHARGE-OFFS> 14
<RECOVERIES> 5
<ALLOWANCE-CLOSE> 209
<ALLOWANCE-DOMESTIC> 209
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 39
</TABLE>
